Hitting Where It Hurts

Fortunately, help is already on the way. One upside of the rapid increase in prices is that it has created a bigger incentive for farmers to grow more food. National policymakers have become more open to removing obstacles that inhibit proper supply responses. China, for example, is enhancing the availability of fertilizers, and improving credit for farmers (as is India). Ukraine is streamlining food delivery to market. And multilateral institutions are improving cross-border policy coordination.

These are welcome steps, but they'll take time before they have an impact. Bolder moves are thus needed now to offset the adverse impact of higher food prices on the most vulnerable segments of society. To this end, many developing countries, and especially those with better-functioning policy infrastructures, can and must act to offer well-targeted cash subsidies, lower sales taxes on food and eliminate tariffs on imported foodstuffs. The poorest will find it more difficult, and will look to the better-off members of the international community to provide them with timely assistance to ward off further suffering. The adequate provision of this is now a moral obligation.

It is often said that even the darkest cloud can have a silver lining. In this case, it comes in the form of opportunities for the many developing countries in Africa, Asia and Latin America that are large producers and net exporters of cereals. For them, the challenge will be to manage the significant windfalls from higher prices, saving part of the proceeds for more difficult times down the road.

The next few months will not be easy, as countries both poor and rich react to the surge in food prices and its myriad ramifications. But the world has the ability to better navigate this phenomenon—which, at its root, is influenced not by supply disruptions but by a fundamental growth in global wealth and prosperity. The trick now is how we respond: we can make things better, or much, much worse.

El-Erian is co-CEO and co-CIO of PIMCO. His book “When Worlds Collide: Investment Strategies for the Age of Global Economic Change” will be published this summer.

© 2008