If Jim Yong Kim was hoping for a honeymoon, the new World Bank president can forget it: To his headaches over Europe’s debt crisis, he can add surging food prices.
Kim’s first month on the job was largely about gauging how Europe is affecting the plight of the poor. There are troubling signs that China and India are slowing and that might leave Asia, which has the largest share of extreme poverty, devoid of growth engines.
That’s almost manageable compared with what’s confronting Kim in month No. 2 — the worst US drought in 56 years and dry weather in agricultural regions in India, Kazakhstan, Russia and Ukraine. Coupled with exploding demand for food, the phenomenon is causing violent commodity-price volatility at the worst possible time for Asia.
Rising food prices limit how much central bankers can cut interest rates to safeguard growth. More troubling would be the potential setback to poverty-reduction programs for decades to come.
The last food crisis began amid the 2008-09 crash of the US economy. In the second half of 2010 alone, according to the World Bank, some 44 million people were pushed back below the extreme poverty line, defined as those living on $1.25 a day or less. Asia is home to the bulk of those who spend between 60 percent and 80 percent of their paltry incomes on food.
“When food prices rise sharply, families cope by pulling their kids out of school and eating cheaper, less nutritious food, which can have catastrophic lifelong effects on the social, physical and mental well-being of millions of young people,” Kim says. “We cannot allow short-term food-price spikes to have damaging long-term consequences for the world’s most poor and vulnerable.”
Poverty isn’t an important metric for currency traders placing bets. It doesn’t figure readily into bond yields or stock valuations. Yet Asia is the latest and perhaps largest frontier for capitalism and opportunity. Multinational companies are counting on its swelling populations, growing cities and emerging middle-class consumer sectors for profits in the future.
Asians won’t consume if growth doesn’t reach them. They won’t buy cars, electronics, fancy handbags, imported beer or designer clothes if putting food on the table is at risk. More important, if too many Asians are preoccupied by the struggle to get enough to eat, that increases the threat of instability, never an ideal setting for a flourishing economy. Food inflation, remember, was among the crucial forces behind the Arab Spring protests.
The good news is that corn prices may already be easing, suggesting we might avoid a price spike as severe as that of 2010, when prices jumped 73 percent in just six months. Corn, of course, goes into everything from sweeteners to biofuel to feed for cows, pigs and chickens. Asia imports loads of it. The bad news, of course, is that any price increase means consumers will have to divert spending to food while the cost of other goods rises as well. This raises the specter of stagflation.
India is the most obvious candidate for that dreaded combination of weak growth and rising prices if its central bank tries to offset any slowdown by printing more money. Markets are already wary of inflation, coming in above central bank forecasts of 6.5 percent this year. India’s worst power crisis, one that left some 640 million people in darkness this week, bodes poorly for the inflation outlook. It’s emblematic of the nation’s infrastructure neglect.
China has its own challenges as the era of cheap food ends. The recent 60 percent jump in corn to a record since June 15 is one problem. This year’s 35 percent surge in soybeans is another; China is by far the Asia Pacific’s biggest importer of soy. Wheat prices are zooming up, too. China is already slowing rapidly as Europe’s mess depresses demand for its exports.
Asia’s policy makers also face a new dilemma. In recent years, the challenge was boosting growth. Even the food-price shock of the period was viewed as a cyclical phenomenon that would pass once farmers responded with increased supply.
What’s different this time is that demographic trends point to increasing demand for food as weather patterns undermine supply. As world temperatures rise, agricultural yields are becoming less predictable. And as the US droughts remind us, the world’s food chain has become more interconnected at a time when weather has rarely been so erratic. On top of it all, water is becoming scarcer. It’s the new oil.
The quickest fix is increased investment in infrastructure and smart government policies. The first remedy might be easy if not for the traumatized state of the world economy. Strapped nations want the private sector to step up, but market turmoil is reducing appetite for risk-taking.
The second would be more plausible if farsighted leadership were present. How many US politicians are brave enough to end all the policies that encourage massive supplies of corn to be squandered making ethanol? And are Asian leaders willing in this environment to provide a broader safety net?
In terms of policy, it’s vital that Asia get the next six to 12 months right and take measures to protect the poor. There’s also more to be done by the World Bank, which Kim pledges will be a “more flexible partner” than it has been in Asia’s recent past. If not, food costs might soon be wrecking too many lives in Asia.
William Pesek is a Bloomberg View columnist.