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Managing food price inflation in South Asia: An agenda for reforms

Published: Wednesday, Dec 21, 2011

Anniversary Issue 2011 (Part Two)

Managing food price inflation in South Asia: An agenda for reforms

Sadiq Ahmed

December 21, 2011

The large magnitude of the terms of trade shock primarily owing

to oil prices along with the acceleration of food prices, especially staple food grains of wheat and rice, have imposed a tremendous burden on South Asian countries, particularly on the low income economies of Afghanistan, Bangladesh and Nepal. The adverse effects of food and fuel price crisis have been compounded by the global financial crisis.  South Asian governments have responded in varying degrees to contain the rise in prices as well as to mitigate the adverse effects on the poor.  Steps have also been taken to stabilize the economy and accelerate growth.  Yet, the negative impact remains substantial and further efforts are needed to respond more effectively to the external shocks.

Short-term policy responses: Policies taken by governments in the first round were aimed at stabilizing food prices. Some of the policies like trade bans, price controls and subsidies may have been justifiable as short-term response on political economy grounds, but they have adverse implications for efficiency and resource allocation over the longer term.  As well, the fiscal space is scarce and the magnitudes of the subsidies entailed are not likely to be sustainable.  Similarly, the efforts of governments to initiate safety net programs are laudable; yet there is a need to examine the programs carefully to ensure their effectiveness and fiscal sustainability.  Finally, the longer term agenda of addressing the supply problems in agriculture remain to be fully tackled.

Long-term policy agenda: At the heart of South Asia’s supply response is the challenge of farm productivity.  South Asian governments need to pay much more attention to the productivity issue in order to reconcile the rising input prices with the objective of keeping food prices stable and affordable for the poor.  Other key long-term policy issues concern trade policies, stock management, input-output pricing, safety nets and regional cooperation. These issues are reviewed briefly below.

F1Source: World Bank 2007.

a)         Agriculture Productivity: Despite rapid growth since 1980, South Asia’s dependence on agriculture remains substantial. While agriculture’s contribution to value added has declined rapidly, it still remains higher than most regions (figure 1).  More importantly, between 30-35 per cent of the labor force remains reliant on agriculture for livelihood, suggesting very low average productivity (figure 2).  Since world commodity prices of energy and fertilizer are likely to remain substantially higher than the levels in 2004, the only sustainable way of reconciling higher input costs with low and stable prices of wheat and rice for citizen’s is to pay attention to farm productivity.  This is among the most urgent policy focus for South Asian governments.

F2Source: World Bank 2007.

The scope for productivity improvements is clear from figure 2, but this can be seen more specifically from the productivity comparisons of the two major food crops, wheat and rice.  The trends in productivity improvements in South Asia and global comparators for wheat and rice per hectare of land cultivated are shown in figures 3 and 4.

F3Source: USDA database

F4Source: USDA database

Focusing on land productivity is particularly important in South Asia where land endowment is likely to emerge as a binding constraint. Regarding wheat, the two major South Asian wheat producing countries (India and Pakistan) achieved substantial gains in productivity between 1970 and 2000, but faced stagnation since then.  Productivity improvements and yield per hectare compare positively with North America but yield remains way behind EEC countries and East Asia.  For example, India faces a wheat productivity gap of 40 percent with East Asia and 50 percent with EEC.   Concerning rice, South Asian countries show significant gains since 1970, especially in Bangladesh and Sri Lanka.  Yet the productivity gap with most of the world (except Sub-Saharan Africa) is large. For example the average per hectare yield in the better performing South Asian countries of Sri Lanka and Bangladesh is still 40 percent lower than the yield in North Africa, 25 percent lower than North America, and 10 percent lower than in East Asia.  The rice productivity gaps are larger for India and Pakistan, and the largest for Nepal.

The yield gaps in South Asia for both wheat and rice are huge and suggest the need for urgent policy attention to find ways to catch up with the performance in the high-yielding countries.  This entails addressing issues relating to technology, inputs (especially water, fertilizer and energy), pest control and farmer incentives.  The range of policies that impact on productivity include incentive policies for farmers (pricing policies, ownership and tenancy issues, farm credit, crop insurance and public expenditure) and policies for ensuring that key inputs are available on time (fertilizer, seeds, water, energy, pest control).

(b) Trade policies: The economic case for reforming agricultural trade policies to enhance global welfare is strong. This requires coordinated efforts in both developed and developing countries.  In practice, agriculture trade policies tend to get enmeshed in political economy issues and using purely economic rationale for advocating trade policies for agriculture is fraught with risk of being ignored by policy makers.  This is partly because of the huge reliance of the labor force on agriculture for income, but also because of the objectives to maintain food prices low for consumers and avoid the kinds of disruption illustrated by the global food price crisis. So, we are essentially in the second best world.  All South Asian countries are engaged in substantial domestic production of food items, especially food grain.  Food self-sufficiency is also a driving force in policy making in the area of agriculture strategy and trade policy.  Reliance on trade is subsidiary. On balance India and Pakistan are net exporter of food while Afghanistan, Bangladesh, Nepal and Sri Lanka are net importers (Table 1).

While the first best arguments against trade protection in terms of comparative advantage and efficiency of resource allocation are often well known at the policy level, from the political economy perspective the real policy choice is how to balance these concerns with the political economy issues of protecting the incomes of farmers and avoiding supply disruptions for consumers.  The sharply adverse consequences of extreme trade policies, such as a ban on exports employed during the crisis by many countries including in South Asia are illustrative of the importance of drawing the right balance in the policy choice.  The evidence is clear that these restrictions accentuated the price volatility, especially in the thinly traded rice market, and created added uncertainty facing food importing countries. Trade restrictions also increase the cost of food security as countries tend to build larger food stock reserves than necessary to counter uncertainty in trade.

Table 1: South Asia Trade Balance for Raw Food


Country

Net Imports (US$ million)

Net Imports as % of all imports)

1980/81

1990/91

2000/01

2004/05

1980/81

1990/91

2000/01

2004/05

Sri Lanka

-73

-110

-167

-248

-5

-5

-3

-3

Bangladesh

-224

-196

-317

-674

-13

-7

-4

-6

India

31

313

1,214

1,865

0

2

3

2

Nepal

13

6

1

-53

7

1

0

-4

Pakistan

155

0

512

465

4

0

7

3

Afghanistan

23

12

-53

-82

9

3

-8

-3

Source: UN COMTRADE Statistics

Note:Food is defined as raw food, excluding all cash crops, processed food products and seafood

On average trade policies for agriculture are more restrictive in South Asia than in other regions (see Table 2) suggesting the scope for lower protection.  The efficiency loss from these high trade restrictions needs to be carefully evaluated against the gains.  Importantly, trade barriers among neighbors are not very effective over the medium to long term, given physical proximity and informal trade opportunities.   Trade cooperation with neighbors would appear to be a more potent way of managing food security than trade bans because such bans simply fuel high-cost informal trade and rent seeking at the expense of both the farmers and the consumers.

Table 2: Trade Restrictiveness in Agriculture in 2006

 

Overall Trade Restrictiveness Index

Tariff Trade Restrictiveness Index

East Asia

26.6

8.7

Europe and Central Asia

25.9

10.3

Latin America & Caribbean

28.1

6.6

Middle East and North Africa

32.3

12.1

South Asia

46.4

31.4

Sub-Saharan Africa

24.9

13.8

Source: Kee, Hiau Looi, Alessandro Nicita, and Marcelo Olarreaga (2006)

c) Food stock and public distribution system:   This is another area of controversy.  Most countries maintain some kind of a stock to respond to supply shortages in a crisis situation.  Some countries also maintain stocks to support a public distribution system.  The goal here is to reconcile the twin objectives of giving farmer appropriate incentives through higher prices but moderating the effects on consumers by providing subsidized supplies to low income group through the public distribution system.

The subject of food stocks has been studied at length. The key questions that have emerged from the experience of South Asia and elsewhere include: multiplicity of objectives; efficiency of public distribution versus markets; corruption and wastage; role of trade; and fiscal costs.  India’s experience best illustrates these various issues and the challenges of trying to reconcile them. Historically, the growing cost of production has forced the government to accumulate a huge stock of rice and wheat at increasing prices.  In particular, wheat prices until 2006 were higher in India than internationally owing to the incentive policy, raising issues about efficiency of domestic supply.   At the same time, the government’s objective to keep prices low for consumers led to subsidies, contributing to a growing fiscal cost of public food distribution.  Concerns also emerged about losses from theft and corruption, and wastages from storages.  Despite these costs of the food stocking policy, India nevertheless feels vindicated by the ability to manage the global food price crisis much better than most countries of the world based on its food stocking and public distribution policies.

Even so, there is a need to rethink the right balance between food stocks and trade.  Maintaining some level of stocks to meet emergency situation and global crises such as during 2007-08 is a sound policy decision.  Working out that prudent level, while keeping an eye on fiscal cost, theft prevention and stock wastage, is important. Participating in the global food market through trade with appropriate safeguards on domestic availability through food stocks is a better policy option than to impose trade bans or prohibitive tariffs.

d) Input-output pricing policies: The complex system of pricing interventions have distorted incentives, reduced the efficiency of farm production and added to the fiscal burden.  Importantly, this has tended to divert attention away from addressing the productivity challenge.  The key to resolving South Asia’s food challenge is to raise productivity. Importantly, the recent price increases for food crops provide policy makers a golden opportunity to revisit the whole support strategy for food policy. The improved terms of trade in favor of agriculture resulting from the global commodity price boom allows South Asian governments to let farmers benefit from these higher output prices while removing the fiscally expensive and inefficient subsidies. The resources thus saved could be redirected to areas that support farm productivity including spending on rural infrastructure (roads, irrigation, rural electricity), farm technology, research and extension.  Food security concerns on the supply side are possibly best addressed by focusing on farm productivity rather than through subsidized inputs.

e)  Safety nets:  An effective safety net system is a key aspect of tackling food security on the demand side. The immediate response of South Asian governments to use the existing safety net programs involving public food distribution is an understandable response to the food price crisis.  However, South Asian governments are also well advised to carefully think through doing so more effectively as well as using other programs for the medium to long term.  A review of international experience suggests the following broad guidelines to build upon in developing comprehensive safety net programs.

The root cause for poverty must not be overlooked in designing safety net schemes.  The most sustainable way of reducing poverty over the long-term is to ensure that policies protect economic growth and promote employment.

The design of an effective public expenditure program that supports economic growth and employment needs to be a key component of a comprehensive strategy for safety nets.  Thus, for example, a public expenditure program that links safety net programs with creating rural infrastructure and ties cash transfers with basic health and education (i.e. conditional cash transfer programs) is likely to yield better outcomes in terms of social protection than those which provide generalized subsidies.

Reduction of various vulnerabilities emerging from natural disasters and lack of access to credit would need to be a key component of an effective safety net strategy.  Micro credit schemes, for example, have played an important safety net role in a number of South Asian countries, especially Bangladesh.  Formal insurance schemes for ex-ante risk reduction can also be very helpful, but they are almost non-existent in South Asia. Most importantly, South Asia is yet to develop a comprehensive strategy to address the vulnerabilities emerging from climate change and lack of cross-boundary water cooperation.

Cash transfer programs are preferred to food or other in-kind transfers because cash increases the purchasing power of households and provide households with choices of how they meet their most pressing needs. Examples of conditional cash transfers that have worked well include the Food-for-Education Program in Bangladesh, Mexico’s PROGRESA program and the Bolsa Escola in Brazil.

The development impact of food based programs can be strengthened with the use of nutritionally fortified grains. A small share of food based safety net programs use fortified grains and a recent IFPRI evaluation in Bangladesh highlights their potential. Estimates show that providing vitamin A and zinc supplements are a highly cost-effective intervention when one takes into account the longer term development benefits of a well nourished child.

A common difficulty of implementing targeted programs during crises arises especially in countries which do not have a well designed and effective program in place.   In such cases, it may be more feasible to focus on existing self targeted programs that can be scaled up relatively quickly.  Well known examples of these programs in South Asia are the food for works program and the employment guarantee schemes.  The food for works program target unemployed workers to support the creation of infrastructure, such as rural roads or irrigation schemes.  On average these programs have worked well, although the monitoring of administration and accountability needs to be strengthened.

Concerning, employment guarantee schemes, the best known example in South Asia is the Maharashtra’s EGS. In 2007, India initiated an even more ambitious National Rural Employment Guarantee Scheme (NREGS).  Bangladesh has followed suit by announcing a similar program in 2008.  These programs can be an effective way of reducing vulnerability and supporting the poor provided these are designed well. The fiscal cost of these schemes also needs to be watched and managed.  The most important issue here is the wage level. The experience with the Maharashtra scheme suggests that wages were set too high, resulting in employment rationing.  Self targeting will work only if the wage is set at a relatively low level so that the non-poor have no incentive to enter this program. The other important aspect is community involvement in the choice of projects to ensure that the work program creates assets that are useful to the community.

(f)        Regional cooperation:  Providing food security to South Asia Region as a whole requires more and better economic cooperation.   South Asia has a mix of food surplus (India, Pakistan) and deficit (Afghanistan, Bangladesh, Nepal and Sri Lanka) countries.  Collectively, it can produce enough food to meet the regional requirements as well as generate a net exportable surplus. Physical connectivity makes markets and prices much more integrated not withstanding official trade and regulatory barriers. Policy coordination is important to avoid illegal activities and subsidy leakages.  Cooperation can also raise productivity through cooperation in areas of water and energy that are critical inputs for raising farm productivity. The rising cost of energy, the emerging water shortages, and the frequency of natural disasters especially from flooding and drought, suggest also the need to pay attention to global public goods such as climate change, cross-boundary water sharing arrangements and regional energy trade.   More and better regional cooperation can be an effective way to manage the farm productivity challenge and ought to be a key element in the design of future food policy strategies in South Asia.

The idea of a regional buffer stock, akin to a food bank, might also make sense and help mitigate regional food crisis.  Instead of imposing trade bans, that are known to be ineffective and costly as they simply spur illegal trade owing to porous borders, a food bank might allow transactions that relieve the pressure on deficit countries and help stabilize prices at the regional level. Such a fund could be financed through an equitable sharing of costs.

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Dr. Sadiq Ahmed is Vice Chairman of Policy Research Institute, a Dhaka think tank, and can be reached at:  sahmed1952@live.com

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