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Rising food and fuel prices: Addressing the risks to future generations

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- While the rises in global food and fuel prices have moderated in recent months, domestic prices remain much higher than previous years and show few signs of abating. Higher prices have pushed many more people into poverty, but the increase in the number of poor is only part of the emerging costs of the crisis. The more profound consequence is the impact of rising prices on households who were already poor. For those already struggling to meet their daily food and nutrient needs, the double shock of food and fuel price rises represents a threat to basic survival. The poorest households are reducing the quantity and/or quality of the food, schooling, and basic services that they consume, leading to irreparable damage to the health and education of millions of children.

- The effects of the food and fuel crisis on malnutrition and schooling can undermine years of progress on the MDGs. Early malnutrition, while preventable, has irreversible costs as malnourished children cannot develop into healthy adults. Estimates suggest that the total number of malnourished people worldwide could increase by up to 44 million in 2008 alone to reach 967 million, up from 848 million in 2003. This is a tragic loss of human and economic potential. Unhealthy, less-productive populations are less able to generate the growth needed to lift themselves and their country out of poverty. Iron deficiency alone is estimated to cause median losses of about 0.6 percent of GDP in developing countries. Progress in education is also being set back: evidence is mounting that poor children are missing school and families are cutting back on education spending as a result of the crisis.

- Effective nutritional and social protection interventions can protect the most vulnerable from the devastating consequences of nutritional deprivation, asset depletion and reductions in education and health spending. Policy responses need to balance political economy considerations that call for measures to help a broad swath of the affected population, with the urgency of protecting the very poor. The latter requires that top attention be given to scaling up interventions for the existing poor. Priority interventions, using quick and practical poverty indicators to target the most needy, would include: (i) expanding benefit levels and coverage of existing targeted cash (or near cash) transfer programs; (ii) use of targeted nutritional interventions focusing on infants and pregnant women; (iii) expanding 'in-kind' food distribution programs including school feeding and distribution of fortified calorically dense food; (iv) use of fee waivers, lifeline-pricing and other forms of targeted subsidies for poor users/consumers of basic food and energy products; and (v) introduction of additional measures to prevent children from dropping out of school such as fee waivers, subsidies for school inputs, or cash transfers.

- In parallel to these short-term actions, countries must act to build sounder and more comprehensive social protection systems over the medium term. Investing in better safety nets will protect the poor from the worst consequences of the rise in food and fuel prices and increase the range of options at governments' disposal to cope with future crises, regardless of their nature (e.g. financial, natural disasters). Prioritizing public expenditures will be essential to prune lower-priority spending and create the necessary fiscal space for effective social protection programs. There is also a gaping need to scale up global investments in nutrition, which have been suffering from gradual decline, and to build up the national nutritional monitoring systems essential to using resources in a cost-effective manner.

- The global development community has a responsibility to act quickly and comprehensively in the face of this global threat to the human capital of the poor. The costs to the global development community and national treasuries of responding to the crisis are much less than the potential costs of millions more undernourished and poorly educated children. Developing countries must make investments in effective nutrition and social protection systems a development priority. Industrial countries and the development community must help mobilize the financial and technical resources needed to aid these efforts.

Rising Food and Fuel Prices – Addressing the Risks to Future Generations(1)

I. INTRODUCTION

The moderation in global prices over the past few months is scant consolation to the millions who are still facing high domestic prices and have cut back on eating nutritious food and on investing in their child's schooling. While high food prices have pushed more people into poverty, the most serious long-term impacts may come from their effect on those already poor. The razor thin margins between daily earnings and spending has led to households eating less, switching to cheaper coarse cereals and reducing non-food spending such as on schooling. These sacrifices can lead to irreparable damage to the health and skill levels of millions of poor people worldwide. This is not only a crisis now, but a time bomb for the future, representing lost human and economic potential for poor people and countries.

Ensuring food security in the face of rapidly rising food prices requires a combination of effective safety nets and improving agricultural productivity. Adjusting to higher fuel prices will require again effective safety nets plus a combination of efficient energy use and diversification away from traditional fossil fuels. This paper focuses on the safety net interventions required to minimize the costs of the crisis to current and future generations-primarily through direct income transfers but also, importantly, through the reinforcement of basic health and nutrition, the provision of high-quality education services and measures to ensure access by the poor. Setting up these safety nets will also reduce the vulnerability of poor households to future shocks such as those arising from climatic conditions or changes in the global economy.

1.1 Price Trends – Food and Fuel

While fuel and food prices are moving away from their recent peaks they will remain high over the medium term. A number of factors propelled the sharp rise in food and fuel prices over the past 12-18 months (see Figure 1). Oil markets experienced increasing prices due to demand drivers and exacerbated by a slow supply response, leading to low spare capacity and tight market conditions. Falling real interest rates and the U.S. dollar depreciation also contributed to rising prices.(2) Crude oil prices, which peaked at $147/barrel in July 2008, had declined by 30 percent from this peak by early September but remain highly volatile. Moreover, in real terms crude oil prices are more than double their peak during the 1970s oil crisis. Food prices have been driven by a combination of rising fuel costs, bio-fuels production, and unfavorable weather conditions, with trade restrictions boosting upward price pressures.(3) Key grain prices have fallen in the past few months with Thai medium grade rice prices declining from a peak of $1100/ton in May 2008 to $730/ton in September. Nevertheless, rice prices remain double their average level in 2007, and prices for most major food crops are projected to remain well above 2004 levels through 2015.

These global price trends have fed into domestic prices in many countries. Median inflation in non-OECD countries rose from 5 percent in 2006 to 8.1 percent in 2008. Inflation increased by more than 5 percentage points in at least 21 countries, including many oil exporters, with significant surges in domestic food price inflation over the past year in countries such as the Kyrgyz Republic (32 percent), Vietnam (26 percent) and Chile (16 percent). Figure 1 in Annex 1 shows that for the majority of countries sampled in Sub Saharan Africa, mid-2008 food price inflation are higher than the 2005-07 average.