Food security

Risks compounded

Due to the deregulation of global agricultural trade, many developing countries have become dependent on food imports. The consequences are devastating, especially in times of extreme price volatility. Liberalised financial speculation on futures markets has aggravated problems. International policy must change.

By Benjamin Luig and Armin Paasch

A collaborative report by the World Bank, IMF, WTO and several UN agencies in May 2011 lamented a “collapse of confidence in international markets”. In fact, the global market was neither a reliable basis for food security from 2007 to 2009 nor in 2011. According to FAO estimates, the number of chronically malnourished people leapt from about 850 million to more than one billion in the course of just a few months in 2008.

Multilateral institutions misguidedly recommend more international discipline “on all forms of import and export restrictions”, hoping to avoid future catastrophes of this sort. Their basic assumption is that the global supply of agricultural commodities fluctuates much less than supply does in indi­­vi­d­ual countries or continents. Accordingly, they consider international trade a cushion against regional price volatility.

Unfortunately, what seems logical in theory can prove wrong in practice. Countless studies show that food imports often increased after markets were deregulated. Accordingly, rice farmers in Ghana, Indonesia, Honduras and Haiti were driven from their local markets. Maize farmers in Mexico suffered the same fate, and so did poultry farmers in Ghana and Cameroon. Some livelihoods were completely wiped out. Smallholder farmers are at particular risk of hunger. Their families make up about one half of the world’s needy people. Integration into the global market does not offer them any prospects.

Price volatility raises concerns

When world market prices for agricultural products were still low, proponents of liberalisation were eager to point out price advantages for urban consumers in developing countries. Today even this is no longer the case, as a recent report by the High-Level Panel of Experts of the UN Committee on World Food Security (CFS 2011, p. 9) suggests. It states that, for some developing countries, liberalisation meant significantly rising food imports, making international food price volatility even more of a concern than it had been in the 1970s.

The more a country neglected local production of food staples and is now slanted towards imports, the more it is affected by international market volatility and susceptible to hunger crises. There are several reasons for higher volatility. Particularly relevant are
– the heavy concentration of the global production of staple foods on exporting countries such as the USA, Australia and Russia,
– the links of food production with energy markets (especially through the use of chemical fertilisers),
– the subsidised boom in agro-fuels, which reduces the supply of food, and
– speculation on deregulated futures markets (see box below).

Deregulated financial markets are said to lead to efficient prices in real markets. However, this is not true, as the global financial crisis has made evident. Nor has liberalisation of commodity futures markets led to greater price stability. Instead, volatility has grown. The impacts of deregulated futures markets and the global market for real food products are now exacerbating one another, with severe implications for the food security of poor people.

The EU in confusion

The European Union plays a key role in global events, but does not pursue a coherent policy. The Markets in Financial Instruments Directive (MiFID) came into force in 2007, shortly before the onset of the global financial crisis. It was intended to create a common internal market in the financial sector. It did not allow for any special treatment of the commodity speculation relevant for global food security.

A reform of the MiFID is currently under review. European Internal Market Commissioner, Michel Barnier, is suggesting limits on dealers’ ability to deal in commodities and a requirement to use real-time reporting to ensure transparency. It is doubtful whether the numerous loopholes and exceptions will be abolished.

Moreover, it is problematic that the EU tackles the MiFID reform and reform of the Common Agricultural Policy (CAP) separately. The purpose of the CAP reform is further liberalisation of agricultural markets. For example, 2015 is to see the abolition of the milk quota regime, which has so far allocated specific production quantities to EU farmers. It is not apparent that the EU’s policies on agricultural and financial markets are consistent in terms of ensuring a livelihood for European farmers and exercising Europe’s international responsibility. Two things are essential:
– there must be a clear distinction between real commodity trade and financial speculation, and
– there must be caps on financial speculation in the food and energy sector.

Change course

Any attempts to restore illusory confidence in the global market are pointless. What is necessary is a change of policy. Agriculture which is ecologically sustainable and which protects resources must be encouraged both in Europe and also in developing countries. A food sovereignty strategy of this nature (each country ensures provisions for its people primarily through what it produces itself) would ensure income in the agricultural regions of Asia, Africa and Latin America and reduce susceptibility to global price shocks.

This is not a matter of complete insulation and self-sufficiency. Many countries will need imports in the long run to bridge supply gaps. However, the imports should only supplement domestic production, but not stifle it. Sovereign states need leeway for their trade policy. Governments must prohibit excessive increases in imports during periods of low prices, in order to safeguard local production.

The rules of the World Trade Organisation (WTO) do not grant enough leeway. They must be relaxed and certainly not tightened. According to the Committee on World Food Security (2011, p. 47) another lesson from the 2008 hunger crisis is that the impact of world market prices on national markets depended to a large extent on the effectiveness of policy measures adopted to insulate the domestic markets from the international markets. Apart form export restrictions, such policy measures include temporary tariff reductions, recourse to state granaries as well as subsidising food and/or farms. The WTO considers all of them “market-distorting practices”.

It is true that export restrictions can inflate world market prices even further in times of crisis. Nevertheless, they are often necessary. In India from 2003 to 2007, restrictions of this kind contributed to the price of rice increasing by only five percent, while the price on the world market price rose by 25 % (CFS 2011, p. 5). Obviously, better international coordination is needed and export restrictions must be banned when there is a threat of humanitarian emergencies. However, complete prohibition of export restrictions would be neither justifiable nor politically viable.

There must be an end to the dogmatic “one size fits all” policy. Different countries must be allowed to pursue their own trade and agricultural policies, and international rules must not prevent them from doing so.

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