Asia hit by food price spikes

If Jim Yong Kim was hoping for a honeymoon, the new World Bank president can forget it: To his headaches over Europe’s debt crisis, he can add surging food prices. Kim’s first month on the job was largely about gauging how Europe is affecting the plight of the poor. There are troubling signs that China and India are slowing, and that might leave Asia, which has the largest share of extreme poverty, devoid of growth engines.

That’s almost manageable compared with what’s confronting Kim in month No. 2: the worst US drought in 56 years and dry weather in agricultural regions in India, Kazakhstan, Russia, and Ukraine. Coupled with exploding demand for food, the phenomenon is causing violent commodity price volatility at the worst possible time for Asia.

Rising food prices limit how much central bankers can cut interest rates to safeguard growth. More troubling would be the potential setback to poverty reduction programmes for decades to come.

The last food crisis began amid the 2008-2009 crash of the US economy. In the second half of 2010 alone, according to the World Bank, some 44 million people were pushed back below the extreme poverty line, defined as those living on $1.25 (Dh4.59) a day or less. Asia is home to the bulk of those who spend between 60 per cent and 80 per cent of their paltry incomes on food.

“When food prices rise sharply, families cope by pulling their kids out of school and eating cheaper, less nutritious food, which can have catastrophic lifelong effects on the social, physical, and mental well-being of millions of young people,” Kim says. “We cannot allow short-term food price spikes to have damaging long-term consequences for the world’s most poor and vulnerable.”

Poverty isn’t an important metric for currency traders placing bets. It doesn’t figure readily into bond yields or stock valuations. Yet, Asia is the latest and perhaps largest frontier for capitalism and opportunity. Multinational companies are counting on its swelling populations, growing cities, and emerging middle class consumer sectors for profits in the future.

Threat of instability

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Asians won’t consume if growth doesn’t reach them. They won’t buy cars, electronics, fancy handbags, imported beer, or designer clothes if putting food on the table is at risk. More important, if too many Asians are preoccupied by the struggle to get enough to eat, that increases the threat of instability, never an ideal setting for a flourishing economy. Food inflation, remember, was among the crucial forces behind the Arab Spring protests.

The good news is that corn prices may already be easing, suggesting we might avoid a price spike as severe as that of 2010, when prices jumped 73 per cent in six months. Corn, of course, goes into everything from sweeteners to bio-fuel to feed for cows and chickens. Asia imports loads of it. The bad news, of course, is that any price increase means consumers will have to divert spending to food while the cost of other goods rises as well. This raises the spectre of stagflation.

India is the most obvious candidate for that dreaded combination of weak growth and rising prices if its central bank tries to offset any slowdown by printing more money. Markets are already wary of inflation — up 7.25 per cent in June alone — coming in above central-bank forecasts of 6.5 per cent this year. India’s worst power crisis, one that left some 640 million people in darkness last week, bodes poorly for the inflation outlook. It’s emblematic of the nation’s infrastructure neglect.

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