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Apr 27, 2011, 04.49 PM IST | Source: Reuters

Food inflation must be tackled in Asia: ADB

Asia must tackle food price inflation aggressively to preserve economic gains and protect some of the world's poorest people now that the region's recovery has gathered strength, the Asian Development Bank's chief economist said.

Food inflation must be tackled in Asia: ADB

Asia must tackle food price inflation aggressively to preserve economic gains and protect some of the world's poorest people now that the region's recovery has gathered strength, the Asian Development Bank's chief economist said.

In an interview coinciding with the issuing of an ADB report, Changyong Rhee acknowledged that food pice rises, if left unchecked, could generate instability. But he said Asian leaders were well aware of the danger and could take action to guard against the sort of unrest gripping the Middle East.

"The reason why we are emphasising food inflation more than the recovery aspect is that unlike the last two years, Asia's economic recovery is on more firm ground," he said on Tuesday evening in his office at ADB headquarters.

"And rising food prices can cause some social instability too." He said the ADB expected global food prices, which have risen 30%, to steady at these higher levels in the second half of the year.

Food accounts for a higher proportion of consumer spending in Asia, according to the ADB -- 40% or more in the consumer price indexes of Bangladesh, Cambodia, India, Pakistan, Philippines, and Sri Lanka -- and the continent's 3.3 billion people include two-thirds of the world's poor.

The ADB report said food price inflation in Asia of around 10% in early 2011, could pull more than 64 million people below the poverty line of USD 1.25 a day if sustained.

Far-reaching consequences

And a failure to act, the multilateral lender said, could have far-reaching consequences.

"Efforts to stabilise food prices must take centre stage," the report said. "Otherwise, the riots that are occurring in the Middle East and North Africa may spread to other parts of the world."

The ADB said the food price rise compounded by a projected 30% increase in oil prices could reduce growth by as much as 1.5 percentage points.

But oil price rises had already exceeded that in annual terms, Rhee said, and if sustained the impact on growth could therefore be higher.

Rhee said many of of Asia's pooreer countries imported large amounts of food, making them among the most vulnerable to rising prices. And they had no large foreign exchange reserves or the fiscal ability to fund large assistance measures. But he said policymakers would find a solution, even if it was not perfect.

"That is why each government is really focused on short-term measures such as providing subsidy and food programmes, trying to stabilise domestic food prices and building up social safety nets," he said.

"Given that many policymakers understand this problem, I don't see any short-term risk of having this kind of instability in the region."

Long-term solutions

That said, food security would be a recurring issue that needed long-term solutions such as investment, infrastructure, better productivity and crop yields.

The problem, Rhee said, was that once prices stabilised or moderated, political and media interest faded quickly. "It is very hard to agree on the international coordination once the problem becomes severe," he said.

The challenge for policymakers is how to tackle food inflation when it is caused by factors out of their control. Bad weather can push up food prices and raising interest rates in response will not lead to lower food prices.

But for rapidly growing Asia, Rhee said monetary policy had to be tightened first. Runaway inflation was a bigger risk for the region than slower growth, especially for the poor.

"I think there is more room in Asia to mobilise monetary policy because many Asian economies, like other developed economies, relied heavily on expansionary monetary policy."

Another potential mitigating factor, he said, could be exchange rate strength. Letting currencies rise, previously anathema to export-driven Asian economies, could help cope with inflation.

Beyond inflation and growth rates, the raw truth was surging food prices could undermine the gains made in cutting poverty and improving the lives of Asia's poor. A 30% rise in food prices in Asia -- one of three scenarios portrayed in the report -- could increase poverty by 193 million people -- almost six percent of Asia's people, or nearly the population of Brazil -- the ADB's modelling showed.

"Many who were poor before the price increases may now be on the verge of hunger and malnutrition, and those who were barely above the poverty line may have slipped back," the ADB said.

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