Global Food Security: Macroeconomic and Financial Crisis Impacts

Shenggen FanDirector General

International Food Policy Research Institute

DG for Economic and Financial Affairs, Brussels, May 4, 2010

Shenggen Fan, IFPRI, May 2010

Key messages

• Global food security is under stress

• Food security is affected by macroeconomic policies and financial turmoil

• Uninsured shocks are costly for poor people

• New agenda for enhancing global food security is needed

The number of hungry needs to fall by 73 mil. per year to meet MDG1

29 countries have “alarming“/“extremely alarming” levels of hunger (2009 GHI)

GHI components:• Proportion of undernourished• Prevalence of underweight in children• Under-five mortality rate

Source: von Grebmer et al. 2009.

Domestic prices remain high in some countries

Rice prices, $US/ton

Source: FAO 2010.

Apr-06

Apr-07

Apr-08

Apr-09

1400 DRC, KisanganiBurundi, Bu-jumburaRwanda, KigaliGlobal

Emerging stress factors

Population growth and demographic changes

Land and water constraints

Climate change

Source: IWMI 2000.

Projected water scarcity in 2025

Macro policies Food security

Fiscal policy

Monetary policy (Inflation)

Exchange rate policy

Energy policy

Inflation and exchange rate effects

High inflation erodes poor consumers’ purchasing power

Volatile prices distort long-term planning for agriculture

Overvalued exchange rate discourages production of export crops

Overvalued exchange rate discourages consumption of local foods

Fiscal responses to the food crisis

Source: Headey, Malaiyandi, and Fan 2009.Note: Agricultural spending is reported in US$, and for countries with *,

the total fiscal stimulus response to the financial crisis is reported.

Oil and food prices are tightly interlinked

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-100

140MaizeWheatRiceOil (right scale)

Source: Data from FAO 2009 and IMF 2010.

Reduced financial revenue may lead to decline in government spending in agriculture

Private investment in agriculture and credit for agriculture may drop sharply

Rural migrants may return to agriculture and rural towns

Remittances may decline sharply

Both domestic and international demand for high value commodities may be affected severely

Donor investment in agriculture and rural development becomes uncertain

Financial crisis: Potential impacts

FAO and WB estimates of impacts

Food crisis Financial crisisFAO WB WB WB CR FAOMalnutrition Poverty Urban

povertyRural Poverty

Poverty Malnutrition

Millions Millions % Change % Change Millions Millions

SSA 24 5.7 2.8 -0.2 - -

LAC 6 0.7 0.3 -0.2 - -

MENA 4 4.6 0.6 0.3 - -

Asia 41 120.5 7.3 3.5 - -

Developing world

75 131.5 - - 53 125

Source: Headey, Malaiyandi, and Fan 2009.Note: CR = Chen and Ravallion 2009.

The cost of uninsured shocks

Uninsured shocks lead to income and asset loss and reductions in consumption

Even the potential of an uninsured shock has welfare costs• productivity and income are reduced as

households take action to limit risk exposure • substantial costs are incurred by poor

households to manage risks

Source: Vargas Hill 2010.

Shocks can severely impact food security

Transitory shock with severeand permanent consequences Cascading series of shocks

Source: Hoddinott 2009.

Tools to manage shocks

Insurance

Credit andsavings

Socialprotection

Source: Vargas Hill 2010.

New agenda for food security needed

1. Invest in agriculture and improve smallholder productivity

2. Keep trade open

3. Promote productive social protection

4. Invest in climate change adaptation and mitigation

5. Improve institutions and capacities

1. Invest in agriculture and improve smallholder productivity

Agricultural spending as % of ag GDP

Source: Fan 2009.

There is a large gap between required and current spending

Increase agric. spending, improve access to inputs and services, secure land rights, invest in rural infrastructure

Source: Fan and Johnson (2009).

4.0Actual ag spending in 2004, billion USD

Annual ag spending required, billion USD (2008-15)

Ag + non-ag growth = highest poverty reduction

Source: Diao et al. 2008.

Poverty simulations, Rwanda

2. Keep trade open

Eliminate harmful trade restrictions and refrain from imposing new ones• to increase efficiency• to stabilize prices

Complete the Doha Round • if tariffs increase to their current WTO limits (bound

level): 11.5% loss of developing country exports US$353 billion loss in world welfare

Potential costs of failed Doha Round could be highSource: Bouet and Laborde 2009.

3. Promote productive social protection

Scale up safety nets to: Secure and smooth food consumption Enable saving and investment Build and diversify assets

Types of interventions e.g.: Conditional cash/food transfers Maternal and child health/nutrition programs Public works Insurance for the poor

Source: Adato and Hoddinott 2008.

Programs depend on needs, capacities, and resources

Innovative insurance for poor farmers and consumers

Agriculture: index-based weather insurance for crops and livestock

Health: community-based health insurance

Effective delivery channels• Agricultural cooperatives to deliver weather

insurance products• Microfinance institutions to provide

microinsuranceSource: Vargas Hill and Torero 2009.

4. Invest in climate change adaptation and mitigation

Sub-Saharan Africa

South Asia

Developing countries

Agric. research 314 172 1,316

Irrigation expansion 537 344 907

Irrigation efficiency 187 999 2,158

Rural roads 2,015 17 2,737

Total 3,053 1,531 7,118

Annual expenditure to counteract climate change effects on child nutrition by 2050 (million 2000 US$)

Source: Nelson et al. (IFPRI) 2009.

5. Improve institutions and capacities

Build up existing institutions and improve evidence-based policy making

• Increase gradual implementation after careful experimentation as in Asian reform process (esp. China)

• Increase investment in information gathering, monitoring, and evaluation

Strengthen human and administrative capacities through increased investment in education and training

Rapid hunger reduction is achievable with effective

country-led and country-owned actions

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