Return of food, fuel crises
By
Dr Ashfaque H Khan
The recent surge in global food and fuel prices has emerged as an issue of serious concern for the Asia-Pacific region in a manner reminiscent of the 2007-2008 periods. The global food and fuel prices have been on the rise in a sustained and synchronised manner since early 2010. Such developments are highly detrimental for the poor and vulnerable sections of the population in the region.
In its 2011 survey, the Economic and Social Commission for Asia-Pacific (ESCAP) has estimated that as a result of higher food and fuel prices, up to 42 million additional people may slip below the poverty line, in addition to the 19 million who experienced a similar fate in 2010. The survey also reports that in a worst-case scenario in which food price inflation doubles in 2011 and the average price of oil rises to $130 a barrel, the achievements of the Millennium Development Goals with respect to poverty may be delayed by up to five years.
What are the factors responsible for the resurgence of food and fuel prices? How should we address these issues? Will domestic policy alone be enough or would we require policy coordination at the global level? What should Pakistan be doing to handle the resurgence of food and fuel crises?
Food prices are up to the extent of 35 percent in various countries within the region. Various factors are responsible for the recent surge in food prices. These include supply shocks as a result of adverse weather conditions, conversion of food into bio-fuels, export bans, hoarding and heightened speculative activity related to food commodities.
Numerous disruptions due to adverse weather conditions have affected key cereals production, especially wheat. Furthermore, one of the leading exporters of wheat, the Russian Federation, announced an export ban in August 2010, thereby pushing the wheat price further up. Rising oil prices are putting greater pressure on food prices through the channel of bio-fuels. Such fuels have begun to emerge as competing utilisation of grain crops, as one-third of the United States’ corn production has been diverted to ethanol production.
The recent surge in food prices is also the result of financial speculation. In fact, the ESCAP survey suggests that some $300 billion has entered in the commodity markets for speculative purposes. This level of investment was not seen even before the start of the 2007-08 financial crises. The massive liquidity injected by the United States and other advanced economies in the aftermath of the global financial crisis is finding its way into tangible assets markets such as commodities, including gold.
There are increasing concerns about the negative impact of the recent surge in oil prices for developing countries in the region. A gradual recovery in global economy, the weakening of US dollar vis-a-vis major currencies, financial speculators entering into the oil markets and the recent instability in the Middle East have been the main contributing factors to pushing the oil prices upward.
How to address the issue of rising costs of food and fuel at the national and international levels is an important challenge for the region. Higher food and fuel prices are contributing to the inflationary build-up in the region. At the national level, the authorities are pursuing a tight monetary policy to address the issue of inflation.
Monetary policy as a way to address the issue of inflation caused by supply-side shocks is constrained by its own limitations. The world has seen the inability of monetary policy to contain inflation in the 1970s when inflationary build-up was caused by supply-side shocks. Tight monetary policy plunged the global economy into stagflation (stagnation plus inflation).
What is required at the national level is to avoid the aspirin approach to monetary policy. Instead of tightening the monetary policy, the authorities must address the supply-side causes of food price increases. The prices of food and fuel can also be reduced by lowering tariff and/or taxes.
The issue of rising price of food and fuel cannot be addressed effectively at the national level alone. International efforts are required to address such issues. In this connection, G-20, a major forum for global policy coordination on economic issues, will have to play an important role. The G-20 must act decisively to deal with the volatility of oil and food prices.
In the area of oil price volatility, the G-20 being the group of all major consumers can match the power exercised over the oil markets by the cartel of producers, that is, OPEC. OPEC, representing the interest of oil producers, and the G-20, which represents the interest of its consumers, can work out a benchmark “fair” price of oil and agree to restrict the oil price movement within a band. Additionally, the G-20 can create a global strategic reserve for oil and release it when it is high in demand.
In the case of food-price volatility, the G-20 may act to regulate the speculative activity in food commodities in financial markets, and discipline the conversion of cereals into bio-fuels. The G-20 can enhance its credibility and effectiveness by evolving a mechanism for consultation with the non-member countries through ESCAP. It was arranged by the former prior to the Seoul Summit.
Pakistan must take the resurgence of food and fuel crises seriously. It is not imprudent to suggest that the persistence of food inflation at a high double-digit level for the last 40 months in a row has been devastating for the poor in Pakistan. Such a high rate of food inflation is the likely cause of pushing millions of people below the poverty line in the last three years. Pakistan must freeze the wheat support price at the current level for the next three years. On the fuel side, Pakistan must review its taxation policy on petroleum products as currently it is a highly taxed sector. The domestic price of petroleum products has gone out of the reach of even the middle class.
The writer is principal and dean at NUST Business School, Islamabad. Email: ahkhan@ nbs.edu.pk
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