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Along with an unsettled political situation, increasing acts of
violence perpetrated by extremist groups operating from the
country’s tribal areas and the quick unraveling of the model of
economic growth pursued by the administration of President Pervez
Musharraf, Pakistan has received another sharp jolt to its economy.
This was delivered by an unprecedented increase in commodity prices.
While the increase in the price of oil has occurred over a
relatively long period of time, that of some agricultural
commodities was sudden and unexpected. In 2007, the price of wheat
rose 77 and rice 16 per cent.
According to a special report by the magazine, The Economist, these
were the sharpest increase in agricultural prices in history. In
2008, the rate of increase has accelerated. Since the start of the
year, “rice prices have soared 141 per cent; the price of wheat by
25 per cent in one day.”
There is a consensus among experts that the rise in the price of
agricultural commodities – not just food grains but of other
products as well – was caused mostly by changes in demand, not by
decreases in supply. Two factors have been important. Continuing
growth of the Chinese economy and an acceleration in the rate of
growth of the Indian economy have brought about significant changes
in the pattern of demand in these two countries.
As people become more prosperous they start consuming more meat and
other livestock products. It takes a great deal of food grain to
produce meat and milk and the demand for fodder increases. The other
influence on the rise in prices is the generous subsidies provided
by Europe and the United States to the manufactures of bio-fuel.
While the increase in the price of oil may have turned the
production of bio-fuels economical, it is by no means certain that
running automobiles on these fuels benefits the environment. Some
scientists believe that it takes more energy to produce bio-fuels
than the energy generated by them.
Because of these changes, “food prices have undergone a paradigm
shift and will not drop back to pre-crisis levels for at least 10
years, putting long-term pressure on governments facing the food
crises.” This conclusion was reached by the Organisation for
Economic Cooperation and Development (OECD), and the United Nation’s
Food and Agriculture Organizasion (FAO), in their joint report,
Agricultural Outlook, 2008 – 2017.
Compared with average prices for 2006-07, the report forecast, that
in 2017 the price of wheat, adjusted for global inflation, will be
two per cent higher and rice one per cent higher. What is especially
worrying for Pakistan is the forecast that according to which prices
of oil seed – a major import for the country – will be up by 33 per
cent. Experts also agree that this time around, the increase in
prices will not be reversed. (See the table.)
“As opposed to other instance of sharp increases in agricultural
commodity prices that have rapidly, dissipated, we could be facing
higher price for some time. Without exception, average real prices
are likely to remain above those observed during 1985-2007,” says
the FAO/OECD report.
The recent surge in food prices has ended a period of 30 years in
which food (and also other agricultural commodities) were cheap,
farming was subsidised in rich countries and international food
markets were wildly out of shape. There is, in other words, a
paradigm shift; an enduring change in sectoral terms of trade in
favour of agriculture. This poses two important questions: how to
benefit the farming community in order to achieve the potential
agriculture has in a country such as Pakistan? And how to protect
the poor who spend a significant amount of their small disposal
incomes on food?
How soon would the farmers in the developing world respond to the
change in their terms of trade? This won’t happen quickly: farmers
always take a while to respond. But in the relatively slow reaction
by the farming community, the governments have also played a part.
They have done that mostly for political reasons. Of 58 countries
whose agriculture price policies are followed by the World Bank, 48
have imposed price controls, or provided consumer subsidies, or
adopted export restrictions, or made adjustments in import and
export tariffs. The state in the developing world could play a role
in benefiting from the dramatic adjustments in food prices of recent
years.
It is not surprising that the agriculture systems in rich countries
respond much more rapidly to price changes than those in the
developing world. Governments in developed economies have been much
more willing to help the farmers – in many they have political power
that out weighs the proportion of their combined income in the
national economy by a wide margin – while those in poor countries
are inclined to protect the urban poor.
Given these policy biases, extra food supplies needed to balance the
sharp increase in demand may come from the farmers in America,
Europe and other big agricultural producers. This is already
happening. America’s winter wheat plantings in 2007 were up by four
per cent and the 2008 spring area sown is likely to be even more.
The FAO forecasts that the wheat harvest in the European Union will
rise by 13 per cent in 2008. The new supply-demand equilibrium may
end up resembling the old one, with world food availability
depending on a small number of suppliers in developed countries and
continuing distortions in food trade such as export subsidies and
dumping.
Ideally the most significant part of the additional supply needed
should come from the world’s 450 million smallholders. All of these
are in the developing world; most of them in South Asia. Such a
supply responses is desirable for a number of reasons.
First, it will help to alleviate poverty. Some 75 per cent of those
who subsist on incomes of less $1 a day depend on smallholder
farming. Increasing the productivity of these farms would increase
the income of the poor and help them to move out of poverty.
Second, it would be economically efficient in terms of the return on
investment. As The Economist put it in its special report cited
above, “it would be easier to boost grain yields in Africa from two
tons per hectare to four than it would be to raise yields in Europe
from eight tons to ten. The opportunities are greater and the law of
diminishing returns has not set in.”
Third, a strategy focused on obtaining a supply response from
smallholder farming would also be environmentally friendly. The
smallholders manage a large proportion of world’s water and
vegetation cover. Looking after both will have enormously beneficial
consequences form the perspective of environment.
But will such a response materialise? “In a perfect world the
response to higher prices is higher output. In the real world,
however, this isn’t always the case,” says a recent report issued by
the International Food Policy Research Institute, (IFPRI). Farming
in the developing world is full of market failures and does not
always respond to prices signals. Governments often intervene with
unhappy results.
The consequence of many public policies, including those adopted by
Pakistan in the past, was that agricultural productivity and output
languished while the poor continued to pay high prices for food. In
the paradigm shift, policymakers in Pakistan have an opportunity to
increase agricultural output, alleviate rural poverty while
protecting the urban poor. But that will need a complete overhaul in
the government’s approach to the development of agriculture.
Ref link:
http://www.dawn.com/2008/06/09/ebr4.htm |
