FOOD INFLATION: CAUSES, IMPACTS, AND POLICIES

By Marcelo Giugale
The rising food prices are not unique to Uganda. It’s a worldwide and regional trend. Wheat, maize, rice, meat and oils are almost twice as expensive on the world markets as they were just two years ago. There are several reasons behind this "food inflation". America pays to turn a third of its maize production into ethanol, that is, to feed cars instead of people (don't ask). The Chinese and Indians middle-classes are getting bigger and richer, and are now eating more and better. Bad weather has cut down on deliveries from Australia, Canada and Russia. The cost of diesel and fertilizer has moved in tandem with petroleum, which itself has moved in tandem with turmoil in the Middle East. And much of the liquidity that was injected to resuscitate the global economy has found its way into the commodity markets -- with stocks, bonds and houses all depressed, where else can you invest the extra cash?
For the poor, food inflation can be catastrophic. Imagine: when you live on two dollars a day or less, chances are that you spend two thirds of your income feeding your family. More to the point, chances are that you do not save and already spend all you earn. When food gets expensive, you have to cut quantity, quality, or both. You eat once a day, not twice, or you buy cheaper staples with fewer nutrients. This can be devastating -- not so much for you but for your children.
We do not know exactly for how long an infant needs to be undernourished before she starts losing cognitive capacity (some scientists say that a month is enough). What we know for sure is that a lack of iodine or iron, and sheer stunting, before the age of two will likely shave some 10 points off your IQ -- forever (remember, the average person's IQ is only 100). And it does not take a scientist to know that students cannot focus on learning when they are hungry, at any age. In other words, temporary spikes in food prices can cause a permanent loss of human capital.
So, governments, donors and development professionals rightly worry about rising food costs. But panic is the enemy of sound policies. Rushing to intervene, politicians tend to ignore seven critical facts.

First, most developing countries are better off when food prices increase because they export more of it than they import. For those lucky countries, better export values mean more resources to spend on education, health and infrastructure. That is why they used to complain loudly when rich nations subsidized their own agricultural production and depressed international food prices for everyone (who can forget the fights during the Uruguay and Doha "rounds" of trade negotiations?). And that is why they will suffer much if global trade is interrupted. Think of Argentina, Cote d'Ivoire, Thailand and Uganda: why should they wish the price of soybean, cocoa, shrimp, or coffee to fall, or want those markets to stop operating?
Second, not all of the poor are worse off when food prices rise. Those living in rural areas are likely to produce more food than they consume -- in technical jargon, they are "net producers". For them, rising prices are a good thing. Not so for the urban poor (who are "net consumers"). It is in cities where the social impact of suddenly-unaffordable meals is likely to be felt. Yet it is also in cities where it is easier to provide assistance (more on this below). Prepare to see villages prosper and slums suffer, and prepare to see less migration out of the countryside.
Third, helping farmers in the developing world become more productive is good for their incomes, but does little to stop food inflation. More access to credit, know-how and transport can raise the yields and the profits of farming households. However, for most produce, prices are determined abroad; local production is just too small to make a difference. Yes, some widely grown crops like Uganda’s matooke are not demanded by foreigners, so more domestic production may cool down their prices. But those crops rarely dominate the feeding menu -- not to mention the preferences -- of the poor.
Fourth, higher food prices in US dollars do not necessarily mean higher prices in the currencies of developing countries. Today, a ton of oranges sells on the international markets for a hundred dollars more than two years ago. But it sells in Brazil for three hundred Brazilian reals less. Reason: the real has appreciated against the US dollar. So have many, if not most, emerging-market currencies. The dollar is not what it used to be.
Fifth, taxing exports does nothing against food inflation. The tax just takes a portion of the higher price away from the farmer and gives it to the government. But the consumer still pays the higher price. How about banning food exports altogether? Would that help? Well, if you can enforce the ban -- not a small "if" -- local prices may fall. But the countries that usually purchase food from you (like Kenya and South Sudan) may soon enough look for other countries to import their food from and stop buying your other exports too.
Sixth, central banks can do almost nothing to tame food inflation. There is no point in pressing them. Even if they raise interest rates sky-high, groceries will not get cheaper. Their price depends on what happens in the world, not in any one country. And anyway, most people do not buy food on credit.
Last, price controls do not work. You may send the police to try to enforce them, but all you will get is empty shelves, because nobody wants to sell at a loss. Hoarding, shortages, black-markets and a lot of corruption usually follows. For the poor, the problem is now double: food is not only expensive but it is also difficult to find.
So, what should governments do? Keep their nerve, let markets work, and compensate the poor. Higher international prices will be passed through to consumers, and part of national production may even be exported. Additional transfers of cash will be immediately needed for those that cannot fend for themselves, especially the most vulnerable groups such as children, the elderly and conflict-affected persons. What if the logistics to make the transfers is not in place, or if we just don't know who is poor and who isn't? Then, instead of giving out cash, you should give out food -- through larger school feeding programs, work-for-food exchanges, or direct distribution centers. It may sound complicated, but the alternative is much worse.
This article was first published in the Huffington Post and has been edited slightly for Uganda. Marcelo Giugale is The World Bank’s Director of Economic Policy and Poverty Reduction Programs for Africa