Rising-Food-Prices-Exacerbate-Poverty-in-Developing-Countries

Rising Food Prices Exacerbate Poverty in Developing Countries

Currency Depreciation, Capital Outflows to Blame

Of the 17 Sustainable Development Goals of the United Nations to be achieved by 2030, eliminating hunger used to be seen as the most feasible. However, recent global events, including the COVID-19 pandemic and Russia’s invasion of Ukraine, have led to a significant setback. 15 years of progress on improving access to food have been lost. Despite global agricultural production being more than sufficient to meet the world’s nutritional needs, food insecurity is significant and rising everywhere, even in rich countries. The substantial increases in hunger in lower-income countries are especially worrying, and the situation demands immediate attention.

Soaring food prices are to blame for this damaging reversal. Worse, more such shocks will likely emerge as climate change worsens and geopolitical tensions mount. The G20, under Brazil’s presidency this year and South Africa’s in 2025, must recognize the gravity of the situation and devise a new stabilization playbook to address these risks. The responsibility lies heavily on their shoulders.

Although food prices have fallen globally from their 2022 peaks, they have remained high or continued to rise in many countries, with the sharpest increases often occurring in the poorest economies. By September 2023, the food price index produced by the Food and Agriculture Organization of the United Nations had fallen by around 11.5% from the previous year. During that same period, average food prices in low-income countries rose by 30% – an alarming situation, given that people in these countries spend 30-60% of their disposable income on food.

Despite cooling agricultural prices worldwide, one primary reason for persistent food-price inflation in the Global South is currency depreciation, making imported food and fuel more expensive. The influx of capital into developing countries after the 2008 global financial crisis, driven by quantitative easing in advanced economies, has reversed following interest-rate hikes in the United States and Europe in recent years. These capital outflows have weakened developing-country currencies, forcing their central banks to raise interest rates even at the risk of triggering an economic downturn. At the same time, the interest-rate hikes have led to high debt-servicing costs, depleting these countries’ foreign reserves and impeding their ability to pay for food imports.

Developing countries’ dependence on global commodity and capital markets undermines their efforts to ensure food security. To counter this, advanced and developing economies should work together to develop and implement international strategies to regulate financial and commodity markets and address sovereign debt problems. This coordinated approach is crucial to mitigating the destructive effects of this dependence.

Public buffer stocks of certain staples—especially grains—can help prevent price spikes, which hurt consumers, and avoid price collapses, which hurt farmers. Some countries, including India and China, have long used buffer stocks to enable countercyclical open-market operations and guarantee supplies during emergencies. Another advantage of buffer stocks is that they allow governments to establish public procurement policies that incentivize sustainable cultivation practices and crop diversification.

Countries that lack the fiscal space to build substantial buffer stocks could work with regional partners to create joint stockpiles. For example, South Africa, the continent’s largest economy, could lead a regional buffer-stock initiative in coordination with the African Union.

Developing countries should also consider implementing macroprudential and capital-account-management policies to prevent destabilizing capital flows. Such policies could include setting limits on and establishing minimum lock-in periods for foreign investment in local financial assets, imposing reserve requirements for inflows, and using differential tax rates for domestic and foreign asset holdings. Global South governments successfully used this approach in the 1990s, and they should do so again.

Rich-country central banks have begun cutting interest rates owing to cooling inflation. The anticipated increase in global liquidity should make it easier to introduce capital-account-management policies, whereas doing so now when financial conditions are tighter, risks exacerbating capital flight. Moreover, developing countries are less likely to face backlash from global financial centres if they coordinate their efforts to manage capital accounts rather than go it alone. Brazil and South Africa are well-placed to spearhead this effort as large middle-income countries.

Lastly, commodity markets, the most important based in the US and Europe, must be more tightly regulated. Governments there should require all commodity trading to take place on regulated exchanges, with strict capital and margin requirements and position limits for individual traders. They should also eliminate the “swap-dealer loophole” to restrict commodity-market speculation by investors with no interest in producers or consumers.

In addition to demanding such changes to financial regulation in advanced economies, developing countries should also consider systematic and coordinated interventions in commodity futures markets to complement their buffer-stock initiatives. Such measures would discourage speculative activity, reducing the grain reserves required to intervene in the physical market.

The G20’s developing countries are keenly aware of the severe threat of food insecurity. The successive presidencies of Brazil and South Africa provide an opportunity to translate this understanding into global action. Coordinated action could bring about significant positive changes and provide hope for a more secure food future.


13th Year • October 2024 • No. 134

Authors

Isabella M. Weber

Associate Professor of Economics at the University of Massachusetts Amherst, is the author of How China Escaped Shock Therapy: The Market Reform Debate (Routledge, 2021).


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