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.