9 May 2008
Skyrocketing food prices have forced the international financial institutions (IFIs) to articulate responses to the situation. The World Bank has conjured a "New Deal for Global Food Policy" to pump agriculture-oriented loans and programs into Africa and to address emergency financing needs. The IMF has voiced concern over the likely macroeconomic shocks of the food crisis in low-income countries. But the Bretton Woods Institutions must wrestle with a legacy that helped set the stage for diminished food security in many low-income countries.
At the mid-April Spring Meetings of the World Bank and the International Monetary Fund (IMF) in Washington, D.C., the top agenda items were closely linked: the enduring financial crisis, the global food crisis, and climate change. Among the three, the global food crisis clearly stood out in its magnitude and gravity.
Within the last year, the price of staple foods such as rice, grain, oil and sugar has increased 50%. Rice prices alone have risen by 90%. A complex interplay of factors has led to the current crisis in food supply and prices, from higher fuel costs, the diversion of food crops to agrofuels, increased demand for food in emerging market countries (particularly China and India), increased fertilizer prices, speculation on global commodity markets, and prolonged drought in Australia.
Setting the Stage
Starting in the 1970s, developing countries were encouraged—pressured, in many cases, by the IMF and World Bank—to abandon economic policies prioritizing self-sufficiency, both in terms of food production and manufactured goods. “Import substitution” policies were discouraged, and borrowing governments were pushed to develop their export sectors. Countries throughout Africa, Latin America, the Caribbean, and Asia devoted their best land and financial incentives to “cash crops” such as cotton, coffee, tea, tobacco, cocoa, and flowers—which are exported primarily to Northern markets. Unbalanced trade rules promoted by the World Trade Organization (WTO), World Bank, and the IMF have allowed rich countries’ agriculture subsidies to artificially depress the prices of foods such as corn and wheat. Meanwhile state marketing boards and grain reserves that aimed to protect both producers and consumers against sharp food price volatility have been privatized in many low-income countries.
With recent skyrocketing price increases of critical food staples, the dangers of over-reliance on international trade for food supplies have been exposed anew, especially as many countries adopt export bans in order to feed their own people. Civil unrest has broken out in some 20 countries around the world, more than half of them in Africa, and government and IFI officials are scrambling for last-minute solutions.
The World Bank: Can a “new deal” make up for its flawed past deal?
World Bank President Robert Zoellick won support at the Development Committee (a committee of Bank shareholders that sets policy directions) meeting for his recently announced “New Deal for Global Food Policy.” Zoellick aims to combine immediate financial assistance to hard-hit countries with long-term lending to boost agricultural productivity. Specifically, the Bank plans to expand current programs and offer emergency financing on a quick and flexible basis. As part of his “New Deal,” Zoellick pointed to a pledge, made at the October 2007 annual meeting of the Bank, to double its lending for agriculture in Africa over the next year. He also outlined a “One Percent Solution” for Africa: allocating 1% of Sovereign Wealth Funds’ assets to equity investments across sub-Saharan African. Zoellick claims this could “draw $30 billion to African development, growth, and opportunity.”
The World Bank’s sudden concern for boosting agricultural productivity represents a major shift from its track record over the past three decades, which have been characterized with sharp decreases in agricultural investments. The World Bank’s funding for farm projects plunged to 12% of total lending in 2007, compared to 30% in 1980. Similarly, the Asian Development Bank’s 2007 Annual Report shows that loans for agriculture and natural resources fell sharply from 11% in 2006 to a mere 1% in 2007.
Meanwhile, the Bank has persistently supported cutting import tariffs in order to lower the cost of food staple imports. A 2007 World Bank paper on agricultural spending in the Philippines recommended liberalizing the nation’s rice imports. A recent Financial Times article commented that the World Bank authors urged Filipinos “not to worry too much about their reliance on rice imports.” Consequently, rice imports in the nation have more than doubled since the early 1990s. According to the Food and Agricultural Organization (FAO), gross imports of food by developing countries grew exponentially with trade liberalization, turning an overall agricultural trade surplus of $7 billion per year in the 1960s into a deficit of $11 billion by 2001.
Anuradha Mittal of the Oakland Institute points out that Ghana reduced rice tariffs from 100% to 20% under structural adjustment policies enforced by World Bank financing, resulting in rice imports soaring “from 250,000 tons in 1998 to 415,150 tons in 2003, with 66 percent of rice producers recording negative returns leading to loss of employment.”
World Bank policy recommendations were substantiated by claims that global rice production and prices had reached price-stability, and that rice-exporting governments would not be able to curb their foreign exports easily. However, in the last several weeks India, Thailand, Vietnam and others have imposed tight export bans in order to protect food supplies for their own people.
The International Monetary Fund: Will the Fund really walk its talk?
Dominique Strauss-Kahn, Managing Director of the IMF has warned that if food prices keep soaring the consequences will be “terrible.” The food crisis will likely inflict public deficits of over 1% of GDP in many African countries, which Strauss-Kahn cautioned is “a huge deficit” that “translates immediately” into current account imbalances.
In response to the crisis, Strauss-Kahn says the Fund will "devote a lot of resources, time, and experts.” He promised a review of the IMF’s “financial toolkit,” implying a revision of the Exogenous Shock Facility, the IMF’s short-term and concessional emergency financing facility for low-income countries. The ESF has not been used by any country to date, due in large part to its high costs and low benefits. The current food crisis has prompted Strauss-Kahn to revise the ESF so that it meets developing country needs.
Low-income countries that have a Poverty Reduction and Growth Facility (PRGF) program already in place are not eligible for the ESF. For these countries the IMF plans to significantly expand the PRGF by increasing quota access rates and program timeframe. The IMF reports that “about ten countries, mostly in Africa” are seeking to get additional finance under the PRGF programs to cover the cost of food imports.
At the Spring Meetings, Strauss-Kahn mentioned that the primary way in which the IMF will add value to the crisis response is through “political policy advice,” particularly when addressing short-term economic liquidity.
During the Spring Meetings, Strauss-Kahn said that the IMF supports solutions such as “temporary, targeted subsidies to help protect the most vulnerable.” However, he also added that such subsidies should not become “permanent.” For an institution historically known for its insistence on slashing or eliminating subsidies, this is a markedly progressive turn. There is also some sign that the IMF might consider a wider range of policy options. Strauss-Kahn has said that subsidies could be financed “through higher revenues, a higher deficit, or reductions in other expenditures,” based on each country’s fiscal circumstances. It remains to be seen, however, whether this suggests openness to innovation not always associated with the IMF. Indeed, with Strauss-Kahn’s repetition of Indian Finance Minister P. Chidambaram’s assertion that using food crops for agrofuel production is tantamount to a “crime against humanity” (diverting agriculture away from food production to provide fuel for automobiles), there is a new tone from the IMF. It will be interesting to see if these developments foreshadow a permanent re-orientation of IMF policies, or are just evidence of Strauss-Kahn’s reputed political skills in bringing people to his side.
Resources
Dangerous Liaisons: A Battle Plan from the United Nations and the International Financial Institutions to Fight Global Hunger, by Anuradha Mittal, The Oakland Institute Reporter, April 29, 2008 (Oakland Institute website)
U.N. and World Bank say to tackle food crisis, by Laura MacInnis, April 29, 2008 (Reuters website)
UN chiefs hold food crisis summit, by Imogen Foulkes, April 29, 2008 (BBC website)
UN sets up food crisis task force, BBC News, April 29, 2008 (BBC website)
Punjab reaps a poisoned harvest, by David Loyn, April 26, 2008 (BBC website)
Food crisis moves up global agenda at IMF, WBank meets, Agence-France Press, April 24, 2008 (AFP website)
Global approach required to tackle food prices, by Dominique Strauss-Kahn, April 20, 2008. (Financial times website)
Transcript of the Development Committee Press Briefing by Agustín Carstens, Chairman, Development Committee; Robert B. Zoellick, President, World Bank Group; and Dominique Strauss-Kahn, Managing Director, IMF, International Monetary Fund Press Briefing, April 13, 2008. (IMF website)
IMF-World Bank Spring Meetings, Ministers Resolve to Counter Slowdown, Combat Food Hikes, International Monetary Fund, IMF Survey, Volume 37, No. 4, April, 2008 (IMF website)
The Exogenous Shock Facility (ESF)—A Factsheet, International Monetary Fund, April, 2008 (IMF website)
The Poverty Reduction and Growth Facility (PRGF)—A Factsheet, International Monetary Fund, October, 2007 (IMF website)