The unnatural coupling: Food and global finance

Jayati Ghosh
Saturday 25 April 2009 by LRAN

Paper for presentation at IDEAs Conference on

“Re-regulating global finance in the light of global crisis”

Tsinghua University, Beijing China, 9-11 April 2009


It has been clear for some months now that the global food crisis, which has been simmering for some time even if it first attracted international attention only around a year ago, is not something that can be treated as discrete and separate from the global financial crisis. On the contrary it has been intimately connected with it, particularly through the impact of financial speculation on world trade prices of food.

This is not to deny the undoubted role of other real economy factors in affecting the global food situation. While demand-supply imbalances have been touted as reasons, this is largely unjustified given that there has been hardly any change in the world demand for food in the past three years. In particular, the claim that food grain prices have soared because of more demand from China and India as their GDP increases, is completely invalid, since both aggregate and per capita consumption of grain have actually fallen in both countries. Supply factors have been – and are likely to continue to be – more significant. These include the short-run effects of diversion of both acreage and food crop output for biofuel production, as well as more medium term factors such as rising costs of inputs, falling productivity because of soil depletion, inadequate public investment in agricultural research and extension, and the impact of climate changes that have affected harvests in different ways.

While these remain urgent issues that require global and national policy interventions, the intensity of the food crisis that hit many developing countries in 2008 was particularly on account of the dramatically high global prices of important food items, which adversely impacted upon national food security for food deficit countries, and their partial pass-through to national economies, which in turn affected the food security of vulnerable groups within countries. It is now quite widely acknowledged that financial speculation was the major factor behind the sharp price rise of many primary commodities, including agricultural items over the past year (UNCTAD 2009, IATP 2008, 2009, Wahl 2009). Similarly, the subsequent sharp declines in prices were also related to changes in financial markets, in particular the need for liquidity to cover losses.

However, the decline in global trade prices of important food commodities has induced some amount of complacency about the food crisis. Yet it continues apace and is even likely to be exacerbated in many developing countries. One significant reflection of this continuing crisis is the fact that, even though global trade prices of wheat, rice, maize and other food items have fallen dramatically since mid/late 2008, the retail or wholesale prices of these commodities in many developing countries have not fallen and in many cases continue to increase. There are other mechanisms through which the financial crisis itself operates to increase food insecurity. These work through the constraints the current crisis is imposing on fiscal policies in balance of payments constrained developing countries and the effects of capital flows upon exchange rates, as well as through the adverse impact upon livelihoods and employment, which reduces the ability of vulnerable groups to purchase food.

In this paper, some of these issues are explored in more detail. In the second section, the role of speculation in determining the recent volatility of prices of food and other agricultural commodities in global trade is discussed. In the third section, the conundrum of persistent high food prices in much of the developing world despite falling global prices, and the implications of this tendency, are explored, along with a consideration of how some developing countries have managed to avoid the more adverse effects. The fourth section contains a discussion of the various interconnections between finance and food that continue to generate food insecurity for a large part of the world’s population. In this section some proposals for regulating finance specifically in order to enable effective strategies for food security are also briefly noted.

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