50221 Improving Food Security in Arab Countries Enabling poor rural people to overcome poverty January 2009 Improving Food Security in Arab Countries Enabling poor rural people to overcome poverty © 2009 The World Bank 1818 H Street, NW Washington, DC 20433 All rights reserved The findings, interpretations, and conclusions expressed herein are those of the authors, and do not necessarily reflect the views of the International Bank for Reconstruction and Development/The World Bank and its affiliated organizations, or those of the Executive Directors of The World Bank as well as the Food and Agriculture Organization of the United Nations (FAO), the International Fund for Agricultural Development (IFAD), or the governments they represent. The World Bank, FAO and IFAD do not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank, FAO and IFAD concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Contents 1. What Factors Underlie The Recent Shock In Agricultural Commodity Prices? ..................1 Why are Arab countries concerned about the recent price shock? ................................................ 1 What factors are increasing food security risks?............................................................................... 2 Will food-price shocks continue to be a problem for Arab countries? ......................................... 7 2. What Is The Impact Of The Recent Price Shock On Arab Economies? ................................9 What impact will the recent food-price shock have on inflation? ................................................. 9 What is the impact of the food-price shock on government budgets?........................................10 What impact can food-price shocks have on poverty?...................................................................12 What are the food security implications for Arab countries with different resource ...............14 endowments and fiscal balances? 3. Food Security In The Future: Import Dependency Is Projected To Increase .................... 17 What do forward-looking models tell us about food security in Arab countries?....................17 4. Improving Food Security With Safety Nets, Family Planning Services, ............................ 23 and Education What long-run consequences can food-price shocks have on education, ..................................23 health, and nutrition? What measures are Arab governments employing to respond to the recent ............................25 price shock, and what are the limitations of these measures? How can Arab countries manage demand to mitigate the consequences...................................27 of price shocks? 5. Optimizing Investments To Increase Productivity And Profitability .................................. 31 What role will productivity play in addressing increasing demand for food .............................31 in Arab countries? Can Arab countries expand cultivated area in order to meet their food demand? ...................32 What are the obstacles to and opportunities for increasing productivity?.................................32 How can Arab countries make the most of scarce water resources? ...........................................35 iv Improving Food Security in Arab Countries Why is investing more in rain-fed agriculture critical to Arab countries? .................................37 How can Arab countries increase productivity? .............................................................................37 What can be done to improve dissemination of knowledge to farmers? ....................................41 6. Reducing Exposure To Market Volatility .................................................................................... 43 How can Arab countries ensure a steady supply of reasonably priced cereal imports?............43 What are alternative stockpiling strategies? ....................................................................................45 Is land acquisition a viable strategy?..................................................................................................48 What alternative strategies can Arab countries employ?...............................................................49 Next Steps ................................................................................................................................................... 51 References ................................................................................................................................................... 53 List of Boxes Box 1.1: Food Security Has Multiple Dimensions ............................................................................... 3 Box 1.2: Why Retail Food Prices Have Not Fallen with Commodity Prices .................................. 6 Box 6.1: Egypt Could Mitigate the Risk of High Wheat Prices with Financial Instruments.....47 List of Figures Figure 1.1: Arab Countries Are the Largest Net Importers of Cereal in the World ................... 2 Figure 1.2: Global Growth Rates of Yields for Major Cereals Are Slowing .................................. 4 Figure 1.3: Biofuel Polices in the United States May Contribute to a Substitution .................... 5 of Wheat with Maize Figure 2.1: The Food CPI Drove the Overall CPI in 2007 .............................................................10 Figure 2.2: Oil-poor Countries Have Fiscal Deficits While Oil-rich Countries ........................11 Have Fiscal Surpluses Figure 2.3: Food Subsidies Are a High Share of GDP in Some Countries .................................12 Figure 2.4: Arab Countries with High Cereal Import Dependency and Large Fiscal ...............15 Deficits are Most Vulnerable at the Macro Level Figure 3.1: Cereal Demand Far Outpaces Domestic Production in Arab Countries .................18 Figure 3.2: Sudan's Potential as the Breadbasket for Arab Countries Is Uncertain ....................20 Figure 3.3: Demand Management and Production Enhancement Both Reduce .......................22 the Import Burden and Vulnerability Figure 5.1: Historically, the Price of Wheat Has Gone Down .......................................................32 Figure 5.2: Expansion of Arable Land in Arab Countries Far Outpaced ....................................33 the World Until the 1990s Figure 5.3: Arab Countries' Cereal Productivity Lags Behind World Averages ..........................33 Figure 5.4: Arab Countries Are Quickly Proceeding from Water Stress to Absolute ................34 Water Scarcity Figure 5.5: The Cost of Self-Sufficiency Grows as Population and Incomes Grow ...................37 Table of Contents v List of Tables Table 2.1: The Poor Are Concentrated in Rural Areas .....................................................................13 Table 3.1: Arab Countries Will Increase Their Cereal Imports by Varying Degrees .................19 Table 4.1: Arab Countries Have Used Various Economy-wide Policies and ...............................25 Existing Social Protection Programs to Address the Recent Price Shock Table 5.1: Irrigation Use Varies Greatly by Sub-region and Country ...........................................35 Table 5.2: Agriculture Research and Funding in National Agricultural .......................................39 Research Institutions Table 6.1: Logistics Performance Index:World Rankings ................................................................44 Table 6.2: Egypt Would Have Saved On Imports by Using Hedging Instruments ....................47 Abbreviations AAAID Arab Authority for Agricultural IFAD International Fund for Investment and Development Agricultural Development AOAD Arab Organization for IMF International Monetary Fund Agricultural Development IFPRI International Food Policy AgGDP Agricultural gross domestic Research Institute product NARIs National Agricultural Research CPI Consumer price index Institutes FAO Food and Agriculture NGO Non-governmental organization Organization of the United OECD Organisation for Economic Nations Co-operation and Development GCC The Cooperation Council for the USAID United States Agency for Arab States of the Gulf International Development GDP Gross domestic product USDA United States Department of ICARDA International Center for Agriculture Agricultural Research in Dry WFP World Food Program Areas WHO World Health Organization All dollar amounts are US dollar amounts unless otherwise indicated Acknowledgements T his report represents a joint effort by the World Bank, the Food and Agriculture Organization of the United Nations (FAO) and The team also received substantive inputs from Dina El Naggar, Hilary Gopnik and Damian Milverton on communications; Lesley Camp- the International Fund for Agriculture Develop- bell on financial instruments; John Blomquist ment (IFAD). on social safety nets; and Ruslan Yemtsov on poverty. The team benefited from valuable Preparation of the report was led by a team guidance by peer reviewers Hassan Zaman including Julian Lampietti (Task Team Leader), (PREM), John Lamb (ARD), Chris Delgado Nicholas Magnan (Agricultural Economist), (ARD) and Mark Smulders (FAO). Luis Con- Sean Michaels (FAO Consultant), Alex McCalla stantino, Farruq Iqbal, Nabil Chaherli, Aseel (Professor Emeritus Agricultural and Resource Barghuthi, Omer Karasapan, August Kouame, Economics), Maurice Saade (Agriculture Policy Laszlo Lovei, Jamal Al-Kibbi, Demba Ba, Kevin Officer, FAO Regional Office of the Near East) Carey, Claudia Nassif, Santiago Herrera, Wael and Nadim Khouri (Director, Near East and Mansour, Hania Sahnoun, Jorge Thompson North Africa, IFAD). Support for the task was Araujo, Elliott Riordan, Julia Bucknall, Raffa- provided by Marie Francoise How Yew Kin, ello Cervigni, Shawki Barghouti, Alex Kremer, Syvie Creger, and Indra Raja. Lelia Croitoru, Adélaïde Barbey, Hari Dulal, Taysir Al-Ghanem (IFAD), and Mylene Kher- The results from the IMPACT model, formu- allah (IFAD) all provided help in various ways lated by the International Food Policy Research through the process. Institute (IFPRI) were kindly made available to the team by Siwa Msangi, Timothy Sulser, and Clemens Breisinger from IFPRI. Executive Summary T his joint working paper lays out a ra- tionale and strategic framework for im- proving food security and managing food-price coming years by strong population growth, low agricultural productivity, and their dependence on global commodities markets. shocks in the Arab countries. The paper does not provide country specific policy and project Arab countries need to act urgently to improve recommendations. Such recommendations will food security. Projections of the region's food follow from the country by country application balance indicate that dependence on imports of the framework, taking into account each coun- will increase by almost 64 percent over the next try's political and cultural preferences, resource twenty years. endowments, and risk tolerance. This paper suggests three critical strategies that, In 2007 and the first half of 2008, a sharp rise in together, can serve as pillars to help offset future agricultural commodity and food prices triggered vulnerability to price shocks: grave concerns about food security, malnutrition and increased poverty throughout the world. 1. Strengthen safety nets, provide people with While the threat of a prolonged food-price shock better access to family planning services, and receded with falling energy and commodity promote education. prices and a weakening global economy in the 2. Enhance the food supply provided by do- second half of 2008, many factors underlying the mestic agriculture and improve rural liveli- volatility in food prices appear here to stay and hoods by addressing lagging productivity will require careful management if the world is growth through increased investment in to avoid future food-price shocks. research and development. 3. Reduce exposure to market volatility by Arab countries import at least 50 percent of the improving supply chain efficiency and by food calories they consume. As the largest net more effectively using financial instruments importers of cereal, Arab countries are more to hedge risk. exposed than other countries to severe swings in agricultural commodity prices, and their Education is the first pillar to increased food se- vulnerability will probably be exacerbated in curity in Arab countries. Arab governments can xii Improving Food Security in Arab Countries reduce demand for cereal by educating families opment, which despite average rates of return about nutrition, while providing people with of 36 percent in Arab countries, receives less access to family planning services. The recent funding than in the rest of the world. Climate food shock is associated with an additional four change is likely to have a significant impact on million undernourished people in Arab coun- domestic production, and research and develop- tries. As much as 35 percent of daily calories ment initiatives are urgently required to drive the consumed in Arab countries come from wheat next green revolution. alone, driving the region's heavy dependence on cereal imports. Health education programs Since Arab countries are likely to remain net would encourage families to choose a more bal- cereal importers even with the successful imple- anced diet that is less dependent on cereal. mentation of these measures, financial instru- ments such as options and futures provide an In addition to education, well-targeted and attractive means for reducing exposure to market scalable safety nets soften the impacts of price volatility by hedging risk. Arab countries could shocks by ensuring that poor families do not also make legislative and organizational changes compromise their health or children's education in national procurement procedures to get better to meet food costs. The poor in the region are prices and to lower costs. most vulnerable to food-price shocks, spending anywhere from 35 to 65 percent of their income Arab countries could also manage their import on food. Most countries in the region have one exposure more actively by investing in infra- or more cash-transfer programs that could be structure to produce, store, and transport food. reformed or broadened to fulfill this need. Approximately 75 percent of the retail price of food is attributable to production, transporta- Arab countries can take steps to increase food tion, and marketing. This kind of investment production at home, even with the constraints could also allow some food-importing coun- imposed by the limited availability of water and tries with access to inexpensive petroleum to land. Projections suggest that by 2050 renew- better arbitrage fuel and food prices. Potential able water will fall below 500 cubic meters per investments could be in land, infrastructure, or capita and arable land to 0.12 hectares per capita. technology, and might even extend to support This second pillar would improve agricultural of research and development in those countries productivity through investments in research with the potential to boost agricultural exports and development. Improved technology will to Arab countries. boost cereal yields, which are currently only half of the average yield worldwide--a gap that A repeat of the sort of severe price shocks seen in is growing. 2007/2008 will inevitably force families across Arab countries to weigh the cost of educating Better water management will be critical in rais- their children or seeking medical care against ing agricultural productivity. Equally important the need to put food on the table. To avoid such is investment in agricultural research and devel- a calamity, all Arab countries need to reexamine Executive Summary xiii their food security positions and their exposure to market volatility) offers an integrated and to future swings in supplies and prices. comprehensive framework to enhance food security. This global challenge requires a global An approach that relies on the three pillars response led by governments, international outlined in this paper (strengthening safety nets, and regional funding and lending institutions, providing people with access to family planning United Nations agencies, non-governmental services, and promoting education; enhancing organizations, civil society, and the private sector domestic food sources; and reducing exposure working in unison. xiv Improving Food Security in Arab Countries Résumé analytique C e document de travail conjoint examine les raisons d'intervenir et propose un cadre stratégique permettant de renforcer la Les États arabes importent au moins 50 % des calories qu'ils consomment. Premiers importa- teurs de céréales, les États arabes se retrouvent sécurité alimentaire et de gérer les chocs des prix plus exposés que d'autres pays aux dangereuses des denrées alimentaires dans les pays arabes. Il fluctuations des prix des produits de base agri- ne propose pas de politiques ou de recommanda- coles. Leur vulnérabilité risque probablement tions de projet destinées à un pays en particulier. de s'aggraver dans les prochaines années en ré- De telles recommandations découleront de l'ap- ponse à leur forte croissance démographique, à plication par chaque pays des principes formulés la faiblesse de leur productivité agricole et à leur par ce cadre stratégique général en prenant en dépendance à l'égard des marchés mondiaux des compte les préférences politiques et culturelles, produits de base. les dotations en ressources et la tolérance aux risques particulières de chacun d'entre eux. Les États arabes doivent donc se mobiliser sans attendre pour renforcer la sécurité alimentaire. La forte hausse des prix des produits de base Les projections de leur balance alimentaire agricoles (les «produits de base») et des denrées démontrent que la dépendance à l'égard des alimentaires de 2007 et du premier semestre importations va progresser de près de 64 % au 2008 a suscité dans le monde entier de graves cours des vingt prochaines années. interrogations en matière de sécurité alimentaire, malnutrition et progression de la pauvreté. Alors Le présent document suggère trois stratégies que la menace d'un choc prolongé sur les prix déterminantes -- trois piliers -- qui peuvent, alimentaires s'éloigne avec la chute des prix de ensemble, étayer les politiques de résistance à la l'énergie et des produits de base et l'affaiblisse- vulnérabilité future aux chocs liés aux prix : ment de l'économie mondiale au cours du second semestre 2008, bien des facteurs sous-jacents de 1. Renforcer les filets de protection sociale, volatilité des prix alimentaires semblent devoir améliorer l'accès aux services de planning perdurer et vont requérir des soins vigilants pour familial et promouvoir l'éducation. que la planète ne revive pas à l'avenir de nouvelles 2. Promouvoir l'approvisionnement en denrées flambées des prix alimentaires. alimentaires produites par les agricultures xii Renforcer la sécurité alimentaire dans les pays arabes Executive Summary xv nationales et améliorer les conditions de grammes de transfert d'espèces qui pourraient vie en milieu rural en s'attaquant au retard être modifiés ou étendus de manière à répondre de la croissance de la productivité par des à ce besoin. investissements accrus en recherche-déve- loppement. Les pays arabes peuvent prendre des mesures 3. Réduire l'exposition à la volatilité du marché pour accroître la production alimentaire inté- par l'amélioration de l'efficience de la chaîne rieure, même s'il existe des contraintes liées à la d'approvisionnement et par une utilisation disponibilité limitée en eau et terres. Les projec- plus efficace des instruments financiers de tions indiquent que d'ici 2050, l'eau renouvelable couverture des risques. disponible passera à moins de 500 mètres cubes par habitant et les terres arables à 0,12 hectares Le renforcement de la sécurité alimentaire dans par habitant. Ce deuxième pilier permettrait les pays arabes repose prioritairement sur l'édu- d'améliorer la productivité agricole par le biais cation -- le premier pilier. Les gouvernements d'investissements en recherche-développement. arabes peuvent réduire la demande de céréales L'amélioration des technologies va stimuler en formant les familles aux questions de nu- les rendements des cultures de céréales. Ils se trition, tout en facilitant l'accès aux services de situent actuellement à la moitié de la moyenne planning familial. Le récent choc alimentaire se des rendements mondiaux, et l'écart ne cesse de traduit par quatre millions supplémentaires de croître. personnes sous-alimentées dans les pays arabes. Le blé représente à lui seul près de 35 % des Une meilleure gestion de l'eau sera déterminante calories consommées quotidiennement dans les pour accroître la productivité agricole. L'inves- pays arabes, renforçant la forte dépendance de tissement dans la recherche-développement la région à l'égard des importations de céréales. agricole est tout aussi important car, malgré Des programmes d'éducation axés sur la santé des taux de rentabilité moyens de 36 % dans pourront encourager les familles à choisir un les pays arabes, elle y est moins bien financée régime alimentaire plus équilibré, moins forte- que dans le reste du monde. Le changement ment tributaire des céréales. climatique risque d'avoir un impact significatif sur les productions nationales et les initiatives Outre l'éducation, des filets de protection sociale de recherche-développement doivent être enga- bien ciblés et ajustables atténuent les impacts gées rapidement pour faire avancer la prochaine des chocs des prix en veillant à ce que les prix révolution verte. alimentaires ne conduisent pas les familles pauvres à compromettre la santé ou l'éducation Comme les pays arabes risquent de rester impor- de leurs enfants. Les pauvres de la région sont tateurs nets de céréales, même en cas de mise en particulièrement vulnérables aux chocs des prix oeuvre réussie de ces mesures, des instruments des denrées alimentaires, ils y consacrent de financiers tels que les options et contrats à terme 35 % à 65 % de leur revenu. La plupart des pays constituent des moyens attractifs de réduction de de la région disposent d'un ou de plusieurs pro- l'exposition à la volatilité des marchés par la cou- xvi Improving Food Security in Arab Countries Résumé analytique xiii verture des risques. Les pays arabes pourraient Un retour de chocs sur les prix comme ceux également faire évoluer les bases législatives et de 2007/2008 contraindra inévitablement les organisationnelles des procédures de passation familles des différents pays arabes à mettre en des marchés pour obtenir de meilleurs prix et balance le coût de l'éducation de leurs enfants réduire les coûts. ou des soins médicaux pour pouvoir assurer leur subsistance. Pour éviter une telle catastrophe, il Les pays arabes pourraient également gérer convient que tous les pays arabes réexaminent plus activement leur vulnérabilité en matière la situation de leur sécurité alimentaire et leur d'importations en investissant dans des infras- exposition aux fluctuations futures des approvi- tructures permettant de produire, de stocker sionnements et des prix. et de transporter les denrées alimentaires. Environ 75 % du prix de détail des denrées Une approche s'appuyant sur les trois piliers alimentaires sont imputables à la production, décrits dans le présent document (renforcement au transport et à la commercialisation. Ce type des filets de protection sociale, de l'accès aux d'investissement pourrait également permettre services de planning familial et promotion de à certains pays importateurs de denrées alimen- l'éducation ; promotion des sources nationales taires ayant accès à du pétrole bon marché de de denrées alimentaires ; et, réduction de l'expo- procéder à un meilleur arbitrage entre les prix sition à la volatilité des marchés) offre un cadre du carburant et ceux des denrées alimentaires. stratégique global et intégré pour l'amélioration Les investissements potentiels pourraient de la sécurité alimentaire. Ce défi mondial porter sur des terres, des infrastructures ou de requiert une réponse mondiale, pilotée par les la technologie, et pourraient éventuellement gouvernements, les institutions de prêt et de venir à l'appui de la recherche-développement financement internationales et régionales, les dans les pays disposant d'un potentiel de organismes des Nations Unies, les organisations croissance des exportations agricoles vers les non gouvernementales, la société civile et le sec- pays arabes. teur privé, tous agissant de concert. Executive Summary xvii .1 . . .2 . . . .3 )2008 2007 ( . . . 2008 . . 4 35 . 50 . . . . . . 35 64 . 65 . . . xviii Improving Food Security in Arab Countries x 57 . . . 500 . .2050 0.12 . . ­ . 2008/2007 . . 36 . . . ( . ) . . . 1 What Factors Underlie The Recent Shock in Agricultural Commodity Prices? V ery high agricultural commodity prices in the first six months of 2008 raised con- cerns worldwide about increased poverty and mal- » volatility due to thinness of markets and limited stocks. Investments in agricultural productivity are nutrition. However, since June 2008, prices have critical to keeping long-term commodity retreated approximately 50 percent, driven down prices stable and affordable. in part by strong production gains in developed countries (FAO 2008a). Other important factors contributing to the fall in prices include the world Why are Arab countries concerned about financial crisis, the precipitous decline of world oil the recent price shock? prices, and the appreciation of the US dollar. Arab countries are very vulnerable to fluctua- In spite of recent food price drops, many of tions in international commodity markets be- the underlying factors behind high and volatile cause they are heavily dependent on imported prices appear to be here to stay. Structural fac- food. Arab countries are the largest importers of tors, such as population and income growth and cereal in the world (Figure 1.1). Most import at biofuel demand, may prevent real prices from least 50 percent of the food calories they con- sliding back to the historic lows witnessed ear- sume (FAO, 2008b). lier this decade. Thinness of markets amplifies how price reacts to small, transitory changes in Heavy dependence on food imports raises con- supply and demand.1 Sustained high prices and cerns about food security. Reliance on interna- increased volatility create a danger for Arab countries because they are highly dependent on international commodity markets for food.2 The 1 Thinness of markets means a small proportion of world production enters international markets through trade. key messages of this chapter are: 2 Arab countries include all members of the League of Arab States (LAS): Algeria, Bahrain, Comoros, » Arab countries are highly exposed to inter- Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Palestine, Qatar, Saudi national food commodity price shocks. Arabia, Somalia, Sudan, Syria, Tunisia, UAE, and Ye- » International agricultural commodities men. Comoros is omitted from analysis because of its may be entering a period of sustained price unique geography. 2 Improving Food Security in Arab Countries Figure 1.1: Arab Countries Are the Largest Net Importers of Cereal in the World (million metric tons, 2007) Global Trade Net cereal imports (in million MT), by region, 2007 Former Soviet Union +21 +105.4 Europe ­11.6 Asia ­46.9 North America ­58.2 ­26.9 Arab Countries Oceania +8 Latin America and Sub-Saharan +9.1 the Caribbean Africa + Net Exports ­ Net Imports Sources: Authors. Adapted from (FAO, 2008e). tional commodity markets raises both price and the untimely convergence of multiple structural supply concerns. In terms of price, high food and cyclical factors.3 Recent commodity market prices put enormous pressure on household projections by the OECD, FAO, and the World and national budgets. In terms of supply, five Bank (OECD and FAO, 2008) (World Bank, exporters (Argentina, Australia, Canada, the 2008b) suggest a structural shift may prevent EU, and the United States) supply 73 percent of prices from returning to pre-crisis levels. While the world's traded cereals (FAO, 2008b) making this may or may not be true, of greater concern access to imported cereal heavily dependent on for Arab countries is that structural and cyclical events in these countries and on Arab countries' forces are creating a system that is very sensi- relationships with them. tive to supply shortfalls and ever-increasing demand, making future price shocks very prob- able. The unexpected speed at which food prices What factors are increasing can increase is especially problematic because food security risks? of the inelasticity of both supply and demand. Supply and demand factors contributing to the recent price shock are best understood in struc- 3 Structural factors are long-term factors that cause a permanent shift in demand or supply. Cyclical factors tural and cyclical terms. The recent food-price are short-term factors that induce a temporary shift in shock is widely acknowledged to be a result of supply or demand. What Factors Underlie the Recent Shock in Agricultural Commodity Prices? 3 Box 1.1: Food Security Has Multiple Dimensions "Food security exists when all people, at all times, have physical, social and economic access to sufficient, safe, and nutritious food which meets their dietary needs and food preferences for an active and healthy life" (World Food Summit, Rome,1996). To achieve food security, the following four dimensions must be considered: Food availability: The availability of sufficient quantities of food of appropriate quality, supplied through domestic production or imports (including food aid). Food access: Access by individuals to adequate resources (entitlements) for acquiring appropriate foods for a nutritious diet. Entitlements are defined as the set of all commodity bundles over which a person can establish command given the legal, political, economic and social arrangements of the community in which they live (including traditional rights such as access to common resources). Utilization: Utilization of food through adequate diet, clean water, sanitation and health care to reach a state of nutritional well-being where all physiological needs are met. This brings out the importance of non-food inputs in food security. Stability: To be food secure, a population, household or individual must have access to adequate food at all times. They should not risk losing access to food as a consequence of sudden shocks (e.g. an economic or climatic crisis) or cyclical events (e.g. seasonal food insecurity). The concept of stability can therefore refer to both the availability and access dimensions of food security. At a national level, food security exists when all of a country's citizens are individually food secure. Source: FAO, 2006a Households, especially poor ones, cannot remain thin and the likelihood of food-price quickly alter and reduce their food consumption shocks will increase. in response to high prices. Instead, they must make sacrifices in other areas of their budgets. Thin international cereal markets imply that Agricultural producers cannot quickly ramp up relatively small shifts in supply or demand will production in response to high prices due to lead to large shifts in prices. Only 18 percent the seasonal time-cycle of agricultural produc- of world wheat production and 6 percent of tion and the slow development of agricultural world rice production is exported; the rest is technologies. consumed domestically (FAO, 2008e). At the height of the recent shock some major wheat- Declining growth in global agricultural produc- and rice-exporting countries banned exports tivity will cause shrinking surpluses in supply. for fear of not being able to feed their people. In order to keep up with food demand, global These bans contributed to the rapid escalation agricultural-productivity growth needs to stay of global market prices. The thinner the mar- ahead of population growth. If not, demand will ket, the sharper the fluctuation in international outpace supply and food prices will rise. Global prices and the higher the likelihood of future productivity growth rates for major cereals are price shocks. slowing (Figure 1.2).4 This is partly because public support for agricultural research has decreased since 1990 (Ruttan, 2002). Unless 4 Productivity growth refers to percent change in growth this trend is reversed, commodity markets will of yields. 4 Improving Food Security in Arab Countries Figure 1.2: Global Growth Rates of Yields for Major Cereals Are Slowing (percent change in growth of yields, 1980­2005) 5% Wheat 4% Annual Growth Rate 3% 2% Rice 1% 0% 1980 1990 2000 Source: FAO, 2008b Note: Yield growth rates reported as seven-year moving averages. Low stock levels increase price sensitivity to dis- mains high when the pipeline stocks dip below turbances in demand and supply. Policy reform the 25 to 30 percent range. in recent years, such as replacing price supports with direct farmer payments, has brought down Climate change will contribute to market stocks in OECD countries from their high levels thinness and instability by increasing cereal in the 1980s and 1990s (Gardner and Sumner, yield volatility and possibly decreasing global 2007; World Bank, 2008a). Low stock levels, cereal production. Global climate change combined with thin cereal markets and ever- models project an increasing probability of increasing demand, contribute to a just-in-time droughts and floods worldwide (Cline, 2007). commodity market that is more vulnerable to A critical concern for Arab countries is how disruptions. FAO forecasts world end-of-season often droughts and floods occur in key cereal cereal stocks for crop years closing in 2008/2009 exporting regions. Research on the impact of at 474 million metric tons, up 9 percent from global warming on average cereal produc- their exceptionally low opening level and the tion is not conclusive, but there are indica- highest volume since 2002/03 (FAO, 2008a). tions that average production will decrease. As a result, the cereal stock-to-use ratio is fore- Rosenzweig and Parry (1996) estimate that casted to rise two percentage points from a low global cereal production could decrease by of 20 percent in 2007/08. Although stocks are 5 percent from 1996 to 2060, even with moder- increasing, the probability of price shocks re- ate investment in climate change adaptation. What Factors Underlie the Recent Shock in Agricultural Commodity Prices? 5 Biofuel subsidies are shifting land away from pro- Food commodity prices historically have moved duction of food. Policies that promote biofuels with petroleum price. Petroleum is the primary such as ethanol and biodiesel, coupled with high ingredient of diesel and fertilizer, which are domestic tariffs that discourage biofuel imports, two key components of agricultural inputs. shift land away from production of food and pas- The cost of transporting food also increases ture (FAO, 2008g). There is evidence that this with the price of fuel. A recent study indicates is occurring in the United States, a country that that when oil prices are above $50 a barrel, oil accounts for 28 percent of world cereal exports and food commodity prices move together, but (Figure 1.3). Fabiosa et al. (2008) suggest that when the price of oil falls below $50 a barrel, oil such policies in the United States will probably and food prices decouple (World Bank, 2009). transmit directly to higher world-market prices Under most circumstances, oil-producers will for wheat and oilseeds. Sustaining such policies be insulated from increases in food commodity in the future would contribute to thinner wheat prices. However, if petroleum prices decrease markets and an upward structural adjustment in and food commodity prices increase, such as world wheat prices. Similar biofuel policies in the when oil prices are low and there is a major European Union, Canada, and elsewhere could drought, oil-producing countries will be less exacerbate anticipated structural changes in the able to finance imports during future price production of wheat, coarse grains, oilseeds, shocks. Rising petroleum prices can also impact sugar, and other crops. commodity prices by increasing the demand for Figure 1.3: Biofuel Polices in the United States May Contribute to a Substitution of Wheat with Maize (1980­2017 area planted, million acres) 100 Maize U.S. Planted Area in Million Acres 80 60 Wheat 40 1980 1990 2000 2010 Source: USDA, 2008b. 6 Improving Food Security in Arab Countries biofuels, which diverts cereal and sugar from The impact of the financial crisis on food pro- food to fuel (FAO, 2008c). duction is difficult to predict. The complex de- mand and supply forces in agricultural markets Monetary policies, currency fluctuation, and could create a number of different scenarios. financial speculation may have also contributed The financial crisis may dampen demand for to the recent shock. Low interest rates reduce the commodities, putting further downward pres- price of storage and encourage the buying and sure on agricultural prices through slower rates holding of real commodities (Frankel, 2008). of GDP growth, negative market expectations, The recent decline of the U.S. dollar against and falling oil prices. Falling oil prices will re- other hard currencies increased the demand duce demand for commodities used in biofuel for these goods, since commodities priced in production (e.g. maize and sugarcane). On the dollars became cheaper in real terms. Financial supply side, the financial crisis could depress speculation may also have contributed to the production incentives through lower crop price shock. In periods of uncertainty and/or prices and reduced producer access to credit. recession, investors shift to real assets includ- Falling petroleum prices, however, will lower ing commodities. This leads to large increases the costs of agricultural production and trans- in non-traditional investments in commodity port. In the end, the net effect on production markets as fund investors bet on continued price depends on the relative speed of adjustment of increases. However, recent research suggests that farm-gate crop and input prices (FAO, 2008a). speculation may be a symptom of the food-price If input prices fall more slowly than producer shock and not a cause (Carter, Rausser, and prices, farmer margins will decrease, encourag- Smith, 2008). ing producers to cut production. However, if Box 1.2: Why Retail Food Prices Have Not Fallen with Commodity Prices "Like the hare in Aesop's famous fable, commodity prices tend to take a quick, early lead [over retail prices] in inflation cycles, but ultimately lose the race, falling in real terms" (Blomberg and Harris, 1995) Globally, consumers are finding that retail food prices remain high, even after commodity prices for cereals have fallen 50 percent since their July 2008 peak. Although this may seem counterintuitive, there is substantial disconnect between commodity prices and retail prices. The relationship between commodity prices and retail prices is complicated. Commodity prices are determined by much more than current supply and consumer demand. Commodities are traded on global auction-based markets, where prices can quickly adjust to actual or expected future demand. Retail goods, however, are traded on many disjointed markets that are subject to preexisting contracts and other frictions (Blomberg and Harris, 1995). Likewise, prices for retail goods, including food, are determined by much more than the price of the commodities used to produce them. In the United States, 25 percent of retail food price comes from food commodities and gets passed through to the farmer. The other 75 percent goes into production, transport, and marketing, and gets passed through to manufacturers, wholesalers, and retailers. Farm level production costs hinge mostly on oil prices, whereas production and transport costs of retail food depend on international wages, energy (oil and non-oil) prices, interest rates, and taxes (Urbanchuck, 1997). In the end, high commodity prices can serve as a warning of overall inflation, but when commodity prices eventually fall, consumer inflation often remains. Source: Bloomberg and Harris, 1995; Urbanchuck, 1997 What Factors Underlie the Recent Shock in Agricultural Commodity Prices? 7 input prices fall in line with producer prices, remain vulnerable to food price and quantity farmers may be encouraged to maintain pro- shocks in the future. duction. The structural factors driving food demand are The financial crisis may also restrict some increasing faster in Arab countries than world- countries' access to credit, limiting their ability wide. The combined population growth rate of to import food. Whether or not the financial all Arab countries is projected to be 1.7 percent, crisis decreases food production, it will slow which is much higher than the world rate of 1.1 down food trade, particularly for developing percent (World Bank, 2008b).5 Not only is the countries. As international food companies and number of people increasing faster in Arab coun- food-exporting countries tighten credit, some tries than elsewhere, but so is their purchasing Arab countries with limited financial resources power. The current income growth rate of Arab will have difficulty financing cereal imports countries outpaces the global average, at 3.4 through debt. This is a serious concern since percent to 3 percent (World Bank, 2008b).6 Ur- Arab countries are expected to depend increas- banization is also on the rise in Arab countries, ingly on imports in the future. with urban population growing by 3 percent during the 1990­2006 period, surpassing the global average of 2.2 percent (FAO, 2008b). Will food-price shocks continue to be a problem for Arab countries? Water and land constraints are particularly challenging for agriculture in Arab countries. Demand and supply factors are increasing food Approximately 75 percent of exploitable renew- security risks for Arab countries. Population able water resources are taken out of the natural growth, urbanization, and income growth are system and put to use compared to between relatively strong in Arab countries and will 1 percent and 30 percent in other regions (World increase the demand for food. Supply-side Bank, 2007a). In some areas, non-renewable constraints are also more binding in most Arab sources such as fossil groundwater are being countries than elsewhere due to acute compe- exploited. Consequently, there is little to no tition for limited amounts of arable land and potential for sustainable increase in water use water, constraining these countries' ability to in most Arab countries. The expansion of ar- increase cereal production. Thin cereal markets able land is also much slower in Arab countries and climate change will increase price sensitivity than globally. Excluding Sudan, the amount to disturbances in these demand and supply fac- of arable and permanent cropland increased tors. The potential decoupling of petroleum and food commodity prices may cause deterioration in the fiscal balances of oil-producing countries, 5 World Bank population data is for the World Bank 's reducing their ability to cope with future shocks. Middle East and North Africa region (MENA). 6 Income as measured by annual percent change in GDP It is unknown if world food prices will be high per capita PPP at constant 2005 international dollars or low, but it is certain that Arab countries will from 2001­2007. 8 Improving Food Security in Arab Countries at an annual growth rate of 1.7 percent from been slower in Arab countries than the rest of 1995­2005 (6.7 percent with Sudan). World- the world. From 1990 to 2007 average cereal wide, arable and permanent cropland increased yields increased 14.5 percent in the Arab region, 2.3 percent (FAO, 2008b). In addition to water compared to 21.5 percent worldwide. and land constraints, cereal-yield growth has 2 What is the Impact of the Recent Price Shock on Arab Economies? T he recent price shock provides important lessons about the potential macro and microeconomic effects of high food prices, and line into poverty, and worsen the condition of those who are already poor. Key messages of this chapter are: about the results of government responses to these trends. At the macro level, inflation in » Food-price shocks threaten macroeconomic Arab countries is a challenge, increasing at more stability in resource-poor countries. than twice the speed of world inflation in recent » Falling petroleum prices make oil-rich coun- years (IMF, 2008). High energy and food prices tries more vulnerable to shocks. are driving factors, outpacing overall inflation » Food-price shocks increase the depth and by several percentage points. High food prices incidence of poverty. also deteriorate the trade balances of all Arab » Different countries face different food secu- countries. Most countries employ subsidies to rity concerns depending on their resource address high food prices, but these subsidies can endowment and fiscal balance. strain a country's fiscal balance. Although food commodity prices have fallen in recent months, they remain higher than when the price shock What impact will the recent food-price began; inflation remains a concern. The global shock have on inflation? financial crisis and declining oil prices will have a significant impact on the fiscal balances of the The food-price shock will have a major impact wealthier oil-exporting Arab countries, dampen- on inflation. The rise in food prices threatens ing their ability to absorb food-price shocks. macroeconomic stability primarily through infla- tion. Until recently, rising commodity prices were At the micro level, the recent shock probably contributing to inflation throughout the world, made poverty both more widespread and more and by some five percentage points in developing severe, although it is too early to determine the countries (World Bank, 2008c). Figure 2.1 indi- exact damage. The poor are certainly most vul- cates that in 2007 the annual percent change in nerable to food-price shocks, because they spend food inflation in several Arab countries outpaced the largest share of their budget on food. Food- the change in overall inflation. Kuwait and Iraq, price shocks can push people above the poverty where the overall Consumer Price Index (CPI) 10 Improving Food Security in Arab Countries Figure 2.1: The Food CPI Drove the Overall CPI (2007) Yemen Syria Egypt Djibouti Jordan Lebanon Algeria Kuwait Food CPI Morocco Overall CPI Iraq 0 5 10 15 20 25 Annual Percent Change (2006­2007) Source: World Bank, 2008b. outpaced the Food CPI, are notable exceptions revenues. In order to finance the additional ex- to this trend.7 Despite falling commodity prices, penditures, oil-poor countries may be forced to inflation is projected to remain high in the future reduce other essential expenditures or increase (IMF, 2008). borrowing, which has a negative long-term effect on their economies. Non-oil-exporting countries that rely significantly on cereal imports such as What is the impact of the food-price shock Jordan, Lebanon, Morocco, and Djibouti all have on government budgets? fiscal and trade deficits, contributing to their eco- nomic hardship. However, rising revenues from Non-oil-exporting countries face increasing other commodity exports have eased some of fiscal pressure due to the recent shock. In ad- the burden in oil-poor countries that are rich in dition to inflation, food-price shocks directly other natural resources. For example, Morocco's affect trade and fiscal balances. Many Arab phosphate exports tripled in value in 2008 and countries (e.g. Egypt, Jordan, Syria, and Ye- covered the oil deficit, while Jordan's export of men) have increased wages for public sector potash helped cushion its food-import bills. employees and have tried to support the poor by increasing bread subsidies, implementing direct cash transfers, and lifting tariffs on basic 7 In addition to the food-price shock, other inflationary food commodities. However, these measures are factors included GCC currencies pegged to a declining not sustainable without concurrent increases in dollar, housing value increases, and oil related liquidity. What is the Impact of the Recent Price Shock on Arab Economies? 11 Figure 2.2: Oil-poor Countries Have Fiscal Deficits While Oil-rich Countries Have Fiscal Surpluses (2007 balances) 50 40 Oil-poor Countries* Oil-rich Countries Percentage of GDP 30 20 10 0 ­10 ­20 Leb. Jordan Egypt* Yemen* Syria* Djibouti Morocco Bahrain Iraq Saudi Arabia Algeria Oman UAE Qatar Kuwait Source: World Bank, 2008b. * Syria, Yemen and Egypt are oil-exporting countries, but their production and net exports are small when compared to the oil-rich countries. Oil-rich countries have been able to absorb subsidies. At the same time, a common gov- high food prices thanks to high oil revenues. ernment response to shocks is to increase the Governments of oil-rich countries have been coverage and size of these subsidies, driving up able to raise public sector wages and implement costs even further. In countries such as Syria large food subsidy programs without incurring and Egypt, which have across-the-board sub- unbearable fiscal strain. However, the recent sidies, the subsidies exceed 1 percent of GDP sharp decline in oil prices may deteriorate trade and could become a major fiscal problem if surpluses, which would reduce foreign exchange commodity prices stay high or in the event of earnings, government revenues, and invest- future price shocks (Figure 2.3).9 While social ment options. If oil prices continue to decline and political considerations may make ratio- but food prices remain high, fiscal and trade nalizing food subsidies unpopular, Chapter 4 surpluses could become chronic deficits. Syria, of this paper outlines potential strategies to for instance, is currently an oil-exporter,8 but re- improve their performance and reduce their serves are declining, and expensive food-subsidy fiscal burden. programs are contributing to a deteriorating fiscal balance. 8 Syria is expected to become a net oil importer by Across-the-board food-subsidy programs can 2010. 9 This pales in comparison to energy subsidies, which create a substantial fiscal burden. Food-price average 7 percent of GDP across the region (World shocks drive up the cost of government food Bank 2008l). 12 Improving Food Security in Arab Countries Figure 2.3: Food Subsidies Are a High Share of GDP in Some Countries (2007) Syria 2.1 Jordan 1.8 Egypt 1.3 Morocco 0.7 Yemen 0.5 Saudi Arabia 0.2 Kuwait 0.1 Lebanon 0.04 Algeria 0.03 0.0 0.5 1.0 1.5 2.0 2.5 Percentage of GDP Source: World Bank, 2008b. What impact can food-price shocks The poor in the region are hit hardest by food- have on poverty? price shocks, spending anywhere from 35 to 65 percent of their income on food. Rough calcu- Rural poverty is at the core of Arab countries' lations suggest that, barring economic growth, food-security problems. About one quarter of a 30 percent increase in food prices in Egypt the population of Arab countries is poor, and 76 would have resulted in a 12 percentage point percent of these poor people live in rural areas. increase in poverty. (In fact poverty has fallen Poverty rates in rural areas are also dropping because there was economic growth). In Mo- more slowly than in urban areas (IFAD and rocco a 14 percent increase in food prices would FAO, 2007). Table 2.1 shows how the poor are have resulted in a 4 percentage point increase in distributed between rural and urban areas in poverty. In Djibouti a 21 percent increase in the Arab countries for which poverty data is avail- food CPI could have pushed extreme poverty up able. With so many of the poor residing in rural by 14 percentage points.10 These are relatively areas, it is imperative that social safety nets are designed to reach these people, which programs 10 These figures are the result of simulations and rep- based on proxy-means testing are not currently resent maximum possible effects. They refer to the well equipped to do. Safety nets will be covered changes in food prices (or food component of the CPI) in greater detail in Chapter 4. approximately over the same time periodófrom the pre- crisis (2005) to early 2008, assuming no income growth and no substitution away from food. They also do not Higher food prices contribute to an increase in take into account possible positive effects of higher food the incidence, depth, and severity of poverty. prices on incomes of farmers. What is the Impact of the Recent Price Shock on Arab Economies? 13 Table 2.1: The Poor Are Concentrated in Rural Areas (Various Years) Percent of urban Percent of rural Percent of poor Country who are poor who are poor in rural areas Yemen1 21% 40% 84% Djibouti1 39% 83% 31% Egypt1 10% 27% 78% Sudan2 27% 85% 81% West Bank and Gaza1 21% 55% 67% Jordan1 12% 19% 29% Syria1 8% 15% 62% Algeria1 10% 15% 52% Mauritania3 30% 50% 78% Morocco1 5% 15% 68% Tunisia1 2% 8% 75% Source: 1 World Bank, 2008d; 2 IFAD and FAO, 2007; 3 World Bank, 2008b Note: Poverty as determined by national poverty line. high magnitudes of impact, which reflects a a large proportion of small farmers in several characteristic feature of poverty in the region: a Arab countries stand to lose from higher food relatively high concentration of the population prices because they are net consumers of food. near the poverty line makes poverty numbers Preliminary findings from Yemen are alarm- very sensitive to even small increases in the cost ing. Between 2006 and 2008 the percentage of of living (World Bank, 2006). However, in Ye- the surveyed population with inadequate food men the doubling of wheat prices in 2007 only consumption grew a shocking 35 percentage resulted in an increase in the poverty headcount points (from 24 percent to 59 percent) (World of six percentage points (World Bank, 2008m). Food Program, 2008). In order to help marginal This is because a relatively high percentage of groups become food secure, employment op- the population lives below the poverty line. portunities need to be generated. Strategies to create economic activity in rural areas will be Some groups of poor people stand to lose more dealt with in Chapter 5. than others from higher food prices. Those that stand to lose the most are the urban poor, the Investing in smallholders is essential to eradicat- rural landless, and small and marginal farmers. ing rural poverty and increasing food security Large farmers will be buffered from shocks since at the national level. There are many reasons they are likely to benefit from higher agricul- policymakers would want to help smallholders. tural produce prices (FAO, 2008f ). In contrast, They usually make up the majority of the rural 14 Improving Food Security in Arab Countries population and of the rural poor. Enabling small- if there are sufficient funds for purchase. Figure holders to become more productive contributes 2.4 provides some possible combinations of de- to household food security, which contributes pendence on imported cereals and fiscal balance in turn to national food security. Therefore the to measure food price and quantity risk faced by success of smallholders should also be recognized Arab countries. GCC and other countries that as a food security goal (IFAD and FAO, 2007; are highly dependent on cereal imports but have FAO 2008f ). The need to invest in smallholders strong fiscal balances are less vulnerable to price will be discussed further in Chapter 5. risk because of their strong resource base. How- ever, since these countries depend entirely on The impact of the food-price shock on select food imports, they are concerned about quantity groups may endure after prices drop. Households risk that could occur via export bans and other in extreme poverty may sacrifice productive export restrictions like the ones witnessed at the inputs to purchase food, reducing their earning height of the recent shock. potential in the following year. For example, in Yemen 10 percent of surveyed farmers consumed GCC countries are most vulnerable to food-price seed stocks reserved for the following year (World shocks when oil prices are low and food com- Food Program, 2008). Some poor households are modity prices are high. Low oil prices weaken undoubtedly forgoing spending on health and fiscal balances of oil-rich nations, making it education in order to feed themselves, ultimately harder for them to handle high food commod- sacrificing the productivity of future generations. ity prices.11 Cyclical factors (e.g., a decrease in The same study in Yemen revealed that 39 percent demand due to the financial crisis and high oil of surveyed households decreased expenditures prices) are contributing to the recent decline in on health (World Food Program, 2008). oil prices, reducing income for the oil exporters. Structural factors driven by Western concerns about energy security and global warming may What are the food security implications contribute to a longer-term slump in oil prices. for Arab countries with different resource These factors could decouple oil and food com- endowments and fiscal balances? modity prices, making it more difficult for oil- rich countries to offset terms of trade losses.12 Exposure to food price and quantity risk is a function of dependence on cereal imports and fis- cal balances. Arab countries are price takers and 11 Depletion of oil reserves may also substantially reduce import dependent because they produce a rela- the extent to which current oil exporters are shielded from the negative fiscal impacts of high food prices. tively small share of world cereal, exposing them 12 Terms of trade losses occur when a country 's bal- to substantial price and quantity risk. Price risk ance of trade deteriorates. This is a long-term risk for is the risk that cereal prices will be prohibitively oil-rich countries since fossil fuel substitutes remain high, making purchase difficult even though relatively expensive. The oil-rich countries can mitigate vulnerability by using current oil revenues to diversify quantity is available on world markets. Quantity their economies so that they are not so dependent on risk is the risk of food not being available, even oil revenues in the future. What is the Impact of the Recent Price Shock on Arab Economies? 15 Figure 2.4: Arab Countries with High Cereal Import Dependency and Large Fiscal Deficits are Most Vulnerable at the Macro Level (2007 Fiscal Balances--percentage of GDP, 2005 Cereal Balances ­ metric tons)* High Most Vulnerable Dependent, but Fiscally Sound Djibouti Bahrain UAE Qatar Oman Kuwait Jordan Libya Lebanon Yemen Cereal Import Dependency Saudi Arabia Algeria Tunisia Morocco Iraq Syria Egypt Sudan Less Dependent, but Fiscally Strained Least Vulnerable Low 0 Deficit Surplus Fiscal Position Low Price and Low Price Risk, High Price and Low Quantity Risk, Quantity Risk High Quantity Risk Quantity Risk High Price Risk Source: Authors. Adapted from FAO, 2008b; IMF, 2008; World Bank, 2008b. Note: Cereal import dependency is measured by net cereal imports/total cereal consumption. * 2007 fiscal balances were drawn from the IMF. The most recent FAOSTAT data on cereal balances is for 2005. Djibouti, Yemen, Morocco, Jordan, Tunisia, 13 In Tunisia, for example, it is estimated that food and Lebanon are most vulnerable to food-price trade balance registered a surplus of 277 million dinars in 2006 and a deficit of 426.8 million in 2007 and the shocks because they face both high quantity and import coverage went down from 121 percent to 79 high price risk.13 Price risk is a problem because percent. In terms of quantities, the country imported weak fiscal balances constrain government 296,600 metric tons of wheat in January and February 2008, 11.8 percent less than in the same period of 2007, financing options. Quantity risk is a problem but the value was two times as much. Moreover, the because of high dependence on imports. These disbursements of the Caisse de compensation reached countries may need external support in address- 575 million dinars in 2007 against 321 million dinars in 2006, corresponding to 1.3 percent of GDP. ing food security because they lack the fiscal resources to handle shocks. 16 Improving Food Security in Arab Countries Sudan, Egypt, and Syria face low quantity risk No Arab country is protected from future food- and high price risk. Price risk is a problem price shocks. Each country needs to assess how because weak fiscal balances constrain govern- much price and quantity risk they can tolerate, ment financing options. Quantity risk is not and how much they can afford to mitigate, in as much of a problem because these countries order to devise a risk management strategy are less dependent on imports. Although these to mitigate the impact of future price shocks. countries are less dependent on cereal imports, Such a strategy will consist of a combination of they all have food-subsidy programs that addressing the growth in the demand for food, weaken their fiscal balances. Chapter 4 presents increasing production of food, and managing ex- some strategies that can be used to bring down posure to volatility in commodity prices. At the the cost and improve the effectiveness of these same time, countries can reduce fiscal pressure programs. by designing more efficient safety nets. 3 Food Security in the Future: Import Dependency is Projected to Increase W hile the future of world food prices is unknown, economic models show that food demand will outpace supply in Arab What do forward-looking models tell us about food security in Arab countries? countries, leaving them much more vulnerable Two forward-looking economic models proj- to food-price shocks than other regions. Policy- ect that demand for food in Arab countries makers need to develop a comprehensive strategy will grow substantially to the year 2030. The that balances the risks associated with imports IMPACT14 model, created by IFPRI (2008a), with the costs associated with increasing do- and an FAO model (2006a; 2008d) are both mestic production. Key messages of this chapter food-balance models that project future food are: demand and supply throughout the world.15 The two models provide strikingly similar results » Forward-looking global economic models for Arab countries except for Sudan despite project that consumption of cereals and using different methodologies.16 Both models meat in Arab countries will continue to project that demand for food in Arab countries outpace production, leading to increasing will grow substantially to the year 2030 and dependence on food imports. beyond, and production will not be able to » Many factors contributing to the recent keep pace, resulting in increasing dependence food-price shock appear to be more severe on imported food.17 This suggests that, unless and enduring in Arab countries than else- where. 14 International Model for Policy Analysis of Agricultural » A three-pillar strategy to address food secu- Commodities and Trade (IMPACT). rity in Arab countries includes strengthen- 15 The projections presented in this paper are from the ing safety-nets and education to cope with IMPACT model unless otherwise indicated. 16 The IFPRI and FAO models produce conflicting rising consumption, enhancing agricultural results for Sudan and whether it will be a net importer productivity and rural livelihoods through or net exporter of cereals. The IFPRI model results are cost-effective investments, and reducing used in all aggregate projections for the region, and both sets of projections are used when focusing on Sudan exposure to market volatility. individually. 17 The IFPRI model goes to 2030 while the FAO model goes to 2050. 18 Improving Food Security in Arab Countries Figure 3.1: Cereal Demand Far Outpaces Domestic Productionin Arab Countries 160,000 Demand `000 MT of cereal (including feed) 120,000 80,000 Production 40,000 0 2000 2010 2020 2030 Source: Authors. Adapted from IFPRI, 2008. Note: Includes Sudan; MT is metric tons mitigating measures are adopted, Arab countries will double, whereas in others they will remain will become more and more vulnerable to global constant or decrease. All, with the exception of food-price shocks. Sudan, will remain net cereal importers through 2030 and beyond (Table 3.1). The primary Dependence on cereal imports will increase by driver of increasing net cereal imports in the almost 64 percent, exacerbating food deficits in model is population growth, with income growth most Arab countries. Total cereal demand in playing a smaller role. Egypt will increase its Arab countries will increase from 2000 levels of cereal imports 138 percent from 2000 to 2030, about 84 million metric tons to nearly 142 mil- far more than any other country in the region. lion metric tons by 2030. With increased invest- Morocco is the only country that will decrease ment in agriculture and technological innovation, cereal imports (by 17 percent).19 cereal production has the potential to increase from estimates of 37 to 69 million metric tons 18 Although land and water are very constrained, in- over the same time frame.18 The total amount of creases in agricultural productivity are the norm, even if imported cereal required by the region is there- they are slowing. Over time, new technologies are created and adopted by more farmers, increasing production. fore expected to rise 55 percent from 47 to 73 These increases, however, will not be able to keep up million metric tons by 2030 (Figure 3.1). with projected demand. 19 Production data from the FAO (2008b) shows that Morocco made a leap in production from 2000­2003 Net cereal imports vary depending on popula- then slowed. Most of the decrease in projected Moroc- tion growth and availability of land and water can cereal imports therefore has already taken place, and resources. In some Arab countries cereal imports from now on their import requirements will increase. Food Security in the Future: Import Dependency is Projected to Increase 19 Table 3.1: Arab Countries Will Increase Their Cereal Imports by Varying Degrees (IFPRI Baseline Assumptions) Projected Projected Renewable Projected increase population income water in net cereal growth, growth, resources/ imports, 2000­2030 2000­2030 capita, 2005 2000­2030 Sub-region and country (percent) (percent) (cubic meters) (percent) Arabian Peninsula1 105 190 145 89 Northeast Africa Djibouti 68 200 378 69 Egypt 59 168 788 137 Somalia 118 167 1,787 48 Sudan 66 254 1,780 -- Mashreq Iraq 95 24 3,688 2 48 Jordan 74 238 163 61 Lebanon 30 186 1,259 52 Syria 78 189 1,379 98 Maghreb Algeria 47 210 355 18 Libya 57 211 103 72 Morocco 45 193 921 ­17 Tunisia 29 200 455 4 Source: IFPRI, 2008; FAO, 2008b 1 Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE and Yemen. 2 1995 data used. -- = Not available. Meat and milk consumption will also rise. produce enough to keep imports near current Meat consumption will increase by 104 per- levels. cent and milk consumption will increase by 82 percent. Increases in consumption of animal Increasing demand for meat and milk further products will be more pronounced in oil-rich raises vulnerability to cereal price shocks. Con- countries--nearly doubling from 2000 to sumption of meat and milk will rise faster than 2030--driven by surging income and population consumption of cereal, and this is reflected in growth. This will lead to substantially greater the makeup of cereal demand. Cereal demand dependence on imports of these products in the for human consumption is projected to increase future. Non-oil-producing countries will also by about 50 percent from 2000 to 2030 whereas increase meat and milk consumption, but have for animal feed it will nearly double. This trend the natural resource endowments necessary to is consistent for oil-producing and non-oil- 20 Improving Food Security in Arab Countries Figure 3.2: Sudan's Potential as the Breadbasket for Arab Countries Is Uncertain 12,000 IMPACT 12,000 FAO Demand '000 MT of cereal (including feed) '000 MT of cereal (including feed) 10,000 10,000 Production 8,000 8,000 Production 6,000 Demand 6,000 4,000 4,000 2,000 2,000 0 0 2000 2010 2020 2030 2000 2010 2020 2030 Source: Authors. Adapted from IFPRI, 2008; FAO, 2008d. producing countries. Without appropriate ity and infrastructure. Currently, cereal yields investment in yield-increasing technology, rapid in Sudan are very low (FAO, 2008b). This is expansion in animal production may come at the partially due to the pervasiveness of rain-fed expense of future crop production.20 agriculture, and partially to low farm-level in- vestment. If Sudan's underachievement in pro- Sudan holds 30 percent of arable land in Arab ductivity is dramatically improved, the country countries, but is far from becoming a bread- could become a major source of cereals for other basket for the region. The IMPACT and FAO Arab countries (Dubai School of Government, models have similar production projections 2008). Neither of these models factor in a for Sudan, but the two models differ in terms potential large infusion of foreign capital into of domestic consumption. IMPACT projects Sudanese agriculture and infrastructure (trans- low domestic demand and net cereal exports. port, irrigation canals, marketing infrastructure, FAO projects higher domestic demand than etc.). While it is clear that Sudan will not be IMPACT, which will keep Sudan a net cereal able to feed all Arab countries, there is potential importer into the foreseeable future (Figure 3.2). for foreign investment to dramatically increase In 2005, the last year for which data is available, Sudan was still a net importer, satisfying only 71 percent of its cereal consumption. 20 These consequences are not accounted for in the model but should be considered. Livestock integrated in crop- ping systems can damage soil through compaction and Sudan's potential as a breadbasket for the region preclude the adoption of some forms of conservation depends on massive improvement in productiv- agriculture. Food Security in the Future: Import Dependency is Projected to Increase 21 production through vertical as well as horizontal is explored in Chapter 6. Figure 3.3 illustrates expansion. This is discussed in greater detail in how these three pillars work together to im- Chapter 5. prove national food security: Managing overall consumption levels helps address long-term A global economic downturn will have little concerns that sufficient supplies may not always impact on the likely increase in food imports.21 be available on world markets (quantity risk) Under a "low investment and growth" scenario,22 and the potential burden of high food com- the IMPACT model projects that cereal de- modity prices (price risk). Increasing domestic mand (feed and food) in Arab countries in 2030 production will reduce quantity risk but will not would be 7 percent lower than under the base- dampen price shocks because Arab countries line scenario, meat demand 8 percent lower, and account for only a small share of world cereal milk demand 15 percent lower. Cereal and milk production. Smoothing exposure to market production would also decrease, but not by as volatility by better management of imports, much as demand. As a result net cereal imports through the instruments described in Chapter would be 7 percent lower and net milk imports 6, will improve price risk management but will 25 percent lower than under the baseline not address quantity risk concerns. Together, scenario. Meat production would fall more these three pillars will create an overall strategy than meat demand under the low-growth that will mitigate the effects of future food-price scenario, leading to a 14 percent increase in shocks. net imports. The challenge for the future is to find the best 21 This particular "low growth" scenario was created be- fore the recent global financial slowdown. It is a broadly ways to improve food security, while recogniz- pessimistic long-term outlook, incorporating decreased ing that there will be a continued and increasing overall economic growth and agricultural productivity dependence on imports. The projections on the growth due to climate change. In contrast, the recent future of the food balances of Arab countries global financial slowdown is expected to be a short- term period (1­2 years) of slow growth. Once more is suggest three critical strategies or "pillars" that known about the effects of the recent global slowdown each country can use to develop a plan to de- on agricultural productivity, a more appropriate "low crease vulnerability to food-price shocks and growth" scenario can be created. The analysis in this report therefore reports the model results under the enhance food security. The first pillar is coping baseline scenario. with rising consumption by strengthening safety 22 The implementation of the low agricultural growth nets, providing better access to family planning scenario assumes that worldwide GDP growth is 0.3 percentage points lower than the baseline (3.06 percent services, and promoting education. This is p.a. as opposed to 2.86 percent p.a.). This scenario also the topic of Chapter 4. The second is making assumes a reduction in worldwide numbers growth for cost-effective investments in order to enhance livestock by 20 percent and a reduction in animal yield agricultural productivity and rural livelihoods. by 20 percent. Finally, the scenario assumes a reduction in worldwide crop yield growth by 40 percent as well as This is the focus of Chapter 5. And the third is a reduction in worldwide oils- and meal-production by reducing exposure to market volatility, which 20 percent (IFPRI, 2008a). 22 Improving Food Security in Arab Countries Figure 3.3: Demand Management and Production Enhancement Both Reduce the Import Burden and Vulnerability 160,000 '000 MT of cereal (including feed) Demand (low) 120,000 Production (high) 80,000 40,000 0 2000 2010 2020 2030 Source: Authors. Adapted from IFPRI, 2008a. Note: Dashed lines were generated by decreasing demand by an additional 0.5 percent each year and increasing production byone percent each year. These lines are purely demonstrative and do not come from the model. 4 Improving Food Security with Safety Nets, Family Planning Services, and Education T he first pillar of the food-security strategy addresses increasing domestic demand for food. Food-price shocks will be particularly involves providing people with better access to family planning services and educating them, particularly the women and children, about the catastrophic for the youngest generation in Arab consequences of an unhealthy diet. Key messages countries if they lead to reduced household of this chapter are: investment in health, nutrition, and education. High food prices may force poor households » Strengthening safety nets is critical to pro- to reduce food consumption, leading to mal- tect those most in need. nutrition, wasting, and stunting. Children may » Providing people with access to family plan- be forced to drop out of school because their ning services and educating them about families can no longer afford the cost of books the consequences of an unhealthy diet can or school fees. A burgeoning population could provide sustainable benefits. be one of the region's greatest assets, and every » Adopting a multi-pronged strategy that opportunity must be taken to ensure that it does includes measures such as food fortifica- not turn into a liability. tion can help reduce the prevalence of malnutrition. Effective safety nets are crucial to preventing a lost generation due to inadequate investments in health, nutrition, and education. But creating What long-run consequences can safety nets that provide the appropriate assis- food-price shocks have on education, tance to those who most need it in a financially health, and nutrition? sustainable manner requires improved target- ing and flexibility, so that they can be scaled up Shocks can lead the poor to reduce food con- when shocks strike and scaled down when they sumption, which could increase the prevalence of recede. Of course there are serious political risks malnutrition. The recent food-price shock is as- involved with safety net reform, as illustrated sociated with an additional 4 million undernour- by recent riots in Egypt in response to short- ished people in Arab countries (FAO, 2008f ). ages in subsidized food. Another method of Judging by both stunting and wasting indicators, minimizing the damage of food-price shocks Yemen is one of the ten countries in the world 24 Improving Food Security in Arab Countries most affected by this increase in malnutrition, sectors of the population may encourage over- and is the most affected Arab country. The most consumption by those above the poverty line. recent data from the World Health Organiza- For example, subsidies on unhealthy foods such tion indicate that 58 percent of Yemeni children as sugar and cooking oil can make a balanced diet under the age of five are stunted and 41 percent less attractive because unhealthier alternatives are underweight (WHO, 2008a). In Djibouti become more affordable (Alston, Sumner, and the problem is also grim: 39 percent of children Vosti, 2006). Obesity, high intake of animal fat, under the age of five are stunted and 26 percent and low intake of dietary fiber are risk factors are underweight. Households that respond to for chronic non-communicable diseases such as price shocks by reducing calorie intake or by coronary disease, diabetes mellitus, and colon shifting consumption away from healthy foods and breast cancer (National Research Council, to cheaper, less nutritious foods increase their 1989). If across-the-board food subsidies do exposure to health risks such as malnutrition cause increasing rates of obesity in Arab coun- (FAO, 2008f ). Childhood malnutrition dimin- tries, the costs of addressing this problem may ishes adult intellectual ability and work capacity, eventually become a major concern.23 To prevent causing economic hardships for individuals and this, Arab countries can start implementing their families (Caulfield et al., 2006). nutrition interventions to prevent diet-related diseases. For example, obesity-related medical Shocks can also lead the poor to reduce in- expenses accounted for 9 percent of total U.S. vestment in human capital. Lower-income medical expenditures in 1998, and may have household responses to sustained high prices reached as high as $93 billion (2002 dollars) may include disinvesting in the future of young (Finkelstein, Fiebelkorn, and Wang, 2003). people. For example, poor families may discon- Egypt, where approximately 45 percent of the tinue preventative health care, withdraw children population is considered obese, is the Arab coun- from school to generate additional income or try most at risk (WHO, 2008b). With obesity reduce costs, and replace well-balanced diets rates higher in Egypt than in the United States, with less expensive, less healthy staples (Benson where obesity is at 32 percent, Egypt's medical et al, 2008). Newspapers in Egypt have reported expenditures could soon skyrocket. While it is that the poor are beginning to shift consumption uncertain that Egypt's broad bread and sugar to cheaper food with lower nutritional content. subsidies are contributing factors to its obesity Some families are also reducing expenditures on rate, it is certainly a possibility that merits fur- education and health services. In Yemen, there ther exploration. are informal reports that poor households are taking children out of school and putting them to work. Certain kinds of general food subsidies may 23 It takes 15 to 20 years before the increase in body weight is followed by the onset of diabetes and another 5 eventually raise long-term health costs. Sub- to 15 years before diabetes causes more serious complica- sidized foods that are made available to all tions such as renal failure, blindness, and amputations. Improving Food Security with Safety Nets, Family Planning Services, and Education 25 Table 4.1: Arab Countries Have Used Various Economy-wide Policies and Existing Social Protection Programs to Address the Recent Price Shock. Economy-wide Policies Existing Social Protection Programs Increase supply Price Reduce using controls/ Food taxes on foodgrain Export Consumer Cash Food for ration/ School Country foodgrains stocks restrictions subsidies transfer work stamp feeding Egypt Morocco Tunisia Yemen Lebanon Syria Jordan WBG Iraq Djibouti Source: World Bank, 2008b. Note: WBG is West Bank and Gaza What measures are Arab governments reduced taxes on food grains. Egypt banned employing to respond to the recent price rice exports to try to shield domestic consumers shock, and what are the limitations of from high world prices. Syria imposed export these measures? restrictions and reduced taxes on food grains. Djibouti eliminated consumption taxes on Arab governments are responding to the re- several food staples and is providing limited cent price shock with a combination of trade food assistance to rural families through donor policies, wage increases, and safety-net programs support. Tunisia reduced taxes on wheat and is that will be difficult to scale back. Trade- and keeping price controls on strategic staples. Ye- tax-policy changes have been a common initial men is temporarily providing wheat subsidies, response, aimed at increasing food security and and Jordan is maintaining bread subsidies.24 controlling consumer prices. Morocco recently reduced wheat tariffs substantially and provided subsidies to wheat importers. It also maintained 24 Jordan eliminated other food and energy subsidies as price controls on wheat, flour, and bread and part of a broader reform. 26 Improving Food Security in Arab Countries Public-sector wages have been increased in more productive uses. Second, when they are several countries, including Jordan, Egypt, not targeted, they are unnecessarily expensive, Syria, Yemen, Saudi Arabia, and Oman, al- because most benefits are captured by the non- though these increases are largely intended as poor.27 And third, in-kind food distribution compensation for both higher energy and food systems entail heavy administrative overhead prices. Some countries have used cash transfers and substantial wastes due to storage losses, and to increase the purchasing power of the poor.25 they encourage corruption, waste, and leakage of Egypt recently expanded its small cash-transfer food to non-human uses. program, and Yemen has created a workfare program building on an infrastructure-based Existing safety nets do not reach those most in social fund and is reforming and expanding its need. Programs need to be targeted to the poor cash-transfer program. One consequence of because they are most affected by price shocks, some of the actions taken so far, however, is that spending proportionately more on staple foods. they will be difficult to remove or scale back. Most cash-transfer programs in the region Increasing public-sector wages is a permanent are small, amounting to less than 1 percent of and untargeted response, fueling inflationary GDP in most cases.28 Most programs use cat- pressure. When recipients become accustomed egorical targeting approaches. Households and to the benefits of maintaining or, as in the case individuals are entitled to benefits if they fall of Egypt, expanding food subsidies or rations, it into eligible categories, such as single mother, can be very difficult to remove them, even if mar- widow, unemployed, elderly, or disabled. These ket prices fall. In the wake of the recent global categories are not limited to the poor, and do financial and economic crisis, Arab governments not necessarily cover the poorest sectors of are expected to reduce food subsidies further in the population. For example, Egypt's social- light of pressures to expand public expenditures to stimulate the economy. 25 Cash transfers can be unconditional, given to everyone who qualifies based on predetermined criteria, or con- Food subsidies are popular, but have substantial ditional, where cash is given in exchange for behavior drawbacks. Many countries in the region rely modification (e.g., sending children to school). heavily on food subsidies as the primary safety 26 In 2006­2007, energy subsidies were more than 11 net, including Egypt, Jordan, Syria, and Mo- percent in Syria and 7 percent in Egypt. 27 Yemtsov (2008) estimates that in Egypt a person in rocco, among others. In-kind food subsidies are the poorest quintile receives 3 times less in terms of particularly popular and many countries have subsidies than someone from the top 20 percent of the expanded these subsidies in response to the distribution and in Morocco the poor are receiving only 10 percent of what the government spends on universal recent price shock. While energy subsidies con- price subsidies, while 90 percent goes to subsidized goods stitute by far the largest safety-net component consumed by the non-poor. in most countries, food subsidies absorb up to 28 Less than 0.1 percent of GDP was spent on cash trans- fer assistance in Egypt in 2005; Morocco spends about 2 percent of GDP in some cases (Figure 2.3).26 0.6 percent of GDP on cash transfers, The National Subsidies have several disadvantages. First, they Aid Fund in Jordan accounted for between 0.6 and 0.7 divert significant resources from alternative, percent of GDP between 2002­2005. Improving Food Security with Safety Nets, Family Planning Services, and Education 27 assistance program covers less than 12 percent comparison to in-kind subsidies, cash transfers of the poor and has a benefit leakage rate to the do not distort commodity markets, typically non-poor estimated at between 48 and 60 per- have lower administrative costs, are amenable to cent in 2008 (World Bank, 2008n). In Yemen payment systems that limit fraud and diversion in 2005, the Social Welfare Fund cash-transfer of benefits, and allow beneficiaries sovereignty program reached only 13 percent of the poor over what is purchased.30 Most countries in the population. Of those who received transfers, region have at least one cash-transfer program 70 percent were not in the target group. The that could be adapted and scaled up to become a National Aid Fund in Jordan covered less than significant safety net. Conditional cash transfers 20 percent of the eligible population in 2005, are a program option that could foster human and of those who received aid, only 14 percent capital development and help break the cycle of were actually eligible. poverty.31 For example, transfers could be made conditional on a child attending school.32 Brazil's Bolsa Familia and Mexico's Progresa/Oportu- How can Arab countries manage nidades are examples of successful large-scale demand to mitigate the consequences conditional cash-transfer programs. of price shocks? Strengthen program coordination and enhance Improve the design of safety nets to dampen payment mechanisms to improve resource effi- the effects of food-price shocks and prevent ciency. At the policy level, program coordination them from doing permanent harm. Simulations indicate that a sharp drop in poverty headcount, depth, and severity would be possible in many 29 Proxy-means testing involves determining a set of ob- servable characteristics that are correlated with poverty countries of the region if the current system of to identify the eligible population without relying on categorical transfers is replaced with transfers direct income measures. targeted through a proxy-means test29 coupled 30 However, there are concerns that the shift from in- kind food subsidies to cash transfers could have negative with geographic targeting (World Bank, 2009). gender implications given that the male head of house- Proxy-means testing typically does well in hold normally receives the transfers, and he may not identifying the chronic long-term poor. By in- necessarily give as much priority to food purchases and creasing the budget dedicated to such programs nutrition as women would do (FAO, 2006c). 31 Cash assistance is provided to poor families condi- away from generalized subsidies, the impact on tional on behavior, often including keeping children in poverty reduction can be substantially increased. school and maintaining health regimes. The cash helps Most Arab countries have the household data reduce poverty in its own right and compensates fami- lies for the opportunity cost of changing behavior; the sets required to establish the necessary target- changed behavior is expected to contribute to long-term ing formula, and many are already adopting or human capital development for the young. considering this approach. 32 The World Food Programme (WFP) in Yemen has introduced school-feeding programs targeting girls' schools, which had a significant impact in enticing par- Employ cash transfers, because they may be ents in several rural communities to send their daughters more cost effective than in-kind subsidies. In to school (IRIN, 2005). 28 Improving Food Security in Arab Countries needs to be improved to reduce overlapping ben- Provide people with better access to family- eficiaries and mandates that waste resources. For planning services. Arab countries have among example, safety nets in the West Bank and Gaza the highest population growth rates in the world. are provided through a complex web of programs The combined population of Arab countries was supported by the government, international do- 73 million in 1950 and, at 333 million, is over nors, NGOs, and charitable organizations, some four times greater today. It will nearly double of which have the same target populations. At again by 2050, increasing to approximately 600 the program level, improvements can be made million. A growing young population requires in the payment mechanisms used to distribute access to sufficient resources to maximize its con- benefits, and in administrative operations and tribution to society. However, a rising population staffing. Egypt is piloting an electronic "smart" also adds to the growing need for food imports. card for its ration system that will eventually It drives up public food-subsidy bills, which can include cash transfers and other benefits such be significant when they are for basic goods and as health insurance. The smart card can be used services that everyone in the population uses. to track and distribute benefits through banks. Higher incomes, urbanization, and education However, smart-card implementation may be are often identified as key factors contributing more difficult to deploy in rural areas, where to long-term reductions in birth rates. However, limited education and access to infrastructure access to family planning services has proven may reduce usage rates. to be very effective in speeding up long-term demographic trends. Demographic trends and Implement safety nets that are flexible enough widespread access to family planning are already to be scaled up when shocks strike and scaled having significant impacts on reducing popu- down when they recede. This is important be- lation growth rates in several Arab countries cause scalability enables relief for the vulnerable such as Tunisia, Lebanon, Morocco, Algeria when prices are high and a reduction in the fiscal and Egypt. The widespread provision of family burden when prices are low. If possible, existing planning services in Arab countries that continue targeted cash-transfer programs should be the to have high population rates, such as Yemen, prime candidates to be scaled up. These include Jordan and Mauritania, could have significant poverty-focused social assistance, as well as social long-term benefits for a range of socio-economic pensions, unemployment assistance, and disabil- issues, including food security.33 ity pensions. Where public workfare is already part of the safety net, it may be useful to expand Educate families about the benefits of a well- program reach. The next most desirable candi- balanced diet to sustain long-term health ben- date would be food stamps or other near-cash efits. A well-balanced diet rich in vitamins and assistance that could be targeted and scaled up minerals and high in fiber can help reduce the or down. Direct subsidies and food distribution would be the least desirable option, only advis- 33 With its current population growth rate of 3 percent able when food markets are functioning poorly or per year, Yemen 's population is projected to increase when subsidies are the only available safety net. from 21 million today to 58 million by 2050. Improving Food Security with Safety Nets, Family Planning Services, and Education 29 risk of health problems such as malnutrition successful in many countries, the fortification and non-communicable diseases. As incomes of flour with iron has not shown an impact in increase, diets will improve. Nonetheless, the reducing anemia as indicated by the results of trend towards diet diversification can be accel- follow up studies in the region.34 Such interven- erated through education programs targeting tions have been criticized for being unsustainable children, who are the consumers of today and and for not reaching those that need them most, tomorrow, and women, who play a key role in especially resource-poor families in rural areas. determining the composition of household diet. In addition, anemia can be caused by multiple A primary objective of such programs would be factors, and the contribution of iron deficiency to inform families about the nutritional compo- to overall anemia figures in Arab countries has sition of staple foods. For example, estimates not been reported.35 A multi-pronged strategy indicate that approximately 40 to 45 percent to reduce micronutrient malnutrition might of the nutritious value of white flour products, include management of infectious disease, de- from vitamins to fiber, is lost during bleaching worming, promotion of breastfeeding, nutrition and other processes (The North African Journal, education, and dietary diversification in addi- 2008). Nutritional education programs could tion to supplementation and fortification when highlight the nutritional benefits of consuming evidence is supportive of such interventions. In whole wheat flour products over white flour recent years, there has been a growing interest in products. breeding bio-fortified varieties of staple crops as a primary tool to fight micronutrient malnutri- Adopt a multi-pronged strategy to help reduce tion. Such an approach has not yet been taken the prevalence of micronutrient malnutrition. up by Arab countries and might be an option Iron, iodine, and vitamin A deficiencies are for some to pursue for combating micronutrient among the most important nutrition-related malnutrition. health concerns facing Arab countries today. Anemia, often caused by iron deficiency, reduces the learning capacity and compromises the im- 34 See, for example, the studies in Bahrain (Ministry of mune system of children and lowers the produc- Health Kingdom of Bahrain, 2003). tivity of adults. Many Arab countries have used 35 Causes of anemia can include: blood loss, hookworms, low dietary intake of iron, high intake of iron absorption dietary supplements and food fortification to inhibitors, vitamin B12 deficiency, folic acid deficiency, address these micronutrient deficiencies. While sickle cell disease, thalassemia (most Arab countries lay the fortification of salt with iodine has been on the thalassemia belt). 5 Optimizing Investments to Increase Productivity and Profitability I ncreasing agricultural productivity is the second pillar of the food-security strat- egy. Higher productivity can increase the What role will productivity play in addressing increasing demand for food in Arab countries? purchasing power of the rural poor, increase foreign-exchange earnings, and reduce import Productivity gains will remain the critical coun- dependence. terweight to increasing demand for food. The evidence presented in Chapter 1 suggests that Food production in Arab countries is limited by there are a number of persistent structural fac- scarce land and water resources. There is little tors that may keep agricultural commodity prices room for expansion of arable land or irrigation, high in the future. However, it may be possible so the emphasis must be put on increasing to gain more insight into what the future holds productivity in terms of yields and value per by looking back at the last 100 years of wheat unit of land and water. Increasing productiv- prices (Figure 5.1). Since the early 1900s, real ity requires investment in research, extension, wheat prices in the United States have trended and technology transfer. Key messages of this downward, driven by expansion and techno- chapter are: logical change. In the 19th and the first half of the 20th century, this increase in productivity » Increasing productivity is the critical coun- was primarily due to an expansion of the area terweight to increasing demand for food and planted. In the second half of the 20th century, production constraints. the increase came mostly from intensification » Investment needs to be targeted to ensure arising from investment and ingenuity (Evans, that water is put to its highest-value use. 1998). While agricultural land continues to » Research and development can lead to expand, the rate of expansion has been slowing. new technologies that will drive up pro- Similarly, decompositions of productivity gains ductivity. point to research and development as major » Investments in rural livelihoods will help causes of growth since the 1960s. The green rural communities make the most of their revolution provided productivity gains that resources. eased high food prices after the 1970 oil shock. 32 Improving Food Security in Arab Countries Figure 5.1: Historically, the Price of Wheat Has Gone Down 900 800 Real Price (US$ per ton) 700 600 500 400 300 200 100 0 1908/09 1922/23 1936/37 1950/51 1964/65 1978/79 1992/93 2006/07 Source: U.S. Department of Agriculture, 2008a. However, as prices declined through the first half per capita is projected to reach 0.12 hectares per of this decade, so too did worldwide investment capita, a fall of 63 percent from its 1990s level in agricultural research and development (World (FAO, 2008b). Bank, 2008e). What are the obstacles to and Can Arab countries expand opportunities for increasing productivity? cultivated area in order to meet their food demand? Productivity in Arab countries lags behind other food-importing developing countries and Opportunity for expansion of arable land is lim- world averages. Cereal yields are currently at ited. For most of the twentieth century, arable- half the world average, and the gap is growing land expansion in Arab countries outpaced the (Figure 5.3).36 In the mid-1980s, productivity global average, but in the 1990s it slowed signifi- growth in Arab countries started catching up to cantly (Figure 5.2). This slow down was mostly due to urbanization and stiff competition for scarce water resources. Limited land resources 36 Cereals include barley, maize, millet, oats, rice, rye, and a rapidly growing population may combine sorghum, triticale, wheat, and cereals not specified to create a troubling future: by 2050, arable land elsewhere. Optimizing Investments to Increase Productivity and Profitability 33 Figure 5.2: Expansion of Arable Land in Arab Countries Far Outpaced the World Until the 1990s, When Expansion Became Limited to Sudan 140% Arab countries Percent of 1961 arable land 130% Arab countries 120% (less Sudan) 110% World 100% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: Authors. Adapted from FAO, 2008b. Figure 5.3: Arab Countries' Cereal Productivity Lags Behind World Averages 4 World 3 MT per hectare 2 Net food importing developing countries Arab world 1 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: Authors. Adapted from FAO, 2008b. other net-food-importing developing countries (Baum, 2004). Recently, however, productiv- (FAO, 2008b; Dyson, 1995). This was probably ity growth in the region is again falling, while due to the widespread adoption of improved it is continuing to rise for net-food-importing wheat and rice varieties in Syria and Egypt developing countries. Productivity growth in 34 Improving Food Security in Arab Countries Figure 5.4: Arab Countries Are Quickly Proceeding from Water Stress to Absolute Water Scarcity 4,000 3,000 Cubic meters per capita 2,000 1,000 0 1950 2000 2050 Source: Authors. Adapted from FAO, 2008b. vegetables also lags behind the global average, Countries need to take different approaches but the gap is small, and productivity growth to address water scarcity depending on their for fruits is above the global average. Low access to and dependence on irrigation. The cereal-productivity growth, coupled with bind- use of irrigation varies greatly by sub-region ing land and water constraints, causes greater (Table 5.1). The GCC are totally dependent on dependence on imports. The main barrier to irrigation due to extremely low levels of rain- high productivity is scarce water, but lack of fall.37 In the Mashreq countries (Iraq, Jordan, investment in research and in farmers also Lebanon, and Syria), the proportion of irrigated plays a role. land ranges from 27 to 43 percent of total cropland. Maghreb countries (Algeria, Libya, Water scarcity is becoming more acute and is a Mauritania, Morocco, and Tunisia) are much major obstacle to increasing agricultural produc- less dependent on irrigation (7 to 18 percent), tivity. Increased water use, coupled with growing whereas Egypt and Djibouti are nearly 100 populations, has made water increasingly scarce percent irrigated. Although water resources in in Arab countries. From 1950 to the present, Sudan are relatively less scarce, the proportion per-capita renewable water resources have of irrigated land remains less than 10 percent fallen by approximately 75 percent. They are (AOAD, 2007). expected to decrease by an additional 40 percent from present levels by 2050. (Figure 5.4). This 37 The IMPACT model includes Yemen in the GCC. downward trend will probably be accelerated by Yemen, however, is not totally dependent on irrigation, climate change. because rainfall is not as low there as in the GCC. Optimizing Investments to Increase Productivity and Profitability 35 Table 5.1: Irrigation Use Varies Greatly by Sub-region and Country (2007, except where noted) Percent total Percent annual Percent perennial Country land irrigated land irrigated cropland irrigated GCC 100 100 100 Yemen 47 42 65 Djibouti 100 100 100 Egypt 95 97 87 Somalia -- 14 -- Sudan 9 8 99 Iraq 32 27 91 Jordan 31 32 31 Lebanon 41 43 39 Syria 30 32 19 Algeria 17 10 90 Libya 14 11 17 Mauritania 7 6 9 Morocco 18 10 75 Tunisia 8 9 8 Source: AOAD, 2007 -- = Not available. How can Arab countries make most agricultural activities. The use of treated the most of scarce water resources? wastewater to irrigate food crops can also be problematic, because it often encounters public There is no new water for irrigation, so any ag- resistance, although this is changing (World ricultural expansion must come from water sav- Bank, 2007). Using wastewater for the irriga- ings. Non-agricultural water demand is growing tion of non-food crops should still be encour- rapidly. Today approximately 85 percent of all aged, because it frees up water for other uses. abstracted surface water and groundwater in Water harvesting is another way to increase Arab countries is already used for irrigation, and this number must decrease.38 Although advances have been made, creating new water 38 This figure is for the World Bank's Middle East and North Africa Region. It does not include the Arab for irrigation using desalinization and waste- countries Somalia and Sudan, and does include the water recycling is not economically viable for non-Arab Iran and Israel. 36 Improving Food Security in Arab Countries water supply for irrigation.39 It is important landowners more entrepreneurial opportuni- to recognize that desalinization, wastewater ties, creates more employment for women recycling, and water harvesting have their limits. and landless workers, and raises agricultural Together they could amount to 20­25 percent wages. In countries that have a mix of rain-fed of abstracted water, but they come at a high cost and irrigated agriculture, such as the Maghreb with limited use. countries, the Mashreq, and Sudan, water pric- ing could create a natural split; cereal would be Policies that lower the cost of water to farmers grown primarily under rain-fed conditions, and encourage non-beneficial and low-value use. high-value crops under irrigation. This would Water and energy subsidies that reduce the price increase dependence on imported cereals, but it of water encourage farmers not to maximize would also generate more foreign exchange from the value of water (World Bank, 2007). First, high-value crop exports that would cover the cost water is lost to non-beneficial use when flood of additional cereal imports. This would also be irrigation is used instead of water-saving irriga- more profitable for farmers and leave them dis- tion systems like sprinklers and drip. Second, posable income with which to buy staples. This farmers choose crops with low value added per is not to say that countries that depend entirely drop of water. For example, vegetable produc- on irrigation should stop growing cereal where it tion yields six times more value added per drop is economically viable and sustainable, as in the of water than wheat production, and ten times Nile Basin of Egypt. In Gulf countries, where ir- more value added per drop than beef production. rigation water is more limited, cereal production In the Maghreb, 40 percent of irrigated land is might be eliminated completely in favor of more dedicated to growing cereal; this is less than in efficient high-value crops. To supplement these the Mashreq (51 percent), Northeastern Africa changes, the strategies outlined in Chapter 6 can (64 percent), and the GCC (73 percent) (FAO, be developed to increase food security. 2008b). When farmers are encouraged to pay the full cost of water, they voluntarily switch their Arab countries will need to import much of their use of irrigated land from low-value crops such cereal, even in cases when they produce some as wheat to higher-value crops such as fruits and domestically. There is a complex balance of advan- vegetables. In addition, they have incentives to tages and sacrifices involved in either importing invest in water-saving irrigation technologies. less cereal, or having more agricultural export earnings with which to import. The tradeoffs Encouraging farmers to replace cereals with between these options need to be carefully evalu- high-value crops has mixed implications for food ated when considering water policy that shapes security. The World Bank's World Development production choice. This tradeoff is unique in each Report (2008e) argues that the top agricultural country, depending on its food needs and agri- priority for the majority of Arab countries is to diversify production out of staples and into 39 Water harvesting refers to practices and structures high-value crops (like fruits and vegetables) for capturing storm water, including the construction for export. High-value crop production gives of small dams. Optimizing Investments to Increase Productivity and Profitability 37 Figure 5.5: The Cost of Self-Sufficiency Grows as Population and Incomes Grow 16% Forgone crop value 6,000 (gross) Percent of cultivated land in high value crops 12% 4,000 US$ million 8% 2,000 4% Percent of cultivated land in high value crops 0% 0 2005 2010 2015 2020 Source: World Bank, 2008f. cultural potential. So long as the necessary time the last year self-sufficiency would be possible. series data on planted areas and yield is available, The total value of income sacrificed in order to an optimization model can be used to evaluate enforce national cereal self-sufficiency over an the tradeoff (World Bank, 2008f ). 11 year period would be a staggering $16 bil- lion. The trade-offs between high-value crops For Morocco, achieving cereal self-sufficiency is and cereals vary by country, but the underlying possible, but it will come at a high cost. Morocco message is the same: the opportunity cost of is less dependent on cereal imports than most moving towards cereal self-sufficiency increases Arab countries. Projections show that Moroc- exponentially as demand increases. can cereal demand for human consumption (mostly wheat) will increase from 73 million metric tons in 2003 to 103 million metric tons in Why is investing more in rain-fed 2030 (IFPRI, 2008). If Moroccan farmers make agriculture critical to Arab countries? reasonable increases in cereal productivity and cultivated area,40 then Morocco could achieve Despite predominately dry climates, many Arab self-sufficiency in cereal production until 2017. countries depend mainly on rain-fed agricul- However, converting land that could be used for growing high-value crops to grow cereals is very costly (Figure 5.5). As demand continues 40 Productivity in each province would be brought to the level of the most productive province in that region of to grow, the cost of self-sufficiency would climb Morocco, and the amount of land in cereal production from $21 million in 2007 to $6 billion in 2017, would be expanded to historical highs. 38 Improving Food Security in Arab Countries ture. In Algeria, Iraq, Jordan, Lebanon, Libya, cultural research will not keep up with climate Mauritania, Morocco, Sudan, Syria, Tunisia, change, and that public resources may be best and Yemen, rain-fed agriculture is practiced on spent in other areas that offer people an alterna- more than half of all arable land (AOAD, 2007). tive livelihood to agriculture. In the Maghreb, Sudan, and Yemen, at least 80 percent of cereal production is rain-fed, and in the Mashreq, from one-half to two-thirds of How can Arab countries cereal production is rain-fed (FAO, 2008b). increase productivity? Rain-fed agriculture in Arab countries is in Agricultural research and development (R&D) danger due to climate change. Climate change yields very high returns. Worldwide, returns to models indicate that average yearly rainfall agricultural R&D are estimated at 45 percent. could decrease by 10 percent in the next 50 In Arab countries, the estimate is slightly lower, years (World Bank, 2008g). Droughts and heat at 36 percent (Alston et al., 2000).42 With waves will become more frequent as weather such high returns, it seems that there is gross cycles speed up. As a result, rain-fed yields will underinvestment in agricultural R&D in Arab fluctuate increasingly over time, and average countries and globally. Following the recent yields will begin to trend downward, decreas- food-price shock, there is a renewed interest ing by 20 percent in Arab countries overall and in investing in productivity, but more R&D is by almost 40 percent in Algeria and Morocco required if Arab countries are to experience a (World Bank, 2007a). It is usually the most green revolution. The returns in Arab countries marginalized farmers and herders who depend include many social advantages, such as en- most on rain-fed agriculture, particularly in the hanced food security and rural livelihoods, and drier areas. These groups will be further margin- benefit a wide range of people, from farmers to alized and impoverished by the negative effects food consumers. Given these broad social re- of climate change. turns, the public sector must play the primary role in investing in agricultural R&D. Helping rain-fed farmers adapt to climate change requires investment in new technologies. Increase public investment in agricultural Research into conventionally bred and genetical- research and development. Arab countries ly modified drought-resistant crops is essential invest approximately $1.4 billion annually in for keeping rain-fed agriculture economically viable (El Obeidy, 2006). Conservation tillage 41 Also referred to as reduced tillage, no-till, and conser- has the potential to increase and stabilize yields vation agriculture, conservation tillage can be used for in the face of frequent droughts (World Bank, both rain-fed and irrigated agriculture. One of its main 2008e).41 Trials on rain-fed wheat in Morocco benefits, soil-moisture retention, is particularly pertinent have generated increased and more stable yields for rain-fed agriculture in Arab countries. 42 The estimate for the Arab region is much less precise, than conventional tillage systems (Mrabet, 2002; as there were only 11 studies to use, considerably fewer 2008). Some experts argue, however, that agri- than in other regions. Optimizing Investments to Increase Productivity and Profitability 39 Table 5.2: Agriculture Research and Funding in National Agricultural Research Institutions Potential researcher Funding PRYs/100,000 Funding as percent years (PRYs)1 (millions of 2000 US$) rural residents AgGDP Algeria 575 14 8 0.4 Bahrain 32 3 457 17.9 Egypt 6,710 68 27 0.5 Iraq 770 -- 30 -- Jordan 198 6 35 1.2 Lebanon 83 4 66 0.4 Libya 261 13 83 1.6 Morocco 606 40 6 0.9 Sudan 595 3 3 0.1 Syria 1,058 15 22 0.4 Tunisia 368 15 16 0.6 UAE 73 -- 46 -- Yemen 245 6 3 0.8 Arab world 11,574 187 14 0.5 Brazil 3,943 924 11 1.4 Argentina 1,858 270 45 1.0 Mexico 3,097 357 12 1.6 Sources: Casas et al. 1999; IFPRI 2008b. 1 A potential researcher year is the equivalent of one year's worth of research. This unit is used since many researchers have a position that also consists of teaching, extension, and consulting, making them only part-time researchers. -- = Not available. agricultural R&D (Pardey et al., 2006), or of its small AgGDP in R&D, regional leaders 0.66 percent of agricultural GDP (AgGDP) are Libya, Jordan, and Morocco (Table 5.2). (Alston et al., 2000).43 This is slightly higher It is not only developed countries that invest than the developing-country average of 0.53 highly in agricultural R&D; Brazil invests 1.7 percent, but far below the recommended invest- percent of AgGDP, 1.4 percent of which is ment level of 2 percent of AgGDP (Gana et invested through government agencies (FAO, al., 2008), as well as the level of investment of 2008b). Arab countries increased spending on developed countries, which averages 2.36 per- cent of AgGDP (Alston et al., 2000). Besides 43 Around 0.50 percent goes to national laboratories, the the atypical Bahrain, which invests 18 percent rest to other public sector research institutions. 40 Improving Food Security in Arab Countries agricultural R&D by only 0.05 percent of Ag- Since agricultural research produces mainly GDP from 1981 to 2000, whereas developed public goods, it is difficult to incite private-sector countries increased their spending by 0.95 investment. Nevertheless, there are several steps percent (World Bank, 2008e).44 that can be taken to strengthen the investment climate. Stronger intellectual property rights Enhance incentives for agricultural researchers for improved varieties and other agricultural in Arab countries. The number of agricultural innovations would help businesses privatize the researchers in Arab countries is relatively high, returns to their investments. In Latin America, but they are under-funded and ill-equipped. competitive funding for R&D has become com- In 1999, there were 14 full-time agricultural mon. Private firms are allowed to compete for researchers per 100,000 rural residents of Arab public funds, which they can use to conduct countries (Table 5.2). Leaders in this respect research with private co-financing. Another are atypical Bahrain, with 457 researchers per method that governments can use to encourage 100,000 rural residents, Libya, with 83, and private investment is to offer rewards for certain Lebanon, with 66.45 This compares well with innovations, such as drought-resistant wheat countries that have high agricultural develop- varieties, that are developed by the private sector. ment, such as Argentina (with 45 researchers per Yet another approach is to encourage innovation 100,000 rural residents), Brazil (with 11), and by letting farmers apply for grants to implement Mexico (with 12) (Table 5.2). However, funding new technologies and techniques. This type of per researcher in Arab countries is much lower, grass-roots, farmer-led R&D has spurred tech- so researchers tend to have lower salaries and nology dissemination and increased incomes fewer resources, making them less productive in several countries, including Albania (World than researchers with better funding (Casas et Bank 2008k). In the end, a partnership between al., 1999). For scholars with Ph.D.s, the finan- public, private, and farmer-led research will be cial incentives to enter public-sector research required to enhance R&D in Arab countries at National Agricultural Research Institutes (World Bank, 2008e). (NARIs) are generally inferior to the incentives to enter academia and focus on teaching. Those Promote a multi-lateral research agenda to who do enter NARIs are often ill-equipped increase the number of beneficiaries from a to be efficient in their research because of low common research agenda. The League of Arab investment in information technology and sup- States (LAS) and United Nations Develop- port staff (Gana et al., 2008). Raising researcher ment Program (UNDP) recommend a regional salaries and increasing resources will attract the R&D fund with a committed long-term budget best and the brightest researchers to agriculture, and will drive the innovation that will increase Arab agricultural productivity. 44 There are signs of improvement as recently Qatar, Tu- nisia, and UAE have made some progress in promoting public sector R&D (Gana et al., 2008). Develop innovative strategies that encourage 45 Bahrain's relatively small rural population inflates private-sector investment in agricultural R&D. this figure. Optimizing Investments to Increase Productivity and Profitability 41 (LAS-UNDP, 2008). The inability to capture farmers alike. Large farmers have the greatest returns to research from beneficial spillovers productive potential per farmer, and will be able is a major consequence of underinvestment at before others to afford innovative, but expensive, the national level (Alston, 2002). Because many technologies. Smallholders may produce less Arab countries share the same agricultural food per hectare and per farmer, but they make goals (primarily food security) and challenges up a large proportion of the target population; (such as water scarcity and climate change), a extension's biggest failure has been not providing multi-nation research agenda could increase them with basic information (Gana et al., 2008). the number of beneficiaries from a common Smallholders often struggle to stay competitive research agenda. Such a program would be well because they lack basic technical and market- situated to incorporate indigenous knowledge ing information. Extension is necessary to help into its research agenda. Because indigenous them produce and market crops with more value technologies are developed from the ground added, which will generate more economic op- up, they are well adapted to the needs of the portunity for both the farmers and their com- end-user (Warren and Rajasekaran, 1993). The munities. As discussed in Chapter 2, ensuring International Center for Agricultural Research the success of smallholders is an essential com- in Dry Areas (ICARDA) has a mandate that ponent of national food security. covers most Arab countries. The Arab Center for the Studies of Arid Zones and Dry Lands Invest in rural livelihoods to enhance food se- (ACSAD), established by LAS in 1968, has curity and improve farmer welfare. Household a mandate similar to ICARDA and covers all assets, such as land, physical capital, education, Arab countries. An independent Arab agricul- and health, are crucial factors in the ability of ture fund could work with ICARDA, ACSAD, farmers to secure rural livelihoods and to partici- NARIs, and other research organizations to pate and compete in agricultural markets (World achieve the objectives of its contributors. Bank, 2008e). Enhancing access to these assets is critical to improving purchasing power and will require significant public investment. Making What can be done to improve smallholder farming more productive and profit- dissemination of knowledge to farmers? able will also go a long way towards improving the purchasing power of rural households. A Couple investments in R&D with improvements broad array of tactics can be used to achieve in extension. Agricultural extension in Arab this, including investing in rural infrastructure, countries is underperforming. In the poorest making product markets work better, improving Arab countries--Somalia, Sudan, and Yemen-- access to financial services, enhancing the perfor- extension is virtually non-existent. A successful mance of producer organizations, and arranging extension agenda must reach large and small payments for environmental services. 6 Reducing Exposure to Market Volatility E ven if Arab countries can successfully ad- dress demand and increase productivity, they will remain net importers of cereal, and How can Arab countries ensure a steady supply of reasonably priced cereal imports? will therefore be exposed to the risks of thin markets and high prices. Reducing exposure A comprehensive review of national cereal- to cereal-import volatility is the third pillar procurement methods may reveal simple ways to of the food-security strategy. A number of generate substantial savings. One cost effective risk management strategies are at the disposal way to generate savings is to improve procure- of Arab countries, each with advantages and ment. Countries that import large quantities disadvantages for reducing price and quantity of cereal should review national procurement risk. Each Arab country faces a different mix of legislation and methods to determine if they are quantity and price risk, depending on its ability inflexible, outdated, and costly. An example of to produce food domestically and its natural archaic procurement among Arab countries is endowment of oil and other natural resources. Yemen, which does not consider price or use so- Each country therefore needs its own tailor- phisticated measures to determine import quan- made risk management strategy. Key messages tity when issuing tenders, instead simply scaling of this chapter are: up from previous years (World Bank, 1995). Characteristics of modern food-procurement » Improving supply-chain efficiency can great- systems include electronic tendering, bidding, ly reduce cost and improve distribution. credit, and transaction-risk mitigation. » Developing virtual stockpiles is a more cost-effective and flexible strategy to address Legislative and organizational changes in na- quantity risk than physical stockpiles tional procurement rules can enable economies » Investing in infrastructure used to produce, of scale and risk management in procurement. store, and transport food can reduce expo- Arab countries represent the single largest sure to cereal-import volatility group of importers. Thus, by relaxing national 44 Improving Food Security in Arab Countries legal constraints that prohibit multinational Underperforming logistics are a problem procurement, they could take advantage of throughout the region. Improving logistics in economies of scale in food procurement and the supply chain is particularly important for reduce cost. Arab countries can also take bet- countries that import large quantities of food, ter advantage of economies of formal markets because it reduces costs and improves distribu- for risk. Another reason they do not always tion. Ultimately, this enables more food to reach receive the best prices and definitive quantities consumers at a lower price. The GCC countries of food imports is that they do not use formal place well in the World Bank's Logistics Perfor- risk markets to insure transactions as much mance Index (Table 6.1), but poorly compared as OECD countries, China, India, and other to other high-income countries. A possible emerging economies. Large trade transactions explanation for this is that because oil exports present substantial risk, and in a world of are so dominant in the economies of these limited supply and competitive procurement, countries, there has been relatively little pressure Arab countries are at a considerable disadvan- from the private sector for trade and transport tage in ensuring their food security compared reform. There is great variation in logistics per- to countries that hedge risk. It is possible to formance in the Maghreb. Algeria is one of the overcome this by partnering with multinational bottom 10 countries ranked worldwide, whereas companies with extensive experience and a wide Mauritania is in the top half and is ranked sixth network of established trading partners, or by among low-income countries. Despite sharing using financial markets to insure transactions similar good relations and close ties with the (World Bank, 2008h). EU, Morocco vastly underperforms compared to Table 6.1: Logistics Performance Index: World Rankings Country World rank (of 150) Country World rank (of 150) UAE 20 Mauritania 67 Bahrain 36 Morocco 94 Saudi Arabia 41 Egypt 97 Kuwait 44 Lebanon 98 Qatar 46 Yemen 112 Oman 48 Somalia 127 Jordan 52 Syria 135 Tunisia 60 Algeria 140 Sudan 64 Djibouti 145 Source: World Bank 2007b Reducing Exposure to Market Volatility 45 Tunisia. Both countries implemented exemplary (World Bank, 2008c, 2008i). Local information customs and port reforms. Tunisia, however, can then be aggregated so that policy makers will was quicker to improve domestic logistics like know how much cereal will need to be imported, trucking and warehousing, and also imple- and where it will be most needed. mented an electronic data exchange to simplify customs clearance (World Bank, 2007b). What are alternative stockpiling strategies? Improved monitoring of world and regional ce- real supply and demand will help Arab nations Countries need to tailor their stockpiling strat- foresee price shocks, allowing them to adjust egies to their specific needs. Food stocks serve imports accordingly. Although it was impossible multiple purposes: as rapid emergency food aid to imagine the full magnitude of the recent food- in times of crisis, as working stocks for regular price shocks on Arab countries, some of the fac- distribution, and as buffer stocks to stabilize tors that caused it would have been picked up by domestic prices (Dorosh, 2008).47 Each country appropriate monitoring systems. Production and must assess how useful each of these purposes stock projections for the major wheat-producing is for their needs. Key factors in making this as- countries are readily available. For instance, sessment are national consumption, variability the United States Department of Agriculture of domestic production (increasing with climate publishes monthly wheat outlooks online that change), storage costs, size of the country relative project production, stocks, and prices. Moving to the international market, risks of produc- forward, policymakers would benefit from the tion shortfalls and high prices to the poor, and introduction of systems to continuously collect thinness of international markets. For example, and assimilate real-time information. Morocco and Syria would need to gauge domes- tic production based on rainfall at critical times Monitoring domestic supply and demand within during the growing season, and adjust their the region is challenging because rural people stockpiles accordingly. Since production varies are widely dispersed. By the time it is known by region within these countries, they would that local stocks or production are too low, it need to transport cereal stocks internally based could be too late to avert a crisis. The League of on where production shortfalls were expected. In Arab States proposes a regional food security monitoring and early warning system that will help to determine the quantity and location of 46 USAID (Famine Early Warning System), FAO, and assistance that will be needed in response to WFP collaborate with local institutions worldwide to monitor potential food shortages. a food shortage (LAS-UNDP, 2008). Such a 47 Every level of the supply chain uses stockpiling to system could collaborate with global institutions improve food security. Farmers, whether net producers that already monitor food supply.46 The creation or net consumers, stockpile if they think prices will rise. Urban consumers stockpile in times of expected scarcity. of weather stations will help predict where Large corporations and governments stockpile to take shortages may occur, as well as how much cereal advantage of high prices or depress prices on domestic these areas will need in order to stabilize prices markets (World Bank, 2008i). 46 Improving Food Security in Arab Countries contrast, UAE and Bahrain know the quantity wheat importer, could have used options and they will have to import (100 percent) without futures to mitigate the impacts of the recent considering domestic production. Their stock- food-price shock. piling strategy would focus on world production and on buying and stocking when quantities are Options contracts give the purchaser the right, high and prices are low. Since these countries are but not the obligation, to purchase a fixed small, they could conceivably hold their stocks quantity of a commodity at a fixed price during in a central location. Alternatively, they could a predetermined time period. Unlike futures, arrange to access stocks held in a neighboring options are paid for up front in cash, making country, like Saudi Arabia, with more stockpil- them easier to access when credit cannot easily ing infrastructure. be obtained. Malawi set up an options contract to protect itself against rising prices. The options Countries can employ financial risk-hedging were exercised over a two month span at the end instruments as a cost-effective complement of 2005, allowing Malawi to import 60,000 met- to physical stockpiling. Financial instruments ric tons of maize at $50­90 below the market can be used to create virtual stockpiles, ensur- price. The premium on the contract was $1.5 ing cereals at a certain price without many of million dollars, so Malawi saved between $1.5 the costs associated with physical stockpiles. and $4.8 million over this two month span with These methods avoid the high cost of physical the option. As the size of an option increases, stockpiles of perishable materials.48 Financial so do both the premium and the potential sav- instruments also improve budget planning by ings (World Bank, 2008i). Individual countries allowing importing countries to lock in prices or a regional fund could negotiate much larger ahead of time. The two primary financial in- contracts to hedge against high cereal prices struments used to establish virtual stockpiles (Box 6.1). are futures contracts and options.49 Some im- porting countries continue to use conventional Countries can hedge against commodity prices contracts with established suppliers, while using using financial instruments such as swaps and futures and options as an added price-security loans with the support of the World Bank. The measure. International Bank for Reconstruction and De- velopment (IBRD) arm of the World Bank offers Futures contracts are one way to manage food- commodity price risk. Futures contracts are 48 Deterioration, handling, transport, rotation (constant financial instruments that require the purchaser procurement and off-take), and opportunity cost of capi- tal all pose economic barriers to stockpiling. This means to buy a fixed quantity of a commodity at a fixed that bigger stocks lead to bigger distributions programs price during a predetermined time period. They and a larger fiscal deficit (Dorosh, 2008). typically require some sort of credit or guarantee. 49 Options on a terminal market offer more flexibility Future contracts would be especially attractive than futures; they insure the buyer against higher prices, but if the material is not required, there is no obligation to oil-rich Arab countries with ready access to to take it. A futures contract on a well-regulated terminal credit. Box 6.1 illustrates how Egypt, a major market can act as an insurance policy. Reducing Exposure to Market Volatility 47 Box 6.1: Egypt Could Mitigate the Risk of High Wheat Prices with Financial Instruments Egypt imported an estimated 7,000,000 metric tons of wheat from November 2007 to October 2008, when wheat prices were soaring. Actual purchase prices for the period are not available but a simple simulation using the Chicago Board of Trade (CBOT) market prices as a benchmark for market trends during the period indicates that the CBOT futures price basis of these purchases would have been $2.75 billion. A hedging strategy based on the use of futures or options during this period would have provided greater budget certainty and, since market prices were rising, some protection against the short-term price increases. This simulation shows how Egypt could have partially protected itself from higher wheat prices by using financial hedging instruments (futures and options). In the simulation, Egypt can use either futures or options, and a discretionary or non-discretionary approach to hedging. Discretionary hedging means hedging when the price is thought to be favorable. Non-discretionary hedging means purchasing hedges at regular intervals irrespective of price. This yields four approaches. These approaches can be applied at any magnitude, covering up to and even beyond 100 percent of expected imports. Each approach involved hedging between May and September 2007, to protect wheat purchases that took place between November 2007 and October 2008. All four strategies would have resulted in a savings over CBOT cash prices cost of the purchase. Futures yielded greater savings than options for the time period examined. Since the price of the futures contracts never fell below the price paid, Egypt would never have been forced to sell them at a loss. If the market prices had moved down, Egypt would have been exposed to potentially large and unpredictable liabilities. For this reason, hedging with futures is inherently more risky than hedging with options. Options would always have been exercised, because the market price was always above the strike price. Options did not perform as well as futures over the time period in the simulation because hedging with options, since they provide greater flexibility, require a premium payment, thus adding to the overall cost. Discretionary hedging did not perform as well as non-discretionary hedging in the simulation. It would have been better for Egypt to purchase fixed amounts of hedges routinely at predetermined dates rather than try to pick advantageous moments to buy. Table 6.2 provides an illustrative example of how hedging with futures and options in 2007­2008 could have provided savings over the CBOT spot market prices during the period November 2007­October 2008. Table 6.2: Egypt Could Mitigate the Risk of High Wheat Prices with Financial Instruments Per Metric 25% 50% 75% 100% Hedge size Ton (millions of US$) (millions of US$) (millions of US$) (millions of US$) Futures Discretionary $85.11 $151 $302 $453 $604 Non-discretionary $91.35 $162 $324 $486 $649 Options Discretionary $81.18 $144 $288 $432 $576 Non-discretionary $85.93 $153 $305 $458 $610 Source: Authors. Note: Percentages in column headings refer to quantity of imports hedged. its clients commodity swaps, and could structure then be used to offset the cost of rising import commodity-linked loans in which the currency food prices. The IBRD can assess a client's risk of repayment would be transformed from U.S. exposure to commodity-price movement and dollars to a commodity index to help reduce assist them in designing an appropriate risk- food commodity price risk. When international management framework. Once a framework is cereal prices are high, the swap allows IBRD to in place, the client will be able to choose from a lower the client country's interest payment ob- menu of available products and services (World ligation. Savings from the debt payments could Bank, 2008j). 48 Improving Food Security in Arab Countries Is land acquisition a viable strategy? might encourage reckless investing by the private sector if it does not internalize risk. Arab investors are increasingly buying or leas- ing land in poor but land-abundant countries Investors should carefully separate development to secure their food supply. This strategy is goals from their food security goals. Investors often described as a win-win. The investor seek to match their abundant capital with host country acquires land and guaranteed access countries' abundant land and labor. From a to the food produced on it, while reaping high development perspective, this makes perfect financial returns to its investment. At the same sense both for the investor and the host coun- time, the recipient country gets an infusion of try. However, high returns inherently involve capital into its agricultural sector, leading to high risk, which is a major drawback when economic development. For this to truly be a the goal is food security. Large-scale farming win-win arrangement, however, it is imperative operations have a notable history of failure in that the investor country protect the recipi- Sudan, and despite its agricultural potential, ent country's citizens from nationalization or the World Food Program currently feeds 5.6 expropriation, labor abuses, and loss of their million people there. Sudan cannot manage to own food security. produce enough food for its own population, let alone those of investor countries. In a country Saudi Arabia and the UAE are worldwide lead- whose people are hungry, an attempt to take ers in buying land in third-party countries. These the harvest away from farmers and deliver it to two oil-rich Arab countries hold more than 2.8 a wealthier investor country could be met with million hectares between the two of them, mostly grave political repercussions. Recently, Daewoo in Indonesia, Pakistan, and Sudan. Several other Logistics of South Korea's 99 year lease of countries have also either acquired or attempted 1.3 million hectares of agricultural land in Mad- to acquire foreign agricultural land: Egypt in agascar (over half of Madagascar's agricultural Uganda and Sudan; Bahrain in the Philippines; land) fell through because of political backlash Kuwait in Cambodia, Laos, and Myanmar; in the host country over what was perceived Libya in Ukraine and Zimbabwe; and Qatar in as "neo-colonialism" (Ryall and Plfanz, 2009). Cambodia (The Economist, 2008; Sudan Tri- Although such resistance may not arise in other bune, 2009). The other major investors in foreign host countries, it should serve as a warning of land are China and Japan. Investment is done by the potential political difficulties associated with governments (UAE), multi-national financial acquiring agricultural land in other countries to institutions (Arab Authority for Agricultural achieve greater food security. Bureaucratic slow- Investment and Development, or AAAID), and downs in host countries also form a deterrent to private companies (Saudi Arabia's Al-Qudra). this investment strategy; exporting a container Public-private partnerships have been suggested of food requires 24 days from Pakistan, 35 days in which the public sector absorbs risk and the from the Sudan, and 89 days from Kazakhstan private sector maximizes profit (Dubai School (Dubai School of Government, 2008). If food- of Government, 2008). However, such a strategy security goals and development goals are both Reducing Exposure to Market Volatility 49 to be met with investment in foreign land, it and store the food. The recipient would still is essential that the political environment and increase the productivity of its land and labor, the business environment are conducive to the and could potentially benefit from the arrange- certain and timely delivery of production. ment without upsetting the local population by selling land, while the investor would have its Establishing farming operations in third-party capital less tied up, and would not incur the po- countries may allow investors to shield them- litical risks associated with land purchasing. The selves from market risk, but at a cost. Using the Gulf countries would benefit from this strategy, global market to secure large quantities of food because they would create supply-chain syner- can be fraught with uncertainty, as the recent gies if they both produced oil and controlled food-price shocks proved. However, opting to the primary production factors dependent on invest in third-party countries instead of using petroleum. If these assets are properly diversi- the market requires the investor to take on all of fied, they also minimize the problems associated the weather risk of the host country, rather than with weather and political risk mentioned in the choose which country to secure food from. Idio- previous paragraph. Bonded warehouses could syncratic political risk in the host country may be constructed in Arab countries, allowing the also be a major concern, especially in countries physical stores tied to international commodity like Sudan which have experienced frequent con- markets to reside inside the region. This would flict. The market allows for more flexibility than reduce apprehension about purchasing hedges third-party investment. Capital locked up in land tied to physical wheat located at distant terminal purchases and long-term leases cannot easily be markets and would encourage more trading of freed up to buy food from other suppliers when the commodity. there is bad weather or political disruptions in the host country. Countries can invest in agricultural R&D of foreign countries over the long term. Chapter 5 presented the evidence of high rates of return for What alternative strategies can R&D investment in agriculture. In Arab coun- Arab countries employ? tries, particularly those where land and water are extremely scarce, productivity might be too Countries can invest in the infrastructure used low to merit limiting investment in research to to produce, store, and transport food abroad. within the region. Investments in foreign agricul- This could be permanent infrastructure, such ture could increase food security by increasing as ports, silos, and roads; mobile infrastruc- the productivity of trading partners or potential ture, such as boats, trucks, and inputs such as trading partners. Furthermore, if intellectual fertilizer; or intellectual infrastructure, such as property regimes are strong enough, investor patents to seed varieties and other technologies. countries could own the technologies that lead Buying land may be unnecessary if an investor to increased productivity, allowing them essen- can supply and control the infrastructure and tially to trade the right to use the technology for technology necessary to produce, transport, a portion of the resulting production. 50 Improving Food Security in Arab Countries There is no single ideal method for reducing investment in foreign land and infrastructure. exposure to market volatility; the tools pre- Some tools, like modernizing procurement sented in this chapter can be used individually, and improving logistics, are basic remedies that or in combination, to minimize risk. Improving should be achieved to some degree by all coun- supply chains can reduce costs and improve tries in the region. Using financial instruments distribution. Investing in foreign land and infra- is a newer technique, but as the World Bank's structure can reduce the amount of cereal that success in Malawi shows, even countries with Arab countries need to import at world prices. small economies can use hedging instruments to Using financial instruments to hedge world price shield themselves from market risks. Investing in risk can help stabilize the price of the cereal that foreign land, infrastructure, and R&D is more they still need to import. suited for Arab countries with larger economies. All Arab food-importing countries should be Appropriate risk management strategies need able to find ways to protect themselves from to be constructed on a country by country food-price shocks like the ones seen over the basis depending on risk tolerance and financial past year, and the World Bank and its partners ability to manage risk through investment in can help them devise, finance, and implement supply chains, use of financial instruments, and appropriate strategies. Next Steps T his joint working paper identifies the core issues associated with food security that are unique to Arab countries and proposes The first step is to undertake a long-term na- tional food-balance projection. This will allow national policy makers to determine how much a framework to address them. The framework food will be consumed, how much is being pro- includes three pillars: (1) strengthening safety duced domestically, and how much needs to be nets, promoting greater access to family plan- imported. Several models are currently available ning services and to education, (2) enhancing that can be used for this projection, including the domestic food supply and rural livelihoods ones presented in this paper. through increased investment in research and development, and (3) reducing vulnerability by The second step is to explore the range of actions improving supply chain efficiency and by more that can be undertaken to strengthen safety nets, effectively using financial instruments such as provide people with access to family planning options and futures to hedge risk. services, and promote education. Improving the performance of safety nets is one of the most The next step is for individual countries to de- important short-term actions that will soften termine how best to combine the three pillars to the impact of food-price shocks on the poor. create an integrated and comprehensive strategy Evaluating the available options for strength- that addresses short, medium, and long-term ening safety nets requires access to reliable policies to improve food security. These strate- data on household income and expenditures, a gies will be country specific as they depend on consensus on the national definition of poverty, a host of factors including national, political, and reasonable data on the administrative costs and cultural preferences, resource endowments, of different programs. The potential returns to and tolerance for risk. However, the framework different levels of investment in nutrition, educa- proposed in this paper provides the necessary tion, and family planning can be analyzed using guidance on the key types of country-specific the food-balance projection. analysis that need to be undertaken in order to develop a comprehensive and customized The third step is to identify potential invest- strategy. ments that can increase domestic agricultural 52 Improving Food Security in Arab Countries productivity and profitability. This is more rele- and then model the costs and benefits of the alter- vant for some countries than others and requires native approaches described in Chapter 6. careful enumeration of the available land and water resources and an assessment of whether or The final step is to give careful consideration to not appropriate policies are in place to make the the budgetary consequences of all alternative most of them. It also requires knowledge of the courses of action. No country can extensively returns to alternative investments in agricultural engage in every option laid out in this framework research and development, and in some cases an so it is essential to assess the tradeoffs between analysis of the potential tradeoffs of pursuing different food security strategies and other na- self-sufficiency in key crops. tional goals. The fourth step is to determine how much and The World Bank, the Food and Agriculture what kind of exposure to cereal market volatility Organization, and the International Fund for is acceptable. Drawing on the results of the food- Agricultural Development all stand ready to balance projection and the sensitivity of the projec- play a role in this process through the provi- tion to steps two and three above, it is possible to sion of technical assistance and financing for measure the national exposure to market volatility investments. References Alston, J. M. 2002. "Spillovers." Australian Jour- Blomberg, S. B. and E. S. 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