Download Food, fuel and financial crisis

Food, fuel and financial crisis:
possible impacts and policy options
Hassan Zaman
Poverty Reduction Group
Presentation at ECA Learning Event
October 30th, 2008
Commodity Price Indices
between Jan-04 to Aug-08
(2000=100)
Energy
Food
800
• Despite recent
corrections, global food
prices remain at
historically high levels.
• Food price inflation
more than double in
ECA in 2008 relative to
2006
600
400
200
0
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Source: Monthly data
from DECPG Commodities
• Energy inflation
continued rising until
Aug 2008 probably due
to staggered domestic
adjustments in ECA
ECA inflation trends (source Kathuria et al)
Food Inflation (%), 2006-08
30
25
20
2006
15
2007
10
2008*
5
0
EU candidates
and potential
candidates
EU new member
states
BRUK
Low er Income
* Aug 2008, yoy
ECA inflation (source Kathuria et al)
Composition of Overall Inflation, 2008*
16.00
14.00
12.00
10.00
Other
8.00
Energy Inflation
6.00
Food Inflation
4.00
2.00
0.00
EU candidates
and potential
candidates
EU new member
states
BRUK
Lower Income
* Aug 2008, yoy
Effects of food crisis on schooling and
nutrition
• Increase in global poverty by 3-5 percentage
points or 100MM more poor and even more
serious impact on already poor
• Additional 44MM malnourished people
worldwide by end-2008 due to increase in food
prices
• Evidence from previous crises suggests
significant risk to educational and health
outcomes (e.g. Brazil, Peru, Indonesia)
Household vulnerability to financial crisis
• Households risk being affected by (i)
unemployment and declining real wages (ii)
lower remittances (iii) pension risks for multipillar systems (iv) credit crunch.
• Past crises have shown greater impact on real
wages than aggregate employment
• However this time could be different. Past
domestically driven ‘currency’ crises led to bouts
of hyper-inflation eroding real wages. This time
employment impacts could be more significant
Financial crisis and household vulnerability
(cont.)
• Stylized causal chain could be reduction in
employment/earnings in formal export-oriented industries
leading to increased urban unemployment contributing to
reverse migration and increased rural poverty.
• Urban informal sector could be doubly squeezed from
lower global demand (sub-contracted products) and
increased labor supply from financial crisis and lower
domestic demand for non-food products due to impact of
higher food prices
• Worst impacts of food crisis could be reinforced by
financial crisis – ie lower spending on food, schooling,
health care leading to irreversible impacts.
What are countries doing to cope
with the food crisis?
• Lowering Domestic Food Prices using reduction
in tariffs and taxes, selective subsidies targeted
at poor, buffer stocks, price controls, export bans
and taxes
• Initiating or expanding existing Social Safety Net
Programs
FOOD PRICE POLICIES OF 120 COUNTRIES
60%
50%
40%
30%
20%
10%
0%
Reduce
foodgrain
taxes
Increase
foodgrain
stocks
Export
restrictions
% of 30 E. European and C. Asian Countries
Price
controls/
consumer
subsidies
None
% of 90 Countries in Rest of World
Based on responses from 120 country teams
Changing policy responses to food and fuel prices
(source Kathuria et al)
Distribution of Policy Responses in ECA
No. of countries
Mar-08
Oct. 2008
18
16
14
12
10
8
6
4
2
0
Export
Restrictions
VAT Reduction Domestic Price
State
on Imports
Controls
Procurement &
Distribution
Staggered
Energy Tariff
Adj
SAFETY NET PROGRAMS OF 120 COUNTRIES
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Cash transfer
Food for work
% of 30 E. European and C. Asian Countries
Food ration/
stamp
School feeding
% of 90 Countries in Rest of World
Based on responses from 120 country teams
Safety Net Expenditures (% GDP)
Mauritius
Ethiopia
S. Africa
Iran
Honduras
Turkey
Bolivia
Morocco
Croatia
Egypt
Argentina
Mongolia
Brazil
Jordan
Indonesia
Mexico
Peru
Kyrgyz
Uruguay
Paraguay
Senegal
Philippines
Expenditures of select countries
10
5
0
5
10
15
20
25
Public Administration & Defense Expenditure (% GDP)
Looking forward: Investing in safety net
programs
• Multiple policy levers for food, fuel and financial
crisis (e.g. ensuring access to credit, labor demand
measures, facilitating remittances).
• Social protection measures are common to all
shocks. Difference in ability to cope largely
dependent on whether safety net investments made
in past
• Investing in targeting criteria, household databases,
and payment systems: take time but not very
expensive and can be used for multiple programs
(e.g. Columbia’s multiple use of its proxy means
test)
Looking forward:
Investing in safety nets
• Central administrative body overseeing strategic
focus of SP programs and ensuring coordination
is important
• Cash-based safety net programs preferable, but
pragmatism and speed of response even more
important
• Nutritional supplementation / feeding programs
required to avoid irreversible damage, especially
to infants