Global Food Security: Macroeconomic and Financial Crisis Impacts

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DG for Economic and Financial Affairs, Brussels, May 4, 2010

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Global Food Security: Macroeconomic and Financial Crisis Impacts Shenggen FanDirector GeneralInternational Food Policy Research InstituteDG for Economic and Financial Affairs, Brussels, May 4, 2010Key messagesGlobal food security is under stressFood security is affected by macroeconomic policies and financial turmoilUninsured shocks are costly for poor peopleNew agenda for enhancing global food security is neededShenggen Fan, IFPRI, May 2010The number of hungry needs to fall by 73 mil. per year to meet MDG1

Shenggen Fan, IFPRI, May 201029 countries have alarming/extremely alarming levels of hunger (2009 GHI)

GHI components:Proportion of undernourishedPrevalence of underweight in childrenUnder-five mortality rate

Source: von Grebmer et al. 2009.Shenggen Fan, IFPRI, May 2010Domestic prices remain high in some countries Rice prices, $US/tonSource: FAO 2010.Emerging stress factorsPopulation growth and demographic changesLand and water constraintsClimate change

Source: IWMI 2000.Projected water scarcity in 2025Shenggen Fan, IFPRI, May 2010Macro policies Food securityFiscal policyMonetary policy (Inflation) Exchange rate policyEnergy policy

Shenggen Fan, IFPRI, May 2010Inflation and exchange rate effectsHigh inflation erodes poor consumers purchasing powerVolatile prices distort long-term planning for agricultureOvervalued exchange rate discourages production of export crops Overvalued exchange rate discourages consumption of local foods

Shenggen Fan, IFPRI, May 2010Fiscal responses to the food crisis

Source: Headey, Malaiyandi, and Fan 2009.Note: Agricultural spending is reported in US$, and for countries with *, the total fiscal stimulus response to the financial crisis is reported.Shenggen Fan, IFPRI, May 2010Oil and food prices are tightly interlinkedSource: Data from FAO 2009 and IMF 2010.Reduced financial revenue may lead to decline in government spending in agriculturePrivate investment in agriculture and credit for agriculture may drop sharplyRural migrants may return to agriculture and rural townsRemittances may decline sharplyBoth domestic and international demand for high value commodities may be affected severelyDonor investment in agriculture and rural development becomes uncertain

Financial crisis: Potential impactsShenggen Fan, IFPRI, May 2010FAO and WB estimates of impactsFood crisisFinancialcrisisFAOWBWBWBCRFAOMalnutritionPovertyUrban povertyRural PovertyPovertyMalnutritionMillionsMillions% Change% ChangeMillionsMillionsSSA245.72.8-0.2--LAC60.70.3-0.2--MENA44.60.60.3--Asia41120.57.33.5--Developing world75131.5--53125Source: Headey, Malaiyandi, and Fan 2009.Note: CR = Chen and Ravallion 2009.Shenggen Fan, IFPRI, May 2010The cost of uninsured shocksUninsured shocks lead to income and asset loss and reductions in consumption Even the potential of an uninsured shock has welfare costsproductivity and income are reduced as households take action to limit risk exposure substantial costs are incurred by poor households to manage risks

Source: Vargas Hill 2010.Shenggen Fan, IFPRI, May 2010Shocks can severely impact food security

Transitory shock with severeand permanent consequencesCascading series of shocksSource: Hoddinott 2009.Shenggen Fan, IFPRI, May 2010Tools to manage shocksSource: Vargas Hill 2010.Shenggen Fan, IFPRI, May 2010New agenda for food security neededInvest in agriculture and improve smallholder productivityKeep trade openPromote productive social protectionInvest in climate change adaptation and mitigationImprove institutions and capacities1. Invest in agriculture and improve smallholder productivity

Agricultural spending as % of ag GDP

Source: Fan 2009.Shenggen Fan, IFPRI, May 2010There is a large gap between required and current spendingIncrease agric. spending, improve access to inputs and services, secure land rights, invest in rural infrastructure Source: Fan and Johnson (2009).0.51.01.52.02.53.03.54.0Actual ag spending in 2004, billion USD Annual ag spending required, billion USD (2008-15) Shenggen Fan, IFPRI, May 2010Ag + non-ag growth = highest poverty reduction

Source: Diao et al. 2008.Poverty simulations, RwandaShenggen Fan, IFPRI, May 20102. Keep trade openEliminate harmful trade restrictions and refrain from imposing new onesto increase efficiencyto stabilize pricesComplete the Doha Round if tariffs increase to their current WTO limits (bound level): 11.5% loss of developing country exports US$353 billion loss in world welfarePotential costs of failed Doha Round could be highSource: Bouet and Laborde 2009.Shenggen Fan, IFPRI, May 2010As quoted by the WTO staff, examples of border measures are: Argentina has recently imposed non-automatic licensing requirements on products as auto parts, textiles, TVs, toys, shoes, and leather goods.India reportedly raised tariffs on some steel products in November 2008. On November 17, 2008, Mercosur members decided to raise their common external tariff, by five percentage points, on numerous items, like wine, peaches, dairy products, textiles, leather goods and wood furniture. - But it seems that this has not been really implementedOn November 26, 2008, Ecuador raised, between 5 and 20 percentage points, its tariffs on 940 products, including butter, turkey, crackers, caramels, blenders, cell phones, eyeglasses, sailboats, building materials, and transport equipment. Russia (a non WTO-Member) has announced its plans to raise import tariffs on cars and harvesters and continued to impose SPS measures. Ukraines Parliament has been considering raising applied tariffs.In December 2008, Indonesias government implemented a regulation which states that imports on 500 individual tariff lines, including textiles, toys, and electronics will require special licenses granted conditionally upon the approval of domestic producers.In December 2008, the Republic of Korea announced that its tariffs on imports of crude oil will rise from 1 percent to 3 percent from March 2009.The European Union announced that it would re-introduce export subsidies for some dairy products from late-January 2009.

Some measures emphasized by the WTO have been discussed at the domestic level in the beginning of 2008 -> Before the Crisis

203. Promote productive social protectionScale up safety nets to: Secure and smooth food consumptionEnable saving and investment Build and diversify assetsTypes of interventions e.g.:Conditional cash/food transfersMaternal and child health/nutrition programsPublic worksInsurance for the poor

Source: Adato and Hoddinott 2008.Programs depend on needs, capacities, and resourcesShenggen Fan, IFPRI, May 2010Innovative insurance for poor farmers and consumersAgriculture: index-based weather insurance for crops and livestock Health: community-based health insuranceEffective delivery channelsAgricultural cooperatives to deliver weather insurance productsMicrofinance institutions to provide microinsurance

Source: Vargas Hill and Torero 2009.Shenggen Fan, IFPRI, May 20104. Invest in climate change adaptation and mitigationSub-Saharan AfricaSouth AsiaDeveloping countriesAgric. research3141721,316Irrigation expansion537344907Irrigation efficiency1879992,158Rural roads2,015172,737Total3,0531,5317,118Annual expenditure to counteract climate change effects on child nutrition by 2050 (million 2000 US$)Source: Nelson et al. (IFPRI) 2009.Shenggen Fan, IFPRI, May 20105. Improve institutions and capacitiesBuild up existing institutions and improve evidence-based policy makingIncrease gradual implementation after careful experimentation as in Asian reform process (esp. China) Increase investment in information gathering, monitoring, and evaluation

Strengthen human and administrative capacities through increased investment in education and trainingShenggen Fan, IFPRI, May 2010Rapid hunger reduction is achievable with effective country-led and country-owned actionsShenggen Fan, IFPRI, May 2010