From the June 5, 2008 Wall Street Journal Asia
June 5, 2008
by Rod Hunter
World leaders are gathered in Rome at the United Nation's Food and Agriculture Organization summit on the food crisis. Looking beyond the urgent task of responding to the humanitarian emergency, leaders need to reorient development priorities to empower farmers in developing countries to meet the world's growing food demand.
Since 2005, the prices of staples are up more than 80%. The World Bank has estimated that higher food prices may have pushed 100 million people into poverty. By some counts, more than 30 countries have seen riots and demonstrations over escalating food prices. World Bank President Robert Zoellick provided needed leadership last week with a 10-point agenda for responding to the immediate humanitarian needs, getting crops and fertilizer into the hands of developing-country farmers for the next growing season, and promoting developing-country farm production.
This food crisis has been decades in the making, with demand overtaking the world's farms' flagging capacity. Since the collapse of international communism, we have witnessed an astonishing spread of prosperity and consumption to once destitute and deprived corners of the world. While President Bush was pilloried for pointing this out, it is wonderful news for which we should all rejoice.
Growth has accelerated over the past five years, as annual global GDP growth rates of 5% and developing-country growth beyond that have boosted incomes for tens of millions, especially in developing countries. Now, Chinese, Indian, Indonesian and other newly prosperous people are treading the same path as the Japanese and South Koreans in prior decades in shifting to meat-rich diets. It takes a lot of grain to produce a little meat, and as people eat more meat, grain demand rises.
The world's farms have not kept pace. Over the past century, agricultural commodity prices have fallen by half in real terms, with price spikes during the 1940s and 1970s. The sharp declines since the 1950s reflect in significant part innovations in agricultural chemistry and biology that have boosted crop yields and farm productivity, especially in Europe and North America.
Persistently declining prices blunted investment incentives globally, and agriculture fell out of fashion in development policy circles. Agriculture's share of development aid fell over the last two decades from nearly 20% at the time of the 1970s price spike to just 3.5% in 2004, the World Bank reports.
The result has been sagging productivity and yield growth outside developed economies. So, while cereal yields in the U.S. reached 6,390 kilograms per hectare in 2006, in Asia yields were 3,436, in Latin America 3,221, and in Africa only 1,477.
To be sure, other factors have exacerbated the tightening agricultural market. Sky high oil prices are drawing agricultural commodities into the energy market -- U.S. ethanol mandates aren't a factor with oil at $130 a barrel. Some 28 countries restrict food exports, strangling international markets and stunting incentives for their farmers. And of course the vagaries of weather have had an impact.
Looking to the future, the picture is daunting. To meet demand, farm output may need to expand by 50% by 2025 and double by 2050, as prosperity spreads and population reaches a projected nine billion. Farmers won't be able to meet this demand simply by putting more land under the plow -- there is currently relatively little unused arable land. Water resources are increasingly scarce. And climate change remains a question mark.
So, was Thomas Malthus right that population will outrun food supply capacity? Unlikely, so long as we let human ingenuity, guided by markets, go to work. When price signals are allowed to operate, a natural resource's scarcity encourages people to use it more efficiently, find more of it and invent substitutes. As economist Julian Simon pointed out, natural resources may be finite, but human creativity, the "ultimate resource," isn't.
Here are some things that can be done to empower developing-country farmers:
- Remove trade barriers. Global trade talks encompassing agriculture should be expanded and brought to a swift conclusion resulting in complete elimination of agricultural tariffs, export restrictions, and trade-distorting subsidies. World Trade Organization negotiations, the so-called Doha development agenda, are fraught with low ambitions. Developing countries such as India claim, for instance, they deserve "special and differential treatment" so that they can protect local farmers. Meanwhile, their consumers are condemned to higher prices, and their farmers find their own export markets balkanized by other poor countries' tariff walls. Elimination of all trade barriers would foster regional trade among developing countries and food security for all.
- Build market infrastructure. Developing countries need to build the infrastructure necessary for their farmers to participate in the global economy: storage facilities, roads, rails and ports, as well as regulatory institutions to assure consumers around the world that their products are safe. Mr. Zoellick's innovative financial risk management ideas could also help. The World Bank and other development agencies have the skills and wherewithal to do this now that agriculture and rural development are back on the agenda.
- Promote technological innovation. Farmers in developing countries need to harness modern innovations such as crop and animal biotechnology. Private sector and government-supported initiatives to develop crop varieties adapted for Asia and especially Africa will help. By the same token, rich-country governments such as the EU, which persists in anti-biotech policies over the advice of its scientists and the WTO, must recognize that their opposition discourages poor farmers from embracing the technologies that can help meet the world's food needs.
- Avoid counterproductive policies. Some have suggested, for instance, creating food stocks modeled on the petroleum reserves held by oil-consuming countries. This strategy could backfire. The overhang of government-owned reserves would displace incentives for private parties to hold stocks. Besides, agricultural markets aren't as vulnerable to politically motivated shocks as the oil market with production concentrated in unstable authoritarian countries.
Happily, we don't have to wait for officialdom to do all this. Financial firms as diverse as Dubai-based Abraaj Capital and London-based Emergent Asset Management report they are making investments in poor-country farms. As Crispin Odey of London hedge fund Odey Asset Management said, "sell banks, buy cheese." This return-seeking capital will bring world-class technology and know-how that will raise farm productivity and yields.
Tight food markets will be with us for years to come. Spreading prosperity and growing population will tax the world's finite natural resources. Yet, "human beings," Mr. Simon explained, "are not just mouths to feed, but are productive and inventive minds that help find creative solutions to man's problems, thus leaving us better off over the long run."
Rod Hunter, a senior fellow with Hudson Institute, served as senior director at the National Security Council under President George W. Bush
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