Sub-regional Seminar on Food Price Inflation in Southeast Asia: Policy Responses to Protect the Poor and the Vulnerable
Welcome Address by
Urooj S. Malik
Director, Agriculture, Environment, and Natural Resources Division
Southeast Asia Department
Asian Development Bank
ADB Headquarters, Mandaluyong City
7-8 October 2008
Distinguished participants, ladies and gentlemen, a very good morning to all of you.
On behalf of the Asian Development Bank, I wish to welcome you all to this sub-regional seminar on food price inflation in Southeast Asia. I would like to express my appreciation to the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) for partnering with ADB in organizing this meeting here at our headquarters. We would especially like to welcome both the respected policy makers from our developing countries from SE Asia, and our development partners from the United Nations, multilateral and bilateral development agencies, and the civil society.
I. Global Effects of the Surge in Food Prices
Early this year, the world witnessed a dramatic rise in the prices of energy and agricultural commodities. FAO estimates indicate that during the first 3 months of 2008, international nominal prices of all major food commodities reached their highest levels in nearly 50 years while prices in real terms were the highest in nearly 30 years.
FAO notes that its Food Price Index rose, on average, by 12 percent in 2006 compared with 2005. The price increase accelerated to 24 percent in 2007. The increase in the average of the index for the first 4 months of 2008 compared to the same 4 months in 2007 stands at 52 percent. The continuing surge in prices is led by vegetable oils, which on average increased by more than 94 percent during the same period, followed by grains with 80 percent, and dairy products with 49 percent. Prices for some commodities, notably for maize, continued to rise over the entire first half of 2008. Up to mid-June 2008, maize prices rose by more than 70%. Likewise, prices for soybeans and soybean oil, after a short retreat, returned to record or near record levels in mid-2008.
Furthermore, FAO points out that the soaring food prices have been accompanied by soaring input prices. Prices for fertilizer, seeds, and animal feed have risen by 98, 72, and 60 percent respectively since 2006. For some inputs, these price rises even accelerated in 2008. On average, the FAO Input Price Index doubled in the first 4 months of 2008, compared to the same period in 2007; US dollar prices of some fertilizers more than tripled. Small farmers in developing countries are always particularly hard-hit by soaring input prices: they have to pay a lot more for the seeds, fertilizer, and diesel they need without being able to benefit from high output prices. These price increases have led to serious hardships for the poor and vulnerable who spend a substantial part of their incomes on food.
In recent months, prices have eased from recent peaks, but remain well above their levels at the onset of the recent price surges. The IMF's mid-September Update indicates that food prices have eased 8% from their June peak but are still 44% above end-2006 levels. Oil prices are about 40% below their June peak, but still double the levels recorded at the end of 2006.
As a result, the IMF notes, a large group of low and middle-income countries is experiencing a substantial weakening of their balance of payments as well as significant acceleration of inflationary pressures. The effects of higher prices have continued to mount and have caused these countries to experience a substantial weakening of their foreign exchange reserves. Compared to IMF's Mid-June estimates, a larger number of countries are estimated to have reserves of less than 3 months of imports at end-2008. Similarly, median headline inflation in low-income countries increased by almost 3 percentage points during the second quarter, reaching 12.7%, and is now projected to reach 13.3% by the end of the year.
Falling stocks, increased demand, high energy and fertilizer prices, steep depreciation of the dollar, and trade restrictions imposed by some countries amplified the price surge of food grains. And while unprecedented developments in the global financial centers are taking place, who can guess as to the overall impact of this on the global economic system? One thing is clear, however, the fortunes of many companies and countries will no longer be the same; and the reverberations of this crisis will be felt globally with developing countries in SE Asia and elsewhere in the world also facing the risks of downside effects to their economies.
II. Effects on Southeast Asia
The global rise in food prices demands concerted action as they will impact on development in Asia. In the Greater Mekong Sub-region for instance, which is a sub-set of Southeast Asia, and where ADB has been working on a regional economic cooperation program, for the 28 million people who constitute the "poorest of the poor" and use over 60% of their income on daily basic food commodities, this development threatens to deepen poverty and reverse the improving poverty rates that we have been experiencing in the GMS countries. The most visible impact of the price surge of agricultural commodities has been in food price inflation. The World Bank estimates for selected countries in Southeast Asia indicate that food consumer price inflation in Cambodia and Viet Nam was hovering around 20-30%; for Lao PDR and Thailand, it was close to 10%. Food price inflation in Indonesia and the Philippines has risen to 8% and 13%, respectively, in recent months. A brief discussion on each of these SE Asian nations follows.
In Cambodia, it has been reported that despite a rice surplus in 2007, the impacts on smallholder farmers are likely to be significant on account of high input prices. Undeveloped domestic storage and processing systems, deficient distribution, and infrastructure constraints cause parts of the country to be vulnerable to food deficits. In the wake of the surge in food and fuel prices, farmers benefited little as Cambodian marketed paddy was too quickly sold to neighboring countries. Whatever earnings these farmers gained, were mostly used to pay back loans from money lenders and traders, leaving them to buy rice for their consumption from the domestic market at a much higher price. With over one-third of the population living under the poverty line, the consequences of rising food prices have been severe for the poorer households and smallholder farmers, thus threatening to wipe out the gains from poverty reduction efforts. The World Bank has predicted that a 10% increase in the price of rice will increase the national poverty rate by 0.5%. Landless households, daily casual laborers, female-headed households, the handicapped, and even those from the Tonle Sap Basin have ended up being severely affected by this crisis.
In Lao PDR, rising inflation poses a risk, despite favorable economic growth at above 7% in 2007. Inflation has continued to increase and reached approximately 6.5% in January 2008, from 4.5% in 2007. As noted earlier, inflation is now reported to be hovering around 10%. While the increasing cost of fertilizer has made a significant impact on rice production, the rising costs of other inputs have also affected prices of poultry and other meat products. This trend in rising food inflation is likely to erode the affordability of food for the poor, in particular those who are net consumers of purchased rice and other food products.
In Indonesia, inflation in 2007 averaged 6.4%, with end year inflation coming in at 6.6%. In the first quarter of this year, inflation accelerated to 8.2%. Food prices have contributed most to the recent spurt in inflation, increasing from 11.3% year on year in December 2007, to 13.6% in March 2008. Food-related prices now make up almost half of the CPI, and an even larger share of the consumption basket of poor households. Much of this inflation reflects growth in international food prices: retail sugar prices increased by 35% in 2007 and cooking oil prices by 15%, both following higher international prices for these commodities as they are increasingly being used as bio-fuels (Indonesia is the world's largest producer of palm oil and a significant producer of sugar). Flour prices also increased strongly, although rice prices increased by a relatively modest 8.7% in the year to December 2007. This was mainly due to a relaxation of import restrictions in early 2007 which led to stabilization of domestic rice prices. However, given the sharp increase in international rice prices, the latter is now rising rapidly towards parity with domestic prices. Food prices are likely to moderate somewhat from April, with the start of the harvest season.
Inflation in the Philippines-well managed in recent years-has begun to rise sharply (from an average 2.6% in 2007 to 5.6% in the first quarter of 2008) largely due to increases in price of key commodities, particularly food and oil. Of the 5.6% inflation, the food group contributed to 3.4%. To shield the poor from high rice prices, the Government has been selling low rice variety stocks at a subsidized price of Php18.50/kg to targeted poor families. The subsidy program, however, has posed risks on Government's fiscal balance target this year. In addition,the Government has moved rapidly to secure rice purchases from international suppliers (Philippines is one of the largest rice importers with 2008 importation seen at 2.2 million tons) and to encourage private sector to import rice by lifting quotas and providing tariff subsidies. The Government conducted the Philippines National Food Summit in April 2008 where President Arroyo announced a P40-billion cluster program to ensure affordable and sufficient food supply, (i.e., the FIELDS Program, pertaining to Fertilizers, Infrastructure and Irrigation Extension and Education, Loans, Drying and Post-harvest Facilities, and Seeds). The Government and development partners agreed to create an inter-agency task force to deal with various issues relating to food and the rice sub-sector (e.g. pricing, supply security) in a holistic manner.
Even though Thailand remains largely self-reliant in terms of food production, high food prices has increased inflation which has come close to 10% in recent months. Skyrocketing farm costs in Thailand brought about by sharp increases in the price of fertilizer and diesel will have a clear impact on most farmers. This will most definitely bear on Thailand's ability to maintain its levels of rice production both to safeguard the availability of its domestic supply and to make good on its pledge to maintain the level of rice exports in the international rice market.
In Viet Nam, the concern about food security is occurring in the face of reasonably abundant food production. While Viet Nam remains to be a net food exporter and is currently the world's second largest rice exporter after Thailand, rapid urbanization has caused a decrease in the total land area devoted to rice cultivation. While land conversion has contributed towards rural to urban migration, and increases in the ranks of the urban poor, it has further sharpened the risk of the poorest among the urban poor being significantly affected by rising food prices. We should now bear in mind that as food accounts for 43% in the total CPI basket in Viet Nam-with rice accounting for 8.2 percent-the increase in world food prices will prove to be a huge challenge as the country faces other adversities arising from their vulnerability to climate change and extreme weather events; corresponding increases in fuel prices; cost of land and housing, education, and social services; as well as special challenges, such as small farm sizes, growing feminization of the agricultural work force, and weak infrastructure support.
Food-grain prices are eventually expected to moderate somewhat because of the increased supply response of farmers. But the structural factors are likely to dominate cyclical factors causing high prices to persist for the foreseeable future. The era of cheap food appears to be over. In this context, undoubtedly those most vulnerable to food price shocks need to be protected from nutritional deprivation, erosion in their real purchasing power, and asset shedding. Failure to protect the poor from income erosion could seriously undermine recent gains in poverty reduction, expose those that are vulnerable to risks of serious malnutrition, and jeopardize the political and macroeconomic stability of each country involved.
III. ADB's Response
As economies transform, the contribution of agriculture to national economic growth is diminishing. Yet the majority of the poor still live in rural areas, and agriculture remains a source of productivity improvement, seasonal employment, and income growth-especially when connected to urban, industrial, and export markets. Support for agriculture and rural areas, therefore, remains an underlying component of ADB's inclusive growth strategy. And while population growth, pressure on natural resources, competing food crop use, and the effects of extreme weather and climate change increase risks to future food security, ADB remains committed to agriculture sector development and regards agricultural production, consumption, and trade to be key contributors to the development of the Asian economies.
ADB's commitment to food security is exemplified in the recent Emergency Food Assistance Project approved for the Kingdom of Cambodia. Cambodia has been severely affected by soaring food prices, where the domestic prices of rice and fertilizer have doubled over the past year, and meat and fish prices have increased 30-60%. The rice price increase has accentuated the vulnerability of food deficit households, including the urban poor. In addition, input price increases threaten immediate future food production as farmers reduce fertilizer use, and do so against the rising cost of transport, processing, and costs of pumping water for irrigation. The situation has increased poverty and hunger, increased migration to urban areas, caused the decline in school attendance, and led to the disposal of land and other assets to buy food and necessities.
The rate of inflation has been accelerated by the combined effects of the surge in the price of food, inputs, and fuel and has created additional demands on the Government's limited revenue base to immediately strengthen safety-net programs for the most vulnerable population to cope with the drastic rise in their food bills. It has released 300 tons of rice onto the open market in order to bring down rice prices and has contributed 4,000 tons of rice to the World Food Programme feeding program, which includes school feeding. It is under these dire circumstances that ADB has decided to augment the Government's ongoing efforts and help offset some of the short-term human costs of this exogenous shock.
ADB's intervention is an integral part of the overall commitment made by ADB President Kuroda in May 2008 at the Annual Meeting in Madrid, Spain to provide assistance to countries hit hard by food price increases. The proposed one-off subsidy on rice seeds and fertilizers will help farmers recover, maintain, and increase crop yields, enabling reinvestments of surplus in the succeeding crop seasons and ensuring adequacy of community food-grain stocks. The Cambodian Government, ADB, and a number of development partners are working together on policy issues and productivity enhancement concerns in agriculture, particularly in the Tonle Sap Basin. The one-off support for a national food security response system will help the Government develop a more sustainable safety-net program to tackle food emergencies in the future through the implementation of the Project's capacity development component along with the attached technical assistance on strengthening the Government's institutional capacity for emergency response to food crisis and improving food security.
The present crisis is a learning experience for Cambodia, and the rest of the region. It warranted the need to develop the Government's capacity for an emergency response system for food security and expand its social safety-net programs. The experiences from countries such as Bangladesh, where the governments have a relatively good record of managing public food distribution through well-targeted and well-managed programs will be useful for the region where food security is a critical issue that threatens its continued growth. Such models can provide a solid basis for supporting the development of an envisaged food security reserve system, and provide the region with several adaptable models for its safety-net programs, many of which have added social benefits, such as the use of food-for-work programs to support the construction and maintenance of essential infrastructure-rural roads, river embankments, irrigation, and other public facilities.
Just last month, ADB hosted the 3rd GMS Development Dialogue on Food Security in the GMS, which sought to discuss some of the very important issues that will be tackled in the next two days. What was clear in that dialogue was that regional and international cooperation can play an important role to help curb further increases in food prices.
We saw that agreements could be forged that provide ideal political platforms to discuss coordinated actions for addressing the current rice price crisis. These can take the form of a collective agreement among the major rice producers to refrain from taking defensive measures to restrict rice exports that could ultimately lead to domestic prices in exporting countries being pushed higher rather than lower; or establishing a food reserve scheme such as what has been done under the ASEAN (in 1979, through the establishment of the ASEAN Emergency Rice Reserve) and, more recently, under the ASEAN+3 framework.
At the project level, regional cooperation can also play an important role in exchanges of information, knowledge and technologies resulting from research and development as well as good practices that promote efficiencies in irrigation, land cultivation farm management, and post-harvest handling and management. Finally, there is an increasingly urgent need for greater international engagement and collaboration among governments, civil society and the private sector, to address the competing demands of energy and food security. This search for alternative low-carbon, more climate-friendly source of energy has had its toll on food and more analysis and international dialogue is needed to discuss the current mix of policies for both clean energy and food. Tomorrow morning, I will be making a brief presentation on highlights of the GMS Development Dialogue.
IV. The Way Forward
Clearly, to address the gravity of issues at hand, there is the dire need for the Asian countries to take action at the national and regional levels. In this context, the next phase of our cooperation must look at developing strategic responses to food security in the GMS.
Work has begun in this area and on improving the livelihoods of poor farmers in Asia through increased application of existing agricultural information and communication technology. Work has also started in addressing food security issues and improving the livelihood of poor farmers by reducing post-harvest losses (from spoilage, wastage, and quality deterioration) in rice. Moreover, we have commissioned a study on developing a strategy of bio-fuels and renewable energy development in the GMS and elsewhere in Asia, and recently a strategic framework on biotechnology was approved by the GMS countries as part of the initiatives for advancing agriculture science and technology in the sub-region.
There are indeed many opportunities that continuously evolve from the rapidly changing Asian landscape, as well as challenges that we all need to work hard to overcome. The initiatives that we will be taking in the next few months and years to pursue these opportunities will need strong support and relentless dedication from our Asian countries and development partners. We are confident that such is the case and are ever hopeful that these activities that will be put into action will elicit the outcomes we are together working hard to achieve.
I would like to wish you all a constructive seminar and a very pleasant stay in Manila.
Thank you for your kind attention.
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