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IMFSurvey Magazine: Interview

IMF Closely Involved in Drive to Relieve Global Food Crisis

Buying vegetables in a supermarket in Beijing, China: food prices are on the rise around the world (photo: CNImaging)

MULTILATERAL INITIATIVE

IMF Closely Involved in Drive to Relieve Global Food Crisis

IMF Survey online

May 13, 2008

  • IMF will consider all requests by members for financial assistance
  • IMF working closely with UN, other agencies on joint approach
  • IMF providing advice to support governments in adapting policies

The IMF is concerned about the impact of price increases for food and fuel, especially on the poor, and is monitoring closely the current commodity price boom.

The inflationary impact of recent food price increases is a particular concern in emerging and developing economies, where spending on those goods is high. Indeed, food price increases accounted for almost 70 percent of headline inflation in 2007 in emerging economies.

Mark Plant, Deputy Director of the IMF's Policy Development and Review Department, explains the status of the various strands of work taking place within the IMF on food and fuel prices and their policy implications, and outlines how the IMF is collaborating with the United Nations and other agencies to help relieve the impact.

IMF Survey online: It seems as though this crisis crept up on the world. Were the warning signs ignored?

Plant: Signs of a possible food problem have been visible for a while. The world has been consuming more food than it has been producing for a few years, prices have been creeping up, and inventories are at historical lows. And we should not forget that this time around, the food price cycle is positively correlated with the one for oil. Fertilizer and transportation costs are affected by the oil price. And the oil price rose dramatically in a very short period of time.

Also, global food markets, that is, food export markets are often thin, especially the one for rice. In the current environment of uncertainty, financial turmoil, and the search for safe havens such as commodities, this can lead to very volatile prices, perhaps with some overshooting.

Nobody could have foreseen that the financial crisis, some flight into commodities, and an oil price hike would all happen at a time when food stocks happen to be low.

IMF Survey online: In the face of hardships, many countries are taking immediate palliative actions, including subsidies on rice in Haiti and a ban on food exports in Guinea. What is the Fund's stance in these cases?

Plant: First of all, most countries should be commended for taking the right policy measures—by right we mean ones that preserve the long-term production incentives while meeting the nutritional needs of their population.

Second, policymakers are being confronted with very difficult policy questions with macroeconomic implications: how quickly to pass on higher food prices, how to prevent these price increases from leading to permanently higher inflation expectations, and how to deal with any resulting balance of payments (and fiscal) financing gaps.

So far, we have generally recommended that policy responses follow some general principles, such as:

    • Coordination at the regional level;

    • Measures that are targeted and minimize disincentives for long-run supply responses; and

    • Actions that are focused on the poor.

For example, subsidizing certain varieties of rice consumed by the poor can satisfy these principals, while subsidizing petroleum products may not. Also eliminating tariffs on key food items could work, as could temporary fertilizer subsidies or expanding school feeding programs. Of course, countries would need to create fiscal space in their budgets to cover the costs of these policy actions.

Plant: "Inventories are at historical lows" (IMF photo)

Having said this, we are also telling country authorities that some policies can be distortionary and inefficient, such as generalized subsidies and across-the-board wage increases. If wage increases are necessary, they should be targeted at low-income workers, and be financed in a non-inflationary manner, to avoid a wage-price spiral.

Moreover, direct price and export controls can undermine long-run supply responses, discourage food production, be difficult to enforce, and drain scarce resources from other critical purposes.

IMF Survey online: How quickly will the IMF revamp its lending instruments to be able to help out more quickly in this crisis?

Plant: Very quickly. The IMF is preparing a review of the Exogenous Shocks Facility (ESF) for Board consideration in June. The modified facility will provide more rapid and effective shocks financing and be a streamlined version of the structure of financing instruments for low-income countries. But I would underscore that the ESF is available now, if any country needs immediate help.

IMF Survey online: Is the PRGF [Poverty Reduction and Growth Facility] a suitable instrument for assisting crisis-hit countries?

Plant: Yes. Countries with PRGF-supported programs can request augmentations of their arrangements if they are confronting balance of payments problems. The IMF's area departments are in active discussion with 10-15 low-income countries on possible Fund financial assistance to help address the balance of payments impact of rising food and fuel prices.

IMF Survey online: How much does the IMF expect to lend to countries affected by the food price hikes? What will it do to ensure that the money goes to worst-affected people?

Plant: The IMF will consider all requests for financial assistance and decisions will be made based on country-specific needs. Augmentations in the past have been in the range of 15-20 percent of quota.

On your second question, the IMF provides balance of payments assistance. In other words, the Fund can help fund import costs. At the same time, teams will very carefully assess the emergency measures put in place in their countries to make sure that they adequately target the most vulnerable.

IMF Survey online: Many civil society organizations criticize the Fund's past advice to low-income countries, such as recommending cuts in food and fuel subsidies and for not providing the fiscal space that would allow countries to increase food and fuel subsidies? What's your response?

Plant: The IMF is well aware that food security is one of the key objectives of any government. IMF-recommended policies are intended to support this objective.

As we all know, the key element in any government's decision making is how to allocate scarce resources. In low-income countries in particular, the overall rate of taxation is often limited and the tax base is very small. Until the recent run-up, food prices have been at historical lows for many years. Financial support for health or education systems and for infrastructure were higher on the policy priority list of most low-income country governments. These priorities may now have changed—but government resources are just as scarce.

So there will be a tendency to look to subsidies. But our advice has focused on eliminating generalized subsidies in favor of targeted transfers that benefit the poor. Most countries have immense social and economic needs and resources are scarce; it would be inappropriate to use them for supporting consumption of the rich. At the same time, the policymakers have to ensure that subsidy policies do not destroy longer-term incentives to produce. This is not an easy thing to get right and it requires a lot of expertise—not just macroeconomics. And we rely on other institutions, such as the World Bank, to advise on these issues.

IMF-supported programs are designed to provide fiscal space to meet government priority spending, while not jeopardizing long-term macroeconomic stability. With the food crisis upon us, we can help the authorities respond flexibly to spend on programs critical to keep people well-nourished. Clearly aid will be needed from the international community to meet these needs, but countries must do so with an eye towards the long-term sustainability of their policies.

In fact global food stocks are sufficient to feed everyone right now, but the food is not necessarily in the right place, which argues for more open trade and markets, not restrictions. Hoarding by governments will simply exacerbate the crisis, not alleviate it. Similarly price controls will rob producers of the incentives to ramp up production.

IMF Survey online: But have IMF policy suggestions and loan conditions contributed to the current problems?

Plant: The current crisis is caused by a variety of factors, which have combined to generate an excess demand for food crops, leading to the rise in prices. They include shifting consumption patterns, higher oil prices that have raised costs of agricultural inputs and transportation, rising demand for food crops to be used in biofuels, and some financial speculation in key commodities.

The current crisis is not in itself due to the liberalization of trade in agriculture. In fact, for much of the past two decades, experience with increasingly open world trade in agriculture has been one of low and stable prices benefiting consumers throughout the world. It is worth noting the crop for which the recent price rise is most acute—rice—is the crop with the most fragmented international markets. Where markets are more integrated, like for wheat and corn, the price hikes have been less rapid.

In general, the IMF does not provide policy advice on agriculture, or any productive sector (that's the preserve of the World Bank and other donors).

However, sometimes in a Fund-supported program, country authorities will include sector-specific reforms, including in agriculture, if it is critical for macroeconomic stability. For example, when subsidies to the agriculture sector are straining the government's budget. But this is rare. Over the past five years, just 35 out of 2,640 lending conditions in Fund-supported programs related to agriculture.

IMF Survey online: The IMF has, however, actively promoted trade liberalization, hasn't it?

Plant: Yes, the IMF is in favor of trade liberalization, including in agriculture. This reflects the clear evidence that countries open to trade do better and grow faster than countries with restrictive regimes. We have promoted this in both developed and developing countries. Agriculture traditionally is heavily protected in both industrial and developing countries, with higher protection in the developing countries themselves. The major impact of protectionist policies is on a country's own population—whether rich or poor. But developing countries have a harder time gaining market access to developed markets and are heavily impacted by the distortions caused by production and export subsidies in industrial countries.

Agricultural liberalization will lead to less volatility in world commodity prices, which will benefit developing countries most. It could also have long-term positive effects on world production and trade, as less volatile prices usually induce longer term investment. However, liberalization entails adjustment costs as well—and these may fall disproportionately on developing countries.

So it is important to take into account development and poverty reduction implications when putting together a reform program, particularly in gauging the pace of reform. Particular attention needs to be paid to food security issues and the concerns of consumers. But this type of advice is in the responsibility of the World Bank and other international organizations, not the IMF.

IMF Survey online: But hasn't the emphasis on trade liberalization created import dependency and weakened self-sufficiency in food in some countries?

Plant: This may be true in some instances, but few, if any, countries are naturally self-sufficient—geography and climate don't permit it. While efforts to ensure some degree of food security by encouraging domestic production and stocking of food supplies are understandable, policymakers also need to be mindful of the trade off between food security and efficiency.

In the past, policies and programs aimed at increasing self-sufficiency by short-circuiting market mechanisms have proved to be very costly. Taxpayers foot the bill, and other social programs that benefit the poor, like health and eductaion, can get squeezed out. And self-sufficiency policies have had detrimental environmental impacts.

There are also less costly means than self-suffiency to increase food security. For example, insurance strategies can help, including strategies involving commodity futures trading. Such strategies could also help with potential balance of payments problems.

In today's globalized economy, we need to modernize international agricultural markets. While these global markets result in interdependency, they also increase supply and lower overall costs. When prices rise sharply, it is a signal that more needs to be produced. The international community must work together to ensure that these higher prices do not cause undue hardship anywhere in the world, but at the same time we need to ensure that markets respond by producing more food and getting to the people that need it. That is not going to be done by reversing the progress made on trade liberalization.

IMF Survey online: How is the IMF collaborating with other international institutions?

Plant: The Managing Director has stressed that the food crisis is a problem that requires an multilateral effort―no one agency or government has the expertise or resources to tackle the entire short- or long-term food problems faced by the world.

The IMF is very much a part of the burgeoning international effort. The Managing Director serves on the United Nations Task Force on the Global Food Crisis, chaired by UN Secretary General Ban-Ki Moon. The staff of the IMF is involved in the support work for that task force.

We are coordinating our efforts with the World Bank and are in contact with the World Food Program, the UN's Food and Agriculture Organization, and other international organizations and bilateral donors. These organizations have expressed interest in working closely with the Fund on food price issues, as they would rely on the IMF to estimate the balance of payment and fiscal impact of the shocks.

Comments on this article should be sent to imfsurvey@imf.org


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