Rising food Prices: Trends and Out Comes

The recent rise in food prices that has hit the regionand which have taken on an international dimension has caught off guard even the best food economists. There have been many riots over increased food prices in such countries as Egypt, Senegal, Somalia and of late, Bukina Faso.

The recent rise in food prices that has hit the regionand which have taken on an international dimension has caught off guard even the best food economists. There have been many riots over increased food prices in such countries as Egypt, Senegal, Somalia and of late, Bukina Faso.

The question that remains unanswered is the trend of such increases, ie how long these could persist and their impact to most economies, but especially the vulnerable developing economies in Africa.

On the question of the trend of such increases in food prices, this may be a medium term problem as it is caused by temporal structural economic supply side constraints which should be fixed if there are concerted policy efforts across the region, and indeed if this policy framework takes on an international dimension.

This is so in that, the magnitude of increase in food prices has both intra and extra effects because deficits in one region is bound to be made up from surpluses in another, and unless a food security policy is agreed and acted on as a matter of urgency across the board, such a problem is bound to persist in the medium term and may hamper growth targets through food inflation which has a substitution effect on other products that would see their prices increased as well.

The World Bank predicts that, food prices could push 100 million people into deeper poverty, and to mitigate this it has proposed US $ 500 million to World Food Program and “one Percent Solution” under which sovereign wealth funds would channel one per cent of their US $ 3 trillion investment potential to Sub-Saharan African countries where majority of the poor reside, and who will bear the brunt of the rising food prices. Whereas this is a welcome decision on the part of the World Bank, it remains to be seen how the sovereign fund managers will buy into this idea given diversified ownership of these funds, and risk averseness attached to them, not to mention the fact that such funds are accumulated for other purposes which may not necessarily appeal to such a humanitarian cause.

On similar note, African Development Bank President Dr. Donald Kaberuka announced a 600 million Euro fund to tackle food price increases which should be welcomed by African countries struggling with adverse effects of food price rise. These measures much as they welcome at this point in time, they simply address the effects and not the cause of such economic structural problem. They should therefore be accompanied by long-term measures that are designed to address the causes of this problem which if not addressed my reverse the gains a number of developing countries have recorded in poverty eradication programs.

The World Bank, IMF, African Development Bank and other multilateral as well as bilateral development partners have the means and mechanism to address this problem. A part from availing the financial resources to fund the agricultural industry in developing countries, they should include measures to ensure food security as part their lending/funding criteria or conditions.

With regard to the impact this problem poses to poor countries, this will be felt in terms of adverse terms of trade which will in turn mean adverse balance of payments resulting from such increase in prices. To appreciate the enormity of this problems one has to consider available empirical evidence: US wheat export prices rose from $375/ton in January 2008 to $440/ton in March.

Thailand rice export prices increased from $365/ton to $562/ton. These increases followed a 181 percent increase in overall global wheat prices over three year period up to January, 2008, and 83 percent increase in overall global food prices over the same period. Importing countries had to pay more for the same imports, thus adverse terms of trade on their part.

Thus for instance, African countries import approximately fifty percent of their fifty million metric tons requirements of rice despite their comparative advantage to produce rice in the massive marsh lands and abundant water resources that have not been utilized to do, mainly owing to policy failures, characteristic of a number of African nation state.

Such countries will have to pay almost double prices for the twenty five million metric tons they import, which is bound to adversely affect their terms of trade and by extension balance of payments.

Since the short-run impact of such increases in food prices for importers of rice/wheat and other food products is that, poor countries will have to spend more to import such foodstuffs up to double their current expenditure on such imports, there is bound to lead to budgetary adjustments which will call for revision of growth targets.

Given their limited financial resources, this trend will limit poor countries’ investments in priority areas such as education, health and social development projects, which will affect poverty levels; in the extreme. Nevertheless, there is ample evidence as to the causes of increase in food prices, but these are not country specific and solutions can not be expected to be similar either.

Among the causes highlighted so far, include concerns over oil prices, energy security and climate change which have prompted many governments to encourage production, and use bio-fuels. This has not only lead to huge demand for bio-fuel raw materials, such as wheat, soy, maize, and palm oil, but also increased competition for farmland to produce these.

Such competition between bio-fuel oils and food consumption industry has triggered the increase in food prices witnessed on international commodity markets. These prices have been aggravated by speculative effects on commodity markets which had anticipated such increase, and factored them into their futures prices.

As pointed earlier, the effect of high food prices can only be reversed by using appropriate policies that addresses causes of this problem mainly focusing not only food production in general, but also food security.

Such policy framework should prioritize food production in national development plans and address food supply side constraints such lack of fertilizers, availability of adequate water resources through irrigation so as to avoid dependency on un predictable rain partners which have been rendered even more unpredictable as a result of climate changes, which more than any thing else, accounts for shortfalls in food production.

Nevertheless, such food policy framework will have to be harmonized on regional basis to avoid regional shortages that deplete regional reserves of food leading yet to net shortfalls in food supply across the region. The only constraint in policy framework in developing counties in Africa, is that, even where the best policies are designed (and there are many across the continent) they are hardly implemented owing to competing political interests that negate the implementation of even the best policies designed.

This again can be traced to power struggles among African political elite, where power is not meant for the common good, but rather power to access wealth. Such a scenario has seen some of the poorest countries in Africa with severe food shortages spending millions of dollars on importation of arms at the expense of their starving masses.

The issue of policy failure in Africa has been well documented, and explains the failure of African nation state to latch into development phase generally. Thus, Olson (1996:19-20) asserts that, “… a country’s institutions and economic policies are decisive for its economic performance, and this argument suggests that poor countries on average have poor economic policies and institutions than rich countries…” It is one thing to design a policy, its implementation is yet another.

The problem facing developing countries has been the failure of public policy at the implementation stage largely due to a combination of factors, ranging from lack of qualified, competent, motivated and independent implementers to wrong mix of policies which are un-coordinated, lack of institutions to implement/monitor policy implementation, lack of societal preparedness, and to some extent, external factors.

Moreover, most policies in developing countries especially in Africa, are designed by external consultants, who then leave such policies to people who least understand the implications of such policies to their respective economies.

Besides, a number of these developing countries have politicized their public service so much so that, policies are seen from a bi-partisan perspective rather nationalistic, and this divides royalty among the implementers of even the best designed policies.

Olson (1996:6) further points out that, those countries with the best policies and institutions achieve their potential, while others achieve only a tiny fraction of their potential outcomes due to indifference among policy implementers and or lack of inclusiveness of such implementers in the process of designing such polices.

Thus, effective implementation of food policies in Africa, (like many other policies) the aforementioned constraints will have to be addressed. Supply side constraints to food production and by extension food security can be mitigated if there is political will and willing to implement these polices by leaders of developing countries affected by such food price increase, which if left unchecked could compound poverty levels among the same countries.

Contact: mnshuti@yahoo.co.uk

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