44998
Rising Food Prices in East Asia:
Challenges and Policy Options
May 2008
Milan Brahmbhatt and Luc Christiaensen1
1Milan Brahmbhatt (mbrahmbhatt@worldbank.org) and Luc Christiaensen (lchristiaensen@worldbank.org) are
respectively Lead Economist in the Poverty Reduction and Economic Management Department and Senior
Economist in the Sustainable Development Department of the East Asia and Pacific region of the World Bank.
They would like to thank colleagues in the field for numerous discussions and background material provided in the
preparation of this note. They especially acknowledge inputs to the discussion of social protection from Jamele
Rigolini and comments by Sarah Cliffe, Emmanuel Jimenez, Donald Mitchell, Vikram Nehru, and Peter Rosner.
The findings, interpretations and conclusions of this paper nonetheless remain those of the authors. They do not
necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent.
1
SUMMARY
Large increases in international food prices in 2007 and early 2008 have become a key
concern for policy makers East Asia. The food price increases � especially those for rice � are
likely to have a significant impact on the living standards of many, particularly the poor.
Enhanced regional and international collaboration are critical in addressing the problem of
high world food prices, together with good domestic policies that help protect the poor and
strengthen food security. Regional bodies like ASEAN or ASEAN+3 can play a key role in
furthering such a coordinated international response.
Among the key reasons for higher food prices are biofuel policies in advanced countries.
These policies aim to promote an alternative, more climate-friendly source of energy, but have
also induced a sharp increase in world demand for grains and in grain prices. So there is an
urgent need for more international dialogue to decide whether the benefits from current
biofuel policies really justify the costs, or whether a new global deal can be struck, allowing a
more open and stable global market in food, as well as continued progress towards environment-
friendly energy sources.
Upward pressure on grain prices from biofuel policies, rising energy costs and the falling
U.S. dollar have been exacerbated by recent export restrictions introduced by rice exporting
countries concerned about food security. An agreement between the main participants in the
international rice market to reduce or remove major restrictions could play an important role
in lowering prices to sustainable levels. This is in the interest of exporters, who wish to maintain
their export markets, and of importers, for whom high prices are inflicting hardship on
consumers, particularly the poor.
Rising food prices are contributing to higher inflation and will - at a minimum - slow the
pace of poverty reduction in most developing countries in the region. Several types of domestic
policy responses can help protect the more vulnerable as well as strengthen food security.
Interventions to ensure household food security by strengthening targeted safety nets
should have the highest urgency. Targeted cash transfers to vulnerable groups help to protect
vulnerable groups directly without reducing incentives to local farmers, although food-for-work,
public works programs and emergency food aid distribution can also help.
Many countries are also undertaking measures to reduce domestic food prices through
changes in trade policies, changes in domestic taxes and subsidies, and through administrative
measures. Reductions in import tariffs and domestic taxes on staples are among the common
measures implemented, although attention has to be paid to the fiscal costs and financing of such
measures.
In the medium term, there is much scope for increasing rice production in an
environmentally sustainable way, through better agronomics, reduction in post-harvest losses,
and more efficient water management. A regional partnership between countries, the
International Rice Research Institute (IRRI) and bilateral and international funding agencies
could foster the widespread diffusion of more advanced, off-the-shelf, agronomic technologies.
However, to sustain rice yield increases further in the future, more public investment must go to
agricultural R&D which only amounted to 0.4 percent of agricultural GDP in Asia compared
with 2.4 percent in developed countries.
2
1. Introduction
Large increases in international food prices in 2007 and early 2008 have become a key
concern for policy makers in East Asia. The increases are likely to have a significant impact on
the living standards of many, particularly the poor. By March 2008, dollar nominated world
food prices were more than two and a half times higher than in early 2002. Almost three
quarters of this increase occurred since the start of 2007, and about half since the beginning of
2008. (Figure 1). Recent sharp increases in international rice prices are of particular concern in
East Asia. Food comprises 30 to 50 percent of the consumption basket of the average household
in East Asia (compared to 15 percent in the United States). Within that, rice accounts for one
third of the daily caloric intake, followed by wheat (12.4%), pork (8.8%), corn (4.4%), soybean
and palm oil (3.4% and 1.8 % respectively).2
This note examines the reasons for the surge in world food prices, in particular of rice.
(Section 2). It reviews the economic and poverty impacts of rising food prices in East Asian
countries (Section 3). It concludes by assessing policy responses undertaken by East Asian
economies so far, and discusses policy options going forward, including the importance of
regional and international cooperation in addressing high food prices (Section 4).
Figure 1. Grain Prices
$/Ton; January 1990 - April 2008
1000
800
600
Rice
400
200 Wheat
Maize
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
an-J an-J an-J an-J an-J an-J an-J an-J an-J an-J an-J an-J an-J an-J an-J an-J an-J an-J an-J
Source: World Bank data and staff estimates.
2. Rice and other international food prices: trends and determinants
The rise in international rice prices since 2004 � reaching over $1000 a ton in April
2008 � is partly the result of global factors that have led to large increases in wheat and other
grain prices as a group, and partly of export restrictions by food surplus countries concerned
about food security. The global factors include rising energy costs, the falling dollar and � most
2FAOSTAT (2003)
3
importantly - policies that have induced a sharp increase in biofuel demand for grains, although
their impact on rice is more indirect than for crops like maize and wheat. These upward
pressures on rice prices have been exacerbated recently by export restrictions in rice exporting
countries, especially in a context of relatively low international stocks. These restrictions aim to
restrain domestic rice prices and secure domestic rice supplies in the face of a volatile
international market, but have had the unintended consequence of provoking preemptive
restrictions by other exporters and distress buying by importers, contributing to further price
increases in the thinly traded international rice market.
Global factors
Recent World Bank studies suggest that rising energy and fertilizer prices and the
falling dollar have contributed about 35 percent of the rise in world food prices.3 This has
occurred directly through higher fuel costs
Figure 2. Ratio of Rice to Wheat Prices in agricultural production (for example fuel
(January 1983 - April 2008 costs for machinery, irrigation systems and
3.00 transport), and indirectly, because energy is
a major input in the production of fertilizers
and agricultural chemicals, which in turn are
2.50 essential inputs in crop production. Rice, in
particular, is fertilizer intensive. Dollar
weakness has been estimated to increase
2.00 dollar commodity prices with an elasticity
between 0.5 and 1.0.4 However, since food
price changes are not closely correlated with
1.50
dollar weakness it is likely that the impact
was at the lower end of this range.
1.00 Increased biofuel demand has been
the largest contributor to the overall surge
in world grain prices. Concerns over oil
0.50
38-n 58-n 78-n 98-n 19-n 39-n 59-n 79-n 99-n 10-n 30-n 50-n 70-n prices, energy security and climate change
Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja have prompted governments to encourage
Source: World Bank data and staff estimates. production and use of bio-fuels.5 This has
3 Mitchell. (2008).
4 Baffes (1997).
5 Numerous countries have set standards or targets for use of bio-fuels the production of which is further facilitated
by implicit or explicit subsidies and trade barriers. The E.U. has set a goal of 5.75 percent of motor fuel use from
bio-fuels by 2010. The U.S. has mandated the use of 15 billion gallons of ethanol from traditional sources
(primarily maize) by 2015 as well as 1 billion gallons of bio-diesel by 2012. Brazil will require that all diesel oil
contain 2 percent bio-diesel by 2008 and 5 percent by 2013, and Thailand will require 10 percent ethanol in all
gasoline starting in 2007. India mandates a 5 percent ethanol blend in nine states, and China is requiring a 10 percent
ethanol blend in five provinces. The U.S. has a tax credit available to blenders of ethanol of $0.51 per gallon and an
import tariff of $0.54 per gallon, as well as a biodiesel blenders tax credit $1.00 per gallon. The EU has a specific
tariff of 0.192/liter of ethanol (0.727 or $1.09 per gallon) and an ad valorem duty of 6.5 percent on biodiesel. EU
member states are permitted to exempt or reduce excise taxes on biofuels. First generation biofuels include starch
and sugar rich crops such as maize and sugar cane which are converted in ethanol (mainly used in the US and
Brazil) and oil rich crops and seeds such as soybeans and palm oil which are converted into biodiesel (especially
popular in the European Union). Production of most first generation biofuels is thus in direct competition with the
use of land for food production. Jatropha, a drought and pest resistant tropical bush with oil rich seeds growing on
marginal lands is a notable exception. Second generation biofuels, on the other hand, are based on cellulose rich
materials such as wood chips, crop residues and algae, and thus not in direct competition with land for food crops,
4
led to increased demand for bio-fuel crops, such as maize, soybeans and palm oil. Almost all of
the increase in global maize production from 2004 to 2007 (a period when grain prices rose
sharply) went for bio-fuels production in the U.S., while existing stocks were depleted by an
increase in global consumption for other uses.6 Land use changes due to increased use of maize
and oilseeds for biofuels led to reduced plantings of wheat, the subsequent depletion of world
wheat stocks to record lows, and a surge in wheat prices.
The impact of biofuel use on rice prices is less direct than for other grains or oilseeds,
since rice is not used for biofuel production and rice land is not easily switched to other biofuel
crops. However the surge in wheat prices is being reflected in rice prices because wheat and
rice are substitutes in consumption and imports. As Figure 2 indicates, rice prices had recently
fallen to exceptionally low levels compared to wheat. This has led to increasing substitution of
rice for wheat in consumption which in turn has contributed to the underlying firmness in rice
prices and their rising trend during 2007. Based on the historical relationship between wheat and
rice prices since 1990, the high level of wheat prices in early 2008 (itself largely reflecting
increased use of biofuels) would suggest rice prices around $600 a ton, up from $326 in 2007.
(Mitchell, 2008). That however is rather less than the further rise in rice prices to over $1000 in
April, for which recent changes in trade policies are more of a factor.
The unintended consequences of recent trade policy actions
The general rise in world grain prices has fostered a growing apprehension among
governments in the major rice consuming countries in East and South Asia about a possible lack
of access to food, which could lead to further politically sensitive increases in domestic food
prices. As a result some have taken preemptive trade policy measures to secure access to food
supplies, which have had a snowball effect, as other governments then also judge it prudent to
take such preemptive measures, contributing to a further surge in world food prices that no
government on its own would have wished for. Among rice exporting countries, the tendency
has been to ban or restrict rice exports, so as to increase supply and lower prices in the domestic
market. Among some rice importing countries, on the other hand, it has led to distress buying by
parastatal importers, with flotation of massive tenders at increasingly high bid prices.
As Figure 3 suggests, the recent acceleration in world rice price increases began with
India's decision to restrict rice exports on October 9. India's decision was in response to surging
world prices for wheat, a major food consumption and import item in India. This event neatly
demonstrates how price increases in other grain markets which are more directly affected by
biofuel policies have ended up also pulling rice prices higher. Rice export restrictions have also
been imposed by Vietnam, China, Cambodia, Indonesia and Egypt. Large purchase tenders
made by the Philippines, the world's largest importer, have occurred at increasingly high prices,
reaching over $1000 a ton in mid April.
but the technology to break cellusose into sugars distilled to produce ethanol or gasify biomass is not yet
commercially viable (World Bank, 2007).
6From 2004 to 2007, global maize production increased 51 million tons, biofuel use in the U.S. increased 50 million
tons and global consumption for all other uses increased 33 million tons, which caused global stocks to decline by
30 million tons (Mitchell 2008).
5
Figure 3. Rice Prices and Recent Policy Responses
$/Ton; January 2004 - April 2008
Rice Export Price, 2004-2008, Thai 100B
Philippines fourth tender >$1,100/ton (April 17, 2008)
1000
800
not Philippines buying > $700/ton
600
per
Vietnam tightens export restrictons
US$
400
200
India imposes export restrictons
Sources: USDA, FAO
0
04 4 04
r-0a 04- 04 04- 05 5 05
r-0a 05- 05 05- 06 6 06
r-0a 06- 06 06- 07 7 07
r-0a 07- 07 07- 08 8 08
Jan- M May- Jul Sep- Nov Jan- M May- Jul Sep- Nov Jan- M May- Jul Sep- Nov Jan- M May- Jul r-0a
Sep- Nov Jan- M May-
Much of the observed increase in food prices is likely to persist for the medium term,
though rice prices are expected to come down substantially from their extraordinary April
2008 peaks. Food crop prices (including rice) are expected to remain high in 2008 and 2009 and
then begin to decline as supply and demand respond to high prices; however, they are likely to
remain well above the 2004 levels through 2015 for most food crops (Table 1). Forecasts of
other major organizations (FAO, OECD, and USDA) that regularly monitor and project
commodity prices are broadly consistent with these projections. Predictions of high food price in
the medium run find particular support from the expected continuing impact of policies aimed at
achieving energy security and reduced carbon dioxide emissions through rapid expansion of
biofuels production. This may present strong trade-offs with food security objectives (see
Section 3 below).
Table 1. Indices of projected real food crop prices, 2007=100.
2007 2008 2009 2010 2015
Real Prices
Maize 100 122 129 124 110
Wheat 100 134 132 129 100
Rice 100 145 153 160 145
Soybeans 100 124 122 118 105
Sugar 100 120 130 130 136
Source: World Bank Development Prospects Group, April 2008. Real prices are US dollar
commodity prices deflated by a US dollar index of manufactured export unit values.
6
3. Impact on countries and households
Macroeconomic Impacts
Macroeconomic effects due to higher food prices are expected to be relatively small at
the level of national income and the balance of payments��as distinct from possible effects on
living standards of the poor. Economies such as Cambodia and Lao PDR are expected to see
fairly small negative effects, while those such as China and Philippines could see somewhat
larger net losses of approximately 0.5 percent of GDP due to higher cereals and/or edible oil
prices. On the other hand, rice exporters such as Thailand and Vietnam likely will see substantial
income gains because of high rice prices, and Indonesia and Malaysia to a lesser extent because
of edible oil exports.
Table 2. East Asia: Consumer price inflation Headline inflation has picked up
2006 2007 2007 2008 Latest in many East Asian economies,
Year Year Q4 Q1 Month notwithstanding the repression of fuel and
"Headline" consumer price inflation energy prices through price controls in
Cambodia 4.7 5.9 8.9 .. 10.8 Jan some of the major economies. As Table 2
China 1.5 4.8 6.7 8.1 8.3 Mar indicates, headline inflation has moved up
Indonesia 13.1 6.4 6.7 7.6 8.2 Mar into the 5-10 percent range in most
Lao PDR 6.8 4.5 5.8 6.8 7.7 Mar countries in the latest available month.
Malaysia 3.6 2.0 2.2 2.6 2.8 Mar While the impact of rising international
Mongolia 5.1 15.1 14.6 19.2 21.5 Mar food prices on overall domestic inflation
Philippines 6.2 2.8 3.3 5.5 6.4 Mar tended to be somewhat muted in 2007 due
Thailand 4.6 2.2 2.9 5.0 5.3 Mar to the relatively small size of international
Vietnam 7.4 8.3 10.7 16.4 19.4 Mar price movements and the appreciation of
Food consumer price inflation many local currencies against the dollar,
Cambodia 6.5 10 17.3 19.8 Jan the large scale of international food price
China 2.3 12.3 17.5 21.0 21.4 Mar inflation in the first quarter of 2008 is
Indonesia 14.7 11.4 11.9 12.4 13.6 Mar likely having a bigger impact. Domestic
Lao PDR 9.8 8.2 7.8 7.5 9.1 Mar food price inflation in China and Vietnam
Malaysia 3.4 3.0 3.7 4.4 4.9 was running at 20-30 percent in the latest
Mar
Mongolia 3.0 25.5 22.6 32.2 35.9 available month of 2008, while it was
Mar
Philippines 5.5 3.3 4.1 7.0 8.2 close to 10 percent in several other larger
Mar
Thailand 4.6 4.1 2.7 6.8 7.8 economies. (Table 2). While international
Mar food price inflation is certainly not the
Vietnam 8.7 11.2 15.9 26.0 30.7 Mar
Source: World Bank data and staff estimates. only factor promoting higher overall
inflation in East Asia � supply shocks in
domestic agriculture (such as last year's swine fever epidemic in China), domestic overheating
and rapid credit growth are also contributing factors in some economies � it is increasingly one
among these factors.
Distributional Impacts
As noted, the share of food in the consumption basket of the average East Asian
household is between 2 to 3 � times as large as that in a developed country like the US. It
ranges between 30 and 50 percent of household consumption (31 percent in Malaysia, 34 percent
in China, 36 percent in Thailand, 40 percent in Indonesia, 43 percent in Vietnam, and 50 percent
in the Philippines). In Cambodia the share of food in total consumption is 59 percent in rural
areas and 40 percent in urban. Internationally traded food products are also a large proportion of
7
the food consumption of the poor � 56 percent in Cambodia for example, and 64 percent in
Vietnam.
The impact of food price increases on the poor also depends on whether they are net
food buyers whose real income will be reduced by higher food prices, or net sellers of food,
who will tend to benefit. The urban poor and landless rural workers are generally net food
buyers, as, typically, are a significant fraction of poor small landholders. Given that most of the
poor live in rural areas � 93 percent or the $1-a-day poor in East Asia are rural � the poverty
effects of the food price increase are most felt in rural areas.
In Cambodia smallholder net buyers make up 25.8 percent of the poor, rural landless 11.5
percent and urban poor 8.4 percent, with another 18 percent being small landholders who are
self-sufficient but not net sellers of food. In Vietnam the proportion of net buyers among the
poor is 47 percent (of whom three quarters are small rural landholders), with another 19 percent
being net self-sufficient. In Indonesia 76 percent of the poor are net rice buyers, including some
72 percent of the rural poor. Here it is estimated that every 10 percent increase in rice prices
reduces the real value of the expenditure of the poorest tenth of the population by 2 percent.7 In
the Philippines it is estimated that for the poorest 30 percent of families, rice constitutes 17
percent of their total consumption and 27 percent of their total food expenditures. It is estimated
that 73 percent of rural and all urban households � many of whom are much poorer than many
net rice producing households � are vulnerable and adversely affected by high rice prices. Some
two thirds of the marketable surplus of rice comes from the wealthiest 40 percent of rice farmers.
Other things being equal, the surge in food prices is likely to increase poverty in the
low and lower middle income countries of the region, although against that must be set the
poverty reducing impact of continued robust economic growth. We estimate that every 1
percent increase in per capita consumption reduces the poverty rate for East Asia as a whole by
around 1 percent (at the $1 a day level). In the medium term there will also be a supply response
to higher prices, as some net food buyers become net food producers. What the overall effect of
these complex interactions on poverty rates in the region in 2008 will be is not yet clear, but it
seems likely that, depending on how much food prices increase during the year, the pace of
poverty reduction in the region will not be as rapid as in the recent past and in some countries
may even reverse. (Poverty rates at the $1 a day level fell by 11-12 percent a year in 2002-2007,
those at the $2 day level fell by 8-9 percent a year.).
4. What can governments do?
Rising food prices are quickly taking on a high profile around the region, eliciting a range
of policy responses. Broadly speaking policy interventions can be divided into three classes. In
order of urgency these are (i) interventions to ensure household food security by strengthening
targeted safety nets; (ii) interventions to lower domestic food prices through short-run trade
policy measures, tax and subsidy policies or administrative action, and (iii) interventions to
enhance the medium-term food supply. Within all three categories of policies there are preferred
options that are more effective and equitable. Table 3 provides an overview of some of the
nearer term policy responses that have been undertaken in selected East Asian economies.
7World Bank (2006) `Making the new Indonesia work for the poor'
8
Ensuring household food security via targeted safety nets
Targeted cash transfers to vulnerable groups are widely thought to be a `first best' way
of addressing food insecurity. Targeted cash transfers support the purchasing power of the poor
without distorting domestic incentives to produce more food, and without reducing the incomes
of poor food sellers (as occurs with price controls and food export restrictions). Examples
include cash or near-cash transfers8 that are conditional upon meeting a requirement (such as low
income, location or occupation) or engaging in a mandated behavior (such as sending children to
school). Various kinds of cash transfer programs are currently used in both middle and low
income countries including Brazil, China, Ethiopia, Egypt, Mexico, Mozambique, South Africa,
Sri Lanka, and Tunisia. Several of these countries are adjusting current programs in response to
the rise in food prices.
Table 3. East Asia: Near Term Policy Responses to Rising Food Prices
Country Economy wide policies Existing social protection programs
Price Increase
Reduce Export Reduce controls/ supply Food Food
import restrictions/ food grain consumer using Cash for ration/ School
tariffs export tax taxes subsidies stocks transfer work stamp feeding
Cambodia X X X X X
China X X X X X X X
Fiji X X X
Indonesia X X X X X X
Lao PDR
Malaysia X X
Mongolia X X X
Papua NG
Philippines X X X
Solomon Isl. X X
Thailand X
Timor Leste X X X X
Vietnam X
Source: World Bank staff assessments.
Only China is currently implementing a targeted cash transfer scheme in East Asia,
although Indonesia and Philippines are studying or developing pilot schemes (Table 3). In
Indonesia the policy package adopted by the government in February includes eliminating import
tariffs and taxes on soybeans, providing a direct price subsidy to small scale producers of
soybean-based foods, increasing the export tax on palm oil to control cooking oil prices,
subsidizing cooking oil for low income households, eliminating VAT on cooking oil, increasing
the monthly quota of subsidized rice for poor households, removing the import tariff on flour,
relaxing flour fortification standards, and strengthening the role of the state logistics agency
(Bulog). In addition the Government of Indonesia is now working to develop and pilot a
conditional cash transfer program targeted at 500,000 extremely poor families. The pilot
program has the potential to provide a safety net for the very poor against shocks such as rising
fuel and food prices, while also helping families ensure access to basic health and education
8Food stamps are the most often used form of near-cash transfer.
9
services. Indonesia's Community Cash Transfer program also provides grants to communities
for increasing school enrollment and healthcare utilization rates. Similarly, the Government of
the Philippines is designing a conditional cash transfer scheme as a medium term safety net
policy that could absorb shocks for the poorest, including food price shocks and to improve
targeting in its subsidized rice program (see below). It is also exploring the possibility of
replacing that program with an unconditional cash transfer scheme.
The scale, targeting efficiency and value of such transfer programs tends to be directly
related to overall levels of development, given the administrative complexities and fiscal costs
entailed. Net additional spending on cash transfer programs should be financed in a fiscally
sustainable way. However a well-targeted cash transfer program may not always represent an
additional fiscal cost. It may even represent a fiscal saving if it is used to replace more costly
and inefficient forms of social protection, such as an untargeted or poorly targeted food subsidy.
In the Philippines, for example, the current rice subsidy scheme is estimated to cost at least
Php26.3 billion (about 0.4 percent of GDP or $650 million). Despite the large expenditure, poor
targeting of the rice subsidy means that the bulk of the benefits are obtained by the middle and
upper classes rather than the poor.
The feasibility of targeted cash transfer programs must also be carefully assessed with
respect to each country's administrative capacity and the political economy surrounding the
implementation of the program, rather than on any rule of thumb. There are significant examples
of low and lower middle income countries that have successfully implemented targeted cash
transfer schemes, sometimes very quickly. Indonesia, for example, rapidly implemented a
temporary unconditional cash transfer scheme in 2005/06 to compensate the poor for a reduction
in fuel subsidies.
When cash transfers cannot be rapidly put in place (for instance, because of the difficulty
in targeting vulnerable groups; see Box 1), food-for-work and public works programs represent
valid alternatives. Evaluations of Argentina's Trabajar program, and of the padat karyas (i.e.
public works) programs that Indonesia established after the financial crisis show that these type
of programs can significantly benefit the poor while, if compensation is kept low enough, also
achieve lower leakage than targeted food subsidies. School feeding programs can also improve
the food intake of school-age children and (indirectly) their families, but do not cover all
vulnerable groups. Emergency food aid distribution should represent a temporary measure
aiming at quickly assisting vulnerable groups until other programs are put in place. However the
physical transfer of food is costly, often suffers from significant leakages And may have growing
disincentive effects on local production if it becomes entrenched beyond the initial emergency.
It is difficult to reach all vulnerable groups with a single social protection program. The
optimal response should therefore consist of a set of fiscal measures and social protection
interventions that cover all vulnerable groups, minimize overlap and address both the short
and the medium term. The response should start from existing social protection programs,
subsidies, tariffs, and import/export restriction, as well as a realistic appreciation of the political
economy associated with existing programs. The response should try to minimize operational
costs and leakages, while taking account of the time needed for implementation. (Implementation
of more sophisticated programs, while taking more time, could also help develop a framework
for responding to future crises.) Annex Table 1 compares features of different social protection
programs, including the time needed to set up and expand programs, costs and leakages.
10
Box 1: Short- and medium term targeting strategies
Targeting the right beneficiaries is among the most challenging and costly tasks in all social protection
programs that are not universal by nature. It can take several months to develop a roster of beneficiaries
of a specific social protection program. Nevertheless, while developing well-targeted social protection
programs is clearly the best long-term solution, especially from the angle of fiscal sustainability, short to
medium term responses ought to be based on the scope and coverage of each country's existing social
protection programs. The following points highlight short and medium term ways to expand social
protection coverage.
It is often quickest to expand the scope and coverage of existing social protection programs, in
particular of cash transfers. A major challenge in assisting the poor during crises is reducing the time
needed to implement an emergency response. The most efficient way is to expand the scope and coverage
of already existing social protection programs. Pakistan, for instance, is in the process of expanding ration
shops for wheat, and Ethiopia has increased the cash transfer amount of its main safety net program by a
third. Cash transfers programs are particularly well-suited to channel additional aid during crises.
Targeted cash transfers are the least distorting response in times of crises, require little additional
logistical resources and, once in place, it is relatively straightforward to extend coverage to additional
beneficiaries.
It is important to consider alternative ways to achieve a reasonable level of targeting in the short term.
It is difficult, if not impossible, to achieve good household targeting in the short term. But this does not
mean that the only viable alternatives are costly programs with universal coverage. Ideally targeting
should be developed from comprehensive surveys of household or individual characteristics; but when a
rapid response is essential targeting can also be geographical, or based on easily observed and pre-
determined individual characteristics, such as age, or weight to height ratios. Brazil, for instance, initiated
a coupon program in the 1980s that distributed food through government-run supermarkets every two
weeks, but, after an evaluation, found it cheaper to subsidize food for all customers in very-low income
neighborhoods, even if that implied some leakage.
Food price subsidies need to be used with care. Because general price subsidies transfer income to
everyone, their fiscal cost is high. Food price subsidies could therefore be restricted to geographical areas
in which the poor are concentrated (for instance, by subsidizing food in registered small neighborhood
stores), or by focusing subsidies on food or non-food items mainly consumed by the poor.
Ensuring household food security by lowering domestic food prices
So far most interventions by East Asian countries have concentrated on reducing
domestic food prices through changes in trade policies, changes in domestic taxes and subsidies
and through administrative measures such as price controls (Table 3).
A number of grain exporters have recently restricted grain exports as a means of
increasing supply and lowering prices in the domestic market. In East Asia Cambodia, China,
Indonesia and Vietnam have joined India and Egypt in announcing restrictions on rice exports or
raising export taxes. As discussed earlier, rice export restrictions in one country have fostered
competitive export restrictions by others, contributing largely to the massive recent rice price
increases in the thinly traded world rice market, sharply increasing food costs in countries that
depend on rice imports.
While appealing to exporting countries from a short term domestic political perspective,
these measures could have significant negative consequences both for exporters and their
customers. The recent restrictions run the danger of destroying confidence in the global rice
11
market as a source of food security and of stimulating support for protectionism and moves
towards "self sufficiency" in the importing countries, leading to a destruction of export and trade
opportunities, at a high cost to growth and efficiency. Export restrictions also tend to have a
limited impact on domestic price levels and a pronounced negative effect on earnings and
incentives for domestic farmers, while also encouraging smuggling. It is notable (and
commendable) that Thailand, the world's largest rice exporter has avoided export restrictions,
thereby cementing its long term reputation as a reliable global supplier. A later section suggests
that cooperative regional or international actions are a way of reversing the recent breakdown
and panic pricing levels in the world rice market.
Other options to lower domestic prices include reducing tariffs and other taxes on key
staples. Many countries impose tariffs on food imports to encourage domestic production and
boost government revenue. In times of sharply increasing prices, reductions in food tariffs and
taxes are an easy-to-implement way to provide some relief to consumers, albeit at some fiscal
cost.9 Removal of import barriers simply allows the country to obtain food at the lowest possible
cost, whether this is through imports or from efficient domestic food producers. Some 24 of 58
developing countries sampled by the World Bank have recently reduced import duties and VAT
in the wake of rising food inflation. In East Asia China, Fiji, Indonesia and the Solomon Islands
have reduced import barriers on food, while Cambodia, China, Indonesia, Fiji and Mongolia
have reduced (or plan to reduce) domestic food taxes.
The present incentive to reduce food import barriers also presents an opportunity to
pursue more permanent trade reform in countries with significant controls on rice imports, for
example the Philippines and Indonesia The Philippines is in fact now considering a reduction in
import tariffs and liberalization of the import market. Some express concern that private traders
will not have sufficient capacity to rapidly fill the rice import gap. Experience from Bangladesh
and Madagascar underscores the importance of transparency and policy consistency in
liberalizing the rice market and fostering private trader participation (Box 2).
The fiscal cost of lower food taxes and additional social protection expenditures will
require financing through increases in other revenues, reduced spending on lower priority areas
or increased borrowing. Whether a country can reduce food taxes, and, if it does, how it finances
such reductions will depend on its initial fiscal and macroeconomic position, its administrative
capacity to raise other revenues (for example taxes whose incidence falls more on upper income
groups), the availability to cut other less socially valuable expenditures and the government's
ability to borrow at reasonable cost. Although there are some differences, in general most East
Asian countries have improved their fiscal positions in recent years, reducing fiscal deficits and
public debt to GDP ratios. Thus East Asian economies may be reasonably well placed to
address the fiscal costs of reducing food import protection or domestic food taxes.
Box 2: Lessons for successful rice market liberalization from Bangladesh and Madagascar.
Bangladesh allowed private trading in grains in the early 1990s. Following a massive flood in mid-1998,
2.4 million tons of private sector imports stabilized domestic prices at import parity levels. The
government also scaled up public safety net programs. Dialogue between the government and private
traders contributed to this success. Officials learned from private traders about changing conditions in
9Removal of import quotas or other quantitative restrictions on imports would not entail a direct loss of fiscal
revenues however.
12
international markets, shipping, port problems and domestic transport. Private traders had a forum to
learn about government policies and express their concerns.
Madagascar liberalized rice markets in the mid-1980s while maintaining high import tariffs and taxes to
protect domestic producers. In early 2004, a production shortfall coincided with a rise in world prices and
a sharp depreciation of the currency. The slow pace of private commercial imports led the government to
float tenders for commercial imports of rice. But, they also left open the possibility that tariffs on these
imports might be waived or rebated and set an official sales price below the tariff-inclusive import parity
price. As a result, private sector import trade was discouraged, and the government did not have sufficient
rice to meet all demand at this official price. It had to ration sales, and a parallel market at a price above
import parity levels developed.
These experiences suggests that while competitive private markets can react more quickly to changing
market conditions at a lower (overall and fiscal) cost, successful involvement of the private sector
requires a level playing field, a transparent, consistent policy and dialogue with the private sector to
minimize uncertainty.
Source: Dorosh, P., 2008, Food Price Stabilisation and Food Security: International Experience, Bulletin
of Indonesian Economic Studies, 44-1, pp. 93-114.
Many East Asian economies have also responded to the food price increases by either
maintaining or extending price controls or, in some cases, by maintaining or extending
consumer subsidies on staples like rice (China, Fiji, Malaysia, Mongolia, Philippines, Solomon
Islands, Timor-Leste, Thailand). These measures may be helpful for managing expectations
and stabilizing conditions for short periods but have significant longer run costs. The risk with
price controls is that they discourage production by domestic farmers, are often difficult to
enforce, and encourage illegal activity such as black markets. As noted above, generalized
subsidies on basic food items such as rice can easily become a big fiscal cost. Even if they are
intended to be a form of social protection for the poor, poor targeting often means that middle
and upper income groups get most of the benefit of the subsidies.
Measures to stimulate a medium-term grain supply response
High prices do present an opportunity to stimulate food grain production and enhance
the contribution of agriculture to medium-run growth. Higher grain prices can help reverse a
generally declining trend in government, private sector and donor investment in the agricultural
sector. Agriculture producers such as Brazil, Malaysia and Thailand have increased investments
in agricultural research and extension in recent years, bolstering agricultural productivity and
reducing agricultural risk. China is following suit by rapidly increasing its investment in
agriculture under its 11th 5 year plan.
However, some of the short-run trade policy options discussed above may limit the
scope for longer-term solutions. For example, policy responses that seek to control markets
through mandated grain prices, export restrictions, forcible procurement, or direct government
involvement in marketing activities are likely to lower the food supply response over the medium
term. In contrast, investment in public goods such as demand led extension and agricultural
research and development to foster better agronomics and better incentives and regulations to
stimulate more efficient water use can go a long way in helping farmers take full advantage of
higher food prices.
13
There is substantial scope for an environmentally sustainable supply response through
better agronomics, reduction in post-harvest losses and more efficient water management. In
most East Asian countries the land frontier has been closed, while population growth and
urbanization continue to reduce the area available for agriculture. The rising demand for feed
grains, following diet diversification into meat, and bio-fuels further increase pressures on land
for rice production. With an estimated 500 million people in East Asia living in absolute water
scarcity, maintaining irrigated food production through large extractions of water from rivers or
the ground is unsustainable. Climate change further adds to the uncertainties. In short there is
little scope to increase rice production through expansion of land under cultivation or irrigation.
Nevertheless more widespread use of existing agronomic practices and technologies
alone could increase rice yields in East Asian countries by at least 25 percent (and up to 80
percent). Improved nitrogen and potassium management techniques could readily result in yield
increases of about 0.5 ton/ha in East Asian countries such as Indonesia, Thailand, the Philippines
and Vietnam. About 25 percent of the value of the total crop in South East Asia could be saved
through better post harvest technology and infrastructure. Increases in irrigation efficiency
(currently in the range of 46-65 percent compared with 85-90 percent in Australia and the US)
can also be achieved through better water management, incentives and regulation.10
A demand-driven regional outreach initiative and more public investment in
agricultural R&D are key. Widespread diffusion of more advanced agronomic, post harvest and
water management technologies could be fostered through a regional outreach initiative in a
partnership between countries, the International Rice Research Institute (IRRI) and bilateral and
international funding agencies. Many countries are also currently underinvesting in agricultural
research and development (R&D). While public R&D spending in developed countries reached
2.36 percent of their agricultural GDP in 2000, it was only 0.53 percent in developing countries,
0.4 percent in Asia, and 0.13 percent in Vietnam. Given the long time lag between the
discovery, distribution and adoption of new rice varieties, increasing public spending on
agricultural R&D today is critical to sustain staple crop yield gains in the future.
Managing domestic price volatility when world food stocks are low. Low worldwide
buffer stocks of rice are among the factors contributing to today's volatile international prices.
International experience has so far suggested that the optimal strategy for domestic food price
stabilization and food security in developing countries involves market based instruments
(including reliance on the world markets and the use of future contracts as insurance against
price spikes) combined with targeted safety nets. This avoids some of the efficiency losses and
fiscal costs associated with government management of buffer stocks and food distribution. This
dual domestic food security strategy of reliance on market forces and safety nets has proven to
work well when food price volatility emanates from domestic supply shocks (as during the 1998
floods in Bangladesh), when world markets are sufficiently supplied, and when exporters'
interest are closely tied to the global market. International rice markets have been generally
characterized by just such conditions over the past decade. The strategy has however come under
pressure in the present conjunction of relatively low world rice stocks with two other factors:
sharply increased demand for grains due to biofuels demand, and the absence of an adequate
framework of rules and cooperative institutions to govern international rice trade. Strengthening
international cooperation on biofuels and on avoiding international market disruptions could
10Just addressing poor land layout, for example, through better leveling and higher bunds to retain wet season water
has been shown to increase yields in Cambodia by 27 percent. A shift from area based to volume based charges for
irrigation water in the Tarim Basin in China resulted in a 17 percent decrease in water use.
14
therefore be very helpful in avoiding a reversion to costly buffer stock policies and in ensuring
that the substantial efficiency gains from international food trade will not go lost in the future.
Regional or international cooperation?
The preceding discussion has stressed the important role of restrictions on rice exports
in the latest surge of prices on the thinly traded international rice market, a development also
underpinned by rising biofuel demand and low worldwide buffer stocks. While export
restrictions have generally been imposed for understandable motives of securing domestic rice
supplies, they have had the unforeseen result of provoking other rice exporters into also taking
defensive measures to restrict rice exports. Meanwhile major importers have felt compelled to
launch huge public tenders at almost any price. The surge in international prices to over $1000 a
ton could ultimately lead to domestic prices in exporting countries being pushed higher rather
than lower, which was the original intention of the export restrictions.
However no individual rice exporter may be willing to pull back from the "beggar-thy-
neighbor" export restrictions that are the principle reason for the recent price surge unless others
do as well. A collective agreement between the major rice producers and consumers could
play a crucial role in defusing the current market disruption. Given their important role in
regional collaboration, bodies such as ASEAN or ASEAN+3 could play a leadership role in
convening a "disarmament conference" between the major players to discuss the needed
actions.11 Since around 90 percent of world production and consumption occur in South and
East Asia, a meeting of the leading producers and consumers in just these two regions may be
sufficient. Countries could agree to reduce or remove export and import restrictions for a
temporary period, reviewing more permanent agreements later.
The potential impact of such an agreement could be substantial as illustrated by the 40
percent drop in world wheat prices on April 24 following Ukraine's cut back in its export
restrictions and prospects of bumper wheat harvests in areas such as the Black Sea basin, Canada
and Europe. The underlying fundamental conditions for the rice market also look relatively
benign in the year ahead. World rice production in the last 3-4 years has been growing at just
over 1 percent a year, a little more than sluggish world consumption growth of around 0.8
percent a year. The USDA projects a further 1 percent rise in world rice production in 2008,
which together with estimated world rice stocks of around 77 million tons, should comfortable
cover demand growth for the year. Indeed India and Indonesia have already announced the
likelihood of bumper rice crops.
In this spirit, the Philippines has already called for an emergency ASEAN meeting on
rice and the rice crisis will be discussed at the upcoming G8 meeting in Japan. Short run actions
to stop the escalation of rice prices could include agreement by China, Japan, and Thailand to
sell down some of their large rice stocks. China is holding 38 million tons of rice stocks
according to USDA estimates. Japan is holding around 1.5 million tons of US rice purchased
under trade agreements, in addition to stocks of domestic rice. Thailand has 2.1 million tons of
government rice stocks in addition to an additional two million tons held by private exporters
and rice mills. Under current conditions, placing even an additional 1-2 million tons of rice on
the world market would have a big impact on prices.
11This includes the establishment of the ASEAN Emergency Rice Reserve in 1979 which has subsequently been
complemented by the East Asia Emergency Rice Reserve under ASEAN +3. While the amounts in these reserves
may currently be too small to dent the current rice price peaks, these agreements do provide an ideal political
platform to discuss coordinated actions for addressing the current rice price crisis.
15
Finally, there is an increasingly urgent need for greater international engagement and
collaboration to address the competing demands of energy and food security. Biofuel
mandates, trade tariffs and subsidies in the advanced countries have distorted world food markets
and have played an important role in rising world food prices. Against these costs, which are felt
most sharply by the poor, is the potential for an alternative low-carbon, more climate-friendly
source of energy. 12 More analysis and international dialogue is needed to decide whether the
benefits from the current mix of policies really justifies the costs, or whether a new global deal
can be struck covering both clean energy and food.13 Analysts have suggested that such a deal
could entail a drawback or elimination of those policies that are contributing to the high food
prices facing consumers today, in particular first generation biofuels policies in developed
countries and agricultural export restrictions and import controls in developing countries. Freer
agricultural trade along these dimensions can be combined with enhanced support for research
and development into new clean energy and alternative energy technologies, or other forms of
international cooperation on climate change.14
12However it has been estimated that converting rainforests, peatlands, savannas, or grasslands to produce food-
based biofuels in Brazil, Southeast Asia, and the United States creates a `biofuel carbon debt' by releasing 17 to 420
times more greenhouse gases (GHG) than the annual GHG reductions these biofuels provide by displacing fossil
fuels.
13According to a recent IFPRI study, most scenarios of increased biofuel use imply substantial trade-offs with rising
food prices. These trade-offs are dampened, although not eliminated, when technological advances in biofuel and
crop production are considered. (IFPRI, IMPACT results, 2006).
14New technologies could include second generation biofuel technologies that rely on waste products rather than
food crops, and which avoid the land use changes and greenhouse gas emissions associated with current biofuel
programs.
16
Annex Table 1: Rapidity and efficiency of response of selected Social Protection programs.
Minimum time Minimum time
required to required to
set up the expand an
Intervention program existing program Costs Leakages Country examples
Targeted cash Three to six To increase the The median The accuracy of When it lowered the fuel subsidy, the Indonesian
transfers months payment, 1 administrative cost of targeting depends on government put in place a targeted cash transfer in
minimum, payment cycle; to cash transfer programs is time and resources less than three months. Local authorities were
(Unconditional depending on expand the set of 10% of the total budget; invested. In Indonesia, responsible for initial targeting, and transfers were
means-tested the accuracy of beneficiaries, 1-2 costs however vary only 60% of the distributed directly to beneficiaries via the post
cash transfers) targeting. months. significantly with Unconditional Cash office system. Haste led however to higher
coverage and the level of Transfers went to the leakages.
the payments. poorest 40%, while in
Brazil's Bolsa Familia,
94% of the funds went
to the poorest 40%.
Conditional Cash 9-12 months. To increase the The median As above. Mexico spends 0.4% of GDP on Oportunidades, a
Transfers payment, 1 administrative cost of CCT program that covers approximately 18% of the
payment cycle; to CCT programs is 8%. country's total population. Beneficiaries are poor
expand the set of households with children under 18 years, and it has
beneficiaries, 1-2 been estimated that 68% of the payments go to the
months. poorest 20%. Brazil's Bolsa Familia targets poor
families with a per capita income of less than
US$60 per month (approximately 11.1 million
families).
Food for work / Three to six One to two In Argentina's Trabajar In Argentina's Jefes In early 2002, over 50% of Argentina's urban
public works months. months. and Jefes workfare program, 80 percent of population had fallen below the poverty line. In
programs, the share of the participants were April 2002 the government launched Jefes, a
wage costs relatively to from the poorest 40%. massive workfare program targeting unemployed
project costs varied from To achieve good household heads with at least a minor below the
30 to 40%, and targeting, it is crucial to age of 18. In May 2003, nearly 2 million workers
administrative costs were maintain compensation were enrolled in Jefes, which had a budget of 1%
less than 2%. below the market rate. of GDP.
Emergency food A few weeks, A few days High. Transport and Usually high. In September 1998, Bangladesh was inundated by
aid distribution but lack of food minimum (pending distribution make up the Information on poverty a large flood, which caused 10% rice production
availability may food and transport largest share of costs, and local prices can losses. The first intervention was an immediate
lengthen the availability). which are expected to be however improve relief effort designed to provide emergency food aid
delivery time. at least as high as private targeting. to disaster victims. The second was a medium-term
costs. In countries with program that distributed 16 kilograms of grain per
poor infrastructure, month to poor households selected by local
administrative costs committees. Finally, in December 1998, when the
could amount to half of soil was dry enough to permit manual construction
the budget. of earthworks, the government initiated a Food for
Work program.
17
References
Baffes, John, 1997. "Explaining Stationary Variable with Non-stationary Regressors." Applied
Economics Letters, 4:69-75.
FAOSTAT, 2003. http://faostat.fao.org/site/502/DesktopDefault.aspx?PageID=502
Mitchell, Donald, 2008. "A Note on Rising Food Prices." World Bank, mimeographed.
World Bank, 2007. World Development Report 2008: Agriculture for Development,
Washington D.C.
World Bank, 2008. "Rising food prices: policy options and World Bank response", Background
note for the Development Committee, Washington, D.C
18