The financial meltdown that is spreading across the globe may have drawn attention away from the world food crisis, but it continues to fester and even grow.
When spiralling food prices dominated international headlines early last year, some called the problem a “silent tsunami”. Food shortages and high prices have affected billions of people, bringing hunger and starvation to the poor in the developing world.
This is very much a man-made crisis – the result of the free market policies adopted by choice or compulsion in almost all countries. These policies have led them to either neglect agriculture or allow shifts in prices to determine the viability of farming.
Growers in developing countries have been ravaged by a combination of competition from highly subsidised imports from developed countries, the removal of price protection schemes and reduced access to credit. Meanwhile, neoliberalism has also created greater possibilities for financial speculators.
The most immediate symptom of the food crisis has been the volatility of prices. Wheat prices, for example, increased by 46 percent between January and February last year, fell back again by May, increased again until early June and have dropped again since then.
Other grain prices have followed a similar erratic pattern. But even with the recent declines, the prices of essential food items remain significantly above their levels of just two years ago.
One of the most common explanations offered for the price rises is that they are demand-led – that they are the result of rapid economic growth and rising incomes in countries such as China and India.
This argument is completely wrong. It is certainly true that in recent decades the rich in China, India and other fast-growing developing countries have changed their diets, and that this has led to increased consumption of food grains. But this is only among a relatively well-off minority.
And, because income distribution in these countries has been worsening quite rapidly, the bulk of the population of those countries has not been part of that tendency.
In India food grain consumption per head is lower now than it was in the 1980s. Even in China consumption per head fell sharply between 1996 and 2003. Although it rose again in the years after, the level of consumption in 2005 was still below that of 1996.
It should also be noted that this is not the first time that the world economy has witnessed increases in the income of a portion of the population. Yet these periods have not typically been accompanied by sharp increases in food prices.
Rather than these simplistic explanations, it is likely that there are other forces at work. In particular, there are five major changes to the supply of food that are crucial to understanding what shapes the global market in food crops.
First, there is the impact of high oil prices. These affect agricultural costs directly and indirectly.
Changing technology has meant growing reliance on chemical fertilisers and on mechanisation, whose costs are directly affected by the price of oil. The spread of irrigation, and especially the use of ground water, requires energy to run pumps.
Second, there is the biofuel factor. Rising oil prices have persuaded governments across the world to seek an alternative to petroleum.
This has led to a significant shift in the type of crops being grown. In 2006 the US diverted more than 20 percent of its maize production in order to grow biofuels.
Brazil used half of its sugar cane production for biofuels, while the European Union used the greater part of its vegetable oil seed output.
Third, the neglect of agriculture over the past two decades is finally being felt. The prolonged agrarian crisis in many parts of the developing world is largely the result of inappropriate policies inspired by neoliberal economics.
One major element of this has been the lack of public investment in agriculture and agricultural research. This has been associated with poor yield increases – especially in tropical agriculture – and falling land productivity.
The opening up of markets to global competition has seen farmers move from producing traditional food crops, which were typically better suited to farmers’ ecological conditions and resources, to cash crops that rely on inputs that must be purchased from agribusiness.
Prices for seeds, fertilisers and pesticides have thus increased quite sharply. The cost of cultivation has also risen as subsidised water and power have been undermined and institutional credit withdrawn.
Financial liberalisation has seen many lenders move away from providing credit to farmers towards other, more profitable, opportunities for investment. Many farmers are forced to opt for much more expensive informal credit networks.
Fourth, there is the impact of recent climate change, which has caused poor harvests in different ways ranging from droughts in Canada and Australia to excess rain in parts of the US.
Scientists predict that warmer and earlier growing seasons will increase crop susceptibility to pests and viruses, which are expected to proliferate anyway as a direct result of rising temperatures.
Some arid regions are already more drought-prone and in danger of desertification.
Fifth, there is the impact of changes in market structure. These allow for greater international speculation in commodities.
It is often assumed that rising food prices automatically benefit farmers. But this is far from the case, especially as the global food trade has become more concentrated in the hands of a small number of agribusinesses.
These companies increasingly control all aspects of cultivation and distribution – including supplying inputs to farmers, buying crops and even retail food distribution.
This is certainly true in developing countries where large corporate players, both national and multinational, are able to control markets and prevent farmers from receiving most of the gains from international price increases.
At the same time governments across the developing world, with the notable exception of China, have reduced public holding of food stocks.
The US department of agriculture estimates that the global stock of wheat is at its lowest level in 30 years, despite substantially increased world demand.
Organisations such as the International Monetary Fund and the World Bank, whose representatives are now breast-beating about the food crisis, earlier played a major role in this reduction of food grain stocks, which they described as “wasteful” and “expensive”.
This has inevitably reduced the capacity to prevent speculative activity from dominating markets and prices. And because public food reserves necessarily take time to build up, they cannot be created quickly to mitigate against price rises.
As the global financial system remains fragile, investors will continue to search for other avenues to make up their losses. Commodities have emerged as an important arena for speculation.
Once again neoliberal policies, especially with respect to the financial sector, are largely responsible for this.
The entire process that has led to the current food crisis has been largely policy driven. In one sense this may be good news, because it means that alternative policies can be developed to reverse the process.
Some governments are turning their attention to the need to maintain public food stocks. India banned futures trading in four essential commodities last year. The government has used public funds to buy up and distribute food. This has played a role in keeping grain price rises below global increases.
However, even small increases in food prices directly impact upon the poor because most workers do not receive wages that take account of inflation. In India the problem is more severe because a large proportion of the population is already malnourished and thereby more prone to debilitating illness.
Falling real incomes and inadequate employment generation have dramatically affected the living standards of working people in India. So the crucial problem of the inadequate food supply has been dramatically worsened by the lack of purchasing power of a significant proportion of the population.
Government policy can make a difference to food prices. But many other factors also need to be addressed.
The fact is that too many countries cannot even ensure that the majority of their people can access the most essential requirements for life. There can be no more telling an indictment of the failure of the development project – and the particular failure of the neoliberal economic paradigm.
This article is an edited version of a lecture given by Jayati Ghosh on The Global Food Crisis and Food Security in India to the Indian Social Institute in Bangalore. Jayati Ghosh is professor of economics at Jawaharlal Nehru University in New Delhi, India