Time to declare war on hunger

Zahin Hasan runs the rule over what will work to lower food prices and what won't

Food price inflation has become a persistent problem. In May 2006, protesting garment factory workers vandalised several factories; rising food prices had made it impossible for them to live on their meagre wages. The working classes spend most of their income on basic foods like rice, wheat, and lentils; continuous increases in the prices of these foods must eventually lead to social unrest.

The media and the government have blamed "cartels" and "hoarders" for colluding to force food prices up; many pundits have advocated the imposition of price ceilings on foods. Such arguments implicitly assume that crop failure is the only legitimate reason for food prices to rise, and that any increase in food prices which cannot be attributed to crop failure must be caused by profiteering/hoarding. I disagree with this assumption: I think that persistent food price inflation indicates real shortages of basic food commodities.

When any good is traded on a free market, its price is determined by the interactions of buyers and sellers; the "market" price is the price at which the quantity supplied (offered for sale) is equal to the quantity demanded (purchased by consumers).

Where does supply come from? Foods are agricultural commodities, stocked by traders at harvest and gradually sold over several months (until the next harvest). If the post-harvest demand is higher than traders anticipated, their stocks become depleted, and they must re-stock with more expensive imported foods, as more local produce will only be available after the next harvest. Increasing diesel prices have had the effect of increasing the cost of irrigation (which relies on diesel-fuelled pumps) and the cost of transporting food (from farms to market). These effects have combined to increase the price at which a given quantity of food is supplied.

Consumers everywhere demand food. In poor countries, however, food demand rises when income rises. Most consumers in poor countries are low-income consumers who are normally purchasing less food than they desire; when their incomes increase, the first thing they buy is more food. Over the last few years Bangladesh has experienced significant economic growth; it is reasonable to assume that rising incomes have translated into increasing demand for food.

Increasing demand and decreasing supply can have only one effect: a shortage, experienced by traders as falling stocks. To meet the shortage, prices have increased to the point where it is now feasible for suppliers to sell imported foods. This is how a free market normally deals with shortage: when suppliers' stocks are reduced, they increase prices so that they can re-stock by purchasing goods from more expensive sources than before (as the cheaper sources have been exhausted).

Over time, high food prices should normally motivate farmers to devote more agricultural inputs (acreage, irrigation, and fertiliser) to the foods whose price has increased. This should increase the supply of local food, at which point prices should stabilise (though probably at a higher level than before).

By this logic, food price inflation should be a temporary phenomenon; it should be seen only until farmers have responded to higher prices by increasing their output of food crops. The fact is, though, that food prices have not stabilised; they are persistently going up. Why have farmers not responded to high food prices by increasing food production?

The answer is that the price of maize has increased faster than the price of any food. The US government's policy is to encourage the production of ethanol fuel from maize in order to reduce American dependence on increasingly expensive petroleum from the Middle East. The demand for maize (as raw material for ethanol fuel) has made maize prices skyrocket; maize is now more profitable than most food crops. Under these circumstances, farmers (in Bangladesh and abroad) will continue to devote more and more acreage to maize (used in Bangladesh for poultry and fish feed), and less to food crops. The American demand for "bio-fuel" crops is reducing worldwide food supplies and forcing food prices up.

If the American demand for maize is creating a worldwide shortage of food, inflation in food prices must be seen as inevitable. In this situation, imposing price controls on foods would be disastrous. If maize prices rise while food prices are controlled at a low level, maize production will become far more profitable than food production, and food production will decline. Such a scenario would end in famine. Food prices must be allowed to rise in order to motivate increases in food production.

The focus of government policy should be to ensure that rising food prices do not force the poor to go hungry. Re-distribution is the need of the hour. The government already has a rationing system which purchases food at market prices and sells it to government employees at a subsidised price. The coverage of the rationing system could be extended so that all adults have access to rations of (subsidised) basic foods.

The cost of such a program would be enormous. Our adult population is about 90 million people. Even if each adult were rationed just 100 grams of starchy food (rice, wheat flour, or potato) per day, this would require the government to purchase and distribute 9,000 tons of food every day (3.2 million tons per year). If this volume of food were subsidised at a rate of Tk 10 per kg, the subsidy would cost about Tk 3,200 crore each year.

Purchasing and distributing 9,000 tonnes of food every day would be a massive logistical operation. It would make more sense to issue subsidy coupons to each adult, with which they could purchase food from private shops. The subsidy coupons would be a form of cash which could only be used to purchase food. This would be similar to the Food Stamps program in the United States.

Can Bangladesh afford such massive food subsidies? The answer is yes. However, it would require: (i) a reduction in wasteful expenditure, or (ii) more effective tax collection.

It is easy to locate wasteful expenditures. On June 21, The Daily Star reported that eighteen state-owned enterprises (SOEs) made a loss of Tk 6,100 in the year ending on June 30, 2007. If not for the losses of these SOEs, the government would now have 6,100 crore taka in its coffers which could be used to subsidise rationed food. The largest loss-maker was BPC which lost over Tk 3,100 crore. BPC's losses could be stopped simply by raising the prices of diesel and kerosene (which are sold below cost). Biman Bangladesh made a loss of Tk 530 crore which could be saved simply by closing Biman and selling its assets to private airlines.

In most countries, people pay taxes because they expect state health and educational services. In Bangladesh tax revenue has been spent on propping up loss-making SOEs. Successive BNP and Awami League governments packed the SOEs with their supporters; it was in the politicians' interest to keep SOEs over-staffed (and in the red). It is time to recognise that this cannot go on. Loss-making SOEs must now become profitable or close. The poor need subsidies on essential foods; unless state funds are dedicated to this purpose, Bangladesh will face increased hunger and social unrest.

It is not necessary to generate all the funds for food subsidies from budget cuts; dramatic increases in tax collection are also possible. Bangladesh does a very poor job of collecting taxes on corporate profits; most companies evade taxes on profits by falsely declaring a very low level of profit. Income tax officials are glad to accept falsified profit statements; they would rather collect bribes for themselves than taxes for the government. Bangladesh should replace its 40% tax on corporate profits with a 4% tax on corporate sales. As the sales receipts of every company are transparently recorded on their bank account statements, sales taxes are almost impossible to evade.

Food is the most basic human need; the number one objective of the government should be to prevent malnutrition. Subsidising essential foods (particularly starchy foods) is a proven strategy, one to which almost every country has resorted in times of war. Perhaps it is time for Bangladesh to declare war against hunger.

Zahin Hasan is a Forum contributor.