High food prices feed unrest in developing world

AGAINST the backdrop of revolution in the Arab world and rising tensions in Asia, the International Monetary Fund warns that global food prices are likely to stay high for years, posing new economic and political challenges.

Affirming the IMF assessment, president of Canonbury Group and former White House adviser Philippa Malmgren told The Australian: "We've got worldwide food inflation that's hitting the emerging markets harder than anywhere else. It is a really serious problem and it explains the violence we've seen in North Africa.

"Food prices drive politics. Half the income of an emerging market worker is spent on food and energy. This drives people into the streets where they elevate their old grievances. It tests the social fabric. This means that places like North Africa where that fabric is weak descend into coups and violence. In other places like Bangladesh it appears in the form of massive wage demands.

"We've been talking about this for the past 2 1/2 years. During the financial crisis lending to farmers stopped, so they didn't plant. We've had a supply-side shock for most things we extract from the planet, agriculture, mining and oil. I think we are going to continue to see very tight food supplies. Capital is not being put to work in farming around the world.

"The pressure is severe in China. Everybody talks about China's 10 per cent growth rate. But the inflation rate is now 6 per cent and unofficially it's 10 per cent and that's not a sustainable environment. So you've got a serious problem. India has a similar problem. China's ability to suppress civil unrest is powerful. But I think Vietnam looks very vulnerable and some argue it's the next Tunisia. In Bangladesh we've seen textile workers striking and threatening to destabilise politics.

"Pakistan, like Egypt, is massively susceptible to food inflation. The point is this price phenomenon is broad based. It is manifested in different ways but it is important to realise this is not just an Arab street phenomenon."

Malmgren, who was interviewed in Perth where she attended the University of Western Australia's In the Zone conference, said governments in the US and Europe had missed the "incendiary" potential of food prices and had been "clueless" for too long.

Obviously the Arab revolutions have multiple origins, but high food prices have a nexus with epic historical events; witness the French Revolution.

The current price surge follows that of 2008 when food disruptions were registered from Egypt to The Philippines. The food price index of the UN Food and Agriculture Organisation hit a record high last month driven by higher prices for cereals, meat and dairy products. With France chairing the G20, President Nicolas Sarkozy has put food security on his agenda. But this is no guarantee of progress with Columbia University's Jeffrey Sachs, writing in the Financial Times last month that earlier promises for action from the G8 proved to be a "mirage".

In this month's IMF's Finance and Development report adviser Thomas Helbling and economist Shaun Roache write: "The world may need to get used to higher food prices. A large part of the recent surge is related to temporary factors such as the weather. Nevertheless, the main reasons for rising demand for food reflect structural changes in the global economy that will not be reversed."

The world grew accustomed to low food prices in the 1980s and 90s. "But since the turn of the century, food prices have been rising steadily - except for declines during the global financial crisis in late 2008 and early 2009 - and this suggests that these increases are a trend and don't just reflect temporary factors."

Multiple forces are driving higher prices. Consumers in developing nations are now seeking more high-protein foods. The biofuels boom meant that last year production of corn-based ethanol absorbed 15 per cent of the global corn crop. Productivity growth in agriculture has recently stagnated and less productivity means higher prices. Indeed, prices must rise to provide the incentive to correct supply-side shortages. The IMF warns the world faces new pressures and scarcity in land, water and energy, the core elements in food production.

The world's resource demands are escalating. Sachs says that China's economy is 20 times larger than at 1978, the start of its reform era, and India's economy is four times larger than in 1991 when its reforms began.

IMF chief Dominique Strauss-Kahn warned last month of "dire consequences" if food prices rose too high. He cautioned that "we could see rising social and political instability within nations - even war". It is a prediction already realised. Of course, there is no simple link between food and revolution. Indeed, people often respond to higher food prices with fatalistic resignation. It requires a sense of burning injustice spilling into a political cause that becomes the decisive trigger for an upheaval.

The bigger picture, however, into which all of the above comments fit is the flawed nature of the global recovery.

Strauss-Kahn put it with lethal effect: "While the [global] recovery is under way, it is not the recovery we wanted." Spot on. The current structure of recovery cannot work and cannot endure. Australia needs to absorb this truth and hedge its bets.

Seething social unrest across large parts of the globe is driven by flawed economics and this now shapes world politics.

Strauss-Kahn warned the global recovery was "below potential" in rich nations but in risk of "overheating" among emerging economies. The pre-crisis pattern of global financial imbalance (basic to the original crisis) was "re-emerging" and in the IMF's view "put the sustainability of the recovery at risk". The point is that the US and China have been unable to sufficiently correct their huge imbalances and these constitute a threat to economic and social stability.

Reserve Bank board member Warwick McKibbin has warned the bubble in global commodity and Asian property prices was a risk that also endangered Australia. Strauss-Kahn said that in the next decade 400 million young people would join the global workforce. The fear is they will become a "lost generation" of youth "destined to suffer their whole lives from worse employment and social conditions".

Higher food prices are just one manifestation of the larger crisis. Food supply is truly a global issue where all nations are exporting and importing.

The moral from the current revolutions in the Arab world is not just that dictators are finally brought down. It is that unless globalisation is made to work based on enlightened national interest then the hopes of such revolutions will only be dashed.