High Costs: Rising Food Prices and the Impacts on the Poor

By Paola Amador and Kelly Lange
July 21, 2008

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Governments with already limited options may be taking the wrong approach to rising food prices, two experts claimed at an Inter-American Dialogue event last Monday.  The Dialogue hosted a discussion co-sponsored by the Center for Global Development on July 21 about the factors causing the increase in food prices, current responses in Latin America and recommendations for future policy actions. Joachim von Braun, director general of the International Food Policy Research Institute, led off the discussion. Nora Lustig, Shapiro Visiting Professor of International Affairs at the George Washington University, offered comments.

Von Braun opened the discussion highlighting the political risks that the increase in food prices poses to the region, specifically mentioning the recent protests in Haiti as an example. He noted various factors causing the increase in food prices, including the increase in energy prices and rising consumption to a lesser extent.

Additional Resources Listen to an mp3 audio recording of this event Nora Lustig's powerpoint presentation Joachim Von Braun powerpoint presentation

Von Braun noted various factors causing the increase in food prices, including rising energy prices, the fusion of food and fuel markets, and, to a lesser extent, rising consumption. He mentioned that market speculation did not initially cause the rise in food prices; rather, speculation exacerbated the situation once prices were already increasing. In commenting on the role of speculation he stated, “The more tight markets became the more relevant speculative investment in the commodity exchanges market has become.” Lustig hypothesized the possible link between the Federal Reserve Bank’s decision to lower interest rates to address the US credit crisis – sparking a shift in investment portfolios towards commodities – and creating the spikes in commodity prices in the past 6 to 8 months.

Policy responses in Latin America have so far leaned toward renewed use of old distortionary measures, such as export restrictions, price controls and generalized subsidies, in an attempt to decouple international prices from domestic prices. Both speakers felt that these are not the best solutions in the short or long term.  Von Braun and Lustig suggested that adopting or expanding social protection programs, such as conditional cash transfers, would be better alternatives to current measures. Lustig noted, however, that it may not always be feasible to immediately adopt or expand social protection programs.

Central America and the Caribbean stand to be hit the hardest by the negative terms of trade shock combined with the US slowdown. Von Braun and Lustig noted that these countries would be very constrained in their ability to respond to the crisis. Lustig mentioned that multilateral organizations have an opportunity to help these countries smooth the shocks and strengthen social protections.