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◆ Rising food prices: policy options and World Bank response - Background note for the Development Committee2.4 Measures to handle the ‘spillover’ effects of the above-mentioned policyresponsesMany of the policy responses discussed in the previous two sections have significant fiscal implications. In the case of Ethiopia, for example, the total additional costs of combined measures to raise the wage on the cash-for-work program, lift the VAT on food grains, and distribute wheat to the urban poor at asubsidized price, are likely to exceed 1% of GDP. The macroeconomic consequences of higher spending depend largely on how they will be financed. Where additional budgetary costs are financed via higher domestic borrowing, this may lead to higher overall inflation. An alternative is to transfer costs to non-poortaxpayers, which may or may not be feasible depending on country-specific revenue-raising capacities and political economy considerations. Diverting resources from other social sector spending or from other core public investments to finance shortterm responses may have medium and long-run opportunity costs. onthe other hand, addressing food security priorities may provide an opportunityto reduce lower priority expenditures and reallocate these resources. Given the potentially important economic and political costs of not addressing food security, a temporary increase in budget deficits may be warranted.
Not all countries have the same capacity to accommodate and execute additionalsafety net and food policy spending. Using comparable data from the World Bank’s Country Policy and Institutional Assessment indicators, developing countries can be classified into four categories, depending on the extent of fiscal and balance of payments imbalances: (1) those in which initially weak public finances and fiscal management capacity has been further undermined by adverse terms-of-trade shocks (e.g. Burundi, Eritrea, Grenada, Haiti, Jamaica, and Nepal); (2) those in which somewhat stronger initial positions have been weakened by the terms-of-trade shocks (e.g. Burkina Faso, Ethiopia, and Honduras) and/or compounded by political crises (e.g. Kenya and Pakistan); (3) those in whichthere is weak fiscal capacity to effectively execute the additional food policy spending even in the face of favorable terms-of-trade movements (e.g. Mongolia and Zambia); and (4) those with stronger initial fiscal and balance of payment indicators, in which there is greater scope for mitigating the adverse impact of rising food prices (e.g. Indonesia, Mexico, and Tunisia).
The design of public policies to address rising food prices is conditioned by political economy factors. The strength of different interest groups is a critical factor in influencing policy choices and determining what solutions are feasible. Even in cases where countries are net suppliers of food to world markets, governments may face strong incentives to put in place protective measures. Sound policy choices will seek to implement those solutions which are economically most efficient, yet reflective of political economy considerations andin line with the country’s fiscal space and institutional capacity. In some cases, first or even second best policies may not be feasible or may involve difficult political choices. In general, government policy choices are likely tobe better accepted and understood if accompanied by a transparent and effective communications strategy on the causes of high food prices and accompanying policy measures.
3. How can the World Bank and donors help?The Bank is well-positioned to help countries identify the appropriate mix andsequencing of short and medium-term policies needed to support vulnerable groups, while allowing for broader adjustments to the structural increases in foodprices. Core elements of the Bank’s response will include policy advice, financial support and global leadership.
3.1 Support for rapid policy responsesAt present, the greatest demand for Bank engagement is to help countries evaluate the economic and social implications of rising food prices, as well as theavailable policy responses. Since many governments are faced with political economy pressures to implement sub-optimal, and even counterproductive, policies,the Bank can provide analytical inputs to highlight the least distortionary courses of action and help countries forge an effective, integrated response. Increased financial support may also be appropriate in a number of country contexts.
Just-in-time policy advice to address immediate concerns. There is strong demand for Bank advice on the design and expansion of safety net programs and foodmarket interventions to help protect vulnerable groups. In Indonesia, the World Bank’s work has played a significant role in informing discussion of the impact of rice prices on poverty and on the usefulness of various policy instruments, for example cash transfers. In Egypt, the Bank helped bring together Mexican officials with experience of conditional cash transfer programs to share with Government officials. In Ethiopia, wage rate analysis carried out by the Bank was the basis of adjusting the cash transfer element of the country’s largest safety net program.
There has also been demand for advice on market interventions to smooth supplyand lower food prices. An intensified dialogue on food stocks (which addressesoptimal stock amounts, fiscal trade-offs, and implementation challenges) is being held in several countries, including Indonesia and Burkina Faso. In the Philippines, the Bank is advising the Government on the best strategy for reducing rice import tariffs. A high level forum is being organized in Morocco to discuss various reform options of the fuel and food subsidy programs.
Several countries have sought policy advice from the Bank to cope with the macroeconomic implications of rising food prices. Several policy notes have been prepared for partner countries on the causes of high food price inflation (e.g.
Bangladesh and China) and options to manage rising inflation rates (e.g. Morocco). At the request of a number of Latin American Central Banks, the World Bank is organizing a workshop in Peru in May 2008 to discuss the use of inflationtargeting. Several governments are asking for information on global trends andprospects to better understand the structural nature of the rise in food prices, as well as for information on responses adopted by other countries. Bank staff will be meeting with the Ministers of Finance of Central American countries to share Bank knowledge on food price trends and policies.
Meeting short-run financing needs. The immediate fiscal impacts of rising foodprices vary across countries, as many food importers have been compensated by rising commodity export prices. It is still too early to assess the extent to which countries will turn to the Bank to contribute to emerging financing gaps.
However, a few countries are actively considering increasing the size of forthcoming Development Policy Loans (e.g. Burkina Faso’s PRSC 7).
In the short run, the World Bank could scale up financing in existing programsand ongoing investment projects for safety net and agricultural programs. In Latin America, where many countries have comprehensive safety nets providing support to vulnerable groups, the Bank stands ready to scale up financial support to many of these programs. Additional Bank support can help expand and improve existing programs by providing: technical assistance to improve targeting and coverage, programmatic financing for strengthening social protection systems, and contingent financing for budgetary flexibility in the face of large-scale shocks. In Jamaica, the Bank is currently preparing a social protection project, which could be expanded to increase its coverage. In other cases, existing lending programs are being modified to improve the efficiency of safety netprograms. For instance, in the Middle East-North Africa region, a number of DPLs are supporting the reform of food subsidies.
While most of its agricultural projects are geared towards medium-term policy and institutional reforms to increase productivity, the Bank also designs interventions to boost short-term food staple production, storage and distribution.
For instance, an additional $15 million supplemental credit for an existing agricultural project is being prepared in Burundi in order to finance the distribution of crop inputs for the forthcoming agricultural season.
In helping countries meet short-term financing needs, the Bank is collaborating closely with the IMF, and other donors, including the World Food Program (WFP), which has significant expertise in food availability assessments and responding to short-term crisis needs. Close collaboration with the WFP, the EU, bilaterals and other development partners is particularly important in countrieswhere lead donors are not able to expand support or are cutting back food distribution programs (e.g. Mozambique).
3.2 Support for medium-term agendaAn important role for the Bank is to help governments interpret and contextualize the medium-term implications of rising food prices for their national development strategy and investment programs. In doing so, the Bank needs to work closely with other donors to build a shared dialogue and coordinated financialresponse. While it may be premature for countries to have a clear roadmap, analytical work to better understand the economic, poverty and social implications of rising food prices can contribute to the design of flexible, countryspecific strategies. This implies expanding Bank diagnostics and support in critical areas, including: agricultural constraints; distributional analysis of food price increases and safety net programs; rural investment climate assessments;and public expenditure reviews. Flexibility will be crucial, since the Bank may need to adjust its CAS programs, including the lending pipeline and possiblefront-loading of lending programs.
In general, a balanced medium-term response to the structural increase in foodprices calls for expanded investments in agriculture, as well as improved instruments for risk management, involving social safety nets and other risk management instruments. Expanded investments in agriculture should focus on raisingagricultural productivity and not only on food self-sufficiency or food security. The latter is best achieved through international trade, efficient domestic markets, and well designed safety nets. Key issues for the Bank in these twoareas are briefly outlined below.
Making agriculture a priority. In 1980, 30 percent of annual World Bank lending went to agricultural projects, but this declined to 12 percent in 2007. The overall proportion of all Official Development Assistance going to agricultureis currently only 4 percent. Falling and stable world real cereal prices in the 1980s and 1990s contributed to a sense of complacency with respect to agricultural issues in developing countries from the late 1970s until recently. Rising food prices, as well as a heightened concern to accelerate growth among themany agriculture-dependent Sub-Saharan African countries, has led to renewed attention on this sector. The Bank has recently committed itself to doubling lending for agriculture in Africa, from $400 million per year, during the IDA 14period, to US$800 million per year in FY10.
The recent WDR on Agriculture identified four key elements for a comprehensiveapproach to agricultural growth, which will guide the Bank’s renewed focus onthis sector. They include: (i) improving producer incentives (including the removal of subsidies which benefit richer farmers more); (ii) providing quality core public goods . science, infrastructure and human capital; and (iii) stronger institutions to support an attractive rural investment climate for men andwomen, including more access to rural financial institutions and risk management instruments, improved property rights, and greater opportunities for collective action by farmers; and (iv) ensuring sustainable use of natural resources.
Expanding and improving access to safety nets and risk management instruments.
Improving the quality of and access to safety nets will be a priority for protecting vulnerable households in the face of continued uncertainties in global food markets . at least for the foreseeable future. The Bank can help countries build stronger and more flexible safety nets to cope with shocks, with cleartargeting and programmatic frameworks that can be quickly scaled up to protectvulnerable households. In addition, expanding programs to ensure basic nutrition, particularly for infants, and improved access to health and education systems will also help minimize the likelihood that income shocks reduce demand and damage human capital accumulation. Finally, the Bank is also investing to help develop modern risk management systems such as crops and disaster insurance.
3.3 Support for an international agendaThe impacts of the recent surge in food prices are reverberating across key dimensions of the development agenda, including poverty alleviation, macroeconomic stability, investment incentives and energy security/climate change policies. Because it is capable of weaving together the economic, poverty, social, agricultural and environmental perspectives, the Bank is well-placed to catalyzeglobal action and influence the international agenda. Three such issues where the Bank can seek to improve global outcomes are discussed below, many of which are of direct consequence for middle-income countries.
First, the Bank is working closely with countries and other donors to minimizethe adoption of policies with negative spillover effects for others. High levels of trade tariffs and subsidies create major negative externalities. Agricultural tariffs and subsidies in developed countries cost developing countries annually the equivalent of about five times the current levels of overseas development assistance to agriculture. Export bans also bring about negative externalities, particularly for countries that are heavily dependent upon imports.
They can create price spikes in importing countries and political pressure fordomestic food self-sufficiency.
Second, the Bank’s climate change agenda seeks to inform the global debate onbio-fuels through analysis, monitoring and balancing of competing needs for energy and food security. Concerns over increasing energy use, climate change, and carbon dioxide emissions from fossil fuels make switching to lowcarbon fuels a high policy priority at both the global and country levels. Bio-fuels are a potential low-carbon energy source, although whether bio-fuels offer carbon savings depends on how they are produced. Secondgeneration bio-fuels produced from waste products, in particular, can avoid land use change and some of the emissions associated with current bio-fuel programs, and may hence offer significant environmental and social benefits. These benefits, however, have to be weighed against the potential costs of rising food prices. According to a recent IFPRI study, most scenarios of increased use of bio-fuels imply substantialtrade-offs with food prices. These trade-offs are dampened, although not eliminated, when technological advances in bio-fuel and crop production are considered. Trade-offs between energy security, climate change and food security objectives need to be carefully monitored and integrated into both food and bio-fuel policy actions.
Third, the increase in food prices creates an opportunity for the global community to refocus on investments in agriculture and social protection. The structural shift in food prices creates an opportunity for the Bank and other donors to work with partner countries to build the political coalitions and mobilize the necessary financial support to reverse a perennial problem of under-investment in agriculture and to build better safety nets to help the poor cope with their endemic high levels of risk.
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