The socio-economic and environmental impacts of soaring food and oil prices Alicia Bárcena EXECUTIVE SECRETARY Economic Commission for Latin America and the Caribbean ECONOMIC AND SOCIAL COUNCIL DIALOGUE WITH THE EXECUTIVE SECRETARIES OF THE REGIONAL COMMISSIONS New York, 7 July 2008

QUARTERLY AVERAGE PRICE INDEX FOR ENERGY, AGRICULTURAL COMMODITIES AND FOOD (II Q 2006 – I Q 2008, annual average 2005 = 100) What is the problem? Source: Economic Commission for Latin America and the Caribbean (ECLAC).

FOOD PRICE INCREASES ( Percentages )

INTER-ANNUAL GROWTH RATES IN THE CONSUMER PRICE INDEX, BY COUNTRY, During the last five years food inflation has been higher than general inflation in most LAC countries Source: Economic Commission for Latin America and the Caribbean (ECLAC).

INTER-ANNUAL GROWTH RATES IN THE FOOD CONSUMER PRICE INDEX, BY COUNTRY, vs Moreover, in most countries food inflation quickened in 2007, compared with the annual average for Source: Economic Commission for Latin America and the Caribbean (ECLAC).

ANNUAL GROWTH RATES IN THE CONSUMER PRICE INDEX, BY COUNTRY, In 2007 food inflation was significantly higher than general inflation in most LAC countries (Panama, Chile, Bolivia, Nicaragua, Uruguay, Costa Rica, Paraguay, Trinidad and Tobago, Bolivarian Republic of Venezuela). Source: Economic Commission for Latin America and the Caribbean (ECLAC).

Causes Multiple socio-economic and natural factors, both structural and temporary in nature Financial volatility and slowdosn in world growth Global surge in inflation (6%-2006 to 10%-2008 in LAC) Increased world demand generated by Asia (China and India) Supply shocks: key countries stopped exporting (Indonesia) Rise in prices of oil and oil-based agrochemicals (100%-fert) Growing demand for biofuels and effect of subsidies (US+EU) Speculative purchases on future markets Climate-related factors

THE WORLD A dry spring in Northern Europe with floods during the harvest period Second consecutive year of drought in Ukraine and Russian Federation Third consecutive year of drought in Australia; the worst multi-year drought in a century Climate-related factors affected production in 2007 THE REGION A late frost in some important wheat-growing areas in the United States An unusually hot and dry summer in Canada during the harvest period A late frost in Argentina followed by a drought These factors are partially responsible for poor yields of maize, wheat and oats in the last few years.

Biofuels Ethanol: rising production from maize in the United States from 2003 onwards Biodiesel: rising production in the European Union since 2004 and in the United States since 2006 Source: R. Trostel, Global Agricultural Supply and Demand, May, 2008.

The region is a net food exporter, but most of the countries are net importers and at least one faces a critical situation Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of A. Valdés and W. Foster, Agricultural Trade Liberalization and the Rural Economy in Latin America and the Caribbean, document presented at the workshop Rural Development and Agricultural Trade, Washinhton, D.C., Inter-American Development Bank, FOOD AND AGRICULTURAL NET BALANCE IN LATIN AMERICA AND THE CARIBBEAN (Averages , in United States dollars) FAOSTAT | © FAO Statistics Division 2008 | 18 July 2005 Positive food trade balance Negative food trade balance

LATIN AMERICA AND THE CARIBBEAN (24 COUNTRIES): DIETARY ENERGY SUPPLY (DES) AND UNDERNOURISHED PEOPLE, (Kilocalories and percentages) Source: ECLAC, The Millennium Development Goals: A Latin American and Caribbean Perspective (LC/G.2331), Santiago, Chile, 2005, page 61. In the Latin American and Caribbean region, undernourishment is due mostly to access issues, not shortages of food supply

Economic impact: risk of inflation LATIN AMERICA: INFLATION RATE (Quarterly moving average, annualized percentages)

Social impact: risk of reversing progress in poverty reduction Poverty decreased from 44% in 2002 to 35% in But the poor still number 194 million, including 71 million in extreme poverty. This is higher than the 1980 figures. LATIN AMERICA: POVERTY AND INDIGENCE, (Percentages) b Percentage IndigentNon-indigent poor

More areas under production and therefore more pressure on native forests (and on biodiversity). Increased pollution of agrochemicals (health, biodiversity and climate change from nitrous oxides). Pressure on already stressed watersheds from added demand. Increased climate change drivers (deforestation, soil erosion, agrochemicals, methane from cattle and fossil Sustainable development impact

Possible scenario regarding poverty and indigence without active public policies Source: Economic Commission for Latin America and the Caribbean (ECLAC). In some cases, this could pose risks for social and political stability, as has already been the case in Haiti. PercentageMillions of people PercentageMillions of people PercentageMillions of people Indigence Change from situation in With a 15% rise in food prices Without a rise in incomeWith a 5% rise in income2007 Poverty Change from situation in

Summary of costs In the 13 countries studied, approximately US$ 17 billion, or around 3.4% of aggregate GDP, was lost. Estimate of total cost of undernourishment (Dollars and percentages of GDP, ) Source: ECLAC, on the basis of official figures and registry of costs on income and schooling in each country; household surveys conducted in the respective countries. Central America and Dominican Republic (2004) Andean countries and Paraguay (2005) Total ( Millions of dollars) Percentage of GDP VENCRIPARPANPERCOLECURDONICBOLELSHONGUA 0% 2% 4% 6% 8% 10% 12% Total costPercentage of GDP Millions of dollars

Short term Measures to buffer food price increases in domestic markets and/or improve income, especially that of the poor: Direct subsidies for lower income groups Reduce taxes on or subsidize the production of certain foods Tariff reductions for food and inputs Support international efforts to deliver emergency aid to populations at risk Public policy challenges Long term Policies to increase supply and productivity in a sustainable manner: Investment in R&D for efficient and sustainable food and for biofuel production Adequate investment for climate- change mitigation Re-establishment or strengthening of extension services