Rising Food Prices, Poverty, and theDoha Round
Sandra Polaski
Senior Associate and Director, Trade, Equity and Development Program
Introduction
The rapid increase in prices of rice, wheat, corn and other food staples hassent a shock wave through poor households around the world, as well asthrough governments and international policy makers. While food prices arealways volatile, recent increases are of a magnitude last seen in the 1970s.
MAY2008
Summary
This paper examines the issues at stake in the Doha Round in light of rising food prices and theirimpact on global poverty. It first reviews the causes of high food prices, emphasizing those that aresusceptible to action by governments. The author then presents recent evidence on how food pricesaffect the poor and concludes that, although many poor households will require urgent assistance, moreare likely to gain from rising prices than lose. She argues that the Doha Round must allow developingcountries adequate policy flexibility so that they can build up their own agricultural sectors, increasefood supply in the medium and long term, and shield the poor from market failures that can affect theirvery survival. An agreement should:
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Sharply restrict domestic and export subsidies provided to wealthy country farmers, which drivefarmers in developing countries off the land or into poverty. In-kind food aid should also berestricted in favor of cash assistance.
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Allow developing countries to shield at least twenty percent of tariff lines from reductions as“special products” to foster greater domestic production and shield poor households until theybecome more productive or find other livelihoods.
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Create a robust “special safeguard mechanism” that would permit developing countries toaddress short term volatility in global food markets by raising tariffs in response to importsurges or agricultural price drops.
2There are multiple causes: rising demand in large developing countries thathave experienced growth in household incomes; neglect of agriculture inmany developing countries over recent decades, leading to reduced supply;increased costs to farmers due to high fuel and fertilizer prices; competitionfrom biofuels for land use; supply disruptions caused by drought in majoragricultural exporting countries; speculation and an asset bubble incommodity markets; and the decline of the dollar, the currency in which manycommodities are priced on global markets.The impact of the price increases on poverty varies among countries andwithin countries. The effects on the poor depend on whether they are netsellers or net buyers of food, as well as whether they depend on theagricultural sector for wages or other sources of income.This paper identifies those causes of the price increases that would besusceptible to policy changes and discusses the poverty impacts, sometimescounterintuitive, that must be borne in mind. One area of policy that isdirectly at stake is trade policy. The Doha Round of negotiations at the WorldTrade Organization offers a particular challenge, because those trade talksappear to be reaching a crescendo just as food prices have spiked. This paperexamines specific proposals in the Doha Round in light of its findings.Before turning to those issues, it must be noted that the rise in food prices hascreated a crisis for many poor households that demands an immediate policyresponse from the global community. The poor, often those displaced by civilstrife, who already depend on aid agencies for their food supply must beprotected from hunger caused by rising prices. The UN World Food Programestimates it will need over $700 million in additional resources this yearsimply to maintain current feeding levels. Rising prices will push many otherpoor households into deeper poverty and increase demands on food programs.The world must supply additional aid quickly. The initial response fromwealthy countries has been promising, although translating commitments byheads of state into actual appropriations and delivery of aid remains to beaccomplished. Pressure must be kept up. In many developing countries,governments will need to provide safety nets, such as cash vouchers orsubsidized food, to help poor households afford adequate nutrition. Somecountries will have the budgetary resources to fund such programs, but manylow-income countries will need help from international donors.Beyond the immediate aid needed to prevent hunger and increased poverty,however, the complexity of the situation demands careful analysis if appropriate policy responses are to be found. Which combination of policieswill be effective over the medium and long term is the crucial question.
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Causes of the Current Increase in Food Prices
The starting point for a serious discussion of current food price increases mustbe the historical pattern of price changes. Two consistent patterns emerge.First is that food prices are always volatile, because both food supply and fooddemand respond slowly to changes in price. As a result, any disruption in thematch of supply and demand will produce exaggerated changes in price.Figure 1 illustrates the volatility of prices for one crop, rice, over the last 30years, adjusted for inflation.
Figure 1. The Real Price of Rice 1970–2008
50100150200250300350400450
1 9 7 0 1 9 7 3 1 9 7 6 1 9 7 9 1 9 8 2 1 9 8 5 1 9 8 8 1 9 9 1 1 9 9 4 1 9 9 7 2 0 0 0 2 0 0 3 2 0 0 6
P r i c e I n d e x ( 1 9 7 0 = 1 0 0 )
Source: UN Food and Agriculture Organization, staff estimatesThe second historical pattern is that the price of food has shown a downwardtrend over the past century, relative to prices of manufactured goods. Figure 2presents a generally accepted food price index for the period 1900–1987developed by World Bank economists, updated with calculations by IMF staff for the period 1957–2006.
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While food prices have been rising for the lastseveral years, they are still well below levels that prevailed for most of the lastcentury.Is there reason to think that the current price spikes are harbingers of afundamental shift in trends? On the one hand, rising food demand fromgrowing developing countries, a significant factor in current increases, islikely to persist and this is indeed a positive development, as it indicates thatmore people can afford adequate nutrition. On the other hand, higher priceswill elicit increased production—this can already be observed in this season’splanting data. However other contemporary factors have complicated therelationship between supply and demand.The competition of biofuels for crops and land use has had a modest impacton food prices to date, but the effects will grow unless the United States and
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Rising Food Prices, Poverty, and the Doha Round
In a policy outlook, Rising Food Prices, Poverty, and the Doha Round, Sandra Polaski examines the role of a Doha agreement in light of rising food prices and their impact on global poverty. She finds that…
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