Don't impose food price controls, warns World Bank

Food prices have risen nearly 75 percent within a decade and will continue to do so, hurting the poor, warned the World Bank's annual Global Economic Prospects 2008, which suggested that governments ease control over food prices and provide targeted safety nets.

Prices have shot up partly because of the "stepped-up" use of food crops for biofuels and partly because of other factors like rapid income growth in developing countries, high fertiliser prices, low stocks, and droughts, according to the World Bank.

"Agricultural prices are expected to remain nearly flat at high levels in 2008, as biofuels production continues to ramp up in response to consumption mandates and production subsidies, drawing resources from other crops," said the report.

Many countries have liberalised or relinquished control over food prices, the Bank noted, but countries without safety net programmes "will feel pressure" to impose price controls or reintroduce government controls to provide assistance to the poor. "This would undo successful policy reforms and send a negative message to the private sector."

The World Bank said some countries had imposed export bans to contain domestic food price inflation, but "Such bans unfairly penalise the producers of these crops and may encourage smuggling and corruption." According to the Economist magazine, Venezuela and Russia recently imposed controls on food prices.

John Hoddinott, a senior research fellow in the food consumption and nutrition division of the Washington-based International Food Policy Research Institute (IFPRI), pointed out that while controlling or subsidising food prices is a "seductive policy option", the "reality is more complicated".

"Subsidy schemes are horrifically expensive and as a result can crowd out other government expenditures, such as on primary health care and education that also directly benefit the poor," he explained. A large part of the subsidy often ended up going to non-poor households, while well-targeted cash transfers could help those who really needed them, Hoddinott added.

Past periods of food price increases were temporary and lasted only two or three years, the Bank's report noted, but the current price increases were tied to global energy prices and were expected to continue for several years. The report acknowledged that most countries would not be able to shelter their consumers from them.

"Private traders imported food grains during times of domestic shortfall, providing needed supplies and price stabilisation, as well as removing a financial burden from the government."

The report cited Bangladesh as an example of the success of open market food policies. "It has transformed its agricultural sector into one of the most productive in South Asia. The country is largely self-sufficient in rice, a basic staple, and is an emerging exporter of high-value agricultural products. One of the keys to this success was the government's decision to liberalise food imports in the early 1990s.

"By 2000, the private sector was importing 100 percent of imported food, and the government reoriented its large public food distribution system away from mass distribution in favour of a targeted safety net programmes for the poor."

The report suggested that "Such a response would be effective in the current situation of high food prices, but a complicating factor is that part of the current price increases might be more persistent than in the past."

Siwa Msangi, a research fellow with IFPRI's environment and production technology division, said countries might also have to resort to other relief measures. "This could be in form of temporary control over prices of certain food essentials, as Morocco had done last year - it reduced import tariffs to control the price of bread during Ramadan - which helped the poor consumers and did not discourage producers."

Situation could have spin-offs

Net importers of cereals and other food essentials, particularly sub-Saharan African countries, were the most affected, added IFPRI's Msangi.

''Agricultural prices are expected to remain nearly flat at high levels in 2008, as biofuels production continues to ramp up in response to consumption mandates and production subsidies, drawing resources from other crops''

The World Bank report pointed out that "Price increases for vegetable oils and grains primarily affect low-income countries, with the rise in prices since the end of 2004 leading to a terms-of-trade loss equivalent to 0.5 percent of GDP [gross domestic product]. This represents 1 percent of GDP in 29 countries, and nearly 5 percent of GDP for the most affected country, Eritrea."

Msangi said developing countries that were largely dependant on agriculture should take advantage of the high food price environment to invest in food production. "They can pump money into research, developing marketing infrastructure for farmers and even providing fertiliser subsidies."

The emphasis on subsidising ethanol production in the US might shift support from cash crops like cotton, which could help affected producers like Mali and Tanzania, who have borne the brunt of American subsidies for its local producers for many years, Msangi pointed out.

According to a joint report by the FAO and the Organisation for Economic Cooperation and Development (OECD), Agricultural Outlook 2007-2016, expanding cereal use for ethanol production has led to reduced acreage planted to oilseeds, particularly in the US, in favour of maize.

"In the US ... maize use for fuel production, which has doubled from 2003, will increase from some 55 million tonnes, or one-fifth of maize production in 2006, to 110 million tonnes or 32 percent" by 2016.

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