Rising Food Costs Good for Some Countries, Bad for Others

By Claudio Loser
Published in the Dialogue's Latin America Advisor., March 31, 2008

Rising Food Costs Good for Some Countries, Bad for Others

Originally published in Claudio Loser’s monthly “By the Numbers” column for the Dialogue's daily Latin America Advisor.

WASHINGTON, DC—The turmoil in the energy markets has been at the center of our collective concerns in the recent past. However, the year 2008 brings us face-to-face with another major crisis, which some newspapers call "the end of cheap food." Latin America has been hit by rapidly rising food prices, and the inflationary resurgence in the region attests to these trends, which are clearly linked to energy developments and climate change. More generally, the region may benefit from higher prices, but with worrisome differences among countries.

Latin America has been and remains a net exporter of agricultural commodities, and most specifically food. Thus, the 22 percent increase in agricultural prices from 2005 to 2007 has been generally good for the region, as export receipts rose by some $10 billion or the equivalent of 0.4 percent of annual GDP. These gains are probably about one third of the revenues arising from higher oil prices over the same period, but still are significant. The main beneficiaries have been Brazil and Argentina, and to a lesser extent Chile, Colombia, Costa Rica, Ecuador, and Uruguay. Mexico, Venezuela, and Cuba, together with 15 other countries in the region, are net food importers, and so they have suffered a negative shock. The countries in the Caribbean have been hit hard by these trends, but those in Central America tend to be better off, although not in all cases.

It is difficult to predict developments in food prices for 2008, but if we assume an increase of 20 percent—less than the rise experienced so far this year—the impact will again be positive for the region, as illustrated in the adjacent table. Will governments of exporting countries continue to take advantage of this boom and also deal with the effects on consumers? A number of exporting countries have imposed direct taxes on exports to collect revenue and insulate local consumers from the effect of higher prices. In these cases, the danger is 'killing the goose with the golden eggs' (Argentina is the best example). Others are trying to protect inefficient producers (Mexico with regard to corn), while countries like Venezuela are subsidizing food imports very broadly, and wasting resources that could have gone to targeted poverty-reduction programs. For the many other countries that are food and oil importers, the choices are much starker. In those cases, even with foreign help, the road ahead is far from easy and will require skill and courage, which are not always abundant in the region.

Claudio Loser is a Senior Fellow at the Inter-American Dialogue and former Head of the Western Hemisphere Department at the International Monetary Fund.