Port Louis — The World Bank, IMF and UN are all warning against an ominous global food crisis. Prices of basic foodstuffs have reached record highs and are escalating at an astonishing pace. The price of wheat has risen by 130 percent and that of rice by 74 percent between March 2007 and March 2008. Prices of other staples have also registered sharp increases including milk and meat whose prices have more than doubled in less than a year.

The economics behind the rapidly rising food prices couldn't be any simpler: the world is consuming more than it is producing. Global demand for food is being driven by population growth and changing eating habits with the emergence of a new affluent middle class in China and India. While, on the other hand, agricultural supply have been significantly affected by climate change and a shift away from food production to bio-fuels such as ethanol, in order to meet a growing demand for alternative transport fuels given high oil prices.

Following a long period of stability, it now looks like food prices will remain high in the foreseeable future, spelling dire consequences for a large part of the world population. The head of the World Food Programme (WFP) has qualified the rapid increase in food prices as a "perfect storm" that could cause mass starvation. Robert Zoellick and Dominique Strauss-Kahn, heads of the World Bank and IMF respectively, also echoed the risks of starvation, with the World Bank fearing that 100 million people in low income countries could be dragged deeper into poverty. Already, the increasing difficulty to access basic food items at affordable prices has given rise to social unrest and violent protests in Haiti and several countries across Africa and Asia.

Rising food prices do not only create major trade imbalances for net food importing countries, which is the case of many of the less developed and developing nations, but also lead to spiralling inflation. In Mauritius, the return of high inflation since last year has been mainly due to higher prices of food and petroleum products and although the rate of inflation is expected to fall from 10.7 percent to 8.7 percent for the financial year ending June 2008, consumers will still feel the pinch of rising food prices. In fact, 'Food and non-alcoholic beverages' represents the largest component of the CPI basket and accounts for nearly 30 percent of the consumption expenditure of the average Mauritian household. Furthermore, because food expenses make up an even larger proportion of the consumption basket of the poor, rising food inflation is in essence a tax on the poor and has a negative bearing on their purchasing power and standard of living.

Given widespread global concerns about high food costs, how is the issue being addressed? The head of the World Bank, Robert Zoellick, has called for the mobilisation of more aid for poverty stricken countries and a "New Deal for Global Food Policy" to increase agricultural production.

The Mauritian Government has also announced a number of measures to boost the domestic agro-industry with the view of achieving self-sufficiency in certain basic commodities. Rethinking our food production strategy and re-engineering our agricultural sector are of utmost importance to guarantee our food security in the long term. Of course, it should be noted that we shall remain dependent on imports for many basic food items like rice and flour that simply cannot be produced locally.

Pending a supply response, the existing framework to control inflation is mainly monetary policy. Raising interest rates, though, can do little to curb food inflation. As such, despite the high level of inflation the Bank of Mauritius recently cut interest rate in line with lower rates of interest prevailing abroad. The lowering of the Repo rate was essentially aimed at preventing bigger capital inflows, extra liquidity and a rapid appreciation of the rupee which would have harmed export competitiveness and economic growth.

The more likely options to keep tabs on food prices would then appear to be Government intervention in the form of price controls, subsidies and direct provision via the State Trading Corporation (STC). Then again, the use of price controls must be weighed against the risks of distorting the market and stifling incentives of private operators while subsidies are subject to a fiscal constraint. As for direct provision by Government, the procedures often lack transparency and there are doubts as to effectiveness in securing adequate supply.

The scale of the global food price crisis and the limited means available to contain food inflation in the short run signal the start of an era of rising prices which will undoubtedly trigger strong claims for generous salary compensations to make up for the loss of purchasing power. While compensating low income earners for the rise in CPI may be socially desirable, excessive salary increases across the board, unmatched by growth in productivity, can only lead to the expansion of money supply and a perpetuation of high inflation.

All things considered, the most effective way, albeit in the long run, of improving real incomes, purchasing power and standard of living is GDP growth, sustained by improvement in productivity. Perhaps, a common misconception is that productivity growth necessarily implies longer working hours when in actual fact, it relates more to working smarter than working harder. It depends on improvements in human capital via education and training, the state of technology which determines the quality of physical capital and positive management practices. The onus for raising our ability to cope with food inflation notably through enhanced productivity and economic growth is therefore on Government, employers and workers alike.

Dr Vishal RAGOOBUR

Economist Mauritius Employers' Federation