Rising Food Prices - Threat to Global Economic Development

October 13, 2010Global Challengesby EconomyWatch

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According to World Economic Forum President Robert Zoellick, hunger and nutrition are “the forgotten Millennium Development Goals”. 

The most recent threat to the global economy is the rising food prices. The ever-expanding demand-supply gap is the contributing factor for this food price rise. In the recent times the shortage in the food supply has led to violence in many parts of the world. Pakistan has made use of troops to safeguard trucks that are carrying flour and wheat. Violent protests are also witnessed in countries like Mexico, Morocco, and Uzbekistan. This has in turn affected the normal functioning of the economy. The worst hit is the trade segment, which is the major source of revenue for these countries.

 
Causes And Effects Of Food Price Hike

Population did play an important role behind the rising food prices in the recent past. But the scenario has changed over the past thirty years. More than population the rise in the per capita income has fuelled demand, thereby creating the demand supply gap. Particularly, India and China have raised the demand for grains, dairy products and meat, the world over. Huge subsidies that are injected for the production of biofuels have happened at the cost of land taken away from food production. This again has widened the demand supply gap. The ethanol production in the United States is likely to replace the production of corn by 30% leading to a hike in the world corn prices.

Measures have been taken by different countries to combat the rising food prices. Price controls and export quotas are imposed on basic food production. Other tools such as subsidies and regulations are undertaken to prevent the rising food prices. Such restrictions have, on the contrary, increased, rather than dampen, the food price hike. Farmers have moved from producing such crops to more profitable business lines. Although subsidies increase production but distorts the allocation of resources.

The less developed countries are the worst hit on the face of rising food prices since a significant portion of their income is siphoned off for food consumption. For rich countries like the United States food consumes 10% of the income, whereas for countries like Afghanistan, about 60% of the income is absorbed for the consumption of food.

 
World Food Program On The Skyrocketing Prices Of Food

According to the World Food Program, another factor that has contributed to the rise in the food prices is the rise in the oil prices. Climate is also held as a factor.

Another view is that the urban poor will be affected the most due to this rising food prices. In most of the sub Saharan country, the common trend is that the farmers leave their land and head to other lines of production in the urban areas.

According to the World Food Program, the countries that are most affected are Eritrea, Gambia, Togo, Cameroon, Niger, Senegal, Zimbabwe, Haiti, Myanmar, Yemen, Cuba etc.

 
FAO On Food Scarcity

According to the UN Food and Agriculture Association (FAO) about 36 countries would need external food aid for their rising food prices. In March, food aid package worth $243 million was dispersed to Africa, Asian and Middle East countries by the European Union. There are some developing countries, which have preferred the import of food rather than producing themselves. The economic growth of both India and China has raised the demand for meat and dairy products that requiring land, eight times more than that required producing vegetables or other staple food.

It is estimated that there will be a further rise in the demand for food by 60% in 2030, the world over.

 
Implications Of The Rise In Food Prices On The Banking Sector

With the rise in he food prices, the banks in the counties like Britain, Mexico, South Africa and Chile have increased their lending rates. Several monetary policies are undertaken to curb inflation whose major contributing factor is the rise in the food prices.

Hence we may conclude that the main reason behind the rise in the food prices is the rise in the per capita income and rising demand of countries like India and China. There has been an increasing reallocation of land for the production of ethanol, which has acted as major bottleneck in the production of basic food. The worst hit are the developing countries, which spend a significant proportion of the income on the consumption of food. This rise in the food price has contributed to the general rise in prices or inflation. Several monetary policies are undertaken to deal with the same.

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