Egypt experienced a food price inflation of 19 percent between February 2010 und February 2011 and therefore enacted subsidies on basic food items.
Photo: Bilderbox.com

Internal factors are prevalent

The price hike of 2010/2011 is now the second one to have severely affected African countries and their many poor people since the global food price increases of 2007/2008. The following article looks at its extent and impact and points to necessary countermeasures.

Africa already spends more than 50 billion US dollars annually on food imports, and with the global food price increases, the total value of imports is set to further escalate. It is widely held that global food price increases have drastic effects on the macro-economy of African countries, via food price inflation, increasing current account imbalances, and further budget imbalances associated with public food subsidies. They are also believed to strongly impact on private households in African countries, via price increases of the staple food crops and of other food items like sugar and vegetable oils, thereby negatively affecting nutrition and poverty levels. 

 

A closer look at the trade balance

 

The specific situation in some groups of countries has to be tested in order to verify this hypothesis. 

Only 12 of the 47 Sub-Saharan African (SSA) countries are net exporters of “raw” food (unprocessed food). Middle-income SSA countries are food surplus countries, while low-income SSA countries are net food importers. But taking cash crops and agricultural raw materials into account, SSA countries are significant agricultural exporters, while they mainly import grain. Most of the SSA countries and most of the low-income countries in Africa are therefore net agricultural exporters when all the important food and agricultural products are considered (Ng/Aksoy 2008).  This means that the net food imports are not that high in relation to total imports. Only Benin, Guinea-Bissau and Senegal are vulnerable in terms of “raw” food, measuring the share of net imports to total imports. However, the first two countries have other export items, and Senegal has considerable processed food exports.

 

Oil exporters and fragile states are particularly affected

 

Oil exporters are a special case given that oil industry expansion has affected the competitiveness of food and agriculture production. Countries like Algeria and Nigeria, but also Angola and Sudan, have neglected all branches of agriculture, not only food. The three SSA oil-producing countries, especially Sudan (North and South), have been intensively affected by global food price increases. Like other North African economies, Algeria will be able to use its foreign exchange reserves for some time to import and subsidise food, but there are limits to such policies, so that people will eventually suffer and then protest. From February 2010 to February 2011, Egypt experienced a food price inflation of 19 percent (World Bank, April 2011), and it has subsidised basic food items for around 85 percent of its population; an unsustainable position has emerged. This is creating fatal macro-economic policy problems and severe adjustment problems at household level. Being oil exporters and post-conflict countries (with disrupted infrastructure, weak institutions and neglected agricultural and industrial sub-sectors), the worst cases are countries like Sudan (Republic of Sudan and Republic of South Sudan). Global food price increases impact heavily on such countries as they have to reduce the very high amount of fuel and food subsidies to maintain macroeconomic stability; such a move is also considered necessary in order to finance social safety nets targeting the poorest segments of the population. 

Fragile states such as Sierra Leone, Eritrea, Cote d’Ivoire, Liberia, Chad, Guinea, and Sudan, defined by the African Development Bank as countries after conflict which have already undertaken first steps of reform and reconstruction (see Barungi et al. 2011), have specific problems. These are low human development, weak institutions, negative twin balance positions for the budget and the current account, and also negative cereal trade balances (see Box above). Especially with regard to these countries, measuring the cereal trade balance suffers from serious data, information and projection problems and methodological gaps, but such measures impact quite heavily on domestic food price changes and on the build-up of inflationary expectations. 

Food insecurity. According to FAO March 2011 assessments, Africa has 21 out of 29 food insecure countries in the world. These countries need external food assistance, as they lack the resources to deal with reported critical problems of food insecurity. However, the types of food insecurity differ (FAO 2011, Barungi et al. 2011). There are countries with an exceptional shortfall in aggregate food production/supplies like Zimbabwe in March 2011. Countries such as Eritrea, Sierra Leone, Niger, and Somalia have a widespread lack of access to food. And countries like Ethiopia, Malawi, Democratic Republic of the Congo, Benin, Guinea, Kenya, Sudan, Uganda, and others are suffering from severe localised food insecurity. Some of these countries are fragile states. Besides conflicts prevalent in the country and/or in the region, causes that matter are political instability, bad governance, policy and institutional weaknesses, and lack of adaptation to drought and climate change. But for countries that are landlocked, export bans of neighbouring countries and high import dependencies regarding fuel and food play a role, too.

For fragile and food insecure states, the impact of global food price increases is severe, but the different causes of affectedness clearly matter. Increasing production, planning for necessary imports and stocking levels, redirecting production and consumption towards local grains, and developing targeted social safety nets for the benefit of the poorest (so that they can afford to buy grains) are feasible response strategies in coping with global food price increases through longer-term action.

 

Transmission effects and impacts

 

A lot can be learnt from the 2007/2008 global food price increases for understanding the effects and impacts of the current food price surge. When comparing the international and domestic prices across 83 food prices in 12 African countries (see Box below), the average increase in domestic prices between June 2007 and June 2008 was 63 percent in US dollar terms, which amounts on average to 71 percent of the international market price increase. Domestic food prices only increased in the range of 25 to 39 percent in South Africa, Ghana and Cameroon, but by over 150 percent in Ethiopia and Malawi. For the countries with very high price increases, domestic factors, like supply shortages and policy failures, must have played a considerable role. Landlocked countries in Africa show much higher increases of domestic prices than coastal states, which is obviously caused by severe transport and marketing problems and by export bans in the region. Domestic speculation may also play a role.

Imported food/local food. Price increases were highest for maize, at 87 percent, wheat at 65 percent and rice at 62 percent. Local food, like plantains and cassava, showed much lower price increases in the range of 9 percent and 12 percent respectively. This demonstrates that the transmission effects are much stronger for internationally traded grains. However, when conducting econometric exercises for much longer periods (5 – 10 years) rather than simply looking at the period from June 2007 to June 2008, quite different results occur (Minot 2010). In this long-term analysis, 62 domestic price series for maize, rice and wheat for nine SSA countries were compared and tested against the respective international prices (see Box on page 23). Only 13 out of 62 prices show a long-run relationship to the extent that domestic prices were influenced by the international prices. Only 6 out of these 13 prices had a significant long-term elasticity of transmission, implying that on average only a share of 0.54 of a one-percentage change of international prices was transmitted to domestic prices. Even countries like Ethiopia, Malawi, and Mozambique, with the highest proportion of prices linked to international prices, showed that the share of linked prices was less than 40 percent. For Zambia, Uganda and Kenya, there are no prices with a proven long-run relationship to international prices/markets. With regard to the particular commodities, just 10 percent of the maize prices were significantly related to the international maize prices, but almost half of the domestic rice prices were related to the international rice prices (Minot 2010). The simple explanation for this is that the African countries are close to self-sufficient in maize but are highly import-dependent on rice (especially some West African countries). Maize imports have a share of only 5 percent in relation to Africa’s domestic consumption, while the share is somewhat higher in Mozambique. The situation for rice is different as imports represent more than 50 percent of the domestic consumption in Ghana and Mozambique (Minot 2010).

 

Reasons for trend price increases

 

The fact that considerable trend price increases were prevalent for all domestic food prices from June 2007 to June 2008 but international price increases were only transmitted to Africa to a relatively small extent in the long run can be explained by a number of factors. First, food price increases coincided with fuel price increases. Second, grain export restrictions were at work in SSA (in East, South and West Africa). Third, policy factors were creating foreign exchange shortages – by fuel subsidies and by interventions into foreign exchange markets and private trading. Fourth, poor harvests in some countries affected the cereals balance. Fifth, so-called threshold effects seem to have worked because of the rather considerable price increases that were now becoming recognised and measurable in Africa (Minot 2010). Sixth, a single conflict country like Cote d’Ivoire can severely disrupt supply and distribution channels in a whole region, leading to higher prices in Burkina Faso, Mali, and Niger (World Bank, April 2011). As a consequence, landlocked countries in Africa show consistently higher domestic price increases than coastal ones.

 

Adjustments and policy changes are requested

 

The divergence between local and international prices is one problem. There is however also the problem of widely diverging local prices in one particular country. In Tamale (Northern Ghana), the mean price of local rice per ton (between June 2007 and June 2008) was 438 US dollars (USD), but it was as high as 734 USD in Kumasi (Central Ghana); this difference cannot be explained by transportation costs, administration costs and importation costs alone. Among other factors, it may have to do with marketing channels, marketing structures and marketing power. Local taxes could also play a role.

The main question is now how to act, how to react, and how the adjustments are ultimately made. The countries affected, their governments, their farmers, exporters and importers, farms and firms, the humanitarian organisations, and the households and consumers will respond to these price developments in the short term, in the medium term and in the long term – by modifying economic and sector policies, by changing the production mix, by adapting the household budgets and the consumption preferences, and by reorienting the trading patterns. Regrettably however, not enough evidence is yet available of the responses and reactions of these actors in African countries. There is no data on the re­allocation of land and resources to food crops since 2007/2008, or on changes in consumer preferences in urban and rural areas. There is not enough information on policy changes after global food price increases.

 

Poverty and nutrition effects

 

Evidence shows that the number of households in extreme poverty grows in times of such price surges, although this appears to vary greatly between countries. Through the 2010/2011 food price increases, South Sudan can lose a poverty reduction potential of 9 percent to 18 percent compared to the 2009 level (see Barungi et al. 2011). World Bank estimates show that the higher food prices have negative net effects, raising the number of net consumers living below the poverty level of 1.25 US dollars much more than benefiting the net producers by lifting them above this poverty level (World Bank, February 2011). The number of the poor increases sharply. 

Besides the poverty impacts, the nutritional implications of the higher food prices are severe. There are negative effects on the health of infants and pregnant women, on child school enrolment rates and on the working time and workload of children as well as severe repercussions on the productivity of workers in rural areas. Also, negative social, cultural and environmental effects may result. The case of Nigeria, a country with sharply increasing food imports, shows that the nutritional consequences of the food price increases may be quite severe, leading to reduced nutritional intake, more consumption of carbohydrate food and neglect of protein, and more use of food products leading to obesity. However, pulling out children from school for work and selling productive assets by households like livestock are also consequences of the food price increases in the country and elsewhere in Africa (Elijah 2010; World Bank, February 2011). Good harvests of domestic crops (maize, sorghum, millet, cassava), policy support for domestic crops and stable market conditions and supply frameworks for rice can, however, limit poverty impacts.

 

Public interventions needed

 

At national level, pro-active agricultural and agro-industrial development strategies are a first priority; the related policy issues are infrastructure, stocking, value addition and processing, and trade policies. This strategy concept may also timely and effectively help redirect land and other resources towards food crops. In order to improve on the factors raising domestic food prices, strategies to improve the production and marketing conditions for local grains and strategies for installing social safety nets and reducing fuel and wheat subsidies are recommended. Infrastructure, taxation and local trade and marketing policies are important as domestic prices are so divergent within countries. Global food price increases often have very localised impacts; factors such as geography, transport systems and connectivity of markets play a role. Internal market connectivity is a major problem, and therefore ICT (Information and communications technology) improvements can do a lot. Macro-policy measures are requested to ensure that food price inflation does not accelerate inflationary expectations in a country. 

Regional trade in grain is important, especially for Africa. Production and supply conditions can vary considerably between coastal and landlocked countries. The latter were severely affected by export bans in West Africa, East Africa and South Africa. At regional African level, governmental commitments are needed towards establishing regional infrastructure, regional market information systems for key cereal markets and regional marketing structures for core commodities. 

Trade commitments and trade rules for countries at regional African level are important to avoid export bans by food surplus countries in times of price surges and local supply shortages. The efforts of realising the CAADP (Comprehensive Africa Agriculture Development Programme) should also be intensified; regional African initiatives to accelerate agro-industries and to scale up related R&D activities are important as long-term strategies (Yumkella et al. 2011; Wohlmuth 2011). African grains may be promoted in this context. 

As African conflict countries, fragile countries, food-insecure countries and mineral and oil exporting countries have their own problems to provide food at reasonable prices to their citizens, specific initiatives for these groups of countries are requested. In all of them, there is an urgent need for social safety, poverty reduction and nutrition support programmes. These programmes are relevant for net food importing and net food exporting countries. Targeted income increases for the poor – by cash payments or in kind – are important to address the problems of sharp food price increases. 

 

Also, Regional Centres for Humanitarian Relief may be envisaged for drought-affected, disaster-prone and infrastructure-poor areas in Africa. STI (Science, Technology and Innovation) policies are important at national and regional level and along the agriculture-agroindustry value chains in order to improve on productivity and the food security situation (Wohlmuth 2011). National and regional approaches to adapt to climate change impacts are urgently requested. Short-term, medium-term and long-term objectives, targets and policy measures are required at national and regional African levels to overcome structural weaknesses responsible for the domestic food price increases.

 

Dr Karl Wohlmuth
Institute for World Economics and
International Management
University of Bremen
Bremen, Germany
wohlmuth@uni-bremen.de