Building a buffer against food-price shocks

BOSTON :Of the 17 Sustainable Development Goals to be achieved by 2030, eliminating hunger used to be seen as the most feasible. But in the wake of the COVID-19 pandemic and Russia’s invasion of Ukraine, 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. Especially worrying are the significant increases in hunger in lower-income countries.

Soaring food prices are to blame for this damaging reversal. Worse, more such shocks are likely to emerge as climate change worsens and geopolitical tensions mount. The G20, under Brazil’s presidency this year and South Africa’s in 2025, must devise a new stabilisation playbook to address these risks.

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.

One major reason for persistent food-price inflation in the Global South, despite cooling agricultural prices worldwide, is currency depreciation, which has made 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 in recent years, following interest-rate hikes in the United States and Europe. These capital outflows have weakened developing-country currencies, forcing their own 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 is undermining their efforts to ensure food security. To counter this, advanced and developing economies should work together to develop international strategies aimed at regulating financial and commodity markets and addressing sovereign-debt problems. But even in the absence of such cooperation, developing countries can reduce the destructive effects of this dependence by forging partnerships to accumulate buffer stocks of essential commodities and coordinate capital-account-management policies.

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 such countercyclical open-market operations, as well as to guarantee supplies during emergencies. Another advantage of buffer stocks is that they allow governments to establish public procurement policies that incentivise 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, as 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 destabilising 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 centers if they coordinate their efforts to manage capital accounts, rather than go it alone. As large middle-income countries, Brazil and South Africa are well-placed to spearhead this effort.

Lastly, commodity markets, the most important of which are 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, thereby reducing the amount of grain reserves required to intervene in the physical market.

The G20’s developing countries are keenly aware of the serious threat posed by food insecurity. The successive presidencies of Brazil and South Africa provide an opportunity to translate this understanding into global action.

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). Jayati Ghosh, Professor of Economics at the University of Massachusetts Amherst, is a member of the Club of Rome’s Transformational Economics Commission and Co-Chair of the Independent Commission for the Reform of International Corporate Taxation. Sudeep Jain is a postdoctoral research associate at University of Massachusetts.

Copyright: Project Syndicate, 2024.

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