The Hindu Business Line : The Fund, Fed and finance feed the famine

If the WTO arrangements distorted the agro-production structures in developing countries, they were skewed by the policies of the Fund under its structural adjustment programmes and loan conditionalities.

K. Subramanian K. Subramanian

It may seem bizarre, but a closer study of the trends in commodity markets may suggest causal links between the International Monetary Fund (Fund), the US Federal Reserve (Fed) and global finance.

It is no longer practicable to shy away from the global crisis. Unlike in the past, the hit list is not confined to Africa or Asia. Food stamp queues are getting longer in the US, Wal-Marts and Costcos are rationing rice sales.

Ms Sheeran of the UN World Food Programme (WFP) said that famine is no longer local and occurs simultaneously in many countries. It hurts people not usually prone to famines. She has appealed for further funding as the WFP is unable to sustain its programmes.

The Secretary-General of the UN told heads of 26 UN Agencies in Berne, Switzerland, that the world faced “the spectre of widespread hunger, malnutrition and social unrest on an unprecedented scale” and appealed for an immediate injection of food aid to the poorest.

On May 1, President Bush requested Congress to provide an additional $770 million to support food aid programmes. He raised food stamp coverage from 26 to 28 million each month. Two days later, he blamed India and its changing food habits for the crisis.

Though the ogre has risen from the waters and begun to roam the earth since January, many had heard its distant hissing much earlier.

The price build-up

The food price inflation started to build up around August 2005; it reached double-digit level in mid-2006, crossed 20 per cent in September 2007 and accelerated to 43 per cent in March 2008.

The food price index (base 2005-100) of the IMF, which covers a large number of food items, reached 170 in March 2008. The highest value of the index in the past quarter century was 143 in November 1980.

In a disturbing piece, The Economist (‘Cheap no more’, December 6, 2007) reported how its food price index was at its highest since 1845. It rose by one-third in 2006 alone. It coined the term ‘agflation’ to capture the syndrome.

Fear of food prices and shortages has given rise to “food protectionism”, a phenomenon not known earlier. According to the World Bank, 48 countries have imposed price controls, export restrictions, consumer subsidies or lower tariffs. Food riots have been reported from many countries across the globe.

“World agriculture has entered a new, unsustainable and politically risky period,” said Joachim von Braun, head of International Food Policy Research (IFPRI) at Washington D.C. He referred to the “green revolution” of the 1960s that led to cheaper and more plentiful food benefiting both farmers and consumers in the world. These were spurred by investment in agriculture research and development. “Unfortunately, from the 1990s, agriculture fell from the priority list. After enjoying a half century of falling food costs, we now are paying the price for these years of neglect.” Spending on farming as a share of public spending in developing countries fell by half between 1980 and 2004.

The impact of WTO regime on agriculture has been debilitating for developing countries. A number of studies by academic and humanitarian institutions such as Oxfam, Action Aid, etc, confirm the iniquitous nature of WTO arrangements. Though claimed to be a “grand bargain”, the WTO arrangements wrecked the agro economies of developing countries. The terms of trade for food deteriorated between 1998 and 2003.

There have been signs of improvement since 2005 and these do not relate to WTO. Rather, they flow from new springs such as the rise of newly emerging economies. The conundrum observed by many economists is that, contrary to historical trends, the rise of commodity prices is occurring against the economic decline in the West.

The Haiti instance

There were attempts to privatise and deregulate agriculture and open up the economies for imports. In many countries, especially in Africa and Latin America, it resulted in the abolition of buffer stocking arrangements, reduction of tariffs, and destruction of public distribution systems (PDS) and subsidies for farmers and consumers.

The net result was that countries that were self-sufficient or dependent, at the margin, on imports lost their food security and the stamina to withstand supply shocks. The most tragic instance is that of Haiti.

Haiti was self sufficient in rice 30 years ago and under a loan programme of 1986 it was forced to import American rice. By 1998 farmers stopped working on the land. When rice price shot up by 141 per cent in January this year, Haitians rose against the government and its President had to resign.

By and large, Fund programmes created import dependency for food. The advice of the Fund was for countries to build foreign exchange reserves which could buy food in the international market. Many civil activists alleged this advice of the Fund caused famines in Malawi and Ethiopia in earlier years.

The Fund/Bank privatisation programmes bred fragility. The Independent Evaluation Group (IEG) of the Bank has drawn attention to this while criticising its agriculture programmes in Africa. Though the idea was to vacate the role of the government so that private sector could step in and make agriculture more efficient, as the IEG explained, “in most reforming countries, the private sector did not step in to fill the vacuum when the public sector withdrew.”

Sadly, the Fund, which spent many years to frame a new financial architecture to ensure financial stability to save banks, was oblivious to a food stability framework to save human lives.

It relied on the market as an ideological construct and did not factor in the realities and limitations of the market place. As a result, it did not envision a situation when sudden supply demand mismatches and unfathomable time lags required for correction could create chaos and the failure of the market. It is in this abyss that the global food market found itself in January this year.

Truly, the abyss was the creation of the US Fed through its loose monetary policies. In a pioneering study on the impact of monetary policy on commodity prices (The Effect of Monetary Policy on Real Commodity Prices, NBER, WP 12713, December 2006), Prof Jeffrey Frankel of Harvard University explained how high interest rates reduce the demand for storable commodities or increase the supply. Among others such as reduction in inventories, high interest rates “encourage speculators to shift out of commodity contracts and into treasury bills.” “A decrease in real interest rates has the opposite effect, lowering the cost of carrying inventories, and raising commodity prices.”

The tentacles of Fed’s loose monetary policy have spread far and wide though it is narrowly described as sub-prime crisis. It created asset inflation, especially in housing and real-estate. Even as the housing credit was over the rope, footloose liquidity began to crowd other asset markets. The commodity market was one block away for speculators. Most analysts attribute the rise in the price of oil to such speculation. As The Economist (‘Ben’s Bind’, May 1, 2008) explained, “...the fact that prices have soared across so many commodities suggests a common cause”: speculation fuelled by the Fed’s loose monetary policy.

Commodities rush

It is no coincidence that the rush towards commodities reached a feverish pace with the onset of financial turmoil around August 2007. The speculative element in commodity markets has grown sharply and non-commercial trades constitute more than half of all trading and hedge funds are known to have moved into them. Global equity funds deserted financials and real-estate and moved into commodities.

As reported by Businessweek (‘The Turmoil from High Commodity Prices’, April 21, 2008), it is not the traditional end users who are responsible for pushing prices higher. “An increasing number of hedge funds, pension funds, and other large investors are buying commodities in search of better returns than other investment vehicles — stocks, bonds, and the real-estate — are now providing.” According to one estimate, involvement by hedge funds in the raw material sector trebled in the past two years to reach a level of $55 billion. According to a New York Times report (April 22, 2008) the wild swings in expected prices are damaging mechanisms such as futures and options. The market, it is reported, is out of sync with producers and buyers.

Shortages and scarcities do afflict the market. Often in the past, local shortages were resolved through global coordination and food aid. Unfortunately, in the atmosphere of scarcity created presently, apart from pious noises about action, there is no evidence as yet of global coordination and action.

As the market is currently structured, scarcities or mismatches, even small as in rice, get arbitraged and magnified. The policies adopted in recent years by the Fund, the Fed and the financial institutions feed the famine.

(The author can be reached at subrabhama@gmail.com)

More Stories on : Economy | Financial Policy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Growth pangs

The Fund, Fed and finance feed the famine

Does not a doubling of oil prices need a fitting response?

Will gas OPEC have final say on pipeline plans?

Jaipur blasts

Correcting distortions in higher education market

Sub-prime crisis

Tax payment