The Poor Are Paying the Price of the Food Cost Spike

02/16/2011 05:55 pm ET | Updated May 25, 2011

2008 is so last decade. And yet, the recent hike in food prices is bringing food costs near the dangerous levels of that year, creating enormous vulnerabilities in developing countries.

The World Bank's food price index increased by 15 percent between October and January, is 29 percent higher than a year earlier, and only 3 percent below the 2008 peak. According to our latest update of Food Price Watch, a brief that tracks the trends in domestic food prices in low- and middle- income countries, the increase over the last quarter is driven largely by increases in the price of sugar (20 percent), fats and oils (22 percent), wheat (20 percent), and maize (12 percent).

The impact of these growing food prices on poverty has already been felt. Estimates by World Bank economists show that 44 million people have fallen into extreme poverty in developing countries as a result of the food price increase since last June. In case you are wondering, the figure was estimated by subtracting the 24 million net producers of food who came out of poverty from the 68 million net consumers of food who fell below the $1.25 a day poverty line.

The poverty effects go beyond the numbers. If the upward trend continues, there will be higher malnutrition since the poor spend more than half of their incomes on food. In effect, higher food prices are forcing families to eat less and substitute cheaper staples in place of more expensive, nutritious food.

On top of the human suffering, the price hike also creates macroeconomic vulnerabilities, particularly for countries with a high share of food imports and limited fiscal space. There are many countries with good safety net programs in place to cushion the impact of food prices on poor people. But if external and fiscal balances are tight, the capability to protect those who need it most is in serious jeopardy. So at the end of the day, the fiscal impact of the food price hikes will depend on the extent to which food tax revenues increase and expenditures on mitigating measures, such as social protection programs, get higher.

Fortunately, two encouraging factors have prevented even more people from falling into poverty. First, good harvests of key staples, such as maize in many countries in Africa, have allowed for the substitution of imported wheat and rice. Second, the fundamentals of rice market supply in Vietnam and Thailand remain strong. After having experienced the 2008 food price crisis, this time we need to leverage these advantages and do things right.

As the World Bank's President Robert B. Zoellick first stressed this year in his January op-ed, there's much to do, like increasing public access to information on the quality and quantity of grain stocks, ensuring effective safety nets, and preventing export restriction, among many others. This week, he again urged the G20 to put food first, just ahead of the Group's Meeting of Finance Ministers and Central Bank Governors in Paris.

Indeed, there are several measures policy makers can take to prevent the worst. Food Price Watch indicates the "panic buying" can be prevented through the publication of regular data. And safety net and nutritional programs can be scaled up in the most vulnerable countries. Likewise, more investments in agriculture, the development of less food-intensive biofuels, and climate change adaptation, are also needed.

We are reaching the very dangerous levels of 2008, that's true. But there is much we can do to prevent another catastrophe.

This blog was originally posted on the World Bank Institute Growth and Crisis website.