Food, fuel and fiscal crises

Source: http://dawn.com/2008/04/21/ebr1.htm

By S. M. Naseem

The sky-rocketing food prices have emerged as the new crisis not only in Pakistan, but also on the global economic horizon, eclipsing the already looming fuel and financial crises, which had been dominating the headlines.

The world is thus engulfed in a new hydra-headed crisis, with three essential components: food, fuel and finance. The three components have different geographical origins and their effect on different segments of the globe and their inhabitants is highly uneven. But the transmission of these crises in the global economy has become much easier and faster since the regime of liberalisation of trade, capital flows, deregulation and privatisation was imposed through the Washington Consensus in the early 1990s in the name of achieving higher growth and reducing global poverty.

Pakistan is affected by all the three components of the mega-crisis in varying degrees. But its economic managers have always tried to deal with such crises individually, rather than as a whole, and in an ad hoc, rather than a systematic manner.

The new government, which has yet to come to grips even with the more immediate problems facing the economy, has hardly given much thought to these issues, while the outgoing government had hardly paid any attention to these developments as it relied on the continuing aid and investment, epitomised by its parroting of the precept of a minimalist role of the government in the economy. However, with the economy once again in dire straits and these external shocks looming like a meteorite to strike any time, it is about time to be prepared for the worst and consider pro-active economic policies – both domestic and external – which can provide some protection against them, at least to those most vulnerable to them.

Although the food crisis is now a world-wide phenomenon, ordinary Pakistanis are more concerned about whether to buy an additional nan or a 10kg atta bag (the minimum size carried by utility stores, which costs as much as the daily minimum wage) or to buy medicines, shoes or books for the child or to walk five miles to work to save the enhanced bus fare than about knowing how the markets are loaded against the poor, both at home and abroad.

The government in its zeal to publicise its “stellar” economic performance and growth record, did not pay much attention to the needs of the poor. It mistakenly believed that the government could outsource to the market– through the “trickle down” effects – the responsibility towards protecting them against any calamity, such as the one stalking them now in the shape of food inflation.

The current food crisis in Pakistan is often blamed on the past government’s ineptitude – wilful or otherwise – in over-estimating last year’s wheat crop and in allowing the export of 0.5 million tons of wheat and then having to import 1.7 million tons of wheat at much higher prices, costing about $1 billion.

Plausible and reprehensible as this may be about the culpability of a discredited regime, it oversimplifies the complex issues underlying the current food crisis, which are not unique to Pakistan. From Haiti to Hanoi, the food crisis is rearing its head in all corners of the globe, especially – though not exclusively – in the developing world, where food consumption constitutes up to 70 per cent of the family budget.

A dramatic rise in the worldwide cost of food is provoking riots in many developing countries where millions more of the world’s most vulnerable people are facing starvation as food shortages grow and cereal prices soar.

It threatens to become the biggest crisis of the 21st century – a century in which poverty is supposed to become history. However, unlike the past, food shortages and famines are not the result of the Malthusian spectre of population growth – which most developing countries have managed to control dramatically in the last half-century – or even the Ricardian concern about decreasing returns, but much more the result of the inequalities of income and the growing geographical disparities – both within and across national borders – in the degree of development and incidence of poverty. Some of the problems facing these countries are structural and global, rather than cyclical or transitory and contextual or domestic, in nature. Among the structural problems on the supply side are climatic changes, natural disasters (such as tsunami and earthquakes) and the decline in productivity as a result of the petering out of the Green Revolution. These factors have had particularly adverse impact on the access to land and other income-earning assets (e.g. coastal catchment areas for fish-farmers or terraced lands in mountainous areas) of the poor, whose incomes have fallen, while average per capita incomes have shown steady increases.

On the demand side, the structural shifts have arisen from a rise in the incomes of middle classes and the shifts from food grains to cash crops and the increase in demand for processed foods, such as bakery products and fast foods, as well as increase in poultry and meat consumption. The latter has also led to increase in the acreage and production of corn used in raising livestock and poultry – it takes eight kgs of grain to produce one kg of beef – at the expense of wheat and other food crops.

As a result of globalization, there has also been considerable increase in demand for agricultural exports, especially of non-food crops, such as vegetables and fruits, reducing the acreage for and supply of food crops. Further, the rapid pace of urbanisation, especially in Pakistan, has made severe encroachments on farmlands in contiguous areas, which also results in the diversion of irrigation water to meet urban needs.

Water is likely to soon become as scarce as oil, the most important ingredient of the second major global crisis, i.e. that of fuel or energy

With the price of oil per barrel likely to remain in triple digits in dollars (if not in euros), it has also both direct and indirect effects on the pocketbooks of ordinary people. Transport costs, which feed into all other economic activities, are the main carriers of inflationary pressures from this source.

The rise in oil prices has also had the inadvertent effect of increasing corn production for the sake of producing ethanol as a partial substitute for oil, but resulting in the lower production of consumable food grains and raising corn prices.

The other main effect of the fuel crisis is the generation of electric power, which affects both industrial and home-based activities that are playing an increasing role after the introduction of computers, internet, cell-phones and other electronic gadgets. This has led to increased load-shedding with consequential loss of working days in factories and wages for the workers.

Rising transport costs, load-shedding and food inflation are conflating to produce a combustible bomb of social unrest, which may prove more potent than the terrorist threat that has preoccupied public attention.

The rising onslaught of consumerism in which Pakistan has always had a lead has further aggravated the problem and has resulted in imports rising much faster than exports and giving rise to unsustainable current account and fiscal imbalances (as much of the domestic energy consumption is subsidised).

This leads us to the third most important crisis in the global arena, which could engulf the world into a deep recession comparable to the Great Depression of the 1930s, which also started in the US, with incalculable political and economic consequences.

The present financial crisis in the United States owes its origin in the sub-prime crisis triggered by the housing bubble which started sputtering two years ago and was itself the result of the central bank’s efforts to combatan earlier recession in the wake of the bursting of the dotcom boom in 2001, through a series of interest rate reductions.

The US economy’s growth after that recession was largely jobless, and the Federal Reserve remained deeply concerned about the possibility of Japanese-style prolonged economic stagnation. What the US central failed to do, however, was to prevent the banking sector from financing the housing boom without due diligence and prescience about the consequences of indiscriminate lending.

Over the last two decades banks had lobbied in the US to get the government out of its business and to obtain freer rein for “financial innovation”, such as hedge funds and mortgage-backed securities. However, when the housing bubble burst and the banks’ losses climbed into trillions and when the likes of Citibank and Bear Stearns and UBS came on the brink of bankruptcy, they lobbied for the Federal Reserve to intervene and bail them out through an unprecedented government rescue plan.

Whether this bail-out will succeed in saving the United States’ financial system on which the global economy rests or whether it would result in a “de-coupling” of the US economy with the rest of the world remains to be seen.

The structural shifts taking place in the global economy need to be factored in to the economic management of Pakistan, along with the domestic political imperatives emanating from the 18 February elections, by the country’s new economic managers.

There is a need for new thinking and new institutions, as well as the revival and re-tooling of the old institutions, such as the Planning Commission, the National Tariff Commission and the Security and Exchange Commission, along with the country’s think tanks and NGOs to prepare Pakistan for facing the challenges of the domestic and global crises.