Hitting Where It Hurts

Inflation is a cruel tax. It places a very heavy burden on the poorest countries. And when the driver of inflation is higher food prices, the issue becomes one of survival for the most vulnerable segments of the population. Economic concerns can, and do, morph into political ones, as citizens take to the street to express anger at their governments' apparent failure to act.

This is the situation today. Food prices have surged as higher demand has been turbocharged by other factors. Caught by surprise, policymakers at both the national and international levels are scrambling to understand and fix the situation.

At its root, the increase in food prices is part of the bigger phenomenon of the economic development of key emerging economies like China and India. As they become richer, populations in these economies consume more cereals and meat—a testament to their success in sustaining high growth and, more important, reducing poverty in a sustained fashion. While such consumption in China and India remains well below that of industrial countries, the rate of change has caught many by surprise.

This surge in demand is an important part of the explanation for the current wave of food inflation—but not all of it. A number of other, more controversial forces are also in play. Biofuel initiatives, driven by high oil prices and environmental considerations, have also driven the run-up in grain prices. Investors, too, have played a part in disrupting the balance of food supply and demand by snapping up commodities to diversify their portfolios and increase returns. In addition, speculators have piled in, buying commodities via futures contracts that they can then sell at even higher prices. Protectionism and other shortsighted government policies are adding fuel to the fire. Countries such as Russia and Argentina have recently banned the export of locally produced cereals. In an attempt to safeguard supply for their own nationals, they have inadvertently given a new and more sinister meaning to the "beggar thy neighbor" concept that can so distort international trade and global welfare.

It's no wonder, given all this, that there's been a 150 percent increase in the price of rice since the start of 2008. Indeed, the higher prices are quickly hitting consumers in their wallets. According to International Monetary Fund data, in 2007 foodstuffs already accounted for two thirds of the increase in the consumer price index for Asia, and almost half for Africa. The numbers for 2008 will be significantly worse.

What's particularly striking about the current crisis is that this combination of factors has taken the world by surprise. In the past, price spikes have tended to be caused by clear-cut supply disruptions, whether they're droughts, floods or other natural disasters. This time around, the confluence of events has been different. Because of that, policy responses have been slow, suboptimal and uncoordinated. In some cases, one country's food hoarding has made it impossible for more vulnerable populations in other countries to secure basic consumption needs.