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Nagesh Kumar: The food and fuel crisis: Can G20 help?

G20 needs to leverage its clout to play a more proactive role in stabilising food and fuel prices

Nagesh Kumar  |  New Delhi 

The G20 needs to leverage its clout to play a more proactive role in stabilising food and fuel prices

The rising food and oil prices in many parts of the Asia-Pacific region are emerging as major downside risks to an otherwise robust growth outlook for the region’s developing economies. Projections made by the Economic and Social Commission for Asia and Pacific (ESCAP) suggest that these economies, led by China growing at 9.5 per cent and India at 8.7 per cent, should be able to average a growth rate of 7.3 per cent in 2011.

Since August 2010, food prices have increased between 10 and 35 per cent in various countries. Oil prices have increased by 45 per cent over the past year. The rising food and oil prices in many parts of the world over the past year have attracted a lot of attention. Concerns have been raised about the impact on the vulnerable sections of population and on the poverty reduction efforts in populous countries such as India.

In its latest Economic and Social Survey of Asia and the Pacific 2011, ESCAP has projected that an additional 42 million people may stay in poverty in the Asia-Pacific region in 2011 in addition to the 19 million already affected in 2010 owing to rising food and oil prices. These figures include the number of people who would be prevented to get out of poverty as well as those who would be pushed to poverty by rising prices. In the worst-case scenario in many developing countries including India, this would postpone the achievement of the Millennium Development Goal of poverty reduction by up to half a decade.

Adverse climatic conditions have affected supply in many countries including crop failures in Russia, Kazakhstan and Ukraine, floods in Pakistan and Australia, and drought in China. A number of countries like Russia imposed export bans in the wake of crop failures that further aggravated prices in international markets. Another factor has been increasing conversion of food crops into biofuels. In the US, 40 per cent of corn production is diverted to biofuels, which affects the supply of cereals in the market. But much more importantly, hoarding and heightened speculative activity in food commodities, backed by massive injection of liquidity in the advanced countries, have exaggerated the price surge.

Rising food and oil prices are leading to core inflation and monetary authorities are responding by taking monetary tightening measures, as the Reserve Bank of India has done so many times over the past year. However, considering that the rise in food prices has been mainly caused by supply shocks, the monetary policy instruments have their limitations in addressing them.

A durable solution to increasing food prices has to be found in addressing the supply-side factors and those that tend to exaggerate them. Price volatility for foodgrain should be addressed through the counter-cyclical use of buffer stocks. For smaller economies that do not have the capacity to sustain large national food stocks, price shocks can be managed cooperatively by establishing regional food stocks such as the Rice Reserve Initiative of the Association of South East Asian Nations Plus Three and the South Asian Association For Regional Cooperation Food Bank

The vulnerable sections of the population should be protected through public food distribution systems or food vouchers or targeted income transfer schemes besides reducing prices through lowering tariffs and taxes. In that direction, India’s proposed Food Security Act is an important initiative to protect the nutritional security of the vulnerable sections.

In the medium term, efforts should be made to deliver a supply response by reversing the neglect of agriculture in public policy. This can be done by enhancing support for agricultural research, development and extension, and providing easier access to credit and other inputs to foster a new Green Revolution based on sustainable agriculture. The overall global food supply could also benefit from South-South and triangular cooperation on knowledge and technology transfer. For instance, India could assist in spreading the Green Revolution to vast tracts of cultivable land in parts of Africa and the Asia-Pacific region, which would help keep food prices low by expanding the overall supply while taking care of poverty and hunger situation in these regions.

Finally, there is a need for international cooperation in order to stabilise food and oil prices to curb practices that are fanning the price volatility. The G20, which has emerged as a major forum for global economic cooperation, should act decisively to moderate the volatility of oil and food prices given their disruptive effects on the development process. This may include curbing financial speculation in international commodity prices and regulating the diversion of food for biofuels. As regards oil price volatility, the G20, being the group of all major consumers, can match the power exercised over the oil markets by the cartel of producers, viz. the Organisation of the Petroleum Exporting Countries (OPEC). The OPEC and G20 may negotiate and demarcate a benchmark “fair” price of oil and agree to restrict the oil price movement within a band around it. An additional measure to moderate the volatility in the oil market is for G20 to create a global strategic reserve and release it counter-cyclically. It may expedite the implementation of the L’Aquila Food Security Initiative, which includes the provision of financing to developing countries for food security.

As a developing country G20 member with a large mass of poor and vulnerable people, India has a huge stake in stabilising food and oil prices. It should mobilise other developing country members and push this price agenda in the next G20 summit, which is to be hosted by France. The French presidency has been quite supportive of regulating the financial markets and disciplining speculative activity in food commodities. By coordinating its position with like-minded countries in the G20, India would be able to push a consensus on these issues. Having mainstreamed “development” on its agenda at the Seoul summit, the food and fuel crisis is very much within India’s ambit, given the crisis’ potential to reverse the development gains.

The author is chief economist of the United Nations Economic and Social Commission for Asia and Pacific, Bangkok.
The views expressed are personal.

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First Published: Thu, May 26 2011. 00:24 IST