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Panelists from the International Monetary Fund’s seminar on July 1, 2008.


Developing countries hit by skyrocketing fuel and food prices

by John Detrixhe
July 01, 2008


WASHINGTON -- Poor countries that are dependent on imports for much of their food supply are especially vulnerable to rising food and energy prices, according to the International Monetary Fund.

Skyrocketing food prices have hit particularly hard in developing countries, where household spending on food is more than half of total expenditures.

What’s more, the IMF, which provides research as well as financial and technical assistance to its 185-member countries, said in a seminar Tuesday that its latest study shows that surging food and energy costs are “driving some countries close to the tipping point.”

The IMF identified countries spanning the globe that are facing increasing pressure from rising food and energy costs, including Yemen, Mongolia, Nicaragua and Pakistan. Many economists have pointed to surging demand from emerging economies as a reason for the increases in food and fuel.

Even if oil prices stabilized, further increases in food costs would mean some countries would no longer be able “to feed their people and at the same time maintain stability in their economies,” said IMF Managing Director Dominique Strauss-Kahn in his opening remarks.

Strauss-Kahn noted that food and fuel prices have doubled since 2006.

The “universal challenge for all poor and middle-income countries is to find ways to feed the hungry,” while holding onto hard-won economic gains, he said.

The difficulty, according to the IMF, is for these import-dependent countries to help their poor survive price shocks while avoiding damaging the overall economy with protectionist measures. Subsidies, food taxes or bans on food exports do little to foster long-term economic health, many economists say.

“A lot of people are hungry. You bring in wheat and give it to them. Wheat farmers are suddenly poor, because everybody gets free wheat,” said Michele Gambera, senior economist at Ibbotson and Associates in Chicago in a telephone interview.

“Any kind of subsidy, while it might be the right thing to do because people are in dire need, it always leads to other things that are unfair,” Gambera said.

Though food costs have the most obvious impact on the poor, the world’s hungry are by no means insulated from rising oil costs. A study prepared last month by the IMF’s African Department noted that while surging food prices hit the poor hardest, high fuel prices also increase agricultural costs, “aggravating the food crisis.”

The IMF’s study presented Tuesday was part of what the fund called the first broad assessment of the impact of price increases for food and energy. The study reported that annual food-price inflation for 120 low-income and emerging market countries jumped to 12 percent at the end of March, up from 10 percent three months earlier. Likewise, fuel prices rose 9 percent, compared with 6.7 percent during the earlier period.  

The IMF said that a mixture of fiscal, monetary, exchange-rate and trade policies, as well as IMF-provided financing, will be necessary to help these countries hold on to recent economic gains while protecting their poor from the brunt of higher prices.

Strauss-Kahn said the IMF’s study shows that a broad, targeted and cooperative approach is needed.

 “The picture is a picture of a world in crisis,” he said.