Double-Edged Prices

Lessons from the food price crisis: 10 actions developing countries should take

The recent sharp increase in food prices should have benefited millions of poor people who make their living from agriculture. However, decades of misguided policies by developing country governments on agriculture, trade, and domestic markets - often promoted by international financial institutions and supported by donor countries - have prevented poor farmers and rural workers from reaping the benefits of higher commodity prices. As a result, the crisis is hurting poor producers and consumers alike, threatening to reverse recent progress on poverty reduction in many countries. To help farmers get out of poverty while protecting poor consumers, developing country governments, with the support of donors, should invest now into smallholder agriculture and social protection.

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Summary

The attention of the world is currently focused on the global financial crisis, but meanwhile, a large part of the world is also immersed in a dramatic increase in food prices and an equally sharp rise in the price of fuel. Prices of staple foods have seen increases ranging from 30 per cent to 150 per cent in 2007 and 2008. This threatens progress towards achieving the Millennium Development Goals (MDGs). In Cambodia, where half the population relies on bought rice, consumption has fallen, and many families in Burkina Faso are selling off the few cattle they own. Oxfam estimates that 290 million people living in countries most vulnerable to the food crisis are at risk of falling into poverty.

In sharp contrast to the plight of poor farmers and communities, many others in the food business appear to be cashing in on the crisis. Thailand's Charoen Pokphand Foods, a major player in Asia, is forecasting revenue growth of 237 per cent this year; Nestlé's global sales grew 8.9 per cent in the first half of 2008; Monsanto, the world's largest seed company, reported a 26 per cent increase in revenues from March to May 2008. UK supermarket Tesco has reported a record 10 per cent jump in profits from last year.

The disastrous impact of this crisis could have been prevented. Millions of families in poor countries depend on agriculture for their living. Global aid to agriculture has declined from 18 per cent of official development assistance (ODA) in the 1980s to just 4 per cent of aid expenditure today. If rich countries, donors, and developing country governments had invested in smallholder agriculture over the past two decades, poor countries and communities would now be far less vulnerable. The few developing countries that have followed different paths and have invested in smallholder agriculture and social protection have proved to be more resilient to the crisis than their peers.

The global response to the food prices crisis has also been inadequate. This is in stark contrast with the response to the current financial crisis, where huge financial resources have been mobilised by the international community in a matter of days. Countries suffering from the food crisis received promises of just $12.3bn at the Rome FAO conference in June 2008, well short of UN estimates of the $25bn-$40bn needed (and five months on, little more than $1bn has been disbursed). The international community has failed to organise itself to respond adequately: developing countries are being bombarded with different initiatives and asked to produce multiple plans for different donors. A coordinated international response must be led by the UN to channel funds urgently to those in need, and to lead on implementation of the longer-term reforms.

Poor countries that have abandoned their agricultural systems, cut cereal production, and become highly dependent on food imports are extremely vulnerable to food price shocks. This applies especially to those countries which lack the cash to pay for their food imports. Countries which do not have well-functioning social protection systems and strategic food reserves to reduce the impact of price shocks are even more exposed.

Unfortunately, this is the case for many developing countries, and it is largely the result of specific policy decisions taken by their governments, often promoted and supported by international institutions and donor countries. Decades of highly protective and trade-distorting agricultural policies in rich countries are also to blame. Rich countries, donors, and poor countries alike must shift course if they are to reach the MDGs.

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Publication date: October 2008