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Monday 21 Aug 2017 | 11:01 | SYDNEY
Monday 21 Aug 2017 | 11:01 | SYDNEY

Echoes of the other GFC

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13 August 2010 10:08

During his recent Wednesday Lowy Lunch speech, Joel Negin reminded us of the other GFC – the global food crisis. For much of 2007 and 2008 it was this crisis, rather than its financial counterpart, that was on my mind. I wrote about the food crisis here and here, and I have a longer effort due out some time in the future.

The lessons you draw from the 2007-2008 food crisis depend in large part upon how you interpret that event. One view is that the surge in food prices that peaked in 2008 was just the latest in a long line of commodity price booms and busts. It might tell us quite a lot about the cyclical drivers of prices over that period of time, but nothing very much about the long term. At the other end of the spectrum, a neo-Malthusian viewpoint would see the crisis as a warning of deep structural imbalances in global supply and demand for food. 

While my own view is closer to the first of these competing perspectives – much of the food price spike was the product of a particular set of circumstances prevailing at that time – I still think that the food crisis told us some important things about the future longer-term trajectory of the world economy.

More specifically, in my view the food crisis made for a powerful case study of the dynamics of a resource-constrained world economy: that is, a world economy where the rapid growth, industrialisation and urbanisation of some of the world's most populous economies periodically bumps up against supply constraints. In the long term, these constraints can be eased through appropriate policy responses (getting prices right, ensuring the appropriate amount of investment). But there will still be adjustment problems. 

So this is a world where prices are going to be very sensitive to any shocks to supply (and demand), and where government policies can play an important, and sometimes perverse role. Thus in the 2007-2008 food crisis, reasonably tight underlying conditions (low levels of food stocks) meant that a series of shocks (adverse weather conditions, high energy prices, a surge in demand for bio-fuels) produced a price spike. This was then compounded by government action, in the form of export bans by some key suppliers.

Recent events provide some additional support for this view. A severe drought in Russia has seen wheat prices rise at their fastest rate since 1973. And Moscow – in a repeat of 2007-2008 – has announced an export ban. Ukraine and Kazakhstan are reported to be considering similar measures. 

While all this has been good news for Australian wheat farmers, it has also sparked unease among some importing economies – a development which again echoes events in 2007-2008. Are we headed for a repeat crisis' Hopefully not. According to the International Food Policy Research Institute (IFPRI), there is no reason to panic: despite the fact that Russia accounts for about 11% of world wheat exports, IFPRI calculates that excess wheat supplies from the US, Canada and Australia, among others, should be sufficient to plug the gap.

Still, developments over the last couple of weeks should serve as a timely reminder that we should not forget the lessons of the other GFC, and that we should not be complacent about the challenges raised by a resource-constrained world.

Photo by Flickr user hz536n, used under a Creative Commons license.

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