For decades, food prices had been declining in real terms, allowing millions of people around the globe to escape from the trap of poverty. This long-term trend took place despite rapid income and population growth, as agricultural productivity rose steadily.
However, productivity gains began to stagnate in the face of continuing growth in demand, bringing about a reversal of this long-term trend.
Rising food prices contributed to an acceleration of inflation across the Asia and Pacific region during 2007, and in 2008 the further rise in food prices has reached alarming proportions. The rise in food prices is worrisome precisely because food price inflation is the most regressive of all taxes—it hurts the poor the most. This paper addresses the dimensions of the so-called “food crisis” in developing Asia, including the relationship of rising international prices of staple foods to domestic food prices; the impact of dramatically higher prices on growth, inflation, fiscal balances, as well as poverty and inequality; and the policy choices and responses to elicit a supply response and, in the longer run, realize sustainable productivity gains in agriculture that will mitigate the current crisis. First, recent trends in global food prices and their implications for food prices in developing Asia are examined. Section II explains the reasons behind the recent surge in food prices, while Section III provides a scenario analysis of macroeconomic impacts of food prices on inflation and growth in 2008 and 2009, and explores the fiscal consequences of measures aimed at sheltering consumers from the full brunt of the price increases. Section IV presents an assessment of how the rise in food inflation will affect the incidence and severity of poverty and inequality prior to any supply response (the pure price effect). Section V analyzes the supply response as prices rise and farmers respond, using a computable general equilibrium model. Section VI identifies medium-term and long-term prospects for investment and productivity growth in agriculture that are essential if developing Asia is to manage the problem, so that the hard won reductions in poverty incidence in the region are not reversed. Section VII reviews policy responses across the region and concludes with the key messages of the paper.

By: Asian Development Bank (ADB)

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