Last month the president of the World Bank, Robert Zoellick, speaking at the spring meetings of the International Monetary Fund and World Bank, said the global economy is “one shock short of a global crisis”.
What Zoellick was referring to was a combination of shocks: revolution in the Middle East and North Africa, crop failures in major food-exporting countries and the potential failure of one of the Eurozone countries to meet its debt obligations. Such shock effects would be felt by every person in Southern Africa — at the petrol pump, in the supermarket.
Maize prices on world markets have doubled in a year. Food prices peaked in 2008, just prior to the international financial crisis, but in the past year they started their upward climb again. A situation in which food prices rise so rapidly, just as the global economy begins a weak emergence from the effects of the 2008 financial crisis, should ring alarm bells.
One of the immediate causes has been crop failures caused by weather events in exporting countries, such as floods in Australia. According to some market commentators, the perfidious Chinese and Indians are to blame: they are now richer and demand more and better food.
There is some truth in that, but it overlooks the fact that these countries have been net exporters of many of the food products of which prices were rising. More importantly, in almost every major food-exporting country there has been a fundamental shift in agricultural policy, making it more vulnerable than before to changes in oil prices.
Zoellick explained rising food prices partly in terms of global biofuel policy. The United States agro-business lobby spends lavishly to advertise the virtues of biofuel, as does the department of agriculture. In 2007 the Congress said about 7% of US petroleum needs by 2015 would come from biofuel, mostly maize. The country is ordinarily responsible for about 60% of world maize exports and this target would require about 40% of its crop. US farmers loved the policy because it gave them a legally mandated market for their maize and other crops; politicians loved it because it could make them look green (though it was not) and the direct cost to the national budget was small.
Bad ideas that are politically sweet tend to be highly infectious. Every major food-exporting country replicated US policy. Now the European Union, Argentina, Canada, Australia, India and China have all mandated biofuel thresholds for petrol and diesel. Brazil has had a biofuel mandate since the 1979 oil crisis.
What this means for the world food market is that the global food production system now has to feed not only seven billion people but also a very large number of cars around the world. In time increased agricultural productivity and expansion in places such as Russia may mean that we can feed ourselves as well as our cars, but the jury is still out. Right now, the biofuel mandates of 2007-2008 are starting to bite: global food markets are much tighter.
When food prices rise the poor get poorer and discontent increases. Although the dramatic self-immolation of Mohamed Bouazizi in Tunisia may have been the proximate cause of the uprising, few doubt that rising food prices were very much part of what drove people onto the streets of Tunis.
After the “Arab spring” spread to Libya and then Bahrain and Yemen, the markets went apoplectic and oil prices rose to between $110 and $120 a barrel. The fear that the demand for real democracy will infect the major oil suppliers is still present and the violent suppression of calls for democracy in Bahrain led to sighs of relief around the Western world.
Another shock — revolution in a major oil-producing country, a forced bailout or collapse of a major Eurozone economy — and we may yet see the crisis to which Zoellick referred: the “double-dip” recession. The only good news from the gallows is that in 2008, when the financial crisis started, world oil and maize prices fell sharply, and that could happen again.
Of course, whether the competition-phobes in South Africa’s milling industry will pass any decreases in maize prices to consumers is another question.
Professor Roman Grynberg is a senior research fellow in the Botswana Institute for Development Policy Analysis in Gaborone