FOOD SECURITY: SOME MACROECONOMIC DIMENSIONS1
The year is 1996. The subject is food security, which is defined as the access for all people at all times to enough food for an active, healthy life.2 FAO has planned and prepared a World Food Summit for 13 to 17 November 1996 in Rome with the slogan "Food for All". The International Food Policy Research Institute (IFPRI) organized a ministerial conference on the same subject in June 1995; over the past few years, the world's attention has been focused on the myriad issues surrounding food security in its many dimensions. A plethora of papers, monographs, reports and articles have explored, described and analysed the multiple facets of food security.
Indeed, FAO in preparing for the World Food Summit has published three volumes containing 15 papers on subjects related to food security ranging from the ethics of food security to investment for food security (Box 14). In addition, a policy statement and plan of action for adoption by heads of state and governments or their representatives at the Summit have been drafted, taking into account the views of governmental and non-governmental participants in the preparatory process.
Much of this work on food security has in fact been concerned mainly with food insecurity and has until relatively recently focused on the adequacy (or inadequacy) of food production to meet the nutritional needs of a growing population at the global or regional level. While production is of course important, and efforts to increase it need to continue with renewed vigour, it is only part of the picture; farmers do not grow food for altruistic reasons, but to feed themselves and their families through either production or sales, and in most developing countries the majority of the population is directly or indirectly dependent on agriculture. Furthermore, consumers (including many farmers) purchase food and in the absence of sufficient purchasing power they are unable to exert effective demand for food. In this special chapter, the question of food security is examined from a macroeconomic perspective.
The story starts rather unconventionally with a look at the economic development of Europe over the last five to six decades in order to understand what constitutes food security and provide a basis for understanding the problems of food insecurity (much as the medical profession studies health as a means of understanding disease). After a brief review of the conditions, mainly in Europe, in the aftermath of the Second World War, from which postwar thinking about food security evolved in the developed and developing countries as well as in the transition economies of Central and Eastern Europe and the former USSR, the chapter goes on to compare the food supply projections of FAO, IFPRI and the World Bank and concludes that, while there is no room for complacency and investment and technological progress must continue, sustainable food production, even for a growing population, is not the major issue. The question of effective demand for food is. In other words, the issue at stake is can people afford to buy the food that is available, and to purchase enough to ensure an adequate diet?
BOX 14 Synthesis of the Technical Background Documents |
The chapter then moves on to a discussion of the critical role of governments in choosing the appropriate combinations of monetary, fiscal, trade, investment and social policies to create an economic environment that is conducive to the attainment of food security. Although no individual government can control international economic conditions and the economies of many countries are too small to be able even to influence those conditions, each government is responsible for determining its domestic policies in the light of those conditions. The various policy responses of government and the international community required to deal with short-term fluctuations and long-term trends are then explored. The chapter examines a range of issues that affect a country's ability to achieve food security, including: the domestic macroeconomic and trade policies; food reserve stocking; the domestic generation of foreign exchange; foreign exchange and balance of payments support for food security from international agencies; the role and use of futures markets for stabilization; and the importance of debt reduction for the severely indebted low-income countries. Factors and policies affecting overall economic growth and their differential effects on the urban and rural economies are explored in order to examine food insecurity in both urban and rural areas, and what can be done in policy terms to increase food security.
Although sound economic policies are necessary for the achievement of food security, they are not easy to implement in the absence of real political consensus. In the final analysis, food security in any country is the responsibility, and must be under the authority, of the national government in conjunction with local authorities working with concerned groups and individuals within society. The international community and international agencies can assist, but cannot substitute for the actions and political will (which reflects both the scope and the limits of political action) to achieve food security within the country itself.
The desire to achieve some level of food security is as old as humankind itself. Until the last decade or so, the debate in most countries worldwide focused largely on the adequacy of food production to meet domestic needs, with a concomitant national policy emphasis on self-sufficiency in the supply of agricultural products. This focus, especially in the developed countries, has to be seen in the context of the Second World War and its aftermath, which had a profound effect on the minds of governments and societies. Throughout western, Central and Eastern Europe, for example, the years of the Second World War saw real food shortages caused not only by the disruption of agricultural production, but also (and for some countries this was much more important) by supply requisitioning and disruption of international trade and internal marketing arrangements. The early post-war years were characterized by economic reconstruction and tight exchange controls to conserve scarce foreign exchange reserves and these restricted the ability to feed the population through agricultural and food imports, although the existence of "currency zones" (such as the sterling area and the rouble zone) and the Marshall Plan enlarged the trading possibilities beyond national boundaries. Food rationing and price controls for both urban and rural consumers were used to ensure an equitable allocation of the food available during the war, and these were phased out over several years after the war's end. At the same time, policy measures to encourage the expansion of agricultural production on a long-term basis rather than to meet the immediate crisis needs were introduced and the emerging welfare states cast wide safety nets to protect the vulnerable sections of the population, including the poor, the sick, the elderly, the unemployed, the mentally and physically disabled and children.
The circumstances that produced these agricultural and food policy responses were characterized by a period of reconstruction and rehabilitation for countries that were already industrially advanced with relatively small and declining agricultural sectors and low population growth rates. While special incentives were provided to agriculture, this was not done at the expense of industry. In western Europe, for the 15 countries that now constitute the European Union (EU), the annual growth rates of agricultural and industrial production for the years 1948 to 1958 were 3.5 percent and 7.3 percent respectively, while average population growth was 0.7 percent per annum. Exports grew at about 9 percent per annum compared with 6 percent for imports.
After the period of reconstruction, industrial and agricultural output growth rates slowed, but the volume of trade, including agricultural and food products, soared, with imports and exports growing, and continuing to grow, at an annual rate of about 11 percent.3 The relative decline of the importance of the agricultural sector in terms of the economy as a whole meant that although the budgetary costs of agricultural support remained high in absolute terms, they decreased as a proportion of national expenditure.
The outcome of the post-war agricultural policies (and not just in the countries covered by the Common Agricultural Policy [CAP] of the EU because all countries made similar efforts to increase agricultural production) has been high levels of self-sufficiency in agricultural production - of well over 100 percent in many temperate-zone products, although this does not mean that each country is more than 100 percent self-sufficient in every product. The EU is a substantial importer and exporter of agricultural and food products with the rest of the world, even though a large proportion of its trade is intra-EU, and it has made an important contribution to increasing world food supplies.
Given this record, it might seem inappropriate to question whether the EU can be said to have achieved food security and in what sense it may or may not have done so. These questions are important, however, because the mindset that laid so much stress on agricultural self-sufficiency in the light of the wartime experiences has only recently begun to change in western Europe, and the transition economies of Central and Eastern Europe now have to face similar questions as they reorient their agricultural and food policies. So it is important that food security be defined clearly.
Food security has been defined as the access for all people at all times to enough food for an active, healthy life. The three key ideas underlying this definition are: the adequacy of food availability (effective supply); the adequacy of food access, i.e. the ability of the individual to acquire sufficient food (effective demand); and the reliablity of both. Food insecurity can, therefore, be a failure of availability, access, reliability or some combination of these factors.
Inherent in this modern concept of food security is an understanding of food producers and consumers as economic agents. Food availability is the supply of food, which depends, inter alia, on relative input and output prices as well as on the technological production possibilities. Food access is concerned with the demand for food, which is a function of several variables: the price of the food item in question; the prices of complementary and substitutable items; income; demographic variables; and tastes or preferences.4 According to Barraclough, to ensure food security, a food system should be characterized by:
It is worth adding explicitly that a secure food system must be able to deliver inputs and outputs (both those produced and consumed domestically and those traded internationally) where and when they are required.
Within this understanding, is the EU, for example, food secure?
[It] cannot really be claimed that the high levels of self-sufficiency experienced in most branches of EC [European Community] agriculture make a positive contribution to the level of food security enjoyed by the EC's citizens. It is helpful to draw a distinction between self-sufficiency in production and a self-sufficient farming system. The EC's high levels of self-sufficiency in production are often dependent upon heavy use of imported or exportable animal feeds and fuels which are just as susceptible to economic or military blockade as are the foods they produce; and provide no relief for local harvest failure.6
So it cannot be agricultural self-sufficiency that makes the EU food secure, yet food secure it undoubtedly is at the level of the EU itself and of each member state in circumstances short of the cataclysmic. The high post-war levels of economic growth, together with low population growth rates, have resulted in high and growing levels of material prosperity for the majority and the provision of safety nets for the vulnerable. The increasing levels of agricultural productivity and total output, new technologies for food processing and storage, good distribution infrastructure and, critically, an economic system that supplies the goods that consumers wish to purchase have resulted in the availability of a wide range of high-quality and safe foods for domestic consumption and export. In spite of the fact that the policy measures used to implement CAP led to higher consumer prices than would alternative measures, rising consumer incomes and declining real prices of agricultural produce mean that the share of food expenditure in the household budget continues to decline. For all practical purposes, the EU participates in a liberal trading environment on the basis of fully convertible currencies, which, together with strong and stable links with its main trading partners, ensures its ability to import at will. It is this bundle of characteristics that underpins food security in the EU and also in the rest of western Europe as well as such countries as Japan, Canada, New Zealand, Australia, the Republic of Korea, Taiwan Province of China, Hong Kong and Singapore. In practice, this is also true of the United States, although the size and nature of its resource base and infrastructure are such that of all the developed countries, it is perhaps the least vulnerable to external events.
Nevertheless, there are pockets of food insecurity in even the richest countries because food security at the national level does not mean that every household in the country is food secure. The meshes of the safety net may be too large to prevent some individuals and specific groups of individuals from falling through and government policies in several industrialized countries have tended recently to increase the mesh size. A proportion of the population can be living in absolute, not just relative, poverty. Within countries, the food-insecure poor comprise different sub-groups, differentiated by location, occupational patterns, asset ownership, race, ethnicity, age and gender. Thus, at the household or individual level there may be problems of food insecurity caused by inadequate access to food. The relationship between national and household food security is one of the most important and difficult issues confronting governments in all countries at all levels of wealth and development. It is further complicated by the fact that "having adequate household access to food is necessary but not sufficient for ensuring that all household members consume an adequate diet... and consuming an adequate diet is necessary but not sufficient for maintaining a healthy nutritional status".7 A distinction has sometimes been made between chronic and transitory food insecurity at the household level.8 Chronic food insecurity involves a continuously inadequate diet caused by the persistent inability to acquire food. Transitory food insecurity is a temporary lack of adequate food access for a household, arising from adverse changes in food prices, food production or household incomes. With this perspective, the policy options for reducing food insecurity are seen as depending on whether the case is chronic or transitory. Measures to address chronic food insecurity would include increasing the food supply, focusing on development assistance or income transfers for the poor and helping the poor to obtain knowledge about nutrition and health practices. Transitory food insecurity could be ameliorated by stabilizing supplies and prices and assisting vulnerable groups with emergency employment programmes, income transfers or food. How useful this distinction is in making policy choices is open to question. For instance, how temporary is "temporary"? Are the unwanted food insecurity effects of structural adjustment and transition programmes temporary or chronic? Do we have to know before we decide how to deal with them?
The answer is "no". The need is for policy measures that address all aspects of food insecurity with a view to providing the vulnerable with safety nets (which can vary over an individual's lifetime and in response to external emergencies) and to creating the conditions that can lead to an eradication of endemic hunger. This requires economic growth. Countries that have seen negative (or stagnant) growth rates of agricultural production and GDP with a growing population have ever-diminishing resources (which were often very small to start with) to share among an increasing number of people. Improving the equitableness of income distribution can only achieve limited results in these circumstances and, as has frequently been seen, will be strongly resisted by the potential losers. So growth is necessary and, against a background of economic growth, experience shows that it is less difficult (although still never easy) to implement measures that increase equity, particularly if the growth is broadly based to include the agricultural sector. Indeed, many if not all of the countries that are now regarded as being food insecure are characterized by an agricultural sector on which a large proportion of the population still depends directly or indirectly for a livelihood, and this was not true of post-war Europe. Increasing agricultural productivity and incomes in such countries therefore increases the effective demand for food and so is at the heart of improving food security. One of the lessons that can be learnt from Europe, however, is the importance of economic policies that at least do not discriminate against agricultural development and growth.
It is clear from the foregoing discussion that the subject of food security in its most complete sense touches on many different technical disciplines, each of which provides a partial illumination of some of the complex issues at stake. This chapter is written from a political economy perspective and focuses on some of the major economic and trade policies that bear on the achievement of food security.
WHAT ARE THE PROSPECTS FOR WORLD FOOD SECURITY?
On a global level, food security for all requires that the supply of food be adequate to meet the total demand for food. While this is a necessary condition for the achievement of food security, it is by no means sufficient. Although currently enough food is supplied globally, it is estimated that in 1990-92 some 839 million people in the developing countries had inadequate access to food, fundamentally because they lacked the ability to purchase or procure enough, that is, they lacked the means to exert effective demand. This figure, unacceptably high though it is, reflects a substantial degree of progress since the beginning of the 1970s; the number has declined in absolute terms from about 917 million and in relative terms from 35 percent of the population of developing countries to 21 percent, mainly as a result of progress in East Asia (including China) and parts of South Asia, such as India and Pakistan. The situation is most serious in Africa where the number of chronically undernourished people in the sub-Saharan countries more than doubled over the period according to FAO estimates.9 Figure 13 shows the past and projected changes in the number of undernourished people in the developing countries.
What are the medium-term prospects for food supply and demand? FAO, IFPRI and the World Bank have all attempted to make projections to the year 2010.10 Although there are some problems with comparability because of such factors as the differences in base year data, country and commodity coverage and regional definition, indicative comparisons of production, total use and net trade in cereals are possible. The results of the three models are presented in Tables 6 to 9.
TABLE 6 | ||||
Data for 1989-91 and projections comparisons for all cereals (rice milled): developed countries | ||||
World |
Developed countries | |||
Former centrally planned economies1 |
Other industrialized2 |
Total | ||
(............................................... million tonnes ...............................................) | ||||
Production |
||||
Actual 1989-91 |
1 726.5 |
266.0 |
597.8 |
863.8 |
Projected 2010 |
||||
FAO |
2 334.0 |
306.0 |
710.0 |
1 016.0 |
IFPRI |
2 405.0 |
324.0 |
785.0 |
1 174.0 |
World Bank |
2 311.0 |
324.0 |
733.0 |
1 058.0 |
Total use |
||||
Actual 1989-91 |
1 729.8 |
302.1 |
475.0 |
777.1 |
Projected 2010 |
||||
FAO |
2 334.0 |
301.0 |
553.0 |
854.0 |
IFPRI |
2 406.0 |
381.0 |
634.0 |
1 015.0 |
World Bank |
2 308.0 |
308.0 |
540.0 |
848.0 |
Net trade |
||||
Actual 1989-91 |
3.6 |
-37.2 |
129.7 |
92.5 |
Projected 2010 |
||||
FAO |
... |
5.0 |
157.0 |
162.0 |
IFPRI |
-1.0 |
8.0 |
151.0 |
159.0 |
World Bank |
0.0 |
15.0 |
195.0 |
210.0 |
Notes: | ||||
TABLE 7 | ||||||||||
Data for 1989-91 and projections comparisons for all cereals (rice milled): developing countries | ||||||||||
Developing countries | ||||||||||
Sub-Saharan Africa |
Near East and North Africa1 |
Asia and the Pacific |
Latin America and the Caribbean |
Others |
Total not allocated by region | |||||
South Asia1 |
China including Taiwan2 |
Others |
||||||||
(........................................................ million tonnes ........................................................) | ||||||||||
Production |
||||||||||
Actual 1989-91 |
54.7 |
76.8 |
202.8 |
326.8 |
104.6 |
97.0 |
... |
862.7 | ||
Projected 2010 |
||||||||||
FAO |
110.0 |
119.0 |
292.0 |
473.0 |
165.0 |
159.0 |
... |
1 318.0 | ||
IFPRI |
86.0 |
118.0 |
297.0 |
426.0 |
153.0 |
152.0 |
... |
1 232.0 | ||
World Bank |
83.0 |
97.0 |
282.0 |
475.0 |
151.0 |
144.0 |
20.0 |
1 253.0 | ||
TOTAL USE |
||||||||||
Actual 1989-91 |
64.7 |
114.2 |
203.3 |
339.8 |
119.3 |
111.4 |
... |
952.7 | ||
Projected 2010 |
||||||||||
FAO |
129.0 |
191.0 |
302.0 |
488.0 |
185.0 |
185.0 |
... |
1 480.0 | ||
IFPRI |
118.0 |
183.0 |
307.0 |
440.0 |
176.0 |
165.0 |
3.0 |
1 392.0 | ||
World Bank |
96.0 |
169.0 |
312.0 |
502.0 |
189.0 |
172.0 |
20.0 |
1 459.0 | ||
NET TRADE |
||||||||||
Actual 1989-91 |
-8.5 |
-38.4 |
-3.2 |
-14.7 |
-12.7 |
-11.3 |
... |
-88.8 | ||
Pro jected 2010 |
||||||||||
FAO |
-19.0 |
-72.0 |
-10.0 |
-15.0 |
-20.0 |
-26.0 |
... |
-162.0 | ||
IFPRI |
-32.0 |
-65.0 |
-10.0 |
-14.0 |
-23.0 |
-13.0 |
-3.0 |
-161.0 | ||
World Bank |
-14.0 |
-73.0 |
-31.0 |
-22.0 |
-37.0 |
-28.0 |
-5.0 |
-210.0 | ||
Notes: | ||||||||||
TABLE 8 | ||||
Annual percentage growth rates of production and total use of all cereals: developed countries | ||||
World |
Developed countries | |||
Former centrally planned economies1 |
Other industrialized |
Total | ||
(.............................................. million tonnes ..............................................) | ||||
PRODUCTION GROWTH RATES |
||||
Actual 1970-80 |
2.7 |
1.4 |
2.9 |
2.4 |
Actual 1980-91 |
1.6 |
1.4 |
0.2 |
0.6 |
Projected 1989-91 to 2010 |
||||
FAO |
1.5(1.6) |
0.7 (0.5) |
0.9 (1.1) |
0.8 (0.9) |
IFPRI |
1.7 (1.6) |
1.9 (1.5) |
1.4 (1.3) |
1.6 (1.4) |
World Bank |
1.5 (1.2) |
1.0 (0.2) |
1.0 (0.8) |
1.0 (0.8) |
TOTAL USE GROWTH RATES |
||||
Actual 1970-80 |
2.5 |
2.9 |
0.9 |
1.6 |
Actual 1980-91 |
1.8 |
0.1 |
0.6 |
0.7 |
Projected 1989-91 to 2010 |
||||
FAO |
1.5 (1.5) |
0.0 (-0.1) |
0.8 (0.8) |
0.5 (0.4) |
IFPRI |
1.7 (1.6) |
1.2 (0.9) |
1.5 (1.3) |
1.3 (1.1) |
World Bank |
1.5 (1.4) |
0.1 (-0.4) |
0.1 (0.7) |
0.4 (0.3) |
Notes: | ||||
TABLE 9 | |||||||
Annual percentage growth rates of production and total use of all cereals: developing countries | |||||||
Developing countries | |||||||
Sub-Saharan Africa |
Near East and North Africa1 |
Asia and the Pacific |
Latin America and the Caribbean
|
Total | |||
South Asia1 |
China including Taiwan2 |
Others |
|||||
(............................................................. million tonnes .............................................................) | |||||||
PRODUCTION GROWTH RATES |
|||||||
Actual 1970-80 |
1.4 |
2.8 |
2.7 |
4.0 |
3.0 |
2.4 |
3.1 |
Actual 1980-91 |
3.4 |
3.4 |
2.9 |
3.0 |
2.5 |
0.6 |
2.7 |
1989-91 to 20103 |
|||||||
FAO |
3.5 (3.4) |
2.2 (2.3) |
1.8 (1.8) |
1.9 (2.0) |
2.3 (2.1) |
2.5 (2.3) |
2.1 (2.1) |
IFPRI |
2.3 (2.4) |
2.2 (2.1) |
1.9 (2.2) |
1.3 (1.6) |
1.9 (1.9) |
2.3 (1.8) |
1.8 (1.9) |
World Bank |
2.1 (3.3) |
1.2 (1.9) |
1.7 (1.6) |
1.9 (1.6) |
1.9 (1.8) |
2.0 (2.1) |
1.9 (1.8) |
TOTAL USE GROWTH RATES |
|||||||
Actual 1970-80 |
2.5 |
4.5 |
2.2 |
4.4 |
3.2 |
3.9 |
3.6 |
Actual 1980-91 |
3.1 |
3.6 |
3.0 |
2.6 |
3.2 |
1.5 |
2.8 |
1989-91 to 20103 |
|||||||
FAO |
3.5 (3.4) |
2.6 (2.5) |
2.0 (1.8) |
1.8 (1.9) |
2.2 (2.1) |
2.6 (2.4) |
2.2 (2.2) |
IFPRI |
3.0 (3.0) |
2.4 (2.2) |
2.1 (2.3) |
1.3 (1.7) |
2.0 (2.1) |
2.0 (1.7) |
1.9 (2.0) |
World Bank |
2.0 (3.1) |
2.0 (2.4) |
2.2 (2.0) |
2.0 (2.1) |
2.3 (2.1) |
2.2 (2.5) |
2.2 (2.2) |
Notes: | |||||||
BOX 15 Opinions differ about the role China will play in the world grain market. Estimates of China's net grain imports over the next 15 to 30 years range from a forecast of fundamental self-sufficiency to a very unlikely high of 200 million tonnes depending on the assumptions made about several key parameters. A number of sources maintain that China's grain imports could reach 30 to 40 million tonnes, an amount that is less than the former USSR imported in the late 1980s and that would have little effect on the long-term real price of grain. To economize on transport costs and facilities, most of these imports are likely to go to the large cities and coastal region, thus assuring adequate supplies at stable prices. As a result of policy changes made in 1994, Beijing has delegated responsibility for the grain supply of each province to each provincial government. This means that Beijing has largely lost control of the national grain supply since provinces producing surplus grain can (and do) restrict exports to other provinces until they are certain their own needs have been met. This was one reason for the volatile price situation in 1994; grain did not readily move from the surplus to the deficit areas. Thus the move to a national market, which seemed assured by the 1993 reforms, has now been delayed, probably for several years and, if China does import enough grain for its large cities and the coastal area, the national market may well be delayed for decades. In recent years, China has procured about 80 million tonnes of grain domestically, although this figure was probably even lower in 1994 and 1995. Consequently, 40 million tonnes is a very large figure relative to the marketed grain in China. Although 30 to 40 million tonnes of grain imports is a possibility a decade or more into the future (wheat imports are some 11 million tonnes per year), whether the figure will in fact be that high depends on: what China does to encourage domestic grain production in terms of price policy, research, facilitating farm enlargement and ensuring adequate supplies of good-quality fertilizer; the rate at which the demand for livestock products grows; and the country's ability to generate foreign exchange. With regard to pricing policy, it was announced in March 1996 that state grain purchasing prices were to be raised by 20 percent to encourage increased production. New information from surveys in China and satellite pictures suggests that the grain area has been seriously under-reported, which means that the potential for yield increases is far greater than was previously thought. The survey data also suggest strongly that stocks have been substantially underestimated. In assessing the demand for livestock products there are serious discrepancies in the official data on meat and poultry production from the various sources. The output data for meat and poultry implied a per caput availability of more than 32.5 kg in 1993, while the household survey data put consumption at about half that amount. If per caput consumption was in fact 32.5 kg (which has since increased according to the same data measurement methods to about 38 kg), consumption growth should start to slow down, although there has not yet been any indication of this happening. What is perhaps more disturbing is that, while meat and poultry production is said to have increased substantially since 1985, per caput urban purchases only increased from about 22 kg in 1985 to 24.5 kg in 1993, with rural consumption increasing from 12 kg to 13.3 kg over the same period, according to the household surveys. Over the same period, the output of meat and poultry almost doubled from 19.3 million tonnes to 38.4 million tonnes, while the population increased by 12 percent. Another data series puts per caput consumption of pork, beef and mutton at 16.75 kg in 1985 and 27.37 kg in 1993, while yet another, on per caput consumption of selected consumer goods, puts per caput consumption of meat and poultry at 16.5 kg for 1985 and 22.6 kg for 1992. All of these figures are in the Statistical Yearbook of China. A major factor affecting future demand for grain is the consumption of meat. There is great uncertainty about how much meat is now being produced and consumed and how much grain is being used to produce meat, milk and poultry. Most of the published projections of future demand for and supply of grain fail to recognize the ambiguities in the data on the production and consumption of livestock products. The response of the government to rising imports is also critically important.1 Continued investment in agriculture and agricultural research, appropriate pricing policies and increased use of imported production technology, such as seed, are ways of boosting domestic supply. However, given that far larger import volumes than have hitherto been experienced seem probable, investment will also be needed in the marketing infrastructure and institutions to cope with the expanded grain trade. 1 S. Rozelle, J. Huang and M. Rosegrant. 1996. Why China will not starve the world. Choices, First Quarter 1996. |
It can be seen that there is broad agreement regarding projected annual percentage rates of change in production and total use at the global level and for all developing countries taken as a whole, as well as for some of the developing country regional groupings. The greatest divergences in opinion centre on the former centrally planned economies (CPEs), sub-Saharan Africa, the Near East and North Africa and China (see Box 15 on p. 276 for an alternative view of Chinese trade prospects), as well as on total use (essentially consumption) in Latin America and the Caribbean. The FAO and IFPRI projections for net trade at the level of aggregation of "total developed" and "total developing" countries are very close and substantially lower than those of the World Bank, which foresees a far more rapid growth in world grain trade largely as a result of expanded wheat imports into the Asian countries to meet changing consumer preferences away from rice. The FAO and IFPRI net trade projections are more variable for the regional groupings, most notably for sub-Saharan Africa, the CPEs and Latin America and the Caribbean.11
As in all exercises of this type, the outcomes are critically dependent on the validity of the assumptions made about the exogenous environment, rates of changes in the individual variables, the interaction among the different variables and the accuracy of the baseline data.12 Nevertheless, all three studies conclude that the growth in global supply will be sufficient to meet the growth in global demand, and all highlight sub-Saharan Africa as an area that should cause particular concern, whatever the deficiencies of the model might be.13 Although real world grain prices are expected to continue their long-term decline (despite the recent price spike),14 the rate of increase in the demand for food in sub-Saharan Africa is expected to outstrip that of supply, and the ability to meet the increasing demand would therefore depend on the ability of the individual countries to pay for those imports not covered by food aid.
The conclusion that global food supplies can increase fast enough to meet expected demand at constant or even declining real food prices leaves no room for complacency on the supply side. Continuing increases in agricultural output, be they through area expansion (absolutely, through multiple cropping or through reduced fallow periods) or productivity increases, require sustained efforts to improve agricultural technologies and their rate of adaptation and to avoid or reverse environmental degradation so that the output increases are not only sustained but sustainable. In other words, sufficient resources must be committed to investment in agriculture on a continuous basis if the projected potential output increases at global, regional and country levels are to be realized.
If there is no room for complacency on the supply side, there is even less on the demand side. The projections are not based on meeting basic nutritional needs, but on expected effective demand, i.e. the ability to pay. By the year 2010, it is expected that the absolute numbers of chronically undernourished people in the developing countries will have fallen - estimates vary depending on the assumptions made - to perhaps some 680 million, representing 12 percent of the population of these countries instead of 21 percent as at present. While it is reassuring to be told that the world can in principle produce enough food to meet likely demand, the probable inability of so many people to exert sufficient effective demand to feed themselves at even minimally adequate levels is deeply disturbing. Experiences in the countries that have made and are continuing to make good progress, even in the face of a difficult international economic environment, show that governments are the key players in implementing domestic and trade policies which can lead to the achievement of national food security and that economic policies are of particular significance.15
It is difficult to apply the concept of food security at the global or the regional level where region is defined on a geographical rather than a politico-economic basis. Sub-Saharan Africa has been identified as a region where food insecurity is likely to worsen. What this actually means is that a high proportion of countries in that region are expected to have a worsening food security position. Conversely, some of the regions that are expected to improve overall, or at least not to worsen, include individual countries that might see deterioration. The highest level of aggregation at which the concept can reasonably be made operational is that of the national government (the only realistic - and even then partial - exception to this would be the EU because of its degree of politico-economic cohesion) since the achievement of food security depends on action by those who have the power and the responsibility to act. This does not preclude the necessity for action by external agents, such as donor governments, international agencies, NGOs and multilateral and bilateral lenders, to support developing country governments in the fulfilment of their responsibilities.
Since the early 1980s, policy reforms initiated in many countries have been biased in favour of greater market orientation and a more open economy.16 There has been a movement away from the concept of development, including agricultural development, as planned change by public agencies. Indeed, this period has seen a serious questioning of the very role of government - what it should and should not properly do in a market economy. In this context, it is clear that government has a vital role to play if a functioning free-market economy, rather than one that is merely a free-for-all, is to emerge in such a way that the sustained and sustainable economic growth on which long-term national food security depends can occur and that its benefits are distributed equitably.
What then is the role of government and what can governments do that no other body can? Put simply, governments need to govern and this has traditionally been taken to mean securing the borders and protecting the population from both external and internal threat, i.e. keeping the peace without which food security is threatened. It also means ensuring the establishment and enforcement of a legislative and judicial system that defines the rights and obligations of individuals and legal entities, regulates their activities in the public interest and protects their agreed rights. A strong, fair and stable legislative framework is necessary to guide and regulate the individual players in the market and to ensure that they all play by the same set of rules through enforcement of the law so that market activity can contribute to food security for all. Only governments can create the favourable and stable macroeconomic and trade environment that can enable national food security to be realized. For countries in transition, be it from centrally planned to market economies, because of the implementation of structural adjustment policies or simply as a part of the normal process of economic development, the role of government is especially difficult. Governments need to invest in the infrastructure for progress. Inherent in this must be the recognition that investment in the development of human resources (building human capital of both women and men) and action to alleviate poverty add to, rather than subtract from, a country's growth potential and are essential for ensuring food security for all sections of the community. This type of investment includes the provision of those services and infrastructure that have a large public good component, such as education, health, public utilities and roads, and that cannot therefore be provided adequately by the private sector. In addition, the demands of adjustment or development might in some cases require the government to provide temporarily some of the services that can in principle be supplied by the private sector once the successful implementation of policy reform has allowed its capacities to develop sufficiently. In order to avoid stifling the development of the nascent private sector, any such activities, whether undertaken by governments or other agencies, need to be carefully planned and coordinated.
The achievement of food security on a sustainable basis therefore requires that governments take action on a number of different policy fronts. Trade and macroeconomic policies that permit and foster overall economic growth and increase competitiveness in export markets are needed; they should also correct past distortions that favour one sector of the economy to the detriment of others. Agricultural sector policies should be designed to promote sustained and sustainable sector growth in order to increase both domestic food supply and those agricultural and food exports for which the country has a comparative advantage. Although economic growth is very important for addressing the underlying causes of food insecurity, "economies cannot be expected to grow quickly enough to eliminate the chronic food insecurity of some groups in the near future, even under the best of circumstances. Moreover, long-run economic growth is often slowed by widespread chronic food insecurity. People who lack energy are ill-equipped to take advantage of opportunities for increasing their productivity and output".17 Furthermore, gross inequalities of income distribution may prevent the resource-poor from participating in the growth process and certain policy reforms may of themselves have substantial negative impacts on vulnerable groups in society. Special measures may be needed in the short and medium terms to deal with specific cases of food insecurity and to ensure that essential food imports can be financed. Over the long term, some special measures will always be needed, although their nature may change.
It must be re-emphasized that the successful implementation of agricultural and food policies alone cannot achieve a national objective of food security. The elimination of absolute poverty, the root cause of food insecurity, requires action across the board to enable people to escape the cycle of poverty and malnutrition that traps successive generations. Yet the achievement of food security does not have to wait for the eradication of poverty. It is repeatedly stated by international agencies, donor governments, world summits and just about everybody involved in development that the resources and the means to eliminate food insecurity exist, but that the problem is the lack of political will. If governments would only readjust their priorities accordingly, the problem could be solved - although discussion about the time-frame required is studiously avoided. "Success stories" tend to concentrate on the policies that a particular country has implemented without delving too deeply into the socio-political circumstances that enabled it to implement those policies. Rarely is it asked why the political will might be lacking:
Political will is journalistic shorthand for the overcoming of the conflicting interests, ideological blinkers and structural constraints that usually make it impossible for governments to do what is technically feasible and clearly necessary to solve a serious problem. The term contributes to good journalism, but poor social science. Social scientists have to explain why political will is lacking and what might be done to produce it.18
The findings of research on food systems by the United Nations Research Institute for Social Development (UNRISD) are unusual in that the question of political will is raised explicitly. They cast doubt on the political possibilities, rather than the strictly technical ones, of rapidly improving food access for the very poor. This applies to industrialized countries who have widely differing levels of social and economic deprivation as well as to countries at other stages of development. Governments are, after all, dependent on the groups to whom they owe their support, and their room for manoeuvre is correspondingly restricted:
If the problem is really systemic, as the UNRISD team believes, then it can be dealt with effectively only through both fundamental public policy and social change. The latter implies new power relationships among individuals, social classes, groups and nations. Social changes do not come about easily. Convincing political leaders that hunger and poverty are serious and solvable social problems does not bring about political will, although in some circumstances it might help.... In alleviating hunger, politics matters.... How are sufficient political pressures generated to force governments to adopt effective strategies leading to rapid diminution of poverty and hunger? Answers are unique for each time and place. Where social forces have emerged capable of bringing about such policies, however, there have been at least three broad and closely interrelated social processes at work.19
The three social processes referred to are identified as: modernization processes - the social impact of economic growth and technical change; the rapidly increasing availability and dissemination of information, which contributes to social change by changing perceptions and ideologies; and popular participation - the mobilization and organization in a real sense of those previously excluded by lack of control over resources or influence over government. The interactions between political, social, economic and ecological systems and processes as they affect people's access to food - locally, nationally and internationally - are extremely complex and the problems admit of no easy solutions. It follows, and is frequently observed, that there is rarely anything as simple as a technical solution to a complex problem. To take a simple example, assume crop yields can be increased by increasing fertilizer applications, whether fertilizer will in fact be applied depends on many other factors, such as are fertilizer imports regarded as being sufficiently important for the government to guarantee foreign exchange availability on a reliable basis? can the distribution system get the fertilizer to the right place at the right time? do the farmgate prices for output justify its use? can farmers obtain the resources to buy it in the first place? and are some farmers restricted in their access to fertilizer for political or other non-economic reasons?20 It is important to note that here the issue is not so much the political will to establish state interventions or subsidies to encourage an otherwise uneconomical fertilizer use, but the political will to remove existing distortions or privileges.
There are many technical questions (covering a wide range of professional disciplines) concerning food insecurity that require technical answers. Should fertilizer be applied? In certain agro-ecological circumstances, if yields are to be increased, it should be. However, because the basic problems of food insecurity are not purely technical, the solutions are not purely technical either. So fertilizer will be applied only if the political, social and economic configuration determines that it shall be. The rest of this chapter examines some of the economic questions of food security and the policy implications for the governments concerned.
RELIABILITY AS A COMPONENT OF FOOD SECURITY: SHORT-TERM FLUCTUATIONS AND LONG-TERM TRENDS
It is an accepted legal precept that hard cases make for bad law; it could with equal justice also be said that short-term crises make for bad policy. This chapter was written against the background of a perceived global grain crisis, which is of its nature short-term while nevertheless having serious longer-term impacts on several low-income food-deficit countries (LIFDCs). While reacting to an urgent situation, it is important that the longer-term issues are not ignored.
The reliability component of food security concerns both availability and access and is often confused with stability, although the questions of what stability and for whom are rarely addressed explicitly. Weather and other acts of nature affect the stability of supply; abrupt changes in demand affect the stability of price; and the interaction of macroeconomic and sectoral policies within and across countries can affect both.
Fluctuations on the supply side of cereal production have a disproportionate impact on prices because of the relatively small short-term price elasticity of demand for cereals in the aggregate. A major cause of supply instability is a weather-induced shock such as occurred in the early 1970s, when the 1973 cereal crop fell to 3.5 percent below trend, and again in 1995 when the production fall was 3 percent below trend (the effects of this are still being seen). Adverse weather conditions in North America, northern Europe and major parts of the former USSR, together with failure of the monsoon in South Asia, resulted in the 1973 cereals crop being 3.5 percent below trend. This, given that the United States Government had decided in the late 1960s to stop holding large stocks, together with a number of other factors that occurred simultaneously (such as the first oil price shock and its aftermath, which contributed to increases in the prices of many agricultural inputs, and the change in Soviet policy to import cereals during domestic shortage rather than slaughter livestock herds) caused a sharp and rapid escalation of prices in international cereal markets (Figure 14).
A similar weather-induced phenomenon occurred in 1995, with a drop in global production to 3 percent below trend. World grain prices rose sharply during 1995 and further price increases are possible given the unusually low policy-induced stocks and problematic growing conditions in several producing areas. From January to June 1996, United States wheat export prices were up by about 30 percent from a year before, but importers of United States grain were frequently facing price increases of 50 percent or more caused by the reduction or elimination of the export price subsidy. The United States export price of maize, the leading coarse grain, rose by 46 percent over the same period, and this is reflected in prices paid by importers. Rice prices have also risen markedly, despite significant stocks in India and China. The grain import costs faced by many importing countries have increased even more because key exporters have largely suspended export price subsidies. Exporter supplies are tight and world grain stocks have dropped to the lowest level since the early 1970s, the stocks-to-use ratios for cereals being only 14 percent.
Current analysis and market information suggest that grain prices are likely to ease only after the 1996 output level is well defined. Serious drought or other indications of a significant production shortfall, however, could lead to higher and even more volatile prices. If crop conditions progress normally, wheat prices are expected to ease noticeably after the northern hemisphere harvest, perhaps in October and November when the expected large out-turn in Canada is known. The coarse grain market is susceptible to even greater short-term volatility as a result of heavy dependence on just one geographic region - the United States cornbelt area.
The grain market phenomenon is thus one of short-term fluctuations involving sharp price rises and less sharp price falls (the price falls are naturally of less concern to the importing countries, although not to the exporting countries whose policies have been designed to mitigate the falls to a greater extent than the rises) around a long-term decline in the trend of real world grain prices. The rate of decline appears to be slowing down, but there is as yet no real evidence that it has bottomed out. Even at its peak, the 1995/96 price spike reflected a lower real price than at any time between 1970 and 1985, and has never exceeded about 45 percent of the real price in 1974 (Figure 14). The commodity markets for the major tropical agricultural export crops also show great price variability around even more steeply declining long-term real prices.
The price impact of the weather-induced supply shocks of 1973 and 1995 on international markets was of longer duration in both instances than it would have been in an open-market, liberal trading environment because many countries, both exporters and importers, have policies that isolate the domestic market from the international market. This isolation means that price signals from the international market do not reach domestic producers or consumers, who therefore do not adjust to international market conditions. In effect, longer-lived instability is exported to the international market by these countries. The adjustment that occurs takes place within the few countries that have relatively open agricultural economies and tends to be large because the adjustment burden is not being shared by all.
Specific examples illustrate the effects of policy on international market stability. The EU, for instance, has long had in place a support policy for wheat producers that maintains a stable producer price, usually well above the international price. This is achieved through a variable levy system that maintains a constant threshold price, and this is the price paid by importers of wheat in the EU. A variable levy or tax based on the difference between the threshold price and the international market price is imposed on EU imports. To dispose of surplus wheat production into the export market, an export restitution is paid to exporters based on the difference between the domestic support or intervention price and the international market price.
In the cases of both the 1973 and 1995 production shortfalls, the international price for wheat rose above the threshold price and the EU switched from the variable levy and export restitutions to an export tax that maintained the level of the threshold price. Thus, just as EU producers were shielded from having to adjust to the normally lower and fluctuating international price by reducing production, they were also discouraged from adjusting to the higher international price by increasing production because of the export tax. The stabilization of consumer prices also meant that consumers had no incentive to adjust their consumption patterns to changing conditions in world markets. This means that the EU, a major producer of wheat, did not adjust production downwards in response to low international prices and, in fact, exported surpluses into the international market, thereby exacerbating the low prices. In addition, it did not adjust production upwards in response to a higher international price, instead it withheld exports into the international market, thereby exacerbating the international price rise. In the first instance, producers in adjusting exporting countries lost and consumers or governments in importing countries gained, while in the second instance producers in adjusting exporting countries gained and consumers or governments in importing countries lost. The CAP reforms of the early 1990s, including a set-aside provision, have dampened, but not totally negated, the effects described above. South Africa also took measures to stabilize domestic prices by halting grain export contracts in mid-1995. The United States policy reforms have involved a switch to partially and then fully decoupled deficiency payments, but at the same time there was, and still is, the Export Enhancement Program (EEP) (although its use has been suspended during the 1996 price spike). Both the United States and the EU have further dampened producer response to price fluctuations by the use of land set-aside schemes.
Consumers or governments are referred to in the above paragraph because a number of wheat-importing countries also shield themselves, this time their consumers, from changes in the international market price, particularly when that price rises precipitously. Such countries, sometimes using a parastatal marketing agency, purchase wheat in the international market at the international market price and sell into the domestic market at a higher price (tax) if the international price is low or at a lower price (subsidy) if the international price is high. So consumers in these importing countries are not forced to adjust to international market conditions, demand either too much or too little and force further adjustments into the international market. This increases the adjustment burden on those countries that do the adjusting.
As Johnson put it:
Much of the price variability in international market prices is man-made - it is the consequence of policies followed by many governments. In short, national policies that stabilize domestic prices for consumers and producers do so at the cost of international price variability unless the domestic price stability is achieved by holding stocks of sufficient size to create what is in effect a perfectly elastic supply curve for the relevant food product. But countries other than Canada, India and the United States have not held stocks of such size; consequently almost all national programmes of domestic price stability are achieved by varying imports and exports to make supply equal domestic demand at the predetermined and stable price. In this way, all the potential price effects of domestic demand and supply variations are imposed on the world market.21
Nevertheless, changes are occurring in the global environment within which international trade takes place; from the point of view of global and national food security, future strategies need to differ from those of the past. It is also clear that the food security policy responses to the short-term fluctuations and long-term trends need to be different.
There is an underlying concern about the possible disruption of world grain markets in the sense of price spikes caused by massive increases in demand by some of the major importing countries. The countries that are large enough to have the potential to do this are China and India; their size and geographical and agricultural diversity provides some cushioning of weather-induced shocks to domestic grain supply and also gives them export possibilities in good years. A summary of the situation and policies in each is given in Boxes 15, on p. 276, and 16. Box 17, on p. 290, provides an overview of the changing policies of the United States, the major grain exporter.
Over the past four decades, the United States has been the major intertemporal (interseasonal) stockholder of cereals, with the EU also maintaining significant grain reserves since the late 1970s when it became a net cereal exporter. Canada has at times carried far smaller grain reserves while neither Australia nor Argentina have had the storage capacity to do so. Food reserve stocks in India until very recently have been strictly domestic. The stocks held by both the United States and the EU were the result of agricultural policies that supported the domestic price above market clearing levels, requiring the authorities to purchase and hold stocks until a predetermined market price trigger allowed their release into the market. In addition, the various area set-aside schemes and the conservation reserve programmes, which held land out of cereal production, acted as a further complementary stock of grain, albeit in the form of uncultivated land rather than physical quantities of grain. These so-called policy-induced stocks will be drastically reduced or eliminated as market and trade liberalization occurs. This means that the world will no longer be able to rely on such policy-induced stocks to cushion the price effects of a production shortfall.
Two separate but related issues arise. First, what is likely to be the behaviour of the global cereals market in a more liberal trade and markets environment? Work is under way at FAO and elsewhere on analysing this question, but unfortunately only preliminary results are available at the time of writing. Economic theory and an empirical understanding of markets, however, can lead to some informed qualitative speculation. Consider the case of a reduction in world production. Without the cushion of policy-induced stocks to buffer the price rise in response to the production shortfall, the international price rise is likely to be sharper, but with more open economies and liberalized markets there will be greater international market price transmission to more producers and consumers in more countries. This should mean that a larger and quicker supply and demand adjustment will occur in response to the price change, with producers increasing output and consumers shifting consumption in favour of relatively cheaper foodstuffs. Future international market price spikes are therefore likely to be more violent initially, but shorter lived. Following on from this the question arises as to what extent the private sector will assume the stockholding function formerly borne by governments with policy-induced stocks. The private sector would not be expected to carry stocks of a similar magnitude becuase such levels would most probably be unprofitable. Nevertheless, the private sector will hold stocks up to a profitable level and to that extent those stocks would buffer and reduce the magnitude of market price spikes.
This discussion has focused on upward price movements. An examination of Figure 14, p. 284, shows that downward price movements have tended to be far less sharp and deep, reflecting the policies of some of the main grain-producing countries which have been designed to protect their farmers from severe price falls. To the extent that liberalization and policy reform remove or reduce the effects of such policies, the international market would see greater downward price variation than it has in the past. Thus in years of good harvests, price falls would be more pronounced, enabling importing countries to reap the benefits and providing perhaps greater profit incentives for private-sector stocking.
The second issue is that a number of countries may still feel the need to hold some level of food security reserve, as distinct from any working stocks held by private importers and traders. (Countries that do not will bear the full brunt of market instability.) These countries basically have two options; they can hold a physical stock of the commodity or they can hold a foreign currency fund for food security reserve purposes. The main advantage of this second option is that the country does not incur the significant costs of holding the actual commodity and of stock management and that it can earn interest on the hard currency account. However, the use of such a fund during periods of global supply shortfall will exacerbate the price spike. The trade-off for the country involved is the additional import cost caused by the price spike minus what has been earned on the foreign exchange account as compared with the cost of holding the commodity reserve until it is needed.
While a foreign exchange food security fund has both fiscal and monetary implications (e.g. tax revenues or borrowings to establish the fund, a positive balance of payments item and earnings on the fund until it is needed), a physical commodity stock reserve has mainly fiscal implications if purchased locally, but also monetary if acquired through imports. First there is the expense of establishing the stock reserve either through tax revenues or through borrowing. Then there are the maintenance costs associated with the reserve including stock administration, transport, storage, handling and rotation, which need to be financed from the same sources. Finally, distribution and replenishment costs are incurred when the food security reserve is called upon in accordance with the pre-existing rules governing its use. Ideally, the stock would be replenished when prices are low and depleted when high; but, as has been seen, policy reforms that permit substantial price falls have yet to feed through to the international market. The government budget for establishment, operation and management of the physical commodity food security reserve has an opportunity cost over and above the monetary cost for either government or the private sector. This opportunity cost may be great or small, depending on the alternative uses that might have been made of the funds. Given the shortage of both capital and recurrent budgetary funds in developing countries, the opportunity cost if properly calculated is likely to be very high.
BOX 16 India has put food security very high on the national agenda. From being a substantial net food importer in the 1970s, it was nearly self-sufficient in grain production from the early 1980s, more than self-sufficient in the 1990s and carries a high level of buffer stocks. The Food Corporation of India (FCI), which was instituted in 1965, is the main agency for the procurement, storage and transport of grains for distribution through the public distribution system and for maintaining the buffer stocks. The procurement and issue prices of food grains are fixed by the government; the issue price does not cover all the economic costs and the difference represents a government subsidy to consumers. The government also subsidizes the carrying costs of the buffer stocks, which amount to about 30 percent of the value of the stocks. In the past few years, grain output has increased considerably from around 180 million tonnes in 1992/93 to almost 192 million tonnes in 1994/95. Stocks had reached 28.7 million tonnes by March 1995, but transport and storage problems were slowing procurement despite increased output. Nevertheless, most of the wheat coming to market in 1995 was bought by FCI and other public-sector agencies under price support operations, with private traders handling only small quantities of very high-quality grain at prices well in excess of the support prices. By the end of the summer harvest season, stocks had reached between 36 million and 37 million tonnes, but these had been reduced to 29 million tonnes by November 1995. Plans to lower the issue prices of wheat and rice at state-run retail outlets to redress the price increases of previous years had to be postponed for budgetary reasons, despite the rising costs of carrying ever-increasing stocks. Export restrictions were lifted to allow exports of 2.5 million tonnes of rice and 2 million tonnes of wheat for the year, and there was pressure from the Ministry of Agriculture to have the ceilings abolished to permit greater reliance on exports and imports to manage food grain supplies. The most important constraints on increasing exports are inadequate storage, transport and port facilities. However, the removal of the public-sector monopoly on key aspects of infrastructure, including the ports, is encouraging new private-sector investment, and the redevelopment of the ports is expected to be finished by 1997. If this is achieved, some experts believe that India could be exporting 3 million tonnes of wheat and 4 million tonnes of rice by 2002 (rice stocks are currently running at 16 million tonnes). This would make it a major player in the small world rice market, where its prices are competitive. In the wheat market, however, it is less price competitive. There seems to be a strong consensus among the different political parties for continuing with the economic liberalization process while supporting agricultural development and giving high priority to food security. India therefore seems likely to engage more in international trade in grain markets in the future and will perhaps at some point decide to reduce its very large and expensive buffer stocks in favour of a greater reliance on imports. If so, India might play an even greater part in world markets once the port capacity has been modernized and expanded. |
The issue of food security stocking, either as a physical commodity or liquid reserves, nationally or multilaterally through the various fund facilities available, is highly complex in economic terms. When the non-economic factors are included, together with the country-specific conditions for both economic and non-economic factors, it is obvious that each country needs to address the question from its own perspective and to repeat the exercise as the important variables change. In determining government policy with regard to food security stocking, governments need to take account of private-sector activity in grain trading and storage and to decide what the respective roles of the public and private sectors should be.
No single small country is able to do anything about the world market. The question therefore is which policy measures, in addition to the trade-related economic policies discussed in the next section, can governments in low-income, food-importing countries introduce to ensure reliability of food availability and access, both in response to short-term fluctuations and over the longer term? IFPRI, for example, has suggested four sets of measures:
Many developing countries have found that strategies to keep grain affordable to consumers, such as holding large public grain stocks or setting ceiling prices, are unsustainably expensive. There are, however, things they can do:
hold small grain stocks to provide some insurance against price spikes;
use foreign exchange insurance or special credit arrangements, such as the International Monetary Fund's Compensatory Finance Facility [sic], to finance needed imports;
use world futures and options markets to hedge against future price increases;
invest in transportation, communication, and agricultural research to ensure competitive rural markets and enhance the capacity of farmers to respond to changing prices.22
The first point, food stocks, has been addressed in this section. The last is covered in the next section in the context of trade-related economic policies. Points two and three are each given a section of their own because balance of payments support and the use of futures markets are increasingly being suggested by some international agencies and development experts as having vital roles to play in the achievement of food security in developing countries; however, as the following analysis suggests, both have very limited scope for assisting the poorest food-importing countries. Of far greater significance for more than 30 low-income countries is the external debt burden. While this is primarily a long-term concern it clearly has implications for the ability to respond to short-term food price shocks and a section of this Special Chapter is devoted to examining the consequences for food security of high levels of debt.
TRADE-RELATED ECONOMIC POLICIES
A country's trade-related economic policies influence food security indirectly through their effect on the growth of the economy as a whole and of particular economic sectors. They also have a more direct impact on food security and nutrition status by affecting such factors as rural and urban household incomes, the ability to import food to meet domestic shortfalls and demand for food items not produced locally and the earning of foreign exchange to finance the varying share of food imports in total imports:
The expansion of agricultural trade has helped provide greater quantity, wider variety and better quality food to increasing numbers of people at lower prices. Agricultural trade is also a generator of income and welfare for the millions of people who are directly or indirectly involved in it. At the national level, for many countries, it is a major source of the foreign exchange that is necessary to finance imports and development; while for many others, domestic food security is closely related to the country's capacity to finance food imports.... Agricultural trade policy has long reflected the widely held belief that, because of its importance and vulnerability, the agricultural sector could not be exposed to the full rigours of international competition without incurring unacceptable political, social and economic consequences. This view has led to high and widespread protection of the sector.23
It has been argued that the instability in commodity markets that has apparently resulted from agricultural border protection has in its turn led to further pressures for protection. Whether or not this is true, many developing countries have nevertheless implemented economic policies that have been biased against the production of tradable goods in general and exports in particular, as well as against agricultural products. Taxation of the agricultural sector has been high in several countries. A major research study by the World Bank covering 18 countries over a 25-year period found that: "The indirect tax on agriculture from industrial protection and macroeconomic policies was about 22 percent on average... nearly three times the direct tax from agricultural pricing policies (about 8 percent). The total (direct plus indirect) was thus 30 percent."24 The overall effect has been an average income transfer out of agriculture of 46 percent of agricultural GDP, ranging from 2 percent for the countries that protected agriculture to 140 percent for the heaviest taxers. In such countries, investment in food production has therefore been suboptimal and agricultural growth has been stifled, as has economic growth as a whole. Trade-related economic policy reforms and the ongoing structural adjustment programmes should lead towards correction of the long-standing anti-agriculture bias, if the reforms are carried out with real commitment and consistency. "The adjustment in Africa displays several weaknesses. From the evidence of recent policy actions, African governments have yet to display a real commitment to policy reform. Macroeconomic imbalances continue to characterize many economies, even those... that have been engaged in adjustment for more than a decade. Governments continue to interfere in markets."25 The same authors stress the critical role of exchange rate policy in stimulating growth and reducing poverty through the correction of economic disequilibria.
The maintenance of overvalued exchange rates is of particular significance as they impose a tax on exports and subsidize imports. This tool has been used at high cost to stabilize and hold down domestic food prices for urban consumers at the expense of the domestic producers of import-competing and exportable agricultural products, often in the face of severe domestic inflation which has been poorly controlled or exacerbated by economic policy measures. In the long term, therefore, the effects are damaging for food security as: structural changes in the tastes and preferences of urban consumers that do not take account of real international prices, as well as increasing urban incomes, exert pressure to maintain and increase food imports; the ability to pay for those imports has been reduced by depressing the expansion of agricultural and food exports which, for many low-income countries, are the main source of export earnings; the benefits of long-term falling real cereal prices have not been realizable in the face of high domestic inflation; and greater exchange rate overvaluation is related to lower GDP growth. Correcting overvalued exchange rates, which increases the domestic price of tradable food items, and controlling inflation, which slows down the rate of increase in domestic food prices and reduces the cost of stabilization measures, should therefore be put high on the policy reform agenda, and kept there. Rather than delay painful macroeconomic adjustment, which needs to allow for balanced sectoral growth by removing the biases against agriculture, governments may be better advised to implement compensatory interventions aimed at the groups most vulnerable to rises in the prices of tradable foods.
As noted earlier, there appears to be a long-term shift in the terms of trade away from the traditional agricultural export crops in favour of food crops. Thus, over time, a country's comparative advantage will change. Trade and macroeconomic policies, as well as sectoral pricing policies, need to permit the agricultural sector to respond to changes in comparative advantage patterns by reallocation of resources. However, in anticipation of these changes, governments need to invest in the long-term development of agriculture and the rural economy.
The implementation of appropriate trade and macroeconomic policies is critical for another important aspect of food security; the ability to finance the importation of food that is not produced domestically or is not produced in sufficient quantities, both when there are short-term price fluctuations and in order to meet the ongoing import needs reliably.
The sharp grain price rises of 1995-96 have increased the import bills of several countries. Many of the countries in Africa face significant problems with grain imports, especially in East Africa. Also, grain import requirements in North Africa are much higher than usual because of short crops in Morocco and Tunisia, although the normally high caloric intake levels in the area probably offer some flexibility in short-term use rates. Only a few Asian countries appear to be facing serious import problems, but the volume of grain could be substantial. The most significant problems are considered to be in Bangladesh and Afghanistan. Several countries in Latin America and the Caribbean are having difficulties with the higher prices of grain imports as grain output has recovered only slowly from the previous year's drought.
While increasing food aid is often the response to this type of situation, such a solution does not appear to be feasible at least in 1996/97. The overall level of food aid has been declining recently and was expected to be lower this year. Higher prices can be expected to reduce further the quantity of food aid, as most aid allocations are planned and budgeted in value terms. It is to be hoped that the lower food aid availabilities result in careful use of what funds there are in order that the needs of the most severely affected countries and regions can be met, although this would leave a significant number of other developing countries, which are generally in a marginal position with respect to financing grain import requirements, to search for alternative methods of finance in a period of higher prices.
The long-term issue concerns the ability of export earnings to keep pace with food import bills. The relatively rapid decline in real prices of agricultural export commodities has been exacerbated by increased supplies of such commodities in several low-income countries. If one small country increases its exports, it will not affect the world price, but if a large number do, the effect will be to depress prices further and faster. Commodity agreements have had very little success in supporting world prices and are unlikely to yield substantial benefits to the exporting countries in the aggregate. Schiff and Valdés suggest that for "the few export products where developing countries have market power, appropriate export taxes or quotas should be imposed".26 However, it might not prove easy to settle the levels for such taxes or quotas because the appropriate tax or quota in one country depends on the levels set by other countries exporting the same commodity. Furthermore, the ability of exporting countries to set taxes and quotas will depend on the countervailing power by the importing countries or corporations.
There are a number of policy issues that governments can address to the end of financing food imports. For example, there are long-term measures that can be taken to increase a country's export earning capability over time and to increase domestic food production and reduce production, processing and marketing costs. To this end, governments can implement non-distorting measures to increase the export earnings capability of the agricultural and food sector. This should not imply the promotion of export crops at the expense of food crops, nor the promotion of food exports at the expense of food security. The question is one of improving exportability, which must take account of international market demand and is closely linked to improving domestic food availability, which is an important aspect of food security. The reason for this is that for potential exportability to be realizable by large numbers of farmers of different types exploiting different agro-ecological conditions, the internal domestic marketing system must be able to deliver inputs and outputs whenever and wherever they are needed to minimize production and marketing costs and meet market demand on competitive terms.
Policy measures to improve domestic and export marketing should therefore address the needs for hard and soft infrastructure: an adequate agricultural and food research and extension base; improved processing, preservation and storage techniques and facilities; food standards for domestic and imported products, as well as quality control and grading to meet international requirements; information on production, domestic markets, nutrition and international markets; adding value in-country to the basic commodity or producing high-value commodities, such as fruit and flowers, including new product development; export promotion; export credit guarantees; and export insurance.
Where available and appropriate, governments could also take steps to make the maximum use of such programmes as the EU's STABEX scheme and Sectoral Import Programme27 and the increased availability of foreign exchange assistance (as opposed to balance of payments assistance) could be explored. There might also be possibilities for short-term assistance for financing commercial imports under the General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO) Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-developed and Net Food Importing Countries, although the position is not yet clear.
THE USE OF FUTURES AND OPTIONS MARKETS
Market participants in the developed countries make extensive use of futures markets to hedge against short-term price and revenue risk, whereas the developing countries, perhaps with the exception of large-scale traders in international markets, have made relatively little use of these markets. Global changes in agricultural policy, the trend towards freer world trade in agricultural commodities and the emergence of sophisticated financial instruments to manage risk have led some organizations, such as the World Bank and IFPRI, to believe that the use of such instruments could play a useful stabilization role in the developing countries, thereby enhancing a country's ability to achieve food security. However, as the following investigation suggests, a very much more cautious approach is in order, not least because the use of futures and options markets does not necessarily enable prices to be stabilized and never allows them to be stabilized from one season to the next. Any positive effect on food security, therefore, is likely to be felt only indirectly through reduced trading and, hence, balance of payments risks.
The use of futures markets to reduce risk associated with cash price movements in agricultural commodity markets is a long-established practice dating back to 1865 in the United States.28 Their ease of use has caused futures markets to expand dramatically to include numerous and varied markets throughout the world. In the early 1970s, almost 13 million, principally agricultural, futures contracts were traded in the United States. By the early 1990s, the number of contracts (futures and futures market options) had increased to over 421 million, of which 17 percent (over 70 million) related to agricultural markets. This growth in trading resulted mainly from the introduction of futures markets for a wide range of commodities and financial instruments and from the initiation in 1982 of options contracts, including for agricultural commodities.
The use of futures markets to reduce short-term price risk for grains and oilseeds, livestock and meat, and food and fibre crops such as coffee, cocoa, sugar and cotton has become commonplace for United States processors, food manufacturers, commodity traders, and to a lesser extent producers. Although precise data are not available, the volume of trading in United States agricultural futures markets by foreign traders and processors has increased substantially in recent decades. Futures markets for agricultural commodities already exist or are under development in several other countries, but none of them approaches the size, liquidity and range of instruments offered by the Chicago Board of Trade (CBOT), which is consequently a reference point for much of the world trading in futures markets for agricultural commodities. In spite of the data deficiencies, the use of futures markets by traders and processors in domestic markets (as opposed to international trading) is probably far more pronounced in developed than in developing countries and, in general, producers use futures markets far less than traders and processors do (in developing countries producers hardly use futures markets at all). Several suggestions have been advanced to explain why the developing countries, with a few notable exceptions, have made so little use of futures and options markets for hedging purposes.
The transaction costs of hedging may be too high. Hedging may be conducted by means of futures contract markets and futures options markets. In both cases, buyers and sellers incur a brokerage or commission fee for execution of the transaction. Fees vary depending on the type and amount of service rendered, but in liquid, competitive markets with a substantial volume of trading such costs are not prohibitive.
While a futures market contract is binding and obligatory for buyers and sellers, a futures option provides the right but not the obligation to buy or sell the underlying futures contract at a specified price and time. Option buyers pay option sellers a premium much as insurance buyers pay a premium to an insurance company. The costs (intrinsic value and time value) of options are substantial and in developing countries that are short of credit or hard currency may be considered prohibitive.
Futures contracts may specify grades or delivery location that make hedging unattractive in developing countries. Futures contracts contain specific terms with respect to class and grade, price and location for each commodity traded. In the United States, the integrity of these standardized contract terms is overseen by the relevant commodity exchange organization, which is in turn overseen by a federal government regulatory agency. Only through standardization of contract terms and the underlying assurance of performance by buyers and sellers is a futures exchange able to perform its functions.
Most hedging operations do not themselves result in physical exchange of the commodity between buyers and sellers. Most futures contracts acquired for hedging purposes are liquidated by offsetting futures contracts prior to their respective call dates. Futures are not intended to act as cash markets, but rather to provide financial instruments to reduce forward price risk in cash markets. In the majority of hedging operations the specifications of the contract are thus decided with respect to the physical exchange of the commodity.
In instances where the purchase or sale of the futures contract results in physical acquisition or delivery of the commodity, the terms of the contract may be unattractive for traders in a distant developing country because of grade, quality or location. These matters need to be weighed when considering the acquisition of futures contracts. In any case, the purpose of hedging should be distinguished carefully from that of speculation and physical commodity trading.
Futures contract periods may be shorter than the developing country hedging horizon. The longest futures contracts currently traded in grains and oilseeds at CBOT are 18 months (for maize). In fact, few futures contracts are liquid for more than nine months. For developing country importers wishing to hedge against commodity price risk over several years, futures markets offer limited opportunity. Technically, it would be possible for the developing country importer to use a succession of overlapping short-dated contracts to fix a price at some future date beyond a single crop year - a procedure known as "rolling over" futures contracts. This procedure has two limitations - the accumulated transaction costs and the longer-term exposure to adverse margin change, which suggest that developing countries will find hedging in futures best-suited to addressing short-term (intraseasonal) price risk or as an adjunct to longer-term (interseasonal) price stabilization programmes.
There are credit and hard currency limitations in several developing countries. While hedging with futures contracts provides a means of reducing price risk, the buyer or seller of such contracts assumes margin risks, which in volatile agricultural commodity markets can be substantial.
In hedging, the basis (i.e. the difference between the spot or cash price of the commodity to be hedged and the futures price of the contract used) is of primary importance. Although cash and futures prices move in a roughly parallel pattern because they react to the same underlying market supply and demand factors, they are by no means perfectly correlated. The basis may at times deviate substantially, depending on buyer and seller expectations, availability and quality of market information on the part of buyers and sellers, activities of speculators and other factors. Generally, however, the basis tends to be more stable and predictable than the actual cash and futures price levels and is therefore the key to placing and lifting effective hedges.
Buyers and sellers of futures contracts are required to post a performance bond margin, which is a financial guarantee to ensure that the obligations of the futures contract will be fulfilled. The minimum margin requirements generally range from 5 to 18 percent of the contract's face value, depending on the volatility of the underlying market. Brokerage firms may require a larger margin. Margin requirements for agricultural commodities tend to be at the upper level of the range because of their high price volatility.
The initial margin account of each buyer and seller of a futures contract is adjusted daily by changes in the contract's basis - a practice known as "marking to the market". Negative changes in basis that reduce the margin account to a previously specified maintenance level result in a "margin call" to restore the account to its initial level. Because each futures contract is highly leveraged (by a factor of between ten and 20 depending on the commodity and the margin requirement) and is available only in incremental units specified by the commodity exchange (5 000 bushels for grains and oilseeds, for example), a modest change in basis can generate a much larger change in cash requirements for margin calls. The capital required over the life of the hedge can therefore be substantially greater than the initial margin requirement. For traders with insufficient liquidity, margin calls can pose a major problem.
As much of the trading in futures markets is denominated in dollars or other hard currency, the developing country trader is also subject to exchange rate risk. To reduce this type of risk, such a trader may decide to hedge in financial market futures or options, thereby assuming margin call risks for both commodities and currencies.
More sophisticated strategies could, however, mean prohibitively high costs. In developing countries that do not have an adequate and readily accessible supply of hard currency, hedging may be inadvisable or infeasible. In fact, credit limitations and inadequate foreign currency reserves in many developing countries appear to be the main constraints on such countries' more extensive use of futures for commodity hedging.
Of course, not all changes in basis (commodity or financial contracts) necessarily have a negative effect on the financial interest of the developing country trader. For example, in an empirical analysis of commodity and currency cross-hedging opportunities in Egypt and the Republic of Korea, when both were net grain importers, in has been demonstrated that substantial net gains are possible for each country, although primarily from currency rather than commodity hedging.29
Lack of financial and management expertise. Effective hedging requires an intimate knowledge of futures markets procedures and operations and the ability to respond promptly to market changes. Although brokerage or commission services can be obtained, few traders will be prepared to delegate fully all major decision-making responsibilities. Thus the development of appropriate expertise in the developing countries is a prerequisite for effective hedging.
Lack of access to reliable, timely information. Although electronic communication makes market information far more accessible and transferable than was possible even a few years ago, the developing country trader must be prepared to invest substantial resources to develop and maintain the timely and relevant data systems necessary for effective trading.
Perceptions of futures markets trading. Futures market trading is sometimes perceived as being inherently speculative or excessively transparent and subject to public scrutiny and misunderstanding. Alternatively, in some countries there may be an unwillingness to transfer authority to a foreign agent. The financial risk associated with margin calls and losses from hedging operations may be considered to be too politically risky for public traders in developing countries.
Public- and private-sector problems. The public institutions in developing countries are often very rigid and bureaucratic practices are so time-consuming that efficient operation in futures markets is practically impossible with public organizations. The private sector may be very underdeveloped, particularly where there has been until recently, or still is, monopoly and monopsony power in the hands of a state trading organization. Furthermore, access for private-sector traders to hard currency on a sufficiently reliable basis may be problematic.
This brief analysis indicates that there are many good reasons to explain why developing countries have made relatively little use of futures markets. The conclusion to be drawn is that hedging in futures markets (contracts and options) has a very limited but potentially useful function in the international trading of agricultural commodities for some developing countries. Conceptually, hedging offers a means of reducing short-term, intraseasonal price risk for developing country importers as well as for exporters of grains and oilseeds. However, it is not a means of avoiding or eliminating the price instability inherent in many agricultural markets, nor should it be promoted indiscriminately in circumstances where it is manifestly unsuitable as this would be tantamount to encouraging countries to incur additional debt burdens where the outcome is likely to be economically disappointing. Hedging does not necessarily improve the overall financial outcome of trading but, in appropriate circumstances and when effectively executed, it can reduce risk in trading by making the outcome more certain.
Where the availability of credit and hard currency are limiting factors, governments could assess the feasibility of making additional lines of credit available to private traders or, alternatively, underwriting loans by private credit institutions in instances where it can be demonstrated that hedging is appropriate and likely to be conducted in an effective manner. The security for such loans could be the underlying commodity or other assets of the borrower. The World Bank and the International Monetary Fund (IMF) might be approached for additional lines of hard currency credit to facilitate hedging, where suitable, as part of their development assistance programmes.
As part of its statutory purposes, IMF has funds and programmes under which it can make resources available to member countries to help solve certain balance of payments problems such as difficulties resulting from a rise in international cereal prices. IMF can provide financial assistance either under a special facility or by adjustments in regular funding arrangements.
The Compensatory and Contingency Financing Facility (CCFF). This is a special facility designed to help countries in the case of shortfalls in their export receipts or where there are excess cereal import costs. It is one of the financing tools provided as an option for use in the search for an appropriate blend of additional financing and adjustments to assist countries facing adverse external shocks in maintaining the momentum of their adjustment programmes.
Compensatory financing was first established in 1963 to provide assistance with balance of payments problems resulting from temporary declines in export earnings. The facility was broadened in 1981 to include coverage for balance of payments difficulties caused by excesses in cereal import costs. In 1988, a contingency financing element was introduced and combined with the compensatory financing and cereal import financing elements to create CCFF. The basic elements of the facility continue, although there have been some amendments affecting certain details since then. The conditions, which are rather complex, are given in Box 18.
For the period 1981 to 1989, the total cereal import drawings of the five low-income developing countries taking advantage of the facility amounted to only special drawing rights (SDR) 179.1 million, of which SDR 21.7 million was accounted for by immediate repurchases owing to overcompensation. Thus the actual amount was SDR 157.4 million. Five middle-income countries drew a total of SDR 563.2 million for cereal imports. More recently, purchases under the cereal element of CCFF have been made by Algeria, Moldova and South Africa. No cereal purchases have been made under the facility in the last several months, however, and, as the figures above indicate, the scheme was used to only a limited extent during the 1980s.
A brief inspection of the conditions outlined in Box 18 shows that the scheme has several features that limit access for cereal-importing countries: the calculation of the excess costs of the cereal imports; constraints on total drawings; repurchases of drawings; conditionalities attached to drawings; and the integration of excess import costs and excess export earnings. The current underuse of CCFF probably has two main causes. One is that in several country cases the prices of export commodities have also risen, reducing the balance of payments problem and also the eligibility of the member country to use CCFF. This feature of CCFF - the integration of excess costs of cereal imports with excesses in export earnings - has been criticized on a number of grounds, perhaps the most compelling being that of linking two components of the balance of payments where no real link in fact exists, as it would do if a particular imported item was used to produce a specific export item. "There is no justification for assuming that an excess of one specific item on the receipts side of the balance of payments will always be available to finance an excess of another specific but unrelated item on the payments side."30 For example, high cereal prices could coincide with high prices of non-cereal imports. The food security argument for giving priority to financing cereal imports would arguably be better answered by decoupling the balance of payments support, but empirical studies indicate that this would substantially increase the volume of drawings under CCFF, putting IMF's limited resources under severe strain. One way of dealing with this problem could be to tighten the quota restrictions, another would be to restrict the assistance to a proportion of excess cereal import costs. Alternatively, other sources of balance of payments support or foreign exchange assistance could be instituted.
The second reason for underusage of CCFF is that most potential users have access to another IMF facility with more favourable terms, i.e. the Enhanced Structural Adjustment Facility (ESAF).
Low-income member countries with excess cereal import costs who need balance of payments support have apparently preferred to apply for assistance under ESAF, for which IMF has concessional loans. Recently ESAF has been used for cases of excess import costs arising from higher than usual cereal prices. ESAF financing is through concessional loans that carry an annual interest rate of 0.5 percent with repayments semi-annually beginning five and a half years and ending ten years after each disbursement. Recently, 81 low-income countries were eligible to use ESAF. Of these, 27 had ESAF arrangements as of the end of February 1996, with a total amount approved of SDR 3.25 billion and undrawn balances of SDR 1.43 billion.
Financing under the programme can be obtained through inclusion of a contingency mechanism and/or through augmentation of access under an existing arrangement. A contingency mechanism may be used where the programme, as established under an ESAF arrangement, could allow for automatic adjustment in programme targets to accommodate some or all of the increased cereal import costs. This approach could be helpful in keeping the structural adjustment programme going in the case of an external shock such as higher cereal prices.
The other possibility, an augmentation of an arrangement to help meet additional financing needs caused by the adverse shock, can be considered either at the time of a regularly scheduled review or at the request of the member. Such reviews allow for an up-to-date assessment of changed conditions, including higher cereal import costs and the availability of donor assistance and food aid in determining the need for adjustment of existing arrangements.
Short-term balance of payments support is suitable for dealing with a short-term price fluctuation problem but is quite unsustainable if the underlying problem is one of long-term adverse price trends unless, as in the ESAF case, the support is used to enable the process of adjustment to long-term changes to continue.
The World Bank's role in direct assistance to low-income countries in financing food imports is usually a subsidiary, but complementary, one to that of IMF. Actions that assist a country to overcome food shortages or related problems can, however, clearly be considered to be within the Bank's mandate. This is particularly true in cases where a country needs to import food because of an unusual combination of events and where failure to provide the assistance would be likely to have an adverse effect on progress in macroeconomic management and sectoral policies. An important part of the World Bank's contribution is to provide relatively broad balance of payments support while the affected country is in the process of overcoming the temporary food problem.
Adjustment of World Bank project plans and resource use in connection with food problems caused by drought or international food price increases appears to be relatively common. The types of action taken may include modification of planned project expenditures in order to increase a country's financial flexibility in dealing with the problem; the provision of new loans designed to help with economic recovery from drought or other production problems; and an increased focus on rural development to strengthen food production and rural incomes in order to mitigate the impacts of future shocks.
For modification of planned project expenditures, the World Bank and national government may agree on how funds in existing projects are to be reallocated in order to help with the increased food import costs. The reallocated funds are likely to be used to finance activities related to food imports, such as transport and storage, rather than for direct financing of imports. However, since the funds are in foreign exchange, which is fungible, the country may be able to use the redirected funds indirectly for food imports, as well as to provide general support to the import activity.
BOX 18 The compensatory element for cereal imports is designed to provide financing quickly, within stated limits, to member countries experiencing temporary excess costs of cereal imports. An excess in cereal import costs is calculated as the amount by which the cost of cereal imports in a given year exceeds the arithmetic average of the cost of cereal imports for the five years centred on that year. A request for compensatory financing must be submitted by the member country no later than six months after the end of the excess cost year. The specified excess cost year may be the latest for which data are available or it may be more recent to include the current period where some or all of the year's data must be estimated, as long as complete data for the previous two years are available. If estimated data are used for nine months or more of the excess cost year, however, access will be phased over two purchases. The first purchase may use up to 65 percent of the amount of financing available and the second purchase may be made as soon as at least six months of actual data are available for the excess year. To qualify for compensatory financing, the excess in cereal import costs must be temporary, largely beyond the control of the member country and must result in a need for balance of payments financing. In addition, excess cereal import costs can be covered under the facility only in conjunction with calculation of the member country's export earnings position and deduction of any export earnings excess from the excess cereal import costs. The amount of funds that can be made available under the facility to a member country is the smaller of the calculated excess cereal import costs, after adjustment where appropriate for higher than normal export earnings, or the member country's access limit under the facility. Access limits under the facility vary according to whether the member country's balance of payments problems are limited to the specific shock and whether the member country has a satisfactory record of cooperation with the fund. If the balance of payments position is otherwise satisfactory, basic access under the cereal element can be up to 65 percent of the quota. Where there are more general balance of payments difficulties, access is limited to a lower percentage of the quota, usually between 15 and 35 percent, depending on the member country's record of cooperation with the fund and the degree to which the country's economic policies are evaluated as favourable. IMF generally provides financial assistance to member countries by selling Special Drawing Rights (SDRs) or the currencies of other member countries in exchange for a member country's own currency. Under most programmes, therefore, the member country makes a "purchase" from IMF, rather than receiving a loan. At the end of a specified period or an agreed schedule the account is settled by an opposite transaction in which the member country "repurchases" its own currency. Financial resources obtained through CCFF have the same terms and costs as those under regular IMF credit tranches. Repurchase/payback is due between three and a quarter and five years after receipt of the funds. The cost is equal to that of the fund's general resources, somewhat on the low side of commercial rates and recently about 5 percent per annum. Financing resources obtained through CCFF are in addition to resources available under regular fund arrangements. |
Economic recovery loans. These are generally designed to assist in restoring farmers' capacity to increase output following such events as droughts or other natural disasters that seriously affect domestic food supplies. Such loans are not likely to be appropriate for dealing with temporary price spikes in the world market, but could provide an indirect form of balance of payments assistance by reducing the medium-term demand for supplementary imports.
Apart from the limitations and restrictions of the balance of payments support programmes themselves, countries making use of such facilities face the problem of increasing their debt burdens. As the following section shows, some of the countries most in need of balance of payments support are low-income countries that are already severely indebted. Balance of payments support in such cases there-fore raises important policy questions for both borrowers and lenders.
The debt crisis of the 1980s, mostly in middle-income countries, was initially largely concerned with commercial debt and, as such, was perceived as posing a threat to the stability of the global financial system. The Brady Plan, among other initiatives, was a response to this crisis, which now appears to have receded. The 1990s have seen a different type of debt problem, which also has its roots in the 1980s - that of low-income countries' debts mainly to developed country governments and multilateral creditors. Much of this lending took place to help poor countries to cope with falling export commodity prices, rising world interest rates and escalating repayment schedules to commercial banks. Figure 15 shows the change in total external debt as a percentage of GDP by region since 1970. Of particular concern is the continuing sharp increase for sub-Saharan Africa, the region least able to sustain such a debt burden; the improving overall situation for Latin America and the Caribbean and Asia masks the serious difficulties faced by a small number of countries.
In fact, 32 countries are classified by the World Bank as "severely indebted low-income countries" (SILICs), defined as having, for 1991-93, either debt-service-to-GNP ratios of more than 80 percent or debt-service-to-export ratios of more than 220 percent (each measured at net present value). Some 25 SILICs are in sub-Saharan Africa, three in Latin America and the Caribbean, three in Asia and one in the Near East.31 Debt service repayments for sub-Saharan Africa were almost 20 percent of export earnings in 1995, up from 17.3 percent in 1994. Yet this understates the long-term and growing seriousness of the situation: in many countries, the stock of debt has been rising because actual repayments have been lower than scheduled repayments; and arrears have doubled since 1991 and now total three-quarters of annual export earnings. In 1994, for example, scheduled debt service payments for sub-Saharan Africa were over US$20 billion, while actual repayments amounted to $13 billion. The total debt stock of the SILICs was just under US$210 billion in 1994, four times as much as in 1980. Furthermore, whereas in 1980 the total debt as a proportion of national income was about one-third, in 1994 it was about 110 percent; the region's debt-to-total-export proportion increased to 389 percent (and was over 800 percent for three of the SILICs), compared with 150 percent for all developing countries. "The surge in interest arrears (US$11 billion since 1990) and capital repayment arrears ($23.5 billion) highlights just how unsustainable the situation has become."32
The Paris Club, the coordinating body for negotiating the rescheduling and restructuring of the credits of western governments, has taken a series of steps to reduce the outstanding debt of some of the poorest countries, but the conditions for reduction have severely limited the potential impact. However, one-quarter of the debt stock and one-half of the debt service payments for 1991-93 are accounted for by multilateral creditors.33 The World Bank, together with its soft-loan affiliate the International Development Association (IDA), accounts for just over half of the multilateral total of debt stock, IMF and the African Development Bank each accounting for 14 percent. Negotiations have started between the World Bank and IMF to find ways of reducing the debt burden of the SILICs. The support of the G-7 governments will also be of vital importance for finding a solution to this problem. Whatever solution is reached should ensure that the qualifications for debt relief, including the definition of what constitutes an unsustainable debt burden, are not so tough that very few countries can ever hope to meet them.
The debt burden has many negative implications for food security, not the least of which is the constrained ability to import food and non-food items that could increase domestic food production. It is rather ironic that 14 of the SILICs have ESAF arrangements that could assist in supporting their balance of payments in the face of rising cereal prices, thereby increasing their longer-term debt burden. However, the problems caused by high levels of external debt go far beyond the balance of payments issue and seem likely to have had a negative impact on long-term economic growth, including agricultural sector growth.
In the first place, the use of hard currency earnings for debt servicing has led to import compression and this has affected industry because, as essential imported inputs have been cut, the effect has been underused industrial capacity. It has also affected agriculture through a reduction in the supply of agricultural inputs that cannot be produced domestically. The multiplier effects of slow-downs in sectoral growth rates, or even on occasion negative growth rates, must have been substantial. Among these should be numbered a thinner and perhaps narrower tax base, with all that implies for government revenue collection. In addition, the ability to import capital goods for investment has been reduced. Then, there is the impact of external debt servicing obligations on domestic budgets if governments have to resort to domestic sources at high interest rates for financing public expenditure; this can of itself push up interest rates and "crowd out" investment.
Cuts in public expenditure or attempts at cost recovery often hit the poorest hardest, particularly those in rural areas, since it may be politically more feasible to cut rural health workers than city hospitals, for example, or village schoolteachers rather than university lecturers. This amounts to a disinvestment in human capital with very long-term repercussions. To put the problem into perspective, according to the United Nations Children's Fund (UNICEF), an additional US$9 billion per annum would provide the resources necessary for sub-Saharan Africa to meet the main human welfare objectives agreed at the 1990 World Summit for Children, among which were universal access to safe drinking-water, sanitation and primary education.34 As noted above, the actual (as opposed to scheduled) debt repayments were US$13 billion in 1994.
Furthermore, the development of agriculture and domestic food supply is hindered by the lack of finance available for development purposes. A substantial proportion of official development assistance (one estimate puts it at about one-quarter)35 is transferred to multilateral creditors for multilateral debt financing; this is in addition to the attempts by the World Bank and IMF to refinance debt through softer loans which has meant, for example, that in 1994, total IDA disbursements amounted to US$2.9 billion, of which just under $2 billion were used to repay World Bank debt and part of the rest was used to finance payments to IMF! Not only is the quantity of the effective aid reduced, but also its quality as increasing amounts of aid money are diverted to balance of payments support rather than efforts to alleviate poverty. The ability to achieve food security is obviously compromised.
The existence of heavy external debt burdens has also tended to force the pace of structural adjustment programmes; the costs of adjustment are a rising function of the speed of adjustment and growth usually suffers more with shock-treatment adjustment.36 The corollary is that more gradual adjustment requires more external financial support, and hence more debt, to bridge the gap until the macroeconomy is balanced.
Reducing the debt burden of the SILICs is not a panacea for the ills of poverty and food insecurity but, when the long-term impacts on the balance of payments and growth are considered, it is difficult to see a single positive factor that could have a potential effect of comparable magnitude, as long as the resources released are in fact used for the purposes intended. Any discussion of debt reduction invariably raises the perceived problem of moral hazard. In this context, it needs to be recognized that, as well as borrowers, bilateral, multilateral and private-sector lenders also have responsibilities, and to lend for the wrong reasons - whether because of political or institutional pressure on the lenders' side, to governments that lacked popular legitimacy and have since been removed, for projects that were not really appropriate for the country concerned, for consumption or for investments where the return flow could not cover debt service costs - argues for a more flexible approach to the whole question of indebtedness. Mistakes have been made by all parties and lessons can be learned. If the overriding concern is to assist the poorest countries to reduce poverty and achieve food security then this concern should guide attitudes to and support the provision of resources for reduction of the debt stock and not merely for partial subsidization of debt servicing. Perhaps the idea would be more acceptable to the creditors if any debt reduction were made conditional on an agreed proportion of the accrued benefits being used in approved ways to alleviate poverty and food insecurity in the long term.
RURAL AND URBAN FOOD SECURITY: GROWTH WITH EQUITY
In countries with a large agricultural sector, policies to achieve food security at the national level, and perhaps even more at the household level, must include policies for agriculture and the rural economy within which it operates. This is so self-evident that household food insecurity in the urban areas sometimes tends to be overlooked. In this section, therefore, some of the relationships between the urban and the rural economies and the macroeconomic policies that affect the two sectors are examined. In particular, income, employment, taxation and public expenditure policies are of great importance in ensuring accessibility to food supplies; understanding the economic linkages between the urban and rural areas throws a different light on the effects that those policies have on households in the respective areas.
One major consequence of the economic policy bias against agriculture that has hindered its growth in many developing countries has been the extremely high incidence of rural poverty and hence food insecurity. A second consequence is a rate of urbanization that is faster than it would have been in the absence of such a policy bias. More than three-quarters of the poor in sub-Saharan Africa and South Asia live in rural areas. In spite of rapid urban growth of almost 6 percent per annum in sub-Saharan Africa since 1960, which resulted in a population that is about one-third urbanized, the absolute size of the rural population continues to grow.37 Southeast and South Asia have slightly lower levels of urbanization than sub-Saharan Africa and annual growth rates of the urban population of less than 4 percent. Although Latin America and the Caribbean is far more highly urbanized (over 70 percent), a substantial proportion of the poor are rural. Achieving food security therefore requires policies to encourage the development of the rural economy. However, the magnitude of the numbers should not overshadow the fact that governments also need to address a serious and growing problem of food insecurity within sections of many urban populations - this is a problem that has become more serious given the exigencies of structural reform policies.38 It should also be noted that because of inconsistencies in definition and data deficiencies, there is insufficient information about the real incidence of urban versus rural poverty and food insecurity and of the effects of progressive urbanization on urban food insecurity:
An urban bias in much of government policies for food security coexists with a rural bias in much of the detailed food security research. It has long been recognized that developing country governments are more responsive to the urban poor than to the less vocal rural poor. Urban bias in food policies has been criticized by the research community and rightly, especially if transfers affecting food consumption were financed by the rural poor through the implicit and explicit taxation of agriculture.39
The distinction between the urban40 economy and the rural economy is not one conventionally made by economists, who tend to view the system as comprising the macroeconomy at the most aggregate level with a set of sectors - agricultural, extractive industry, manufacturing industry and services - at the first level of disaggregation. Yet analysis approached in this way implicitly assumes a strong and complete set of linkages among the different sectors, which is manifestly not the case in many developing countries. The urban-rural distinction is perhaps a more useful subdivision for analytical and policy purposes and one that has meaning for countries at all stages of development; it is particularly relevant in the context of the least developed countries because the linkages between the urban and rural economies as a whole, especially through the labour and food markets, are often more important than those among the main economic sectors as traditionally defined. In other words, the lack of development of the non-agricultural sectors in the rural economy means that there are few vertical linkages within a sector such as manufacturing that cut through the urban-rural divide and form cross-linkages with the agricultural sector; similarly, the urban services sector may have few such vertical linkages with service provision in rural areas - the connections between the urban economy in general and the agricultural sector are more often through distribution, perhaps of imported goods.
The urban-rural distinction is also relevant to the countries in transition from centrally planned to market economies where agricultural policy reforms have had a serious impact on the rural economy. The provision of many economic and social services in the rural areas, such as rural road maintenance, nursery schools and cultural and leisure facilities, was formerly the responsibility of the heavily subsidized collective and cooperative farms and the privatization of agricultural holdings has left a vacuum in terms of rural services provision. At the same time, the sharp reductions in agricultural subsidies are leading to contraction of the industry with associated rural unemployment and urban migration, although in some of the transition economies there is strong anecdotal evidence that some areas have seen quite a substantial migration of the unskilled unemployed from industry to agriculture.
In most developing countries, agriculture is still the mainstay of the rural economy and, directly or indirectly, the main source of rural incomes. There has therefore been a tendency to stress the need for the development of agriculture per se by calling on the argument that, in economies that are predominantly agricultural, capital scarcity limits the absorption capacity of the urban areas for labour migrating from agriculture. Thus growth of agriculture and related rural enterprises is the main vehicle by which employment and income can be increased on a widespread basis. Land-augmenting technological change is the key to higher agricultural productivity; consumer food prices fall in consequence and national income rises. The decline in food prices also has a multiplier effect on national income as urban wages need not rise as much as would be necessary without the fall in food prices and this, in turn, results in additional employment and greater output for the whole economy. Agricultural growth has other multiplier effects. Increased agricultural production generates effective demand for goods and services produced by the domestic non-agricultural economy and, as a result, relative prices (the terms of trade) shift in favour of the non-agricultural sectors, while resources, including labour and capital, are transferred from agricultural to non-agricultural uses, which stimulates growth in the non-agricultural sectors. The positive impact of agriculture-led development strategies where they are appropriate is well documented in empirical studies.41
The issue is rather more complex, however. A sectoral development focus on agriculture, which is more pointed given the bias against agriculture in favour of other sectors, obscures the fact that agriculture as a sector operates predominantly in the context of the rural economy, a complex subset of the national economy that extends beyond any single sector. It also ignores the high and growing dependence of the rural poor on non-agricultural sources of income, such as craftwork, services, remittances and non-agricultural wages, which can together equal or even exceed the agricultural income share.42 This phenomenon is not confined to the landless rural poor, but also includes a large proportion of small-scale farmers who are net food purchasers. Tackling rural food insecurity therefore clearly requires the development of the rural economy as a whole, not just agriculture, and will contribute to tackling urban food insecurity through increased food supplies at lower prices.
The other sectors of the rural economy are related to the agricultural sector by way of the backward and forward linkages, as well as through the multiplier effects on consumption and production. Von Braun notes that "a review of the farm/non-farm linkages in rural sub-Saharan Africa suggests that agricultural growth multipliers appear to be significant though somewhat lower than in some Asian countries".43 This implies that policy measures for sub-Saharan Africa in particular need to be geared towards developing the linkages in the first place, rather than just to increasing those that already exist, if agricultural development is to lead to broadly based growth of the rural economy and if the agricultural sector is to be integrated into the national and international economies (see "Trade-related economic policies",
p. 293). At the same time, agricultural development itself requires the creation and continuing expansion of these linkages within the rural economy and with the national (urban) and international economies. This offers the prospect of increasing rural employment opportunities and incomes. For example, on the input supply side (the backward linkages), there will be a growing demand for capital goods, such as tools and agricultural machinery, as well as for the associated service inputs. The forward linkages include such factors as output marketing and food processing. Some of the consumption goods that will be increasingly demanded as agricultural (and indeed non-agricultural rural) incomes grow can also be produced in the rural areas.
Such a focus on the development of the rural economy, with agricultural development as its driving force, could have major benefits in the longer term for the urban economy. At the moment, the situation in the many developing countries that have not had broadly based development is rather difficult. The lack of growth in the rural economy has spurred rural-urban migration at a rate that has exceeded the capacity of the formal urban employment sector to absorb it. Food subsidies for urban consumers provided additional encouragement, especially perhaps in Latin America and the Caribbean and some other regions where the bimodal agrarian structure led to extreme rural poverty and destitution. For example, in looking at sub-Saharan Africa, Gleave argues that "present levels and rates of urbanization and the size of major cities in the subcontinent are not the result of economic development but a reflection of the lack of it.... The problems include employment (and unemployment), housing, traffic congestion, electricity supply, water supply, sewerage and waste disposal."44 (This is in sharp contrast to newly industrialized countries (NICs) in Asia where urbanization has increased in line with employment opportunities.) The demand-reducing policies that form part of many structural adjustment programmes45 have exacerbated this already difficult situation, especially in the urban areas; cuts in public-sector employment, reductions in food subsidies, the imposition of indirect taxes and falling real wages have a disproportionately negative effect on the urban poor with a concomitant rise in the incidence of urban food insecurity. The reduction in labour opportunities and real wages in the formal sector increases the labour supply in the informal sector and puts a downward pressure on the returns to labour. This occurs despite the rise in the price of food, which usually causes a rise in wages, because labour in the informal sector is not organized so as to articulate an effective demand for higher wages. The linkages with the rural sector primarily through labour and food markets and remittances ensure that some of these negative effects will be transmitted to the rural economy.
The long-term, broadly based growth of the economy is a precondition for improving food security. This must necessarily involve the development of the rural economy as a whole, which requires agricultural sector growth, and greatly strengthened linkages within the rural economy and between the rural and the urban economy. Growth of itself, however, while necessary, is not sufficient. Growth needs to be equitable for all of the population, rural and urban, because, even if the absolute numbers of food insecure are greater in the rural areas, there are still many people in urban areas who are malnourished and, given the linkages between the urban and rural areas, poverty and food insecurity in one will have negative effects on the other.
In the longer term, growth with equity requires that the food-insecure poor acquire more control over resources so that the benefits of growth are shared more equitably, which will of itself lead to more growth. More immediately, there are policy measures that can be implemented to improve the food security position of the poorest,46 taking account of the need to protect the most vulnerable from the negative effects of structural adjustment programmes while allowing the long-term benefits for economywide growth from those programmes to be realized.
Taxation. The poor are critically affected by taxation policies. Changes in the tax base that increase government revenues through the imposition of indirect rather than direct taxes generally have a disproportionate effect on the poor. Direct taxes tend to be progressive whereas indirect taxes are regressive if they are imposed on goods and services that are purchased by the poor (food, public transport, fuel for cooking) or if the inputs into such goods and services are taxed; indirect taxes can be designed to be progressive if they are levied on luxury goods and services. Thus, whereas reducing the disproportionate direct and indirect tax burden on the agricultural sector removes some of the anti-agricultural and anti-rural bias of earlier policies, its replacement by inappropriately designed taxes can lead to a more widespread bias against the poor.
Public expenditure. The policies adopted for public expenditure are as important as those for taxation. Cuts in public expenditure can be made so that spending on vital services such as primary education and primary health care in both urban and rural areas is maintained. It is easier of course if the economy is growing, even though this may still mean a temporary drop in per caput expenditure. Negative growth poses more intractable difficulties, but priority can be given to those services most needed by the very poor. In practice, there is too often a bias in favour of the upper- and middle-income urban population, with expenditure on hospitals and secondary and tertiary education being accorded higher priority than the provision of free access for the very poor in both urban and rural areas to a more basic level of service that they otherwise cannot afford and that is essential for the development of their human capital.47
Investment in infrastructure and budgetary allocations for infrastructure maintenance are therefore needed for the achievement of development goals in the longer term; the neglect of maintenance invariably turns out to be a false economy.
Public expenditure choices also need to consider the provision of food subsidies, an important mechanism for transferring income to poor households where the majority of the income is devoted to food expenditures. Food subsidies have mostly benefited urban consumers and have in many cases been universal. Largely for budgetary reasons, the tendency has been to replace universal subsidies with targeted subsidies and much time and effort has gone into devising targeted schemes. That replacing universal with targeted subsidies has reduced costs is indisputable, but the success of targeted subsidies in achieving full coverage of the target groups is far less obvious. Stewart lists four main reasons for this: lack of information about the targeted schemes among the target groups; costs of acquiring entitlements to targeted schemes; qualifications for entitlement that exclude some of the poor as well as the non-poor; and social stigma.48 Although a narrow benefit-cost analysis of targeted interventions may well be positive, such an approach does not take into account the real costs of excluding some of those in need, which include both short-term and long-term losses in labour productivity and intergenerational effects arising from maternal malnutrition and reproductive efficiency. Another point is that, although universal subsidies may in some cases benefit the richer groups more in absolute terms (much as agricultural price supports benefit larger farmers more in absolute terms), the benefits to poorer groups in terms of income effects are greater, because of the substantially higher proportion of income spent on food. Furthermore, if the coverage of food subsidy schemes, whether universal (in the sense that all buyers of, say, imported wheat and wheat products benefit from the subsidy) or targeted, does not extend to the rural areas as well as to the urban areas, the majority of the poor are in any event not going to benefit from the subsidy. The traditional belief has been that the rural poor, as food producers, will better receive their benefits in the form of higher agricultural prices, but, as a large proportion of the rural poor (be they semi-subsistence farmers or landless labourers) are net food purchasers in many developing countries, an increase in food prices will often tend to outweigh the income effects of higher farmgate prices for agricultural produce. Thus the provision of food subsidies and the form they take are important determinants of food security directly and of the ability, through enhanced labour productivity and income effects, to take advantage of opportunities to improve the food security position of the household.
Government policies and the labour market. The only resource that many poor people possess is their labour and this is usually limited by being unskilled or at best semi-skilled; in addition, its productivity may be reduced by malnutrition, ill health and the lack of affordable opportunities for education and training. Nevertheless, employment-based growth offers the most effective way of tackling poverty and food insecurity in both urban and rural areas.49 This requires government policies that improve labour productivity; enable the poor to access labour opportunities;50 remove or avoid anti-labour biases in the factor markets; and, in the sequencing of policy reforms, allow for the slower adjustment of labour markets relative to capital markets. The World Bank found that:
Many countries make imports of capital goods cheap (through low tariffs and over-valued exchange rates), offer tax breaks for investment in capital equipment, and subsidize credit - all of which tend to reduce the price of capital. Subsidized energy prices often exacerbate this bias and, furthermore, have adverse environmental consequences. In contrast, social security taxes, labour regulations and high wages (especially in industries in which competition among producers is weak) all tend to raise the cost of labour in the formal sector.... Labour-market policies... are usually intended to raise welfare or reduce exploitation. But they actually work to raise the cost of labour in the formal sector and reduce labour demand. Studies from the 1970s and 1980s found that job security regulations reduced the long-term demand for labour by an estimated 18 percent in India and 25 percent in Zimbabwe. There is little poverty, in any case, in the formal sector. Yet by trying to improve the welfare of workers there, governments reduced formal sector employment, increased the supply of labour to the rural and urban informal sectors, and thus depressed labour incomes where most of the poor are found.51
In most developing countries, and increasingly so under structural adjustment programmes, formal employment accounts for only a minor proportion of available labour. Recognizing the importance of the informal sector, agencies such as the International Labour Organisation (ILO) and the World Bank are advocating policies to strengthen the informal sector by reducing or eliminating restrictions on its activities, even though this has negative features in the short to medium term:
For developing countries, there is no alternative but to accumulate sufficient investments to generate a high rate of employment-intensive growth. Employment creation is a unique instrument for achieving such an objective since it is a vital input in the creation of wealth and, at the same time, the most efficient mechanism for income distribution. Creating the conditions for a growth regime that maximizes employment and restrains unemployment and deprivation will require a coherent strategy for poverty reduction.52
Governments, sometimes in partnership with international agencies, have implemented a wide range of employment-creating programmes with a greater or lesser degree of success.53 At their best, such programmes provide productive employment for the very poor - productive in the sense that the work undertaken creates useful social infrastructure, such as roads, water supply and sanitary facilities, or addresses resource constraints, such as land quality and irrigation. While government or international funding (in cash or in food wages) may provide the necessary resources, it is sometimes possible to involve the private sector in the actual implementation. In countries at all stages of development it is often easier to build the infrastructure than to ensure its maintenance when the responsibility is transferred to another level of government without the provision of additional funding. Although most schemes seem to have been implemented in rural areas, there is no inherent reason why appropriate schemes cannot be designed for urban areas. The significance of the locality depends in large part on the physical and financial mobility of the labour force. Planning is important, for budgetary reasons and also for the institutional and technical support needed for success.
Any policies to improve food security should be informed by a knowledge of who and where the food-insecure are and how the policy measures succeed in addressing the food insecurity. How and what to monitor are decisions that a government must make in the light of its own national circumstances and international agencies may be of assistance. An interesting initiative by FAO and the Save the Children Fund with regard to monitoring and identifying emergency situations is summarized in Box 19 and it could ultimately be of use in more routine situations.
This chapter has emphasized that economic growth alone (even growth with equity) cannot solve all of the problems of poverty, food insecurity and malnutrition. Without equitable growth, however, it is difficult to see how there can be any solutions at all. For policies for growth with equity to be adopted there needs to be the political will for doing so, but governments everywhere are brought to power and kept in power by various coalitions of interests and where those interests are very narrowly based because of a lack of control over resources, including political access, for large sections of society, it will be difficult to take action that goes against them. Experience indicates that redistribution of resources is easier when the economy as a whole is growing. It is also the case that political support for measures that benefit the poor will be easier if the non-poor also benefit to some extent. Thus, for example, the replacement of universal food subsidies with targeted subsidies has in some instances led to a loss of political support for the programme. Governments have to make hard decisions about the realistic choices and compromises that lie within their power; policy-advisers - even economists - can in the final analysis only advise about alternatives and possible outcomes:
Visionaries have been preaching against human selfishness for millennia without spectacular success.... Appealing to the longer-term self-interest of the powerful may occasionally be more effective than relying on their altruism. A healthy well-fed and well-educated labour force is essential for future profits and prosperity. Poverty and hunger breed crime, disease, riots, revolutions and war. Poor people make poor customers. Environmental destruction deprives future generations of their birthright. All these facts are well known. They have not been sufficient as yet, however, to produce the political determination to adopt effective strategies to eliminate poverty and hunger or protect the environment adequately even in rich countries, to say nothing of poor ones where economic and technical constraints are much tighter.54
While it seems necessary to stress the problems that lie ahead in achieving food security for all, we should nevertheless remember that in many countries the achievements to date have already been substantial. Economics may be popularly known as the dismal science, but sound economic policies that emphasize growth with equity have played their part in these success stories and can continue to do so in the future.
BOX 19 The Save the Children Fund (SCF) is working in conjunction with FAO on a project supported by the EU to design a computer-assisted method for more reliable famine early warning. The underlying methodology incorporates a household food economy approach to food security assessment with a view to providing information about changes in food access rather than just in food availability. By so doing, it aims to take account of rural households' varied sources of income and their various strategies for surviving conditions that threaten to increase food insecurity. The programme is capable of managing data from a wide range of sources, including expert opinion and informal information about local conditions; the latter is very important because formal data sources are limited in their coverage, very aggregated and take little account of the complexities of microlevel food systems. According to SCF's background information on the project, which is still in the developmental stage, the model is composed of three elements: · the database with a description of each food economy (defined by reasonable homogeneous settlement, production and market factors) being studied in terms of its normal sources of food supply, tendency to surplus or deficit and the location and characteristics of the markets that are used for trade and at which labour is sold; · a capacity to vary the characteristics of the wider context, e.g. prices and access to markets; · a capacity to analyse this information to derive a series of outputs which, taken together, indicate the vulnerability of each area, i.e. the probable effects of the stated conditions on access to food in each food economy. The model generates information in the form of maps, graphs and written reports identifying areas in relative need, with estimates of the proportion of the population in food deficit and the degree of that deficit. Although the risk-mapping model has been designed for famine early warning and is potentially a very useful tool to that end, it seems probable that the approach will have much wider applicability; the effects of natural disasters, such as drought or flooding, and of disasters caused by humans, such as war, are susceptible to this type of analysis, as are the "normal" patterns of food insecurity. Thus it could in the future be adapted to assist governments in monitoring food security in known areas of relatively high food insecurity on a routine basis and to evaluate the outcomes of policies aimed at improving food security. |
1 This chapter was commissioned by FAO from external authors to explore some macroeconomic issues related to food security from an alternative perspective in order to broaden, deepen and enrich the debate on this very important subject. This was done in the awareness that professional economists have strong and honest differences in their interpretations and assessments of facts and information related to many issues, including those relating to food security. FAO welcomes the contribution to the debate without taking any official position on its content.
2 FAO. 1983. Report of the Committee on World Food Security, 8th Session. Document CL83/10. Rome. The definition was endorsed at the International Conference on Nutrition in 1992 and, with minor variations of wording, it is now in widespread use among those dealing with poverty and food security issues.
3 An overview of the development of world and regional trade can be found in FAO. 1995. Agricultural trade: entering a new era? in The State of Food and Agriculture 1995. Rome.
4 For a fuller discussion of the demand for food and the distinction between demand and consumption, see FAO. 1995. Policy reform and the consumer. In The State of Food and Agriculture 1995. Rome.
5 S.L. Barraclough. 1991. An end to hunger? The social origins of food strategies. A report prepared for the United Nations Research Institute for Social Development (UNRISD) and the South Commission based on UNRISD research on food systems and society. London and Atlantic Highlands, NJ, USA, Zed Books Ltd in association with UNRISD.
6 A. Swinbank. 1992. The EEC's policies and its food. Food Policy, February 1992, p. 53-64.
7 P. Diskin. 1994. Understanding linkages among food availability, access, consumption and nutrition in Africa: empirical findings and issues from the literature. Michigan State University International Development Working Paper No. 46. Department of Agricultural Economics/Department of Economics. Michigan State University.
8 World Bank. 1986. Poverty and hunger. World Bank Policy Study. Washington, DC, World Bank. The World Bank seems to have largely dropped this distinction in its recent strategy paper: H.P. Binswanger and P. Landell-Mills. 1995. The World Bank's strategy for reducing poverty and hunger: a report to the Development Community. Washington, DC, World Bank. The emphasis is now on short-term and medium-term policy measures for addressing both types of food insecurity. However, some authors have tried to maintain the earlier distinction.
9 FAO. 1996. Food, agriculture and food security: developments since the World Food Conference and prospects for the future. World Food Summit technical background document No. 1. Rome.
10 The main findings of each are presented and discussed in IFPRI. 1995. Population and food in the early twenty-first century: meeting future food demand of an increasing population. Edited by N. Islam. IFPRI Occasional Papers. Washington, DC.
11 In subsequent model revisions for projections to 2020, IFPRI results for 2010 have been revised most notably for the former CPEs (production and consumption) and for sub-Saharan Africa (net imports), which are now much closer to the FAO projections.
12 An extensive discussion of methodological issues, population projections and the findings for the main regional groupings can be found in IFPRI, op. cit., footnote 10. Further consideration of the regional issues is available in various numbers of the IFPRI Food, Agriculture and the Environment Discussion Paper Series.
13 These findings are considered by one reviewer to be unduly pessimistic about the prospects for food security in sub-Saharan Africa. See G.I. Abalu in IFPRI, p. 121-126., op. cit., footnote 10.
14 This is addressed later in the chapter.
15 There is a wealth of documentation on this subject at all levels of technicality. FAO produces a wide range of publications on specific aspects and the technical background documents for the World Food Summit 1996 (see Box 14, p. 263) provide extensive coverage of many aspects of food security. Useful overviews are also provided in: World Bank. 1995. World Development Report 1995. New York, Oxford University Press; P. Pinstrup-Andersen and R. Pandya-Lorch. 1994. Alleviating poverty, intensifying agriculture, and effectively managing natural resources. Food, Agriculture and the Environment Discussion Paper No. 1. Washington, DC, IFPRI. In addition, several background papers for IFPRI's 2020 Vision initiative have been prepared covering a wide range of relevant topics.
16 The main pressures underlying these policy reforms are presented in FAO. 1995. Policy reform and the consumer, in The State of Food and Agriculture 1995. Rome.
17 World Bank. 1986. Poverty and hunger. A World Bank Policy Study. Washington, DC.
18 Barraclough, op. cit., footnote 5, p. 266.
19 Ibid.
20 As an example, there have been cases where a government agency has restricted, for example, fertilizer supplies to those supporting a particular political party.
21 D.G. Johnson. 1984. Alternative approaches to international food reserves. Paper prepared for the FAO Symposium on World Food Security, Rome, 3 to 7 September 1984. ESC:FS/SYMP/84/5.
22 P. Pinstrup-Andersen and J.L. Garrett. 1996. Rising food prices and falling grain stocks: short-run blips or new trends? 2020 Brief No. 30. Washington, DC, IFPRI.
23 FAO, op. cit., footnote 3, p. 265.
24 The results of this survey are published in five volumes in the World Bank`s. The Political economy of agricultural pricing policy. Baltimore, MD, USA and London, Johns Hopkins University Press. A summary of the major policy findings is given in M. Schiff and A. Valdés. 1992. The plundering of agriculture in developing countries. Washington, DC, World Bank.
25 L. Demery and L. Squire. 1996. Macroeconomic adjustment and poverty in Africa: an emerging picture. The World Bank Research Observer, 11(1): 39-59. The authors review evidence from six African countries using data from detailed household surveys.
26 Schiff and Valdés, op. cit., footnote 24.
27 The purpose of the EU's Sectoral Import Programme is to provide foreign exchange for the purchase of certain high-priority imports, such as fertilizer, agrochemicals, machinery and spare parts for agricultural processing and fishing equipment. The equivalent amount in local currency must be forthcoming and the scheme is open to private-sector agents as well as government agencies.
28 The function and use of futures markets, including the distinction between hedging and speculation and the different uses made of them by producers, traders, processors and speculators, is the subject of a large literature. A good introductory explanation
of futures markets for agricultural commodities can be found in D.M.G. Newbery and J.E. Stiglitz. 1981. The theory of commodity price stabilization: a study in the economics of risk. Oxford, UK, Clarendon Press.
29 K.M. Gordon. 1982. Food security: a mean-variance approach. Department of Agricultural and Resource Economics, University of California, Berkeley, CA, USA. (Ph.D. thesis)
30 H. Ezekiel. 1993. Integration between export compensation and cereal financing under the IMF Cereal Financing Scheme. In P. Berck and D. Bigman, eds. 1993. Food security and food inventories in developing countries. Wallingford, UK, Commonwealth Agricultural Bureaux International.
31 The 32 SILICs form the majority of the 41 countries classified by the World Bank in World Debt Tables 1994-95 as heavily indebted poor countries (HIPCs). The remainder of the HIPCs consist of seven countries that have received concessional treatment from the Paris Club and two lower-middle-income countries that have recently become IDA-only countries. See S. Claessens, E. Detragiache, R. Kanbur and P. Wickham. 1996. Analytical aspects of the debt problems of heavily indebted poor countries. Policy Research Working Paper No. 1618. The World Bank Africa Regional Office, Office of the Chief Economist, and East Asia and Pacific Regional Office, Office of the Regional Vice President, and International Monetary Fund Research Department.
32 Financial Times, 20 May 1996.
33 The discrepancy between debt stock and debt service payments arises because the multilateral creditors are the first to be paid because of the severe penalties incurred if a country falls into arrears with IMF or the World Bank. For a detailed analysis of the issue, see Oxfam. 1996. Multilateral debt: the human costs. Oxfam International Position Paper. Oxford, UK.
34 Ibid.
35 Ibid.
36 T. Killick. 1993. The adaptive economy: adjustment policies in small, low-income countries. EDI Development Studies. Washington, DC, World Bank.
37 M.B. Gleave, ed. 1992. Tropical African development. Harlow, United Kingdom, Longman Scientific and Technical; New York, John Wiley and Sons Inc.
38 See Demery and Squire, op. cit., footnote 25, p. 294, who note that the evidence suggests that urban poverty appears to have increased significantly. They also emphasize the continuing data problem, despite the recent increase in the number of household surveys.
39 J. Von Braun. 1987. Food security policies for the urban poor. Reprint No. 169. Washington, DC, IFPRI, from A. Kopp, ed. 1987. Scientific positions to meet the challenge of rural and urban poverty in developing countries. Proceedings of a conference organized by the German Foundation for International Development and the Centre for Regional Development Research at the Justus-Liebig University of Giessen, Germany, 22 to 26 June 1987. Hamburg, Verlag Weltarchiv GMBH.
40 There is no standard definition of urban in terms of size of town. Furthermore, definitions can include administrative and commercial importance and non-agricultural activity criteria. Thus, in the developing country context, urbanization is characterized more by diversity of economic base with relatively low dependence on agriculture than by size, see Gleave, op. cit., footnote 37.
41 A good summary is given in: T.L. Vollrath. 1994. The role of agriculture and its prerequisites in economic development. Food Policy, 19(5): 469-478.
42 J. Von Braun. 1989. The importance of non-agricultural income sources for the rural poor in Africa and implications for food and nutrition policy. Reprint No. 189. Washington, DC, IFPRI, from PEW/Cornell Lecture Series on Food and Nutrition Policy.
43 Ibid.
44 Gleave, op. cit., footnote 37, p. 311.
45 A theoretical and empirical analysis of the different components of structural adjustment programmes and their impact on poverty can be found in F. Stewart. 1995. Adjustment and poverty: options and choices. London and New York, Routledge.
46 F. Stewart, ibid, offers a more detailed exposition of the subsequent discussion.
47 See Demery and Squire, op. cit., footnote 25, p. 294.
48 Stewart, op. cit., footnote 45.
49 See Demery and Squire, op. cit., footnote 25, p. 294.
50 "Where the poor are concentrated on the periphery of urban areas, as in many developing countries, the costs and availability of public transport become key factors in their ability to obtain employment." World Bank. 1994. World Development Report 1994. New York, Oxford University Press.
51 World Bank. 1990. World Development Report 1990. New York, Oxford University Press.
52 J. Von Braun, ed. 1995. Employment for poverty reduction and food security. Washington, DC, IFPRI.
53 A good account of the types of programmes that have been attempted in different countries and regions and the lessons that can be learned is given in Von Braun, ibid.
54 Barraclough, op. cit., footnote 5, p. 266.
