Food Price Crisis Draws Attention at IMF/World Bank Meetings

15 April 2008 by Soren Ambrose

It was easy to predict that the global credit crisis would be a major concern at the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
/World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

spring meetings.

But while that was true, it was clearly the case that the heads of the two institutions were intent on focusing attention on the rapidly rising price of food around the world. Both the World Bank’s Robert Zoellick and the IMF’s Dominique Strauss-Kahn made the crisis the centerpiece of their messages to the media. Not surprising, perhaps, given that “food riots” are making headlines in many low- and some middle- income countries. Since February, civil unrest in response to the rising cost of living — with food prices as the most obvious trigger — have taken place in Burkina Faso, Niger, Cameroon, Cote d’Ivoire, Egypt, Senegal, Ethiopia, Haiti, Yemen, and the Philippines, with deaths occurring in at least four of those countries.

The IMF reports that food prices have increased 48 percent since the end of 2006.

The institutions are doing well to try to focus the attention of the world on the desperate situation that is rapidly introducing new instability to already-vulnerable countries. It is also possible, however, to deduce that the institutions are working hard to be seen as part of the solution, in hopes that will make it less likely they are identified as part of the cause. Agricultural programs in many countries, particularly in Africa, were devastated by the “structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

programs” of the 1980s and 1990s. While the previously existing regimens, dominated by state marketing boards, were riddled with problems, the reforms insisted on frequently put both farmers and consumers at the mercy of unregulated middlemen and left struggling farmers with nowhere to turn for the credit, extenstion services, and assistance with inputs (fertilizer, pesticide, etc.) they once had. The Bank’s promise of doubling its agricultural assistance to Africa, to about $800 million a year, has been welcomed by many, but it is not yet clear what kinds of programs it will introduce. If the programs are designed to encourage large-scale farms and corporate provision of seeds and inputs, they could end up disrupting agricultural economies based on small-scale producers even more.

The World Bank put out several press releases and released a report drafted for the meeting of its Development Committee called “Rising food prices: policy options and World Bank response.” The IMF put out a shorter report in its IMF Survey.

Both institutions identify similar causes for the crisis — a convergence of factors including skyrocketing oil prices, the global credit crisis, increased demand for meat and other products from the growing middle class in China and other emerging markets, and the increasing demand for crops like corn (maize) and sugarcane to make ethanol and other agrofuels. But neither institution has a convincing solution to offer. Indeed, institutions that have supported “free trade” so fervently will find it difficult to recommend measures that recognize food as a unique product that cannot be treated as an ordinary commodity. Thus far, much of their emphasis has been on encouraging countries to limit their use of consumer subsidies and export bans.

The IMF and World Bank both say they can expand existing programs (the Bank cites an upcoming credit to Burkina Faso that will be increased) to make more assistance available. And both say they are offering policy advice to countries grappling with food shortages and/or inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. . But neither claims to be able to reverse the problem anytime soon; indeed they both seem to expect the problem to persist for several years.

The IMF report says that “In Africa and Asia the effect of higher food prices would have to be seen not only in terms of undermining the efforts to fight against poverty but also as representing a new kind of macroeconomic imbalance, Strauss-Kahn said. For a large part of Africa, a shock could be expected that was as big as, and maybe bigger than, previous shocks.”

Strauss-Kahn tried to dramatize the problem at a press conference: “Thousands, hundreds of thousands of people will be starving. Children will be suffering from malnutrition, with consequences for all their lives.”

Zoellick, in addition to using a bag of rice as a prop at a press conference, has said that “33 countries” — a curiously precise number for which he provided no explanation — could be at risk of civil unrest because of food prices.

The recent burst of demand for agrofuels (also called biofuels) has attracted the most notice among the causes cited. The Wall Street Journal’s front-page article on April 14 quotes Indian finance minister Palaniappan Chidambaram saying “When millions of people are going hungry, it’s a crime against humanity that food should be diverted to biofuels,” said India’s finance minister."

The same article points out that Zoellick must be feeling a bit uncomfortable, since as U.S. Trade Representative he asserted and defended U.S. agricultural policies, including the promotion of ethanol made from corn. In an appearance Friday morning on National Public Radio, Zoellick resisted the host’s unusually aggressive attempt to get him to acknowledge that the Bank’s report (cited above) cited agrofuels as the main factor in creating the crisis.

For me, the swift change in conventional wisdom regarding agrofuels has been quite remarkable, and a cause for hope that rationality may prevail sooner rather than later. In July 2007 I attended the U.S. Social Forum, where I participated in a couple panel on the perils of agrofuels. The threat they pose to food security was then a rather novel argument, now it is accepted fact. Economist Paul Krugman, a popular New York Times columnist last week cited agrofuels as the main cause of the crisis, and coined the term “demon ethanol” (a play on the old prohibitionist phrase “demon alcohol.”) While the battle is far from won, and will no doubt extend to “second-generation” agrofuels made from waste products and genetically-engineered crops, the progress made so far is encouraging.

In the meantime, however, the food price crisis will undoubtedly demand a great deal of attention as we attempt to prevent starvation of “hundreds of thousands” (in Strauss-Kahn’s terms) amidst plenty.

Article published in IFI Watchnet



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