Tackling Asean’s food crises

POLICYMAKERS from 10 major Southeast Asian economies gather in Phnom Penh this week for the summit of Asean nations amid growing global concerns about the impact of soaring food prices and intense supply shortages.

Russia’s initial suspension of the Black Sea agreement that allowed Ukrainian grain exports at end-October sent cereal prices surging, worsening an already woeful situation in the region. In Laos, inflation spiked to a high of almost 37 per cent in October, with steep increases in the prices of rice and other food items such as pork, poultry, fish, seafood and eggs. In the Philippines, food prices rose by 9.4 per cent in October, pushing headline inflation to 7.7 per cent in October, the highest recorded inflation since December 2008.

Given that food typically accounts for between one third and one half of household spending in Asean countries, faster food price rises quickly lead to financial and food insecurity. Spikes in the cost of food production can quickly turn into broadbased inflation and create a cost-of-living crisis. This in turn affects the health of the region’s agri-food industry, upon which many livelihoods depend.

Analysis by Oxford Economics for Food Industry Asia (FIA), a regional trade association, shows that in 2021 the agri-food sector contributed almost US$810 billion to the economies of five Southeast Asian economies – Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. This means that activity in the agri-food industry contributed to between 25 and 32 per cent of the total national GDP of those five economies in 2021, and accounted for between 35 and 48 per cent of all jobs, or the equivalent of around 127 million full-time workers.

In other words, this sector that employs 127 million workers across five major Asean countries is facing enormous short-term pressures from rising input prices and falling consumer demand, and even larger long-term pressures from climate change and unfavourable demographics. As Asean policymakers consider a wide range of policy challenges this week, they must be cognisant of piling additional policy risks on the agri-food sector’s outlook.

Three policy ingredients

There are three policy dynamics playing out across Asean that pose additional threats to the agri-food sector’s post-Covid-19 recovery and its preparation for future challenges.

The first is food nationalism. This is the wrong place and the wrong time for anti-trade policies in the Asian agri-food system. In September, India – the world’s largest rice exporter – banned exports of broken rice. Between June and October, Malaysia halted exports of live poultry.

Export restrictions are a grossly inefficient solution to rising prices. In the short run, banning food exports eats into the profitability of food producers and scares off foreign investors. Whilst it might serve to quell inflation temporarily for the region’s net food exporting nations, the net food importers, such as the Philippines Brunei, and Singapore, suffer rising prices – which spill over international boundaries and contribute to general inflation through Southeast Asia’s closely integrated regional supply chains.

The second relates to the fiscal rebalancing taking place after the extraordinary fiscal measures of the pandemic era and the rising cost of debt financing. This is clearly of priority concern for the region’s financial stability. But governments should approach any new taxes on food and beverage consumption or the removal of existing agricultural subsidies with great care, in an already inflationary environment for low-income households, when producer margins are already squeezed.

The third is the looming prospect of health- or environment-related excise taxes on the nutritional content of food and plastics packaging, respectively. While the social imperative behind such initiatives is noble, examples around the world have shown that there is a formula for success with such programmes.

Those that are designed in collaboration and open communication with industry partners and delivered together with a well-organised communication campaign and serious enforcement policies are more successful in phasing-in good practices in product formulation and packaging design, without harming domestic industry and jobs. Tax rises alone are a blunt instrument that damage business and rarely achieve the intended health and environmental goals.

Indonesia has already highlighted the issue of food security as a key priority for its own chairmanship of Asean in 2023, which means that the Phnom Penh summit should be a springboard for action over the coming 12 months. Steady heads and pragmatism are required to deal with short-term challenges.

The only solution to global food price insecurity in the longer term is ensuring the highest yield from agricultural production in a sustainable way by extending agricultural technologies, investing in research and development, and reforming archaic land laws. This is the recipe for successfully attracting foreign investment. A policy environment that damages those prospects could be counterproductive.

The agri-food sector, the single biggest employer in the Asean economy, is emerging from the harsh economic climate of the pandemic and facing long-term challenges from climate change and declining demographics. Of course, food price inflation will trigger anxieties about short-term food security, but policymakers must be aware of the longer-term damage that rash, short-term and national-minded food policies can do to the region’s future health.

The writers are from Oxford Economics. James Lambert is director of economic consulting, Asia, and Thang Nguyen is lead economist macro consulting, Asia.