High food prices - what policies work best?

19 February 2010
Julia Compton
Comment
Do you think food prices are old news? Then you are either rich or lucky in where you live.  We’re not just talking about Kenya and Ethiopia, where recent droughts have kept food prices at near-record levels.   In New York City,  The Economist reported last month, ‘the number of people having trouble paying for food has increased 60%, to 3.3m, since 2003 and ... a staggering one in five of the city’s children rely on soup kitchens – up by 48% since 2004’.    

In 2007 and 2008, when world food prices suddenly shot up to historically high levels, many governments in developing countries struggled to cope with the fallout. Governments rushed into a whole range of policy measures, some of which were very different from the advice they were being given by well-meaning economists and aid agencies.  So – what happened next? ODI, working with the Hunger Alliance (a NGO research and advocacy group) has commissioned case studies in three countries – Bangladesh, Nicaragua and Sierra Leone – to find out.  At the end of January, we held a two-day technical meeting with international researchers to share experiences, and a public meeting to discuss some early findings.  

When world food prices rise, governments have three basic approaches they can use to soften the blow for ordinary people. First, they can try to keep their own national food prices down, for example through trade measures and subsidies. Second, they can give a helping hand to the poorest and worst-affected people – for example through increased welfare payments, employment schemes or food handouts. Or third, they can start a quick ‘grow-our-own’ campaign to increase national food production, help some families feed themselves, and hopefully bring food prices back down.  

The devil is in the detail, as always. For example, who exactly should get cash transfers (welfare), and how do you work out the right amount to pay them? How do you make sure that the benefits of a subsidy or tax cut get passed onto the consumer, and don’t just make the storekeepers richer? If you give farmers cheap fertiliser to grow more food, how do you make sure they don’t use it on their cotton crop instead?   

We discussed a lot of such policy challenges in our recent meetings. Here are a few of the things we learned: 

  1. Even the best ideas won’t work unless you have the right conditions in place. For example, a lot of international agencies recommended 'social transfers' (cash payments to poor people) as the ideal response to the food crisis. But lots of countries found it impossible to set up a national welfare system overnight. 
  2. Being clear, decisive, reassuring, and consistent matters a lot. For example, in one Asian country, millions of better-off consumers rushed out to buy large sacks of rice because the government stoked up fears of a national shortage. Of course rice then disappeared from the shops and the price skyrocketed – with potentially devastating effects on the poorest people, who only have enough money to buy rice one day at a time. In one African country, the government announced that it would be importing grain and setting low prices – so the big private importers sat on their hands. Then the government shilly-shallied, shortages started to appear and the price went up further. The lesson? Bad government action is worse than none.  
  3. Understanding what people do themselves to cope with high food prices is important for getting policy measures right. In poor countries, government-supported handouts and employment schemes often don’t reach that many people, and most poor people have to get along as best they can, with the help of family and friends.  Government policies can make this easier.    
  4. Global trade rules, combined with pressure to liberalise, may limit the scope of action of poor countries to protect their citizens from high world food prices. This may be an important topic for the Doha round to address. For example, one of the quickest measures that importing countries can take when food prices rise is to cut tariffs on imports, but successive rounds of trade liberalisation have meant that many such tariffs are very low (or zero) already.

Food prices are still relatively high in many countries, and some observers are forecasting that world prices will go up again in 2010-12. So it’s important to find out what worked and what didn’t in 2007/8, and try to avoid making the same mistakes. ODI will be publishing findings from this study in April. Meanwhile, if you have views or findings you would like to share, please contact us or respond to this blog.   

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Julia Compton