Food, fuel and financial crisis: possible impacts and policy options

1. Food, fuel and financial crisis:possible impacts and policy options Hassan Zaman Poverty Reduction Group Presentation at ECA Learning Event October 30th, 2008

2. Despite recent corrections, global food prices remain at historically high levels. • Food price inflation more than double in ECA in 2008 relative to 2006 • Energy inflation continued rising until Aug 2008 probably due to staggered domestic adjustments in ECA

3. ECA inflation trends (source Kathuria et al)

4. ECA inflation (source Kathuria et al)

5. Effects of food crisis on schooling and nutrition • Increase in global poverty by 3-5 percentage points or 100MM more poor and even more serious impact on already poor • Additional 44MM malnourished people worldwide by end-2008 due to increase in food prices • Evidence from previous crises suggests significant risk to educational and health outcomes (e.g. Brazil, Peru, Indonesia)

6. Household vulnerability to financial crisis • Households risk being affected by (i) unemployment and declining real wages (ii) lower remittances (iii) pension risks for multi-pillar systems (iv) credit crunch. • Past crises have shown greater impact on real wages than aggregate employment • However this time could be different. Past domestically driven ‘currency’ crises led to bouts of hyper-inflation eroding real wages. This time employment impacts could be more significant

7. Financial crisis and household vulnerability (cont.) • Stylized causal chain could be reduction in employment/earnings in formal export-oriented industries leading to increased urban unemployment contributing to reverse migration and increased rural poverty. • Urban informal sector could be doubly squeezed from lower global demand (sub-contracted products) and increased labor supply from financial crisis and lower domestic demand for non-food products due to impact of higher food prices • Worst impacts of food crisis could be reinforced by financial crisis – ie lower spending on food, schooling, health care leading to irreversible impacts.

8. What are countries doing to cope with the food crisis? • Lowering Domestic Food Prices using reduction in tariffs and taxes, selective subsidies targeted at poor, buffer stocks, price controls, export bans and taxes • Initiating or expanding existing Social Safety Net Programs

10. Changing policy responses to food and fuel prices (source Kathuria et al)

12. Expenditures of select countries

13. Looking forward: Investing in safety net programs • Multiple policy levers for food, fuel and financial crisis (e.g. ensuring access to credit, labor demand measures, facilitating remittances). • Social protection measures are common to all shocks. Difference in ability to cope largely dependent on whether safety net investments made in past • Investing in targeting criteria, household databases, and payment systems: take time but not very expensive and can be used for multiple programs (e.g. Columbia’s multiple use of its proxy means test)

14. Looking forward:Investing in safety nets • Central administrative body overseeing strategic focus of SP programs and ensuring coordination is important • Cash-based safety net programs preferable, but pragmatism and speed of response even more important • Nutritional supplementation / feeding programs required to avoid irreversible damage, especially to infants