Food prices are soaring around the world and putting heavy pressure on consumers. How should countries react?
RFE/RL put this question to Liliana Balbi, senior economist at the Early Warning System of the Food and Agriculture Organization (FAO) of the United Nations, to learn more.
RFE/RL: Food prices have gone up everywhere and some of the sharpest effects have been felt in Central Asia. Why is that?
Liliana Balbi: These countries in particular, the countries of Central Asia, they have a very large dependence on world markets. They import from one-third to 60 and 70 percent of all the cereals that they consume and that is very high. So, if you import half of your consumption requirements and the price doubles, you are really in a bad position.
RFE/RL: Some countries respond to food price increases by putting price controls in place. What are some of the advantages and disadvantages of that strategy?
Balbi: You have several countries in Central Asia and elsewhere that use these, especially for basic products like bread, for example Russia and Armenia. But the thing with price controls is the problem that the countries have to be very cautious that it does not generate speculation.
And, if the [price controls] are universal so that the price of the commodity is fixed in all markets and for everybody, then it is not very redistributive, because you benefit everybody and not the part of the population that is really needy or more vulnerable.
Easier To Begin Subsidy Than End It
RFE/RL: Another common strategy for coping with rising food prices is for governments to subsidize the cost of some basic commodities; to be sure people can afford them. Is that a good strategy?
Balbi: All the [factors] need to be weighed, but we have several examples where these measures are not effective because, if there are not a lot of administrative controls, they lead to speculation, such as doubling of prices in the market and all that.
But it depends upon each country. If the government has enough to subsidize all the prices and it is not such a burden on their budget and you have large numbers of vulnerable people, then it could work.
Subsidies have the problem that they are easy to put in place but difficult to remove. It depends on the budget of the government. If the government can support this, well, that's one situation.
But if it becomes a burden for the budget of the government and you are diverting money that could be used for development or for other purposes, well, what FAO recommends is to target very much the population or groups of population that need the subsidy.
Export Bans Raise Prices
RFE/RL: There is yet another response we sometimes see from governments facing rising food prices. That is, they ban the export of foodstuffs their country produces, such as wheat, in hopes that by keeping an adequate supply of the commodity at home they will keep its price from rising in the local market. Is that a good or bad approach?
Balbi: If there was a bad harvest and the government estimates there won't be enough for export, by banning export it increases domestic supplies. And if there is more supply, well, the price tends to be lower. So that is the idea.
But what happens is that then the price will increase in the rest of the world and that puts inflationary pressures on all economies, even in the same country that was trying to protect its consumers. So, it is very limited, we think, as an effective measure, even for the country that takes that measure. And definitely at regional and world levels, it prompts increases in prices rather than stabilizing prices.
RFE/RL: It seems there are no simple solutions to keeping food prices down and that the effectiveness of individual strategies varies widely depending upon a country's resources. But is there a single step that FAO recommends that all countries should take to help prevent new food-price crises in the future?
Balbi: We think that really the underlying cause of all these food-price crises is a lack of investment in agriculture for several decades. The only sustainable policy measure is to increase production at country level and at global level. Production has not increased at the pace of the demand from the growth in population and then whenever there is a climatic problem you have this price volatility.
So, what FAO recommends as long-term solution is to increase productivity through better production techniques, better use of agricultural technology, maybe providing farmers with credit or support programs, but to increase production.
And in fact in the previous 2008 crisis, from what we monitored of the policy measures taken by governments, very few governments really adopted policies to increase production and productivity. But in countries where there really were programs to support famers -- there were countries in southern and western Africa for example -- you can see that production has increased in the past years and that may be the reason that this food crisis at the international level is not touching Africa now like in 2008, because they have had one or two years of bumper harvests.
RFE/RL put this question to Liliana Balbi, senior economist at the Early Warning System of the Food and Agriculture Organization (FAO) of the United Nations, to learn more.
RFE/RL: Food prices have gone up everywhere and some of the sharpest effects have been felt in Central Asia. Why is that?
Liliana Balbi: These countries in particular, the countries of Central Asia, they have a very large dependence on world markets. They import from one-third to 60 and 70 percent of all the cereals that they consume and that is very high. So, if you import half of your consumption requirements and the price doubles, you are really in a bad position.
RFE/RL: Some countries respond to food price increases by putting price controls in place. What are some of the advantages and disadvantages of that strategy?
Balbi: You have several countries in Central Asia and elsewhere that use these, especially for basic products like bread, for example Russia and Armenia. But the thing with price controls is the problem that the countries have to be very cautious that it does not generate speculation.
And, if the [price controls] are universal so that the price of the commodity is fixed in all markets and for everybody, then it is not very redistributive, because you benefit everybody and not the part of the population that is really needy or more vulnerable.
Easier To Begin Subsidy Than End It
RFE/RL: Another common strategy for coping with rising food prices is for governments to subsidize the cost of some basic commodities; to be sure people can afford them. Is that a good strategy?
Balbi: All the [factors] need to be weighed, but we have several examples where these measures are not effective because, if there are not a lot of administrative controls, they lead to speculation, such as doubling of prices in the market and all that.
But it depends upon each country. If the government has enough to subsidize all the prices and it is not such a burden on their budget and you have large numbers of vulnerable people, then it could work.
Subsidies have the problem that they are easy to put in place but difficult to remove. It depends on the budget of the government. If the government can support this, well, that's one situation.
But if it becomes a burden for the budget of the government and you are diverting money that could be used for development or for other purposes, well, what FAO recommends is to target very much the population or groups of population that need the subsidy.
Export Bans Raise Prices
RFE/RL: There is yet another response we sometimes see from governments facing rising food prices. That is, they ban the export of foodstuffs their country produces, such as wheat, in hopes that by keeping an adequate supply of the commodity at home they will keep its price from rising in the local market. Is that a good or bad approach?
Balbi: If there was a bad harvest and the government estimates there won't be enough for export, by banning export it increases domestic supplies. And if there is more supply, well, the price tends to be lower. So that is the idea.
But what happens is that then the price will increase in the rest of the world and that puts inflationary pressures on all economies, even in the same country that was trying to protect its consumers. So, it is very limited, we think, as an effective measure, even for the country that takes that measure. And definitely at regional and world levels, it prompts increases in prices rather than stabilizing prices.
RFE/RL: It seems there are no simple solutions to keeping food prices down and that the effectiveness of individual strategies varies widely depending upon a country's resources. But is there a single step that FAO recommends that all countries should take to help prevent new food-price crises in the future?
Balbi: We think that really the underlying cause of all these food-price crises is a lack of investment in agriculture for several decades. The only sustainable policy measure is to increase production at country level and at global level. Production has not increased at the pace of the demand from the growth in population and then whenever there is a climatic problem you have this price volatility.
So, what FAO recommends as long-term solution is to increase productivity through better production techniques, better use of agricultural technology, maybe providing farmers with credit or support programs, but to increase production.
And in fact in the previous 2008 crisis, from what we monitored of the policy measures taken by governments, very few governments really adopted policies to increase production and productivity. But in countries where there really were programs to support famers -- there were countries in southern and western Africa for example -- you can see that production has increased in the past years and that may be the reason that this food crisis at the international level is not touching Africa now like in 2008, because they have had one or two years of bumper harvests.
