The New Global Growth Path: Implications for Climate Change Analysis and Policy

Peter Sheehan
Centre for Strategic Economic Studies
Victoria University
In recent years the world has moved to a new path of rapid global growth, largely driven by the developing countries, which is energy intensive and heavily reliant on the use of coal – global coal use will rise by nearly 60% over the decade to 2010. On unchanged policies global CO2 emissions from fuel combustion are likely to nearly double their 2000 level by 2020 and continue to rise beyond 2030. Neither the SRES marker scenarios nor the reference cases assembled in recent studies using integrated assessment models capture this abrupt shift to rapid growth based on fossil fuels and centered in key Asian countries. An international effort to develop new, realistic projections to 2030, with a range of scenarios beyond that time, is urgently required.
Recognition of this path as a realistic possibility will have significant effects on the
impact and damage estimates in an unchanged policy case, on the analysis of achievable stabilisation paths and on estimates of the costs of achieving stabilization at a given GHG concentration level. Finally, such recognition means that, if widely desired stabilisation goals are to be achieved, policies with an immediate effect on emissions, perhaps such as price, tax and regulatory measures to reduce energy use and the rapid diffusion of existing non-fossil fuel technologies, will be required, together with greater knowledge about the effectiveness and the economic costs of such policies.
The new global growth path
For more than two decades the world economy has been changing rapidly, with that
change driven by two different but related factors: successive waves of new computing and communications technologies and an expanding process of liberalisation of national and international markets, in areas such as trade, finance, technology and labour. This process has entered a new stage in recent years,\ especially since the entry of China into the World Trade Organisation in 2001 and the
strong growth being achieved in India. Global economic growth has been higher than expected for some years and energy demand has been very strong, much greater than anticipated by markets, providers and analysts.
summary information on trends in global GDP and energy use over 1972–2006. While there was considerable variation within them, in each of the three decades from 1972–2002 the average annual growth of world GDP (in constant purchasing power parity prices) was 3.5%, with per capita GDP growth at around 2%.
By contrast, over the four years 2002–06 the global growth rate was 4.9%, with per capita GDP growth at 3.7%, a very high rate in historical terms. The growth in primary energy use over 2002–06 (3.3%) was more than twice that over 1992–2002 (1.5%), while the share of coal in primary energy use rose strongly, from 25.5% in 2002 to 28.4% in 2006. Indeed, while over the 1972–2002 period coal use grew less rapidly than all other energy sources, over the last four years this has been reversed, with coal use growing by 6.1% per annum, more than twice the rate of all other energy sources (2.3%). Thus coal consumption has provided nearly half of the increase in total primary energy consumption in the last four years, with the absolute increase in coal consumption over 2002–06 (653 mtoe) greater than the increase over the whole of the two decades 1982–2002 (583 mtoe).
The quite different outcomes shown for 2002–06 relative to the previous three decades might well be dismissed as cyclical fluctuations. But it is now widely accepted that fundamental, long term factors are at work: the sustained emergence of China and India as economic powers, more rapid growth in other developing countries, the revival of Japan from its stagnation over a decade or more, better economic prospects in Russia and other CIS states, and more generally an open world economy with low inflation. Reflecting both current demand and revised expectations for the future, global market prices for oil, coal and resources have risen sharply and large scale investment plans for energy and resource development have been put in place, both in key markets such as China and India and in supplier countries such as Australia, Brazil and Russia. This new global economic path has led to a flurry of activity by governments and businesses around the world, as they seek to reassess their position in a world in which China and India are major economic powers.
As a result, longer-term growth forecasts from both private groups and public agencies are being revised upwards. For example, summarises the aggregate forecasts for GDP (in constant purchasing power parity prices) from the IMF World Economic Outlook published in April 2007, using a ten-year moving average annual growth rate. The IMF’s projected global growth rate over 2002–2012 is 4.9%, the same as the actual growth rate for 2002–06. This is not driven by the advanced countries, whose overall growth is projected to slow gradually, but by accelerating growth in all other countries, expected to reach 7.1% per annum over 2002–2012.
The climate implications arise not only from the likelihood of higher long term rates of world economic growth, but from two key facts about this growth path: that energy use and CO2 emissions continue to increase in the developed countries and that many of the developing countries driving growth, such as China and India, rely heavily on coal for their energy needs. As an example within the developed countries, the 2007 projections from the US Department of Energy’s Energy Information Agency for the
USA, still the largest user of energy in the world, show energy use and CO2 emissions from fuel combustion growing at 1.1% and 1.2% per cent per annum respectively from 2005–2030, with energy use and emissions from coal use both growing at 1.6% per cent per annum (DOE, 2007). In the second half of 2006, 140 new coal-fired power stations were in planning or construction in the US (Romero, 2006). In terms of the reliance on coal in key developing countries, in 2004 coal provided 71% of total primary energy supply (excluding biomass and waste) in China and 55% in India, by comparison with 17% for the rest of the world (IEA, 2006). As noted above, increased use of coal is already evident in the historical data – world coal consumption has risen by 30% between 2000 and 2006, about the same as the total percentage increase over the previous two decades, and growth of nearly 60% over the decade to 2010 seems inevitable.This paper aims to document the reality of the new growth path and to explore its implications for climate analysis and policy, without embarking on the major task of providing a detailed projection and/or scenario consistent withThe impact of China and India on global trends
The shift to rapid growth in energy use in China
There has been widespread discussion in recent years about the rapid rate of economic
growth taking place in China, and about the impact of that development on world markets for coal, oil and natural gas. Energy use has indeed grown very rapidly – over the five years 2001–06 total energy consumption grew by 71.5% (11.4% per annum), with GDP growth of 10.0% per annum. This explosive growth in energy use was in sharp contrast with earlier trends. From the ‘opening to the market’ in 1979 to 2001 energy use grew at a much lower rate than GDP, with average rates of growth of 4.1%
and 9.7% for energy use and GDP respectively, with the energy intensity of China’s GDP falling continuously through to 2001 and the elasticity of energy use with
respect to GDP being only 0.42. This decline in energy intensity was especially marked in the second half of the 1990s, so that the shift to rates of growth in energy use in excess of GDP growth after 2001 had profound and unexpected implications in energy markets, and led to severe shortages in 2003 and subsequent years.
The decline in energy intensity in China over 1979–2001 was highly unusual for a developing country,4 but most existing projections of China’s future energy use assume an early reversion to an energy elasticity of 0.5–0.7%, For example, the most
well known projections internationally are those of the International Energy Agency (IEA), published biennially in its World Energy Outlook. In the 2006 edition, with an
assumed average growth rate of GDP (in constant purchasing power parity prices) of
5.5% per annum over 2004–30, the IEA projected growth of only 3.2% per annum in
it or exploring the elasticity of energy use with respect to GDP of 0.58, and that the rate of growth of China’s energy use over 2004–2030 will be little more than half its rate over 1971– 2002 (5.5%).
Of the existing published projections the most realistic, in terms of the trends that have emerged over 2001–06, is the unchanged policy case contained in China’s National Comprehensive Energy Strategy and Policy (NDRC, 2004; see also Dai and Zhu, 2005). The unchanged policy scenario in this report projects annual average growth in energy use and CO2 emissions over 2000–2020 of 4.7% and 4.6% respectively. These growth rates are reasonably close to the outcomes for 1971–2002 noted above, and well above the IEA 2006 growth rate estimates for 2002–2030.
Nevertheless, shows clearly that energy use in the Chinese economy is expanding much more rapidly than envisaged in scenario A. In terms of the main aggregate indicator, primary energy use, the actual figure for 2006 is about 15% greater than the projected figure for 2010, and electricity generating capacity in 2006 was 11% above the projected level for 2010. The demand for coal has been extremely strong, with the 2006 actual being 18.5% above the projected figure for 2010. The demand for oil was broadly in line with projections in 2006, as higher oil prices impacted on demand and led to fuel substitution, and usage of natural gas is also within the projection range. In terms of total energy use, and in particular coal use, the Chinese economy is on a path well above that in the 2004 official Chinese projections, which in turn are well above the IEA 2006 projections.
one of the main reasons for growth in energy demand ahead of the projection. It shows the actual output data for 2006 for four energy intensive industries for which output projections were provided in the NDRC report (2004). Output is running well ahead of expectations in these industries: for two industries (iron and steel and cement) output in 2006 was ahead of the 2020 projected level; paper production in 2006 was closer to the 2020 than to the 2010 projection, while ethylene output is also somewhat ahead of the projection. Consistent with these data, many observers (e.g., CASS, 2007) believe that a structural shift towards energy intensive industries is the main reason for rapid growth in energy use since 2001.
The Chinese Government has expressed concern about the economic, environmental
and social impact of continuing high rates of growth of energy demand. In the 11th Five Year Plan (2006–10) the Government included as a priority target a reduction of 20% in energy use per unit of real GDP over the five-year period (Wen Jiabao, 2006). The precise implications of this target for the growth in energy use and the energy elasticity of GDP depend on the rate of growth of GDP achieved, but the implied elasticities range from 0.41 with 8% per annum GDP growth to 0.52 with 10% growth. Thus the current target also implies a return to the elasticity levels achieved over the 1979–2001 period. Issues concerning the shift from an energy elasticity of GDP of less than 0.5 over 1979–2001 to a value greater than one over 2001–06, together with the prospects of reverting to earlier levels in the near future, are thus critical to understanding the future path of China’s energy use. The reasons for the low elasticity over 1979–2001 have been analysed in an extensive literature (e.g., Sinton and Levine, 1994; Lin and Polenske, 1995; Garbaccio et al., 1999; Sinton et al., 1998; Zhang, 2003; Andrews- Speed, 2004) but limited scholarly attention has as yet been given to the post-2001 trends. In terms of the declining aggregate energy intensity up to 2001, there is strong evidence that this reflected a widespread fall in sectoral energy intensities and took place in spite of an ongoing shift to a more energy intensive economic structure. The fall in sectoral intensities was in turn due to a combination of energy conservation programs and technological change being driven by a planned economy with energy rationing, with rising relative energy prices also playing a significant role in the 1990s. Sheehan and Sun (2007) conclude that, now that energy supplies are abundant, the enforcement mechanisms of the command economy no longer available and rapid growth in energy intensive industries is continuing, an elasticity of significantly less than one will be difficult to achieve, and will require sustained and integrated policy implementation.
Consistent with this analysis, Sheehan and Sun (2007) use a simple but disaggregated model to project China’s energy use and emissions out to 2030. They conclude that, on the policies in force in 2005, China’s energy use and CO2 emissions from fuel combustion are likely to grow by more than 6% per annum over 2005–30. This would imply emissions from energy use (excluding cement production) of 6.2 GtC in 2030, by comparison with an overall global figure in 2004 of 7.2 GtC. Their simulations indicate that achieving major reductions will be difficult, but that a sustained new policy implementation process, involving use of the full range of instruments, could reduce China’s energy use and CO2 emissions by about 35% relative to this projected level by 2030, implying a growth rate over 2005–30 of 4% per annum.
The sustained rise of India
India’s growth has been accelerating since the late 1970s, and reached 5.5% in the Ninth Plan period, 1997–2002. The preliminary GDP growth rate outcome for the
Tenth Plan period, 2002–07,5 is 7.6% per annum, by comparison with a target of 8.1%, and growth in the last two years of the plan period averaged 9.2%. The Planning Commission (PC) has set a growth rate target of 9% for the Eleventh Plan period, 2007–12, with sectoral growth rates of 4.1% for agriculture, 10.5% for industry and 9.9% for the service sector (PC, 2007).
India’s growth has traditionally been driven by services rather than industry, but a notable feature of recent trends has been an increase in the growth of secondary industry (and especially manufacturing) relative to the overall growth of GDP. The target growth rate for real value added in manufacturing is 12% per annum.
The energy elasticity of GDP (excluding energy from biomass) for India was 1.15 over the period 1971–2005, although it was lower over 1990–2002 than in the earlier period. Energy use in India has been limited to date by a focus on service industries and by supply shortages, and half the country’s population remains without electricity (PC, 2007). But industrial and household demand is increasing and sustained efforts are being made to increase electricity generation, primarily through coal-fired power stations. The Planning Commission projects that the demand for coal will rise by 7.6% per annum between 2005–06 and 2011–12 (PC, 2007). India has also been highly dependent on energy from biomass and waste. But with expansion possibilities limited in these traditional areas, growing demand for energy will need to be increasingly met from commercial sources.
The major forward-looking study of India’s energy requirements is the Report of the Expert Committee on Integrated Energy Policy, prepared for the Planning Commission and published in August 2006 (Parikh, 2006). This report outlines both India’s growing energy needs in the context of rapid growth and the programs that are being put in place to ensure that they are met. On the demand side, and on the basis of a range of assumptions about growth rates and the energy elasticity of GDP, it projects growth in commercial energy demand in India between 5.6% and 7.2% per annum over 2006–07 to 2031–32. On the supply side the authors run eleven alternative scenarios, starting from an existing policy case in which the least cost energy sources are developed (scenario 1) through a cascading series of policy scenarios in which the potential of non-fossil energy sources and of energy savings are maximised. In scenario 11 all such policies are implemented simultaneously. For their preferred case of 8% GDP growth, scenario 1 projects an increase in commercial
energy use of 6.0% per annum over 2006–07 to 2031–32, while for scenario 11 the figure is 5.1% per annum. In scenario 1 CO2 emissions from energy use are expected to rise about 7% per annum to 1.5 GtC by 2031–32, while projected emissions by that date are about one third lower in scenario 11 at 1.0 GtC, a growth rate of about 5.5%.
An indicative quantification of the implications of the new growth path
The purpose of the preceding discussion is to provide evidence, for two major countries, on emerging trends in GDP growth and energy use. The new growth path will, of course, impact on many other countries in different ways. But it is important to note the scale of developments in China and India: if, in the light of the trends reviewed above, CO2 emissions from fuel combustion and cement production are assumed to grow by 6% per annum in both China and India over 2004–30, the additional emissions in 2030, over and above the IEA (2006) projection for that year,
amounts to 52.5% of global energy demand in 2004. That is, these revised assumptions alone produce a further increase of over 50% in global emissions relative to the 2004 level, in addition to the increase of 59% already envisaged in the IEA 2006 projections, by 2030.
Short of an authoritative international projection of the implications of the new growth path being available, the strategy of Sheehan, Jones et al. (2007) is adopted here to provide an indicative quantification for working purposes. They start from the IEA (2006) projections, but adjust them to take account of the trends discussed above
in China and India, and in a number of other rapidly developing countries in East Asia, but otherwise adopt the IEA (2006) assumptions and results. The methodology and detailed assumptions used are described in that paper while the results, for CO2 emissions from fuel combustion and cement, are provided in. Emissions in 2030 are 120% above the 2004 level (and 150% above the 2000 level), and still growing at over 2% per annum at that time. First, in recent years the world has moved to a new path of rapid global growth, largely driven by the developing countries, which now comprise 40% of world GDP. This growth path remains energy intensive and heavily reliant on the use of coal – global coal use will rise by nearly 60% over the decade to 2010. Second, if the key developing countries in Asia continue to drive growth after 2010, albeit at a more subdued pace, then on unchanged policies global CO2 emissions from fuel combustion are likely to double their 2000 level by about 2020 and continue to rise beyond 2030. This must be considered a realistic, though of course not inevitable, unchanged policy outcome. Third, the SRES marker scenarios, finalised in 1998, do not capture this abrupt shift to rapid growth based on fossil fuels and centered in key Asian countries, and no longer provide a
realistic guide for climate change analysis. The reference cases assembled in recent studies using integrated assessment models also fail to recognise this new reality. An international effort to develop new, realistic projections to 2030, with a range of scenarios beyond that time, is urgently required. Fourth, recognition of this new emissions path as a realistic possibility is likely to have a significant effect on the impact and damage estimates from an unchanged policy case, on the analysis of achievable stabilisation paths and on estimates of the costs of achieving stabilization at a given GHG concentration level. Finally, recognition of this new growth path also means that policy must focus on the short-run dynamics of emissions, and on measures with immediate impact. For example, if stabilisation is to be achieved at 550 ppm CO2e a significant reduction in global emissions relative to the reference path is needed in the next ten years. This in turn will require an emphasis on policies with an
immediate effect on emissions, perhaps such as price, tax and regulatory measures to reduce energy use and the rapid diffusion of existing non-fossil fuel technologies, together with greater knowledge about the effectiveness and the economic costs of such policies.

Rising food prices: policy options and World Bank

Background note for the Development Committee
Rising food prices: trends and determinants
The rising trend in international food prices continued, and even accelerated, in 2008.U.S. wheat export prices rose from $375/ton in January to $440/ton in March, and Thai rice export prices increased from $365/ton to $562/ton. This came on top of a 181 percent increase in global wheat prices over the 36 months leading up to February 2008, and a 83 percent increase in overall global food prices over the same period.

Increased bio-fuel production has contributed to the rise in food prices. Concerns over oil prices, energy security and climate change have prompted governments to take a more proactive stance towards encouraging production and use of bio-fuels. This has led to increased demand for bio-fuel raw materials, such as wheat, soy, maize and palm oil, and increased competition for cropland. Almost all of the increase in global maize production from 2004 to 2007 (the period
when grain prices rose sharply) went for bio-fuels production in the U.S., while existing stocks were depleted by an increase in global consumption for other uses. Other developments,
such as droughts in Australia and poor crops in the E.U. and Ukraine in 2006 and 2007, were largely offset by good crops and increased exports in other countries and would not, on their own, have had a significant impact on prices. Only a relatively small share of the increase in foodA production price (around 15%) is due directly to higher energy and fertilizer costs.

The observed increase in food prices is not a temporary phenomenon, but likely to persist in the medium term. Food crop prices are expected to remain high in 2008 and 2009 and then begin to decline as supply and demand respond to high prices; however, they are likely to remain well above the 2004 levels through 2015 for most food crops. Forecasts of other major organizations (FAO, OECD, and USDA) that regularly monitor and project commodity prices are broadly consistent with these projections. Predictions of high food price in the medium run are further strengthened when we factor in the impact of policies aimed at achieving energy security and reduced carbon dioxide emissions, which may present strong trade-offs with food security objectives.

Impact on countries and households
Rising global food prices are contributing to high food inflation in many countries. The pass-through of rising global prices does not translate into an immediate and proportionate rise in domestic price levels, due to various factors such as a weakening dollar, domestic infrastructure and price stabilization policies. While the extent of global price transmission varies, over the past year there have been significant surges in domestic food price inflation in countries such as Sri Lanka (34%), Costa Rica (21%), and Egypt (13.5%). In many countries
and regions, food price inflation is higher than aggregate inflation and contributing to underlying inflationary pressures. For example, in Europe and Central Asia overall inflation in 2007 averaged 10%, food inflation 15% and bread and cereals inflation 23%.4 This compares to 6% overall inflation and 6.4% food inflation in 2006.
The terms-of-trade effects of these higher food prices have generally been mitigated by rising non-food commodity prices, although these averages mask significant balance of payments impacts for certain countries. When all primary commodity price changes are considered, the terms-of-trade impacts become large and positive for resource rich countries as exports of oil and other commodities more than compensate for higher food prices. Countries with the largest negative terms-of-trade impact include Lesotho, Eritrea and Gambia.

The distributional impacts of rising food prices can be serious even in countries where the balance of payments has not been adversely affected. While some households benefit from higher prices, others are hurt by them, depending on whether they are net producers or consumers of the food staple and the extent to which wages adjust to higher food price inflation. In general poor people, especially in urban areas, suffer due to rising food prices. Using a sample of household data for eight low income countries, a recent paper5 analyzes the impacts of higher prices of key staple foods on poverty, taking into account direct impacts from changes in commodity prices, and impacts through changes in wage rates for unskilled labor. The results show that, in six of the eight countries considered, price increases for staple foods were associated with a significant rise in poverty.

Averaging across these eight countries, the increase in food prices between 2005 and 2007 is estimated to have increased poverty by 3 percentage points. A recent assessment in Indonesia shows that over three-fourths of the poor are net rice buyers, and an increase in the relative rice price by 10 percent will result in an additional two million poor people (or 1% of the population). Analysis using an alternative price index weighted according to the consumption patterns of the poor in Latin America suggests that in most countries of the region, the effective inflation rate faced by the poor is higher than the official rate by 3 percentage points.

For many countries and regions where progress in reducing poverty has been slow, the negative poverty impact of rising food prices risks undermining the poverty gains of the last 5 to 10 years, at least in the short term. For example, in the case of Yemen, estimates show that the doubling of wheat prices over the last year could reverse all gains in poverty reduction achieved between 1998 and 2005. Over the long term, the impact on poverty of higher food and other commodity prices is less clear and depends partly on how overall economic growth responds to increased wealth accumulation and investment by net food-selling rural

What can governments do?
Policy interventions can be divided into three broad classes: (i) interventions to ensure household food security by strengthening targeted safety nets; (ii) interventions to lower domestic food prices through short-run trade policy measures or administrative action, and (iii) interventions to enhance longer-term food supply. Within all three categories of policies there are ‘first best’ or preferred options that are more effective and equitable, and introduce fewer distortions.

Ensuring household food security via targeted safety nets First best options to address food insecurity include targeted cash transfers to vulnerable groups. These support the purchasing power of the poor without distorting domestic incentives to produce more food, and without reducing the incomes of poor food sellers. Examples include cash or near-cash transfers7 that are conditional upon meeting a requirement (such as low income, location or occupation) or engaging in a mandated behavior (such as sending children to school). The scale, targeting efficiency and value of such transfer programs tend to be directly related to overall levels of development, given the administrative complexities and fiscal costs
entailed. They are not always a feasible option in low-income countries with weak administrative capacities.

Various kinds of cash transfer programs are currently used in Brazil, China, Ethiopia, Egypt, Indonesia, Mexico, Mozambique, South Africa, Sri Lanka, and Tunisia. Several of these countries are adjusting current programs in response to the rise in food prices. For example, in Ethiopia, where food price inflation in February 2008 was 23 percent (year on year), the Government has raised the cash wage rate of the largest cash-for-work program by 33%.

A number of countries, including Bangladesh, Madagascar, Cambodia, and India, are using self-targeted8 foodfor- work programs, while others, including Afghanistan and Angola, use emergency food aid distribution to ensure food security for vulnerable groups. The food-for-work program in Bangladesh has been expanded recently due to both natural disasters and the rise in food prices. While self-targeting reduces the costs involved in administrative targeting, the physical transfer of food is itself costly and can lead to leakages. Food aid can also have growing disincentive effects on local production if it becomes entrenched beyond the initial emergency or is not tied to a work requirement. Still other countries, including Burkina Faso, Brazil, China, Kenya, Honduras, Mexico and Mozambique, make effective use of school feeding programs to improve the food intake of school-age children and their families. South Africa is expanding allocations to its school nutrition program to keep pace with the rate of food inflation.

On the downside, school-based programs do not typically address child malnutrition at its most critical point – when children are in their infancy.
Rising food prices also risk derailing recent gains in reducing malnutrition. Between 1990 and 2005, the share of children under five with moderate and severe stunting fell from 33.5 percent worldwide to 24.1%.9 While food prices are not the main driver of malnutrition, they do affect nutritional outcomes through their impact on real incomes and household purchasing behavior. In compensating for rising food prices, vulnerable households may substitute towards less food, or cheaper, but less nutritious, substitutes for current diets.

Ensuring household food security by lowering domestic food prices First best options to lower domestic prices include reducing tariffs and other taxes on key staples. Many countries impose tariffs on food imports, both to encourage domestic production and boost domestic revenue. In times of sharply increasing prices, reductions in tariffs and taxes can provide some relief to consumers, albeit at a fiscal cost. The revenue loss from reducing tariffs can be significant and the fiscal implications of combining this with additional social protection expenditures may well require cutbacks in lower priority areas. Some
twenty-four of fifty-eight countries sampled have recently reduced import duties and VAT in the wake of rising food inflation. Others, such as the Philippines, continue to maintain high tariffs to protect domestic producers in– yet these high tariffs adversely affect the large majority of the poor, who are net consumers. Several countries (mainly in the Middle East-North Africa region) have a long history of using bread or grain subsidies specifically targeted to the poor to cope with household food insecurity. Others have introduced consumer subsidies for staples following the recent rise in food prices. For example, the Government of Yemen is supplying wheat in select markets at subsidized rates following a sharp rise in food prices. In early 2008 the Government of Pakistan announced that it was reviving a ration card system to distribute subsidized wheat. The risk with such measures is that they can become entrenched, incurring high fiscal costs. Moreover, if consumer subsidies are met by measures to keep producer prices low, this can create disincentives for domestic food producers, and end up being counterproductive. The one exception is when price controls are explicitly introduced as a temporary measure and are widely felt to be justifiable in terms of a higher social goal. In such cases, the risks of entrenchment will be minimized, as observed in recent interventions to limit price increases for staples during Ramadan in Morocco. For countries that are grain exporters, there may be political pressures to ban or tax grain exports in high price years. Unfortunately, several countries have now implemented these types of measures. These policies tend to have a limited impact on domestic price levels and a significant negative effect on earnings for domestic producers and exporters. They can also lead to sharp price fluctuations in countries that depend on imports, proving harmful to the global system. In the 1970s and 1980s, many countries implemented a grain buffer stock policy to physically carry over grain surpluses (domestic or imported) from low price years to high price years. In practice, this policy tended to entail high fiscal costs with difficult management and governance issues, while the benefits it yielded for household food security were unclear. Furthermore, world markets could be relied on to provide a steady supply of relatively cheap grain imports when needed. More recently, however, the stock-holding policies of several large producers—such as the U.S., E.U. and China—have changed, contributing to the present situation of very low global grain stocks and increased global price volatility. As a consequence, a number of developing countries, such as Indonesia, are considering reverting to this form of price management, particularly after experiencing the impact of export bans in key export countries.

Measures to stimulate a medium-term food grain supply response While higher grain prices are clearly a burden to poor net purchasers of food, they also present an opportunity to stimulate foodgrain production and enhance the contribution of agriculture to mediumrun growth. For example, higher prices weaken the rationale for costly floor prices or import tariffs for grain, and may facilitate the implementation of politically difficult trade reforms. Higher grain prices can also help to reverse a generally declining trend in government, private sector and donor investment in the agricultural sector. Agricultural producers such as Brazil, Malaysia and Thailand have made significant progress in agricultural commercialization in recent years, and have increasingly undertaken investments in research and extension necessary to promote increased agricultural productivity and reduced agricultural risk.

However, some of the short-run policy options discussed above may limit the scope for longer-term solutions. For example, policy responses that seek to control markets through mandated grain prices, export restrictions, forcible procurement, or direct government involvement in marketing activities are likely to lower the food supply response over the medium term. In contrast, alternative measures such as the piloting of market based risk management tools in Malawi, and the improvement of publicly accessible market information systems in India and Mali, are all likely to mobilize significant new resources in the private sector to cut marketing costs and improve efficiency of grain markets over the medium term.

For many low-income countries, transport and logistics costs are a key component of food prices and are generally far higher than OECD benchmarks of around 9 percent. While countries can do little to reduce ocean shipping costs (which for high volume, relatively low value goods such as grains and edible oils represent a significant part of the final price), they can act to lower the overall cost of domestic distribution. The importance of strengthening inland transport links in mitigating price spikes was recently underscored in Congo Republic. Improvements in transport capacity stemmed the rise in food price inflation that was experienced in 2006, and further investments in transport links with Brazzaville are expected to be an important part of controlling price spikes. Investments in basic transport infrastructure have a proven record in reducing prices, particularly in remote locations in countries such as Nepal. Moreover, improvements in customs facilitation, logistics performance, and efficient grain storage can also have significant benefits for consumers, while generating a favorable supply response

Measures to handle the ‘spillover’ effects of the above-mentioned policy responses
Many of the policy responses discussed in the previous two sections have significant fiscal implications.In the case of Ethiopia, for example, the total additional costs of combined measures to raise the wage on the cash-for-work program, lift the VAT on food grains, and distribute wheat to the urban poor at a subsidized price, are likely to exceed 1% of GDP. The macroeconomic consequences of higher spending depend largely on how they will be financed. Where additional budgetary costs are financed via higher domestic borrowing, this may lead to higher overall inflation. An alternative is to transfer costs to non-poor taxpayers, which may or may not
be feasible depending on country-specific revenue-raising capacities and political economy considerations. Diverting resources from other social sector spending or from other core public investments to finance shortterm responses may have medium and long-run opportunity costs. On the other hand, addressing food security priorities may provide an opportunity to reduce lower priority expenditures and reallocate these resources. Given the potentially important economic and political costs of not addressing food security, a temporary increase in budget deficits may be warranted.

Not all countries have the same capacity to accommodate and execute additional safety net and food policy spending. Using comparable data from the World Bank’s Country Policy and Institutional Assessment indicators, developing countries can be classified into four categories, depending on the extent of fiscal and balance of payments imbalances: (1) those in which initially weak public finances and fiscal management capacity has been further undermined by adverse terms-of-trade shocks (e.g. Burundi, Eritrea, Grenada, Haiti, Jamaica, and Nepal); (2) those in which somewhat stronger initial positions have been weakened by the terms-of-trade shocks (e.g. Burkina Faso, Ethiopia, and Honduras) and/or compounded by political crises (e.g. Kenya and Pakistan); (3) those in which there is weak fiscal capacity to effectively execute the additional food policy spending even in the face of favorable terms-of-trade movements (e.g. Mongolia and Zambia); and (4) those with stronger initial fiscal and balance of payment indicators, in which there is greater scope for mitigating the adverse impact of rising food prices (e.g. Indonesia, Mexico, and Tunisia).
The design of public policies to address rising food prices is conditioned by political economy factors.

The strength of different interest groups is a critical factor in influencing policy choices and determining what solutions are feasible. Even in cases where countries are net suppliers of food to world markets, governments may face strong incentives to put in place protective measures. Sound policy choices will seek to implement those solutions which are economically most efficient, yet reflective of political economy considerations and in line with the country’s fiscal space and institutional capacity. In some cases, first or even second best policies may not be feasible or may involve difficult political choices. In general, government policy choices are likely to be better accepted and understood if accompanied by a transparent and effective communications strategy on the causes of high food prices and accompanying policy measures.
Just-in-time policy advice to address immediate concerns. There is strong demand for Bank advice on the design and expansion of safety net programs and food market interventions to help protect vulnerable groups. In Indonesia, the World Bank’s work has played a significant role in informing discussion of the impact of rice prices on poverty and on the usefulness of various policy instruments, for example cash transfers.10 In Egypt, the Bank helped bring together Mexican officials with experience of conditional cash transfer programs to share with Government officials. In Ethiopia, wage rate analysis carried out by the Bank was the basis of adjusting the cash transfer element of the country’s largest safety net program. There has also been demand for advice on market interventions to smooth supply and lower food prices. An intensified dialogue on food stocks (which addresses optimal stock amounts, fiscal trade-offs, and implementation challenges) is being held in several countries, including Indonesia and Burkina Faso. In the Philippines, the Bank is advising the Government on the best strategy for reducing rice import tariffs. A high level forum is being organized in Morocco to discuss various reform options of the fuel and food subsidy programs.

Several countries have sought policy advice from the Bank to cope with the macroeconomic implications of rising food prices. Several policy notes have been prepared for partner countries on the causes of high food price inflation (e.g. Bangladesh and China) and options to manage rising inflation rates (e.g. Morocco). At the request of a number of Latin American Central Banks, the World Bank is organizing a workshop in Peru in May 2008 to discuss the use of inflation targeting. Several governments are asking for information on global trends and prospects to better understand the structural nature of the rise in food prices, as well as for information on responses adopted by other countries. Bank staff will be meeting with the Ministers of Finance of Central American countries to share Bank knowledge on food price trends and policies.

Meeting short-run financing needs. The immediate fiscal impacts of rising food prices vary across countries, as many food importers have been compensated by rising commodity export prices. It is still too early to assess the extent to which countries will turn to the Bank to contribute to emerging financing gaps. However, a few countries are actively considering increasing the size of forthcoming Development Policy Loans (e.g. Burkina Faso’s PRSC 7).

In the short run, the World Bank could scale up financing in existing programs and ongoing investment projects for safety net and agricultural programs. In Latin America, where many countries have comprehensive safety nets providing support to vulnerable groups, the Bank stands ready to scale up financial support to many of these programs. Additional Bank support can help expand and improve existing programs by providing: technical assistance to improve targeting and coverage, programmatic financing for strengthening social protection systems, and contingent financing for budgetary flexibility in the face of large-scale shocks. In Jamaica, the Bank is currently preparing a social protection project, which could be expanded to increase its coverage. In other cases, existing lending programs are being modified to improve the efficiency of safety net programs. For instance, in the Middle East-North Africa region, a number of DPLs are supporting the reform of food subsidies.

While most of its agricultural projects are geared towards medium-term policy and institutional reforms to increase productivity, the Bank also designs interventions to boost short-term food staple production, storage and distribution. For instance, an additional $15 million supplemental credit for an existing agricultural project is being prepared in Burundi in order to finance the distribution of crop inputs for the forthcoming agricultural season.

Expanding and improving access to safety nets and risk management instruments. Improving the quality of and access to safety nets will be a priority for protecting vulnerable households in the face of continued uncertainties in global food markets – at least for the foreseeable future. The Bank can help countries build stronger and more flexible safety nets to cope with shocks, with clear targeting and programmatic frameworks that can be quickly scaled up to protect vulnerable households. In addition, expanding programs to ensure basic nutrition, particularly for infants, and improved access to health and education systems will also help minimize the likelihood that income shocks reduce demand and damage human capital accumulation. Finally, the Bank is
also investing to help develop modern risk management systems such as crops and disaster insurance.

Support for an international agenda
The impacts of the recent surge in food prices are reverberating across key dimensions of the development agenda, including poverty alleviation, macroeconomic stability, investment incentives and energy security/climate change policies. Because it is capable of weaving together the economic, poverty, social, agricultural and environmental perspectives, the Bank is well-placed to catalyze global action and influence the international agenda. Three such issues where the Bank can seek to improve global outcomes are discussed below, many of which are of direct consequence for middle-income countries.
First, the Bank is working closely with countries and other donors to minimize the adoption of policies with negative spillover effects for others. High levels of trade tariffs and subsidies create major negative externalities. Agricultural tariffs and subsidies in developed countries cost developing countries annually the equivalent of about five times the current levels of overseas development assistance to agriculture. Export bans also bring about negative externalities, particularly for countries that are heavily dependent upon imports. They can create price spikes in importing countries and political pressure for domestic food self-sufficiency.
Second, the Bank’s climate change agenda seeks to inform the global debate on bio-fuels through analysis, monitoring and balancing of competing needs for energy and food security. Concerns over increasing energy use, climate change, and carbon dioxide emissions from fossil fuels make switching to lowcarbon fuels a high policy priority at both the global and country levels. Bio-fuels are a potential low-carbon energy source, although whether bio-fuels offer carbon savings depends on how they are produced. Secondgeneration bio-fuels produced from waste products, in particular, can avoid land use change and some of the emissions associated with current bio-fuel programs, and may hence offer significant environmental and social benefits. These benefits, however, have to be weighed against the potential costs of rising food prices. According to a recent IFPRI study, most scenarios of increased use of bio-fuels imply substantial trade-offs with food prices. These trade-offs are dampened, although not eliminated, when technological advances in bio-fuel and crop production are considered. Trade-offs between energy security, climate change and food security objectives need to be carefully monitored and integrated into both food and bio-fuel policy actions.

Third, the increase in food prices creates an opportunity for the global community to refocus on investments in agriculture and social protection. The structural shift in food prices creates an opportunity for the Bank and other donors to work with partner countries to build the political coalitions and mobilize the necessary financial support to reverse a perennial problem of under-investment in agriculture and to build better safety nets to help the poor cope with their endemic high levels of risk.

Fed Up with American Legislation Rhetoric?

As I write this short commentary, I have started reading Larry Diamond’s book, entitled the Spirit of Democracy: The Struggle to Build Free Societies Throughout the World (2008). Diamond is a professor at Stanford University and probably some of you also know him as an editor of many issues in the Journal of Democracy. He starts his book with the following quotation from Mahatma Ghandi: “the spirit of democracy cannot be imposed from outside. It has to come from within”. The disregard by American legislators of this fundamental principle of political development is not the only reason that Ethiopians are dismayed of the proposed Senate bill on their country. There is also another more important issues: why Ethiopia? For example, Ethiopia is more stable than Pakistan and India, more democratic than China, more open than Eritrea or Saudi Arabia, more progressive than Kenya, has good record of economic growth or is among the promising developing countries to achieve the UN development goals (MDGs), and more importantly, Ethiopia is a US ally in the fight against global terrorism including support for the AFRICOM (an American military command centre in Africa). All this just makes the proposed Senate bill ridiculous and even a laughing matter.

Although the core values of democracy have universal appeals, Americans themselves continue to be part of the problem in the democratization processes by frustrating national leaders with their ill-conceived hegemonic agenda or supporting political opposition groups that have no clear developmental agenda. One explanation for this is that many American politicians have little or no international experience and knowledge. This then makes them very vulnerable to the influence of powerful interest groups. We all know how Iraqi and Afghan Diaspora lobby groups and emotional policy experts contributed to George Bush’s disastrous foreign policies. Perhaps it is time that Americans learn from the experience of middle power countries like Canada whose foreign policies promote peaceful dialogue and conflict resolution and strategic interventions guided by the principles of multilateralism, such as a UN-mandated intervention.

In all frankness, the new or revised draft Senate bill on Ethiopia is a typical Western policy or legislation document on Africa. When you propose intervention in an African country, there are costs and you must come up with a rational to justify that cost, such as political problems, human rights violations and stalled economic development. To be transparent, the document recognizes Ethiopia’s progress in development, regional leadership and security vulnerability and other factors. This is an important strategy to appease many American legislators who have been closely following the situation in the Horn of Africa. On the other hand, the bill must stick to its initial purpose, which is accommodating the needs of lobby groups and, to justify its “relevance”, it must cite, among other things, reports of human rights violations (don’t forget that there are more negative human rights reports on America, especially in relation to its war on terror, than on Ethiopia) and Ethiopia’s democratization challenges which are not uncommon in many developing countries. The bill then proposes legislation that calls on America to provide support for Ethiopia while dictating what should be done. What right do American politicians have to dictate what should be done in Ethiopian? The Ethiopian government will denounce this legislation (if passed), which means that it will achieve nothing. Those American politicians should realize that American diplomats and business people arrive in Addis Ababa, the capital of Africa, almost daily and that their actions have serious consequences for American interests.

What should we say about the groups that lobby American legislators? My own version is that the Ethiopia Diaspora lobby groups are supported by complex networks of interest groups which could be broadly classed as follows: 1) intellectual thugs, identifying themselves as “professors”, “PhDs”, “Drs” etc (to increase their low self-confidence), who write focusing on the negative aspect of Ethiopian society while undermining development efforts including the contribution of donor countries. This justifies the campaigns of lobby groups; 2) former Derge officials whose policies and practices caused the displacement, arrest, torture and murder of hundreds of thousands of Ethiopians. They used to swear on the destruction of American “imperialism”; 3) groups that still remain tied to their old (1970s) political habits, which is to remove a ruling party from power by any means necessary, instead of developing governance capacities and seizing state power by winning competitive elections; 4) a segment of the rich Diaspora middle class that has no sympathy for the plight of our poor relatives. This group focuses on the issues of state and political power; 5) groups within the Eritrean Diaspora which have also been good at encouraging and supporting separatist groups; and 6) groups that identify themselves as Ethiopians (mainly Eritreans) in order to advance their anti-Ethiopia agenda. Tecola Hagos’ anger over this draft bill is clearly understandable, but he might have gone too far to implicate foreign countries like Egypt, Sudan and Pakistan. In my view, the Egyptians, Sudanese and others have concluded that times have changed. In their views, Ethiopia is now ruled by a “conservative” group of people who also have successfully mobilized international support around their development agenda. They know that any conspiracy against Ethiopia will backfire.

The Ethiopian government should set up an independent commission to study Diaspora-Ethiopia relations and utilize the findings to initiate a multi-party process for drafting legislation on the Ethiopian Diaspora. Through legislation, the government should recognize genuine Diaspora groups that play a positive role in Ethiopian development and hold irresponsible groups accountable. Such legislation also encourages domestic civic and political groups to think strategically when they form relations with Diaspora groups.

Finally, maybe, after all, all this American legislation rhetoric can be a good thing for Ethiopia. Because, it motivates Ethiopians to get out of foreign aid dependency. With the economy growing and basic infrastructure laid down, the government needs to work hard to increase its taxation capacity and achieve self-sufficiency. Either way, Ethiopian government officials should remain dignified and not even worry about all this nonsense or so the called “Support for Democracy and Human Rights in Ethiopia Act of 2008”.

Getachew Mequanent

Ottawa, Canada

September 15, 2008
What is the stand of Ethiopia on the Algiers Agreement?

Eritrea forcefully evicted UNMEE and occupied the TSZ and UNSC effectively legalized and legitimized the actions of the mighty rouge regime of Eritrea by terminating UNMEE * and relinquishing TSZ. With this action UNSC become partner in crime against the people of Ethiopia. Eritrea and UNSC killed and buried the Algiers agreement and still they think and believe it is alive. They talk about compliance and Ethiopia to respect the ruling of the border commissions and implement virtual demarcations. The issues are not really what Eritrea and UNSC think and believe. What Ethiopia thinks and believes is the most important factor whether the Algiers agreement dies or survives. Because, Eritrea and UNSC expect and continue to demand Ethiopia's compliance where as they stripped and breached the original agreement.

Way back Eritrea killed the Algiers agreement and today UNSC nailed on the coffin surrendering to the wishes of Eritrea. The termination of UNMEE by UNSC fulfilled the desire of Eritrea. This decision is a huge victory for the dictatorial regime of Eritrea and serious setback for the entire regions of the horn. The UNSC complied with the directive of the Eritrean regime and carried out the orders effectively paving the way for the total abrogation of the Algiers treaty. The unilateral expulsion of UNMEE by the Eritrean regime and the eventual termination by the UNSC leaves Ethiopia free of any kind of obligations from defunct treaty.

If Eritrea can pick and choose any part of the agreement and discard other part it dislike freely without any consequences, Ethiopia can also declare the agreement as null and void. Eritrea unilaterally recompiled and rewritten the agreement and the UNSC tailed the dictator by approving the amendments. Eritrea violated and abrogated every part of the agreement long before this feeble decision of UNSC which legitimize the actions of the Eritrean regime. From the beginning the integrity of the Algiers agreement constantly undermined by the Eritrean regime and the UNSC not only unwilling to correct the situations but shielded the regime from any kind of responsibilities. Eritrea with the collaborations of UNSC nullified the agreement in totality and Ethiopia has no obligations whatsoever to implement any part of the agreement.

The track record of the UNSC in relations to Ethiopia - Eritrea peace process is one-sided, ineffective, powerless and mostly useless. UNSC tolerated and accepted all kind of violations and breaches from the Eritrean regime. It shows no inclinations of any kind to correct the problems and to protect the integrity of the Algiers treaty. Now the UNSC officially voted to terminate UNMEE in accordance with the directive of the Eritrean regime and as such UNSC and the Eritrean regime both are in breach of the Algiers agreement. Termination of UNMEE and Temporary security zone directly negate the agreement. All along, the position of Ethiopia is to honor and implement the treaty in totality without reservations. The Ethiopian government repeatedly called the Eritrean government to respect the treaty and embark on peaceful resolutions of outstanding issues. The Ethiopian government also called UNSC and international entities in many occasions to intervene and ensure the integrity of the Algiers treaty without any success. Unfortunately and sadly, Eritrea intensified its war rhetoric by destabilizing Ethiopia and the whole regions and UNSC and the international communities completely abandoned their responsibilities and in some cases sides with the dictator.

Ethiopia's position of dialogue and peace with the Eritrean regime is unattainable, impractical and as proven again and again is illogical. No one can make peace with the Eritrean regime and it is futile exercise to hope against all hopes. Eritrean regime never believes in peace and never accepted the Algiers agreement as the base of all inclusive peace pacts with Ethiopia. The agreement provided the regime amble time to recover from the military defeat and also counted on fortunes to find face saving opportunities. In which case the agreement shined on the Eritrean regime and won windfalls more than it bargains. The demarcation commission awarded every thing to Eritrea and the regime sees no interest to dialogue and settle peacefully with Ethiopia. Mission accomplished and the international community on it side the regime intensified its aggressions toward Ethiopia up to this time without any cost.

The Eritrean regime can never be partner of peace and Ethiopia must and need to pull the rug under the feet of the regime. Ethiopia unequivocally and clearly must state that Eritrea and UNSC invalidated the Algiers agreement and has no obligation to implement any part of the treaty. Ethiopia simply needs to state the facts on the ground. No obligations of any kind to shoulder the responsibilities while Eritrea with the collaborations of UNSC violated and breached the original agreement. This decision frees Ethiopia from the Algiers treaty and obligations. If Eritrea freely terminate and discard part of the agreement why Ethiopia honor any part at all?




Economic Growth for Inflation: The Ethiopian Dilemma

Asayehgn Desta, (Ph.D)

Sarlo Distinguished Professor of Business Economics

Dominican University of California

Economic Growth for Inflation: The Ethiopian Dilemma
By and large, Ethiopia has recorded seventeen years of economic stagnation under the leadership of The Derg, a military government. For example, in 1990/91, the growth rate of the Ethiopian Gross Domestic Product (GDP) was -3.2 percent, cyclical unemployment was about 12 percent, the rate of inflation was about 21 percent, and the country’s budget was at a deficit of 29 percent of GDP. For the last five years, contemporary Ethiopia has gathered momentum by recording a steady economic growth. Along with this growth, however, the country has seen an accelerated, double-digit increase in the price of goods and services. Thus, inflation has remained a scourge of the Ethiopian economy (e.g., Tadesse, 2008; Demissie, 2008; Goodo, 2008; Kassahun, 2002).

Stated in simple words, Ethiopia at this juncture is faced with an overheating economy. With the global soaring price of oil, wheat, corn, and minerals, this condition cannot be regarded as unique to the Ethiopian situation. What makes this a special case is that Ethiopia is a low-income country. The increase in National Consumer Price Index (the main gauge of inflation) has become very detrimental to the low-income groups and retirees who live off a fixed income. The risk of inflationary pressure is reducing the purchasing power of the Ethiopian birr. Since the current inflation rate in Ethiopia is approximately 20 percent, what used to cost only one birr a year ago now costs about one birr and 20 cents.

Given that a large portion of county’s population lives in absolute poverty (i.e., less than one dollar per day), it is time that the regime in power identifies the salient factors that might be contributing to inflation in Ethiopia. Also, it is absolutely vital that economic policymakers design strategies that could curtail the on-going erosion of purchasing power—to curb inflation before it deepens the economic crisis and contributes to political instability (Desta, 1993).

The focus of this study is to examine both the main causes and the consequences of existing inflationary pressure in Ethiopia. The first section discusses the theoretical frameworks that are believed to be the causes of inflation in developing countries. The second part provides some suggestions on how policymakers may control the current inflationary pressure in Ethiopia and prevent the resurgence of inflation at a minimum cost in terms of output loss.

Inflation as an Economic Growth Phenomenon
From theoretical and empirical perspective, determining the direction of causality between economic growth and inflation in the developing countries is very controversial (e.g., Hossain & Chowdhurry, 1996). In 1950s, the Structuralist Economist view of inflation, as pioneered in Latin America, persuasively argued that moderate inflation and economic growth are positively related. This was in contradiction to the policy advice of the international lending institutions (Meier, 1995; Mallik & Chowdhurry, 2001). Stated in simple terms, inflation stimulates the economy since nominal wages may lag behind prices, allowing for slower adjustment to wage expectation.

Similarly, the Keynesian economic perspective assumed that moderate inflation might accelerate economic growth by raising the rate of profit, thus increasing private investment (Jung & Marshall, 1986). According to Meier, inflation accelerates economic growth in two ways: “by redistributing income from workers and peasants, who are assumed to have a low marginal propensity to save, to capitalist entrepreneurs, who have assumed to have a high marginal propensity to save and invest; and by raising the nominal rate of return on investment relative to the rate on interest, thus promoting investment” (1995). Capitalizing on the Keynesian theoretical framework, the ruling party in Ethiopia seems to attribute the surge in inflation to macroeconomic growth. As stated by Goodo, “The Ethiopian government admits that inflationary pressure has become very severe. However, it also claims that the economy has been growing at 10% for five consecutive years and it is healthy at present.” (2008; Hassan, 2008).

Using the full-employment model, it is possible to assume that if a nation achieves full employment, economic growth is likely to precipitate an inflationary situation. Since the 10 percent increase in nominal GDP cannot keep pace with a 20 percent inflation rate, the acceleration of economic growth is overstated. In fact, it is possible to assert that double digit inflation in Ethiopia is nothing but a clear sign of an unhealthy economy (Goodo, 2008). As persuasively argued by Barro, the inflationary situation in a country could have a negative-structural-break effect on economic growth, if the sustained increase in prices is more than 15 percent (1996).

The inflationary economic growth process generates distortions in the allocation of resources under the free market system. It may not bear fruit if the Ethiopian citizens do not “have confidence in the stability of the value of money, and . . . if inflationary financing is not accompanied by governmental policies of holding down the wage and interest costs of business enterprises” (Meier, 1995, pp. 180). It needs to be appreciated that following a rise in the Consumer Price Index, the Ethiopian government not only scrapped taxes on flour and grains but also started selling edible food items at subsidized prices in order to repress inflation. The government claims “greedy” businesses and speculators are the cause of the inflation. They subsidize food to placate the vulnerable urban poor and the salaried government employees. The efforts of the Ethiopian government to curtail inflation are in the right direction. However, the governmental subsidization programs may be effective only for a short period of time. They are likely to result in shortages; inefficient production and distribution; and black markets. To suggest possible solutions for curtailing inflation in the long run, the articulation and disarticulation between aggregate demand and aggregate supply will be investigated. Additionally, the monetary policy Ethiopia will be assessed in relation to the chronic inflation that has manifested in the country.

The demand-pull and cost-push factors for inflation
Keynesian economists often classify inflation according to the source of the inflationary pressures. The most straightforward method defines inflation in terms of sustained pressure from the demand side of the market or the supply side of the market. By and large, a rampant inflationary situation in any country occurs because of an imbalance between demand-pull and cost-push factors. The demand-pull inflation scenario occurs when a sustained increase in prices is preceded by a permanent acceleration of the nominal gross domestic prices growth (e.g., Gordon, 2009). Stated differently, inflation occurs when increases in total spending are not offset by increases in the supply of goods and services. When many consumers are trying to buy the same good, the price of that good inevitably increases, as there is a limited supply. Also, demand-pull inflation could be a result of an increase in consumer and business confidence, an increase in the money supply, and/or government budget deficits.

On the other hand, cost-push inflation is an increase in production costs that force firms to raise prices to avoid losses. In broad aggregate terms, these could be as a result of energy shocks, weather shocks, increase in the prices of agricultural inputs, a decline in land holding sizes, or import price hikes—all of which might result in a currency devaluation.

With limited land holding, massive land degradation, soil nutrient depletion, and inefficient production techniques, it is possible to argue that, despite economic growth, rapid population growth can contribute to low agricultural productivity, based on the law of diminishing returns. For example, the food estimate for the 2004/05 periods in Ethiopia indicates that while the population increased at about three percent, the food production grew at 3.7 percent (ESSGA, 2006). When compared with the eruption of population in Ethiopia, the food growth is at the margin to provide adequate nutrition (Worku, 2000). In addition, while cereal production in Ethiopia increased by 17.7 percent from 2005/07, the prices of cereals jumped by 15 percent. This is both due to increases in the price of fuel oil and fertilizers, as well as inefficient market structures (Teshome, 2008).

Due to the diversification of the commodity export base that Ethiopia is pursuing under the Agricultural Development Led Industrialization (ADLI) paradigm, farm exports have grown on average by 25 percent (Tadesse, 2008). Nonetheless, it needs to be underlined here that due to an extensive use of chemical fertilizers, the limited rural Ethiopian land is currently facing a number of environmental challenges. The challenges range from land degradation to environmental pollution. Due to the misguided application of chemicals in agriculture, it is estimated that Ethiopia has accumulated one of the largest stockpiles of obsolete pesticides on the African continent (Edwards, 2004). Therefore, we can generalize that the sharp increase in the price of agricultural outputs could be attributed to the limited production technologies currently available in rural Ethiopia.

What is more, Ethiopia is heavily indulged on growing horticulture commodities in order to diversify its exports and earn foreign exchange. Given this, Ethiopian farmers are reducing the production of more essential edibles. Instead, they harbor the production of horticultural commodities in order to amass strong foreign currency. More particularly, most of the agricultural land in the proximity of highways is tailored to the production of horticultural crops (i.e., floriculture fruits and vegetables) for export. The reduction of its limited land holdings to the production of horticulture products has accentuated the price of the staple products. Since the market for horticultural products is strongly dependent upon knowledge, human capital, and technical inputs, “small producers are frequently eliminated from markets for failure to understand market dynamics or because of their inability to meet new production, sanitary, and quality standards” (USAID, 2005). Given this fact, it can be argued that in the long run, the dependency of Ethiopian farmers on the production of horticultural commodities is not only less lucrative but also environmentally costly. For instance, the pattern was the same in other similar countries that imported agro-chemicals (viz., herbicides, pesticides, and fertilizers) for horticultural products. They would not only exhaust the productivity growth of their agricultural land, but also create toxic and hazardous waste that could pollute the surrounding environment and damage human health (e.g., Desta, 1998; Edwards, 2004).

Inflation as a monetary phenomenon
According to Monetarist economists, in every case where the inflation rate of a country is high for any sustained period of time, its rate of money supply growth is also high (e.g., Friedman, 1959). In accordance with this, the National Bank of Ethiopia has recently responded by tightening the monetary policy in order to tackle the chronic level of inflation. However, to examine if a relaxed monetary policy has been the source of inflation in Ethiopia, the role played by financial and non-financial intermediaries in the supply of money stock needs to be factored out.

In Ethiopia, financial intermediaries may accelerate inflation if the National Bank of Ethiopia relaxes its financial and monetary policies that regulate the Ethiopian financial intermediaries to maintain the statutory liquidity requirement of demand and time deposits. In addition, an increase in money supply could accelerate inflation if the central bank substantially reduces the discount rate or buys existing government bonds from investors. The discount rate is the interest rate charged by the National Bank of Ethiopia when member banks borrow from it.

As shown in Table 1, Ethiopia seems to have been driven into an inflationary trap because there was an increase in the country’s broad money supply (i.e., currency in circulation, demand deposits, savings deposits, and time deposits) from 19.4 percent in 2002 to 23.3 percent in 2006. Ethiopian banks adopted a relaxed monetary policy to help promote the financial markets. That is, the banks overused their reserve facilities to boost their credit portfolio (Teshome, 2008). The excess reserve in Ethiopia occurred due to more savings. As persuasively argued by Demissie, “the demand for bank credit rose sharply to finance large-scale investment projects by the public enterprises and the rapidly expanding private sector. Substantial negative real interest rates and commercial banks’ excess reserves facilitated the rapid expansion of credit” (2008).

From 2002 to 2006, Ethiopia’s real GDP increased by 6.8 percent (See Table 1). Instead of adjusting the money stock with the increase in GDP, the country’s money supply accelerated by about 18 percent, contributing to an average 12 percent increase in the rate of inflation. The link between money supply and other determinants of growth is not an automatic process. However, if we abide by the principles of the transmission mechanism, we can argue that the increase in money supply in Ethiopia might have contributed to an increase in investment thereby leading to an acceleration of economic growth. In addition, though it is very difficult to document, the inflow remittance through the informal channels from abroad might have contributed to the soaring of prices in the Ethiopian market of goods and services. Thus, the lesson to be ascertained from this analysis is that to successfully jump out of the inflationary trap, the Ethiopian monetary authorities need to tighten the stock of money in the country. In other words, a tight monetary policy could serve as an anchor for inflationary pressure in Ethiopia. However, the problem of inflation in the Ethiopian environment cannot be tackled without addressing the large budget deficit.

Fiscal Deficit and Inflation
Tax levy in underdeveloped countries is generally very low. In addition, a government cannot or does not find it politically feasible to raise taxes when it needs to increase government spending. During wartime, the need to rapidly increase military spending results in government expenditures rising faster than tax revenues. The desire of the government to reduce taxes in the face of a continued high level of spending can lead to large budget deficits. Large budget deficits can be the source of inflationary monetary policy. As argued by Meier, “When financing of government expenditures by money creation exceeds the non-inflationary limit, total spending in the country becomes greater than production valued at stable prices. Prices rise and the balance of payments tends to go into deficit” (1995, pp. 176; see also Johnson, 1966).

To promote more investment; to maintain law and order within its highly volatile domestic environment; and to ascertain peace and tranquility with its neighbors, the Ethiopian government has been running a budget deficit of between five and six percent of GDP per year (See Table 1). Government deficit could be financed by selling government savings bonds (monetization of the debt) if there is a highly developed capital market. However, capital markets barely exist in Ethiopia. Thus, the Ethiopian government has either depended on external sources of finance or has financed its budget deficit by printing high-powered money (currency and deposits at the National Bank), which serves as a reserve for commercial banks and allows commercial banks to expand their loans (Johnson, 1966; Meier, 1995, pp. 177; Hassan, 2008). Since donor funds have not greatly increased in 2007/08, it is reasonable to assume that the government’s commitment to finance large-scale capital projects and infrastructure improvements has contributed to the sustained inflationary period (AfDB/OECD, 2007).

Summary and policy implications
For the last five years, Ethiopia has recorded sustaining economic growth. Moderate inflation is an inevitable consequence of sustained economic growth. It can enhance economic growth by mobilizing the resources of a country. However, inflation in Ethiopia is beyond the break-even point. Instead of stimulating economic growth, inflationary pressure in Ethiopia seems to be on the verge of distorting the allocation of resources and is likely to be a deterrent to undertaking productive investments. With a substantial increase in prices, Ethiopian banks are on the verge of lending to the least solvent borrowers to keep from bankrupting themselves. In addition, as the value of the domestic currency depreciates, domestic savers may decide to invest abroad.

Rampant inflation proliferates inefficiencies and disrupts investment. It takes time and proper policy to adequately damp inflationary fires. The supporting price controls implemented by the Ethiopian Government as knee-jerk responses to inflation might be effective for a short period of time. In fact, political and economic agitators may be calmed by government subsides, supplements, and price floors, as well as an increase in interest rates and reserve requirements. Banning speculators in futures trading of edible products and preventing rising prices with government subsides might not halt the rampant inflation. Inflation creates more inflation unless long-term stabilization programs are pursued. Let it be assumed that the National Bank of Ethiopia is allowed to function independently. Furthermore, assume it is immune from political pressures to tighten its monetary policy, such as auditing of financial institutions to maintain reserve requirements or forcing banks to indulge in prudent lending procedures. However, granting legal independence to a central bank is not sufficient to keep monetary policy effective on a sustained basis unless the central bank also dominates the fiscal policy of the government. In other words, the framework of fiscal policy should result in a monetarily dominant regime. Granting legal independence to the central bank, the fiscal policy regime must be such that it does not allow changes in the price level to become the mechanism through which the condition for government solvency is satisfied (Canzoneri et al., 1998).

A stabilization program may include a drastic cut in the money supply (while cutting government expenditures) or a devaluation of the currency. These policies can have their own inertia and usually induce an unexpected inflation. Since a large portion of inflation in Ethiopia is due to a price surge in edible and finished products, one of the long run strategies for suppressing inflation and increasing employment in Ethiopia is to balance the aggregate demand with long-run aggregate supply. Aggregate demand is a combination of the price level and real output at which the money and commodity markets are both in equilibrium (Gordon, 2009).

If Ethiopia is to achieve long-term sustainable growth, its developmental process has to be rooted in the Ethiopian system of thought and its people-centered approach, rather than depending on the Western capitalist model of industrialization by invitation to gain various forms of external assistance. Since agriculture is the backbone of the Ethiopian economy, its sustainable development model must be one of self-sufficiency—to feed its own people instead of producing environmentally-insensitive horticultural products to amass foreign currency. Contrary to expectations, Ethiopian horticultural commodities are sold at very low prices. Additionally, they lack markets to absorb production, often involve a large number of middlemen, and lack marketing institutions to safeguard farmers (Gebremedhin, 2007).

Given the resources and techniques of production, the Ethiopian agricultural sector seems to have exhausted its productivity growth. To improve productivity under these conditions would require substantial investment in research and development. For example, since deforestation, desertification, increase in population, shortage of water, and air-related disease are to a large extent the symptoms of poverty, the poor need to be organized to formulate and implement their own development strategies and ensure that their basic needs are fulfilled. Based on land security and adhering to environmentally-sensitive, cooperatively-managed systems, it reasonable to assume that Ethiopia would not only achieve growth and equity (with full employment and modest inflation) but could also empower the Ethiopian people to fully participate in the design and management of long-lasting development paradigms (Kofi & Desta, 2008).

Table 1

Ethiopia’s GDP, Inflation, Broad Money, Public finance, Investment, Savings, and Current Account Balance, 2001-2008

Real GDP

Growth rate (%)
Inflation rate (%)
Broad money increase (%)
Government budget/GDP (%)

Gross Capital Formation, % GDP
Domestic Saving, % GDP
Current Account Balance (%)/


1.6 d
7.2 b
19.4 b

-4.5 b
15.1 b
12.3 b

11.5 b
8.6 b
20.0 b
-7.4 d
12.4 d
5.4 d

10 c
9.2 c
16.4 b
-5.8 d
11.4 d
2.6 d
-9.1 a

9.7 c
9.0 c
23.3 b
-7.4 d
11.4 d
5.2 d
-10.2 a

18.0 a
-5.8 d
12.0 d
8.1 d
-14.4 a

Notes: a Economic Intelligence Unit (1997, 1998, 1999, 2006). Ethiopia: Country outlook. EIU Views Wire.

b International Monetary Fund (2008, April). International Financial Statistics.

c The World Bank Group (2007, April). Ethiopia. World Development Indicator Database.

d1 International Monetary Fund (2007, June 15).

d2 AfDB/OECD (2007). African economic outlook: Ethiopia.

AfDB/OECD (2007). African economic outlook: Ethiopia.

Barro, Robert (1996, May/June). Inflation and growth. Federal Reserve Bank of Saint Louis Review.

Canzoneri, M. M., Cumby, R., & Dibba, B. (1998). Is price level determined by the needs of fiscal solvency? CEPR Discussion Papers, No. 1772.

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Desta, A. & Kofi, T. (2008). The saga of African underdevelopment: A viable approach for Africa’s sustainable development in the 21st century. Trenton, NJ: Africa World Press.

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ESSGA (2006, November). Food and agriculture indicators: Country Ethiopia.

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Hossain A. & Chowdhurry A. (1996), Monetary and financial policies in developing countries. London: Routledge.

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Kassahun, R. (2002, August). Structural adjustment and macroeconomic reforms in Ethiopia.

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Teshome, A. (2008, May 14). Response to Dr. Said Hassan: On the cause of the current soaring inflation rate. Retrieved May 29, 2008, from

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Worku, Z. (2008). Is sustainable food security possible in Ethiopia? Retrieved April 9, 2008, from

Let’s Shun Playing Politics for a Change and Rally for a Common Cause

(By Mulubrhan Tsehaye, June 17, 2008)

For some time now, we have been hearing through various media outlets about the threat of starvation and people in need of emergency food aid in the southern and eastern parts of the country. The same media sources have also been reporting that a significant number of children are reportedly malnourished. We, Ethiopians should take this familiar grim news about a possible threat of drought and malnutrition with utmost sense of distress for it has affected our nation successively before with a devastating effect of immense proportion. Our country’s famine of 1974 and 1984-1985 that claimed millions of innocent lives is fresh in our minds and this alarming news should be a harsh reminder of a possible catastrophe hovering over our nation if it is not dealt with immediate and speedy response. It is obvious that this calamity has been caused by a number factors including the global high food prices, the global increase in oil prices, the increase of bio-fuel production using edible crops and of course to all these was added the failure of rains. While droughts are usually directly caused by the forces of nature beyond human control such as those like the failure of rains or even the global food crisis etc, functional democratic institutions and a government with effective early warning mechanism, a swift emergency response and a broad public participation in coordinating assistance to the needy can play a vital role in saving lives.

Yes, there are some conflicting reports, mainly from sources of the Ethiopian government that contend that the magnitude of the problem is exaggerated and the number of citizens under the threat of starvation in those parts of the country is considerably lower than that has been reported by the international media. Be that it may be however, the overriding issue that requires a particular attention should not be whether or not the reporters were quick to exaggerate or undermine the magnitude of the disaster or how high or low the number of malnourished children is. It is rather how to quickly and swiftly react and ward off this potentially catastrophic crisis. One starving child is too many and no child should be left starving no matter how difficult and challenging it is to reach each and every individual. The government thus has to avoid being tangled in a rather needless argument as to whether the magnitude of the disaster was exaggerated by some reporters or some of the aid agencies are ballooning the number of victims to sustain their employment etc. First of all, what bad can come out of exaggerating the gravity of the problem and overwhelming it with a excessive response? One would imagine that excess flow of aid would not be a challenge that the malnourished children wouldn’t be able to handle? The government thus ought to continue focusing its full attention on how to confront the challenge at hand head-on and work relentlessly to effectively coordinate and speedily deliver the critically needed aid in order to successfully avert the potentially severe calamity of malnutrition or even starvation in those parts of the country.

Secondly, it is a public secret that Ethiopia under the current government has been registering a remarkable and rather unprecedented successive economic growth that is slowly pulling the country out of the deeply rooted poverty and long standing backwardness. These are real and tangible achievement records of the ruling party that are unmistakably visible through out the nation. Whether this year or next year there happens to be failure of rains, malnutrition or not the visible economic progress all over the country is the result of some of the polices put in place by the ruling party and no matter what the its adversaries might say, the people of Ethiopia are the primary witness of these visible steps forward. Nobody can take away this from the government of EPRDF. Thirdly, as far as political records go, since the get go, the current government is the only government in the history of our nation that officially declared that poverty is the principal enemy of our nation and it will concentrate all its efforts on eradicating poverty that has devastated and humiliated Ethiopia for the past centuries. Now, regardless of how significant progress has been registered and how far the nation has marched forward in the path of economic growth, there are and will be still massive economic and social problems that entail to be undertaken including the threat of drought or even starvation every time rain fails or any other natural disaster strikes. It is obvious that in poverty stricken countries like ours, the journey to completely stamp out the longstanding and deeply-rooted poverty can not be accomplished overnight for it is a colossal task that poses a particular challenge of an immense proportion.

Of course, those few disingenuous Diaspora extreme elements will always try to politicize unfortunate natural phenomena like this to proliferate their political agenda. Instead of being alarmed by potentially serious reports like this and try to do whatever they can to help their compatriots, they are scrambling on to taking cheep shots against the ruling party in a bid to score some cheep political scores by blaming the current government about every misfortune that might take place on this Earth. It is a public record that these extreme elements have been blatantly roaring and campaigning against any aid for Ethiopia just because the current ruling party happens to be their adversary. While they are aware that the principal beneficiary of such aid is the poor and needy, they were and are prepared to pursue their selfish political agenda even if it means depriving the poor and destitute the critically needed help. True to their character, on one hand, they have made it their mission to lobby relentlessly all the donors including the European Union and World Bank and others to cancel any short term or long term developmental aids and loans that might be aimed at combating poverty and the reoccurring droughts in the country. And now, on the other hand, they are preaching that the current government is deliberately impoverishing and even starving the people and the reports of food shortage and malnutrition are the ruling party’s own making. Of course, to those of us who are accustomed to the mind setting of these rather deranged narcissists whose principal goal is merely reinstating themselves to power by any means necessary, their blame game does come as a bolt from the blue and nothing they attempt to say or do should be of any value.

The good new is however these narcissists are the minority and their narcissist ideals do not reflect in any way the patriotic fortitude of the majority of Ethiopians in and outside the country who truly understand the situation on the ground and are genuinely determined to do whatever they can to help and at the same time pressure the government to rise up to the challenge and react swiftly and effectively to ward off the looming calamity before it goes out of hand. Thus, Ethiopians of all political persuasions with an independent choice of rational outlook that is merely focused on the wellbeing of the ordinary Ethiopian people need to put our respective political differences on hold and get together now and mobilize our efforts to do our outmost share to quickly foil the threat posed to our compatriots for we owe it to the children in need. Playing politics and bickering at each other from a safe distance will never have any positive effect on the endeavor to combat this threat. Yes, we may have political difference and some of us are profoundly opposed to each other on many social and political issues but this is not politics; it is rather a common predicament of every citizen that entails a coordinated thrust by a force of unison.


Statement at the Conclusion of the 2008 Article IV Consultation Mission to the Federal Democratic Republic of Ethiopia

An International Monetary Fund (IMF) mission team, led by Mr. Robert Corker, visited the Federal Democratic Republic of Ethiopia during May 7-19, 2008, to conduct discussions for the 2008 Article IV consultation. At the conclusion of the visit, the mission issued the following statement:
"Ethiopia has recorded impressive growth during the past few years—the fastest for a non-oil exporting country in Sub-Saharan Africa. Growth has been supported by structural reforms and infrastructure development, as well as favorable agricultural conditions. Rapid growth has contributed to poverty reduction and progress toward the Millennium Development Goals (MDGs). However, it has also been accompanied by rising pressures on prices and international reserves, exacerbated by sharply higher world oil prices. In March, the 12-month increase of overall inflation was 30 percent, with food price rises of 40 percent (year on year) having a particularly strong negative impact on the urban poor. Reserves were below 2 months of imports.
"The consultation discussions focused on policies to reduce inflation while preserving the growth momentum. In this regard, the mission supports the authorities' objectives to return to single-digit inflation and rebuild reserves to three months of imports. It recognizes the measures taken so far to achieve these objectives, including through actions to slow broad money growth to below 20 percent.
"To place inflation on a firmly declining path the mission advised the authorities to support efforts to reduce monetary growth through a tightening of fiscal policy in FY2008/09 (July-June). It also recommended the authorities seek additional external financing on a grant or concessional borrowing basis to buffer the severe effects of high world oil prices on the balance of payments and soften the impact of domestic policy tightening on economic activity. Such financing, for example, could facilitate needed investments in the power sector without crowding out private domestic borrowing.
"Over the medium term, the mission expressed support for the government's overall strategy to strengthen the foundations for growth—with an increasing role for the private sector—while preserving macroeconomic stability. Key aspects include scaling up public sector investment in infrastructure, health and education, while maintaining a sustainable debt position, and boosting overall economic activity through commercialization of agriculture and fostering the non-farm private sector.
"The mission emphasized that it will be critical to strike a judicious balance between demand-dampening and growth-enhancing measures in the next few years to achieve macroeconomic stability and permit a return of international reserves to a comfortable level. This will allow the Ethiopian economy to become more resilient to shocks.
"The mission would like to thank the authorities for frank and open discussions, as well as the warm hospitality extended to the team."

Rising Food Prices Revolution needed to meet coming food demands

By Alex Evans and Eyasu Solomon
April 2008
Food prices are rising fast. In 2006, the FAO food price index rose by an average of 9 per cent compared with the previous year. By 2007, that figure had increased to 23 percent – 37 per cent if December 2007 is compared with December 2006. Over the last three years, according to the World Bank, global food prices have increased by 83 percent. While high price events are not unusual in agricultural markets – even if food prices stabilize at 25 per cent above their 2001 level, this would still only bring them to early 1990s levels – the unusual feature of the current situation
is that the price spike applies to almost all major food and feed commodities, rather than just a few of them. The move to current price levels has also been unusually sudden. As recently as 2005, the Outcome Document from the UN World Summit noted the need to ‘address the impact of weak and volatile commodity prices and support the efforts of commodity-dependent countries to restructure, diversify and strengthen the competitiveness of their commodity sectors’. Less than three years later, corn is at around its highest level in 11 years, rice and Soya are at their highest level in 34 years, and wheat – like crude oil and gold – has recently touched its highest level ever. This briefing paper focuses on what this important change means for international development. It starts by assessing the drivers of rising prices, noting that while in the short term the pressure is on the demand side, a suite of ‘scarcity issues’ – climate change, water scarcity, energy security, pressure on land – will increasingly affect the supply side over the longer term. The paper then discusses the implications of higher prices for developing countries, before setting out a brief survey of implications for development policy, focusing in particular on humanitarian assistance, but also touching on increasing supply, helping low income countries to benefit from rising prices, scarcity issues, trade and the question of fair shares.
At present, the main drivers of increasing prices are on the demand side. Historically, demand growth for food has been about 1. 5 per cent each year; now, however, it has risen to 2 per cent, and Goldman Sachs estimate that it will be as high as 2. 6 percent within a decade. The World Bank estimates that food production will need to grow by another 50 per cent by 2030 (and 85 percent for meat) to fulfill projected demand. A particularly important part of the picture has been rapidly rising income growth, notably in emerging economies such as China and India. Joachim von Braun, Director General of the International Food Policy Research Institute (IFPRI), argues that high income growth accounts for perhaps half of the recent increases in food prices. As middle classes grow more affluent, food consumption patterns change too – often towards diets richer in meat and dairy products that are much more intensive in terms of both grain and water use. The role of bio fuels as a source of demand for grain has also been a significant element of recent food price rises (von Braun estimates 30 per cent of the picture). The US already spends $7 billion a year supporting ethanol. This consumes 20 per cent of America’s corn crop – a figure likely to rise to 32 per cent by 2016. Looking ahead, the EU has a target for 10 per cent of its transport fuel to come from bio fuels by 2020, while the US has proposed a target of 36 billion gallons of renewable fuel by 2022. But there are also supply factors in play. In the shorter term, one issue is that food supply is quite inelastic, i.e. supply responds relatively slowly to increases in demand. IFPRI estimate that aggregate agricultural supply increases by only about 1–2 percent for each 10 per cent increase in price – and by even less when (as now) prices are very volatile. The problem of reduced exports from important food producers (such as India, Argentina and Kazakhstan) is also problematic, especially when matched by importing countries seeking to purchase larger than normal volumes of food in order to build up stockpiles. Another shorter term supply-side issue is that some current price volatility is attributable to speculative investors seeking safety in commodity markets from the weak dollar and from falling equity and bond markets – although opinion is divided over how significant a factor this is. There is also the factor of low inventory stocks, which explains some of the current market volatility. In the short term, food prices look set to ease somewhat, particularly if (as now seems likely) the northern hemisphere enjoys a good wheat crop. But in the longer term, four more fundamental supply-side factors – which might collectively be termed ‘scarcity issues’ – are already starting to make themselves felt, and are likely to become more significant. First, the costs of agricultural inputs – and especially energy – are rising. Today’s global agricultural system is predicated on the availability of cheap, readily available energy, for use in every part of the value chain: both directly (e.g. cultivation, processing, refrigeration, shipping, distribution) and indirectly (E.g. manufacture of fertilizers, pesticides – the cost of urea, a fertilizer, has almost tripled since 2003). But as noted earlier, oil prices are already at their highest ever level; many analysts expect them to stay relatively high over the medium to long term. In addition, since food can now be converted into fuel, there is effectively an arbitrage relationship between the two, implying an ongoing linkage between food and fuel prices. Second, water scarcity is likely to become a more pressing issue. Global demand for water has tripled in the last 50 years; 500 million people live in countries chronically short of water, and this number is likely to rise to 4 billion by 2050. A particular worry is depletion of limited groundwater resources, on which some parts of the world including the US, Egypt, Pakistan, India and China – have been enjoying a ‘free ride’ for the past two or three decades. Third, there is the issue of land availability. Some commodities analysts argue that whereas historical increases in demand have been met through increasing yields, in future an expansion of acreage will also be required. However, this will be expensive, given the infrastructure investment involved; there may also be diminishing returns, since much of the best land is already under cultivation. Above all, there is simply increasing competition for what land there is, including food, feed, fibre (e.g. timber, paper), fuel, forest conservation, carbon sequestration and urbanization, on top of high rates of soil loss to erosion and desertification.
The FAO estimates that there is at most 12 per cent more land available that is not already forested or subject to erosion or desertification, and that 16 percent of arable land is already degraded. The fourth, and perhaps most fundamental, factor is climate change. Overall, the International Panel on Climate Change (IPCC) projects that global food production could rise if local average temperatures increase by between 1 and 3 degrees Celsius, but could decrease above this range. Crucially, however, this is before extreme weather events are taken into account; and the IPCC judges that extreme weather, rather than temperature, is likely to make the biggest difference to food security. Glacial melting will affect agriculture as well: the IPCC estimates, for example, that many Himalayan glaciers could disappear by 2035, with catastrophic results for Chinese and Indian agriculture during the dry season. Its assessment is also that
‘climate change increases the number of people at risk of hunger’, and will lead to an increase of between 40 million and 170 million in the number of undernourished people. Many of these factors, on both the supply and the demand side, also apply to fisheries and aquaculture. Demand for fish and seafood is rising sharply, again largely because of increasing affluence. But while the FAO estimates that an additional 40 million tonnes of aquatic food a year will be needed by 2030, it also notes that catches of wild fish have remained roughly stable since the mid-1980s, at around 90 million tonnes a year, and forecasts that this figure is unlikely to rise substantially.
These underlying trends will place increasing emphasis on aquaculture, which last year accounted for 43 per cent of fish consumption (up from just 9 per cent in 1980). However, future expansion of the sector will depend not only on increasing investment capital, but also on availability of land, fresh water and energy –which as noted above, are all already subject to stresses of their own.All in all, the jury is still out on whether recent food price rises will be sustained or not. Many commentators, including the World Bank, estimate it will take ‘several years’ for supplies to increase to rebuild stocks and allow prices to fall. However, over the longer term, structural factors – a population forecast to rise to 9.2 billion by 2050, rising affluence and the four ‘scarcity trends’ referred to above – suggest the possibility of a structural, rather than merely cyclical, shift. Models from both IFPRI and the US Department of Agriculture show that while food prices will not rise much more over the next decade, they are also unlikely to fall significantly.
Rising food prices will hit poor countries and poor people hardest, and will present an obvious impediment to achieving the Millennium Development Goal of halving hunger by 2015. The FAO has already announced that 36 countries are in crisis in terms of food security, and will need external assistance; of these, 21 are in Africa (although not all of them have been affected equally).Poor people typically spend a high proportion of their income on food purchases: Oxfam put this figure at around 50–80 per cent. Of particular concern are landless poor people in rural areas. Most poor people are rural, and most rural poor people are net food buyers, who are unlikely to be compensated fully by additional employment as agriculture grows, or by higher wages. However, the extent and rapidity of current rises mean that urban populations are also being hit, as World Food Programme head Josette Sheeran recently noted: ‘There is food on shelves but people are priced out of the market. There is vulnerability in urban areas we have not seen before.’
High food prices are already posing extensive challenges to the provision of humanitarian aid. The World Food Programme currently feeds 73 million people in 78 countries (less than a tenth of the world’s undernourished). Its agreed budget for 2008 was $2.9 billion, but rising costs – for logistics as well as for food itself – mean that, according to the WFP, this level will not even cover current deliveries and at least $500 million more will now be needed. Josette Sheeran raised the possibility in a recent interview that the agency would have to look at ‘cutting the food rations or even the number of people reached’ if the additional funding were not forthcoming. Improvements in aid quality are needed too: humanitarian aid still needs to shift to a proactive insurance model from its current reactive configuration. Although the Central Emergency Response Fund – in which funds are allocated before emergencies – is likely to meet its 2008 target of $500 million, this remains a small proportion of the overall requirement. Humanitarian requirements in 2007 were $4 billion, for example, and the older, more reactive Consolidated Appeals Process remains the main window for funding.
Numerous countries have already reacted to rising food prices with concern and a broad range of policy interventions designed to address the situation. The approach taken by most countries so far (Azerbaijan, Bangladesh, Bosnia, China, Egypt, Ethiopia, the EU, Ghana, India, Indonesia, Mexico, Morocco, Nigeria, Peru, the Philippines, Russia, Taiwan and Turkey) has been to reduce or eliminate import tariffs. However, at least some of these reductions in import tariffs have been offset by the imposition of additional export tariffs or quotas by other countries – some of them major producers – in order to reduce domestic prices (Argentina – where the move has led to major unrest among farmers – China, India, Kazakhstan, Ukraine and Vietnam). Among other approaches currently being tested are making purchases to establish or replenish stockpiles and strategic reserves – which in turn increases pressure on prices (Iraq, Malaysia, Turkey and the UAE); increasing subsidy levels (Egypt, India and Oman); capping prices (China, Russia and Thailand); and examining the possibility of introducing rationing (Malaysia and Pakistan).Various countries have witnessed protests, riots or other forms of civil unrest that are at least partly attributable to rising food prices. At the time of writing, some of the most serious disturbances so far have been in Egypt, Haiti and Lebanon; unrest has also been experienced in Burkina Faso, Cameroon, China, Côte d’Ivoire, Guinea, Mauritania, Mexico, Morocco, Mozambique, Niger, the Philippines, Senegal, Uzbekistan, Vietnam and Yemen. As these lists show, rising food prices are of concern in every part of the world, and so far there is little consensus among governments on what to do about the issue. Currently most donors appear to be in information- gathering mode themselves, although World Bank President Bob Zoellick has called for a ‘new deal’ on food, including a recommendation that countries investigate cash transfers targeted at poor consumers, rather than the less efficient option of regulating food prices across the entire economy. There is significant scope for donors to help developing countries to share information on which approaches have worked where.
The World Bank has argued that more expensive food imports will disrupt the trade balances of relatively few countries, because the majority will see largely offsetting gains in other commodity exports; from the Bank’s perspective, the countries most adversely affected include Jordan, Egypt, the Gambia, Lesotho, Djibouti and Haiti. However, the impact of rising food prices needs to be looked at in tandem with concurrently rising energy prices, which are also imposing strain on many importing countries. An International Energy Agency study in December 2007 found that the rising cost of oil had already wiped out the benefits of increased aid and debt relief to 13 non-oil-producing African countries including South Africa, Ghana, Tanzania, Ethiopia and Senegal. According to the IEA, the increased cost of oil bought by these countries since 2004 was 3 per cent of their combined GDP – more than the total sum of debt relief and aid they had received over the past three years. If the combined effect of higher food and energy prices is to create balance-of-payments problems for countries, the question of compensatory financing may emerge as a significant issue. So far, the International Monetary Fund reports that demand for financing from funding windows such as the Exogenous Shocks Facility has been low, although critics retort that this is at least in part because of the significant conditionality attached to such lending. It is also important to note that funding windows designed to provide liquidity on shocks such as sudden changes in terms of trade are built on the assumption that such shocks will be short-lasting. If – as suggested earlier – food prices have risen as a result of a longer- term structural shift, then there are open questions about how quickly countries taking out loans will be able to pay them back, potentially heightening pressure to increase the concessional element of such loans.
What does all this mean for policy-makers – and especially? For donors?
Start with what rising food prices mean for the humanitarian system, where short-term pressures are likely to be most acute. First, consider the issue of aid volume in the context of humanitarian assistance. As noted earlier, the World Food Programme has called urgently for an additional $500 million. Given the scale of recent food price increases, it does appear likely that additional funds will be needed just to maintain current levels of food assistance. It would be of particular concern if the US were to follow up on suggestions that it might reduce the amount of food aid it provides to the WFP as a result of rising prices and costs, given that the US is by some distance the largest donor to the programme.(Washington is reported to have told the WFP that it is facing a 40% increase in food commodity prices compared with last year, and hence will ‘radically cut’ the amount it gives away – although more recently it has announced a $200 million increase in food aid, suggesting that this risk may have abated somewhat. But at the same time, more specificity is needed on how the WFP’s headline figure breaks down. It would be useful, for example, to know how the $500 million would be distributed between different types of aid (such as food aid, vouchers or cash transfers), and between which recipient countries. It is also essential that the WFP’s call for additional funds be set in the context of the needs of the UN humanitarian system as a whole, given that the programme accounts for only around half of total global food aid.52 While there is no doubting the WFP’s effectiveness in setting out its case, donors also need to hear from other multilateral agencies (notably UNICEF, the UN Development Programme, FAO and the World Health Organization), and ensure that OCHA (the UN’s Office for the Coordination of Humanitarian Affairs) is in the lead on coordinating funding calls as well as other emergency action from across the sector. This raises the question of wider humanitarian
system coherence. While progress was made in 2005 on Strengthening OCHA’s coordination role at global level, on the role of Humanitarian Coordinators in country and in the use of pooled funding arrangements, much remains to be done. The WFP has much to contribute here. It is fair to say that at the time of the UN High Level Panel on System-Wide Coherence in 2006, the WFP was not among the principal enthusiasts for a more coherent approach. But as the humanitarian system moves into a demanding context with the potential for faster-paced operations, better interagency coherence becomes more important than ever. On a related note, it would be interesting to explore the possibility of a ‘one UN’ initiative on food security, which could bring a harmonized approach to bear both at the global level and in specific countries (UNDP’s office in Yemen has already been approached by the government with a view to piloting such an approach). Such an initiative might bring together the WFP, FAO, IFAD, UNICEF,UNDP and WHO, and focus on developing and mobilizing resources for a package of policies and programmes, potentially for presentation at the Secretary-General’s summit meeting on the Millennium Development Goals in New York in September 2008. Another important current issue is changing ways of giving humanitarian assistance. As noted earlier, many donors (including the WFP) are increasingly focusing attention on social protection programmes, given that poor countries tend to lack social welfare systems – a deficit that places many poor people with precarious livelihoods at acute risk from economic shocks and stresses. For such vulnerable people, access to food is as important as the availability of food, and social protection programmes can play an important role in closing the gap. But it is important to stress that the current enthusiasm for social protection approaches is relatively novel, and that the evidence base on the effects and challenges of such projects is not yet as extensive as it could be. In particular, humanitarian donors need to be acutely aware of the political impact of a large-scale shift towards the provision of safety nets. If donors provide cash or food directly – as opposed to through national governments – then there is a potential risk of diluting states’ own accountability to their citizens. Better answers are also needed to questions about the potential inflationary impact of some social protection measures, the best combination of cash and in-kind transfers, what kind of targeting and conditionality works best, and so on. It is too soon to see social protection systems as any kind of panacea to the issue of high food prices. Donors should also assess carefully what the value added would be of the WFP’s moving into wider social protection, given the humanitarian sector’s relatively limited experience of social safety nets, and the extent of the organizational change and shift away from traditional core business that this would imply for the WFP. In the background lies the question of what it will mean for humanitarian assistance if (as considered earlier in this paper) the recent shift to higher food prices is structural rather than just a blip – if, in other words, this is the ‘new normality’. At present, around 850 million people are classified as ‘food insecure’. At times of peak demand, humanitarian agencies have been able to feed about 100 million people at the very most. If a longer-term effect of changes in world food markets were to increase the number of people in need of humanitarian assistance significantly beyond that level, then it is not clear that the humanitarian system would have the capacity and knowledge to respond, even if sufficient financial resources were available. It is therefore essential that in addition to coping with the current short-term turbulence in food markets, donors make a sustained effort to ask ‘what if?’ questions and plan for further contingencies.
As discussed above, the implications of higher food prices extend far beyond humanitarian assistance. The Suddenness with which the issue has emerged has raised not only the political stakes, but also the risk of knee-jerk policy responses. Meanwhile, the complexity of the drivers of rising food prices makes a comprehensive approach essential – while also increasing the likelihood of unintended consequences from policy responses. Policy-makers therefore face an awkward and hazardous balancing act between the urgency of responding, on the one hand, and taking enough time to understand the consequences of what they are doing, on the other.
The remainder of this paper identifies some of the larger policy questions that arise for aid donors. In most cases it does not attempt to answer them; at this stage, the aim is to build the evidence base and to act as a catalyst for more intensive and thorough conversations, involving a wider range of actors, with the objective of building shared awareness around the issue. With that caveat stated, consider the following issues: Increasing supply. Perhaps the hardest question is how the world is going to increase food supply to meet the huge rise in anticipated demand noted at the beginning of this paper. Much work needs to be done, quickly, to figure out where this increase is going to come from (both geographically, and in terms of new agricultural techniques and technologies), and what needs to be done to make it happen. An urgent first step towards increasing the available food supply should be to ensure that production of biofuels does not undermine food security – an issue now acknowledged by President Bush, who has commented that ‘If you look at what is happening in corn, you’re beginning to see the food issue and the energy issue collide.’ While an outright ban would probably be unwieldy and undesirable, discussion of basic standards for bio fuels production – with food security at their heart – should be an early priority for policy-makers. Helping low income countries to benefit. While supply increases in the shorter term are likely to come from existing ‘breadbasket’ countries such as the US, Canada, Russia, Ukraine, Brazil and Argentina, there is longer-term potential for lower-income countries to play a significant part as well – especially in Africa, largely bypassed by the first Green Revolution, where productivity remains far lower than in other regions .But although poor countries should in theory be able to benefit from rising prices for agricultural commodities, the reality is that they are held back by poor infrastructure, the need for better access to technology and finance, restrictive supply chain standards and other barriers as well. Aid donors therefore need to be clear about how crucial their role will be in this. Until recently, agriculture was seen as a rather unfashionable relic of the past in many donor agencies (and perhaps especially in their country offices). That needs to change quickly: donors need to invest heavily in programme aid – and in many cases, rebuilding their own capacity – in rural development. Managing scarcity. Donors will also need to be capable of helping countries to devise integrated strategies for managing scarcity in land, water, energy, food and the effects of climate change. The first step towards this is mainstreaming throughout donor agencies a much better sense of how these scarcity trends link to each other – as they all do, frequently in subtle and complex ways. On top of that, donors need to integrate scarcity issues more thoroughly into their governance and economic analyses (as underlined by the role of land disputes as a catalyst for the recent post-election violence in Kenya). Within the specific context of food, a good starting point would be to build a much more comprehensive picture of the overall resource footprint of different foods (and in the process, move the debate on from its current unsophisticated focus on the minutiae of specific variables, such as ‘food miles’). Trade. Donors also need a clearer picture of the trade dimensions of the current food prices issue. As noted earlier, the current picture of food-focused trade measures is growing more complex by the day, as importers lower import tariffs even as exporters raise export tariffs. Meanwhile, some countries – including China – are apparently exploring the potential for bilateral food supply arrangements, of the kind already becoming more common in energy supply. Other countries are displaying enthusiasm for import substitution policies – most notably the Philippines, which has announced its intention to move from being one of the world’s largest importers of rice to self-sufficiency within just three years. Donors and development advocates need to find their way towards a renewed strategic stance on agricultural trade. Even before food prices began their sharp increase, there was lively debate in the donor community about the extent to which agricultural trade liberalization would in practice benefit low-income countries. That debate is now further complicated by the fact that even if liberalization is desirable in principle, careful attention will need to be paid to the need to sequence reforms, in order to avoid (for example) the risk that rapid elimination of Common Agricultural Policy export subsidies could increase food prices in developing countries. Finally, there is the elephant in the room: the long-term question of fair shares, pithily illustrated in a recent cartoon in the US in which a portly man in a suit takes a maize cob out of an African child’s food bowl, with the speech bubble, ‘Excuse me. I’m going to need this to run my car.’ Inequality between countries is falling for the first time in a generation. From 2003 to 2007, per capita income grew faster in every region of the South than in developed countries: hardly news in East and South Asia, but a major shift in Latin America and Africa. In 1980 developed-country GDP was 23 times higher than in developing countries; in 2007 it was 18 times higher. Yet even as inequality between countries falls, it is rocketing within them – particularly within developing countries, and above all in emerging economies such as China, where the difference between the top 20 per cent and the bottom 20 per cent has grown by 40 per cent over the last three years.
In his book Development as Freedom, Amartya Sen observes that ‘the focus has to be on the economic power and substantive freedom of individuals and families to buy enough food, and not just on the quantum of food in the country in question.’ Later, he observes that ‘[some] who buy food may be ruined because the real purchasing power of their money incomes may have shrunk sharply. Such a famine may occur without any decline in food output, resulting as it does from a rise in competing demand rather than a fall in total supply.’ Now, Sen’s questions may be starting to apply at the global level. Even while the line between developed and developing countries grows more blurred with each passing year, the gulf between the haves and the have nots has never looked wider. In a context of increasing tightness of food supply – which is likely to grow further as population, affluence and scarcity trends all continue to rise – we may well reach a situation in which relative inequality can have absolute implications for the world’s poor, and in which a burgeoning global middle class inadvertently takes food beyond the purchasing power of the world’s poorest people. Indeed, we may already be there.
This is a time of massive change for global food policy, in developed as well as developing countries. In addition to the concerns discussed in this paper about what higher food prices mean for poor people, there are questions about environmental standards; obesity and health; animal welfare; competitiveness, between countries and companies; the security of globalized ‘just-in-time’ supply chains; and numerous other issues. At the heart of these debates is the deceptively simple question: what should global food policy be trying to achieve? We need to be clear at the outset about the nature of the choices that we face. There are real tradeoffs between different potential objectives in food policy – such as competitiveness for consumers, security of supply, environmental conservation, local sourcing. That raises the question: who is the ‘we’ that decides the shape of 21st-century food policy? Who has the power to make choices?
Evans & Eyasu can be reached at