Terra Firma

“We consider that the recent dramatic escalation in food prices worldwide has evolved into an unprecedented challenge of global proportions that has become a crisis for the world’s most vulnerable, including the urban poor.”

So reads a press statement from the United Nations on April 29, 2008. Countries devastated by political turmoil, natural disasters and war have faced food inflation and shortages from time immemorial. But agflation is now striking dozens of countries at once for the first time since the early 1970s – and the political risk implications are growing.

The problem has been building slowly but steadily: global food prices have risen some 83 per cent over the past three years. In particular, soaring prices for wheat, rice, corn and soybeans have already generated acute food shortages and political turmoil in several countries. Beyond the obvious stakes for the hundreds of thousands who may starve and the 100 million more who risk sliding deeper into poverty across the developing world, the World Bank warns that food shortages place as many as 33 countries at risk of civil unrest.

Two agricultural-market demand shifts in particular are driving the problem. First, rising incomes in developing countries like China and India have shifted hundreds of millions of consumers from grain-based toward meat-based diets. Second, skyrocketing oil prices have heightened demand for global biofuels. Though many governments hope eventually to produce a larger share of biofuels from non-food cellulosic matter, the limitations of current technology ensure that ethanol production still comes mainly from corn in the United States and sugar cane in Brazil.

On the supply side, rising fuel prices increase shipping costs, weather-related disasters in several states have badly damaged crops, and higher prices for oil used in fertilizer prevent poorer farmers from increasing output. Policymakers in many countries accept that the most sensible policy response to food inflation is to remove import tariffs, the barriers that both rich-world and developing countries often use to protect domestic agricultural industries. But to stabilise local supplies and ease price swings at home, large exporting countries like China, India and Russia have placed export restrictions on food commodities.

Particularly in wealthier countries, supply will likely respond to the price spikes, but export curbs and infrastructure constraints in poorer states will limit the speed and efficiency with which crop production can respond – and it is far easier to quickly increase the supply of textiles or automobiles than of crops that can be brought to harvest just once a year.

FEW POLITICAL RISKS ARE AS DESTABILISING AS FOOD INFLATION

There are many forms of political risk that drive people into the streets in the developing world, but few are as direct and politically destabilising as a sharp increase in the prices that consumers pay for food. Rich-world countries are not immune to the political implications of agflation, but in rural areas of developing states like Pakistan, Afghanistan, Vietnam and Nigeria, political risk is especially potent because food can account for more than half of an average household budget. Protests in urban areas usually pose a more direct threat to their governments than does upheaval in the countryside. But in countries like India, a ruling party or coalition government may depend on support from rural voters to remain in power.

Rising prices and shortage of staples have already sparked unrest in several countries. Many more are at risk. In Indonesia, food inflation drove some 500 protestors from the conservative Islamic group Hizb ut-Tahrir into the streets this spring to demand government action, raising official concern that conservative religious movements will use public anger over rising food prices to build support for other elements of their political agendas.

In Pakistan, food prices have surged 35 per cent in 2008. As the key players in the country’s newly elected coalition government bicker over political strategy, reforms meant to address a host of domestic problems, including food shortages, gather dust. Civil strife triggered by rising food prices could cripple public confidence in Pakistan’s newly-elected leaders at a particularly delicate moment in the country’s transition back to democratic rule.

Rising food prices in South Korea fuel overall inflation, leaving the Bank of Korea in a difficult position as it tries to address a fall in exports to the United States and a slowing economy. North Korea faces one of its worst food shortages since a famine during the 1990s killed more than a million people. Flooding destroyed 11 per cent of the country’s rice crop last summer. China and South Korea, North Korea’s primary lifelines, have restricted exports of staples to meet demand at home.

China’s food inflation problem is a longer-term one. Freezing conditions earlier this year badly damaged harvests and contributed to Asia’s crop supply disruption. Lingering drought conditions in northern provinces have limited grain production, and surging food prices have contributed to drive overall inflation to 11-year highs. The Chinese farm sector has struggled to expand output in recent years as the breakneck pace of urbanisation steers people and resources away from farming, and as new construction on the outskirts of China’s cities reduces the country’s stock of arable land. Some 15 million rural labourers move to Chinese cities each year, increasing annual urban demand for grain by 4.5 million tons.

In Egypt, where 14 million people live on less than $1 per day and rely heavily on government-subsidised bread sold for less than $0.01, violent street clashes sparked by food shortages have killed or injured scores of people. Fearing a repeat of the deadly bread riots of 1977, the Egyptian army has begun baking bread and selling it directly to consumers. Governments like Egypt’s which provide subsidies for basic food items are especially vulnerable to budgetary pressures.

PROBLEMS IN OIL EXPORTING COUNTRIES TOO

In Middle Eastern countries like Syria and Yemen that are not profiting from windfall oil revenues, governments are straining to maintain food subsidies. Yet, even oil-exporting countries face potential civil strife – particularly from migrant workers, who tend to be poorer than domestic workers. In response, Saudi Arabia has slashed import tariffs on poultry, dairy and vegetable oils from 20 per cent to 5 per cent. The United Arab Emirates has signed an agreement with food distributors to keep prices of several staple food items at 2007 levels.

The recent hike in rice prices could trigger unrest in Nigeria, particularly if its largest supplier, Thailand, places restrictions on rice exports. Several drought-prone, conflict-ridden countries in the Horn of Africa will be at higher risk of famine if food prices continue to surge, placing the sub-region – Africa’s most unsettled – at even greater risk.

In Argentina, a major grain producer, high external demand and weather disruptions at home have sent wheat prices soaring. To guarantee domestic grain supplies during an election year and to keep prices under control in an environment of rising overall inflation, the government closed its export registry in March 2007. The move helped push global grain prices even higher. In response to an increase in export taxes, Argentinean farmers launched a large-scale strike. The political standoff has generated conflict between Cristina Fernandez de Kirchner’s government and the farming sector, a problem that will not be easily resolved and could push grain prices still higher.

WHO BENEFITS?

Despite the widespread gloom, there are winners from the agflation trend. The losers will clearly be the urban poor and the landless rural population in developing countries, who must either pay more for the same amount of food or cut back on how much they eat. The winners are farmers, who, if allowed to sell their crops at market clearing rates, will earn windfall revenues. The relative clout of farmers in the United States and European Union gives them a more favourable policy environment than their counterparts in the developing world, where policy-makers are working to limit price increases to keep people fed in the near term. Yet, several emerging countries – like Russia, Pakistan, India and China – are providing subsidies and raising purchase prices to farmers to induce them to expand their plantings.

NOT NECESSARILY A SHORT-LIVED PROBLEM

Some analysts argue that the underlying economic pressures that created this series of food inflation-related crises – and the broad range of political risks they generate – are driven mainly by supply shortfalls, encouraging us to believe this global crisis is likely to be short-lived. This view dangerously underestimates the durability of the economic problems and the diverse set of political risks that global food inflation might eventually create.

First, demand pressures, driven by rising income levels in a growing number of developing countries, are the likeliest primary drivers behind the price spikes. The reduction or elimination of import barriers in several states and the profit motives for producers to raise output will help alleviate some supply problems, but growth in demand for food products in China, India and other emerging market countries will continue to grow for years to come. Second, policymakers in many states, mindful of near-term political risks, are already resorting to short-sighted remedies like price caps and export restrictions that will aggravate both shortages and global inflation.

Food inflation is one of the many problems driven by the entrance into the international marketplace of hundreds of millions of new consumers. Given this trend’s direct impact on political risk in a broad range of countries, its potential implications for political and social stability inside developing states all over the world are likely to prove substantial and unpredictable.


Ian Bremmer, President, Eurasia Group

Ian Bremmer is president of Eurasia Group, the world’s largest political risk consultancy. He is also a columnist for Slate, a contributing editor at The National Interest, and a political commentator on CNN, Fox News and CNBC.