Will the Asian Financial Crisis Jeopardize Future Food Security in the Region?

NEWS & VIEWS: How would you characterize the nature of the damage inflicted by the Asian financial crisis on the various countries in the region?

I will concentrate on South Korea, Thailand, and Indonesia. In South Korea, the major shock is to the system of government and business relationships. I think the crisis could really help industrial restructuring and in opening up the Korean economy. In Thailand, this is a relatively minor blip. Most of the restructuring will be limited to the financial and property sectors. That’s not a huge share of the economy. I don’t think it jeopardizes the development path they were on. Perhaps there will be a better balance between the urban and rural sectors. This could actually be a healthy thing for Thailand.

For Indonesia, I’m much more pessimistic. Until there are reforms to the political system, there will be lasting damage to the economy. I don’t see any evidence that those reforms are in process. If I had to predict, I’d say Indonesia could lose three to five years of economic growth.

NEWS & VIEWS: How might this crisis affect food and agriculture in the region?

We have to distinguish among the countries. In Thailand, the big impact has been the increase in the price of rice, which has created a strong export market and is good for farmers. It has hurt consumers in the urban areas, but they were probably wealthy enough to cushion that blow. I don’t think there is a serious nutrition problem in Thailand.

In Korea, the big issue was trade financing for imports. They were highly import dependent, and cutting those imports off was a real threat to their food security. The U.S. package of $2 billion in trade guarantees and credits for agricultural imports stabilized that situation almost overnight. Now for Korea, the main impact is that their rice and beef farmers are no longer as heavily protected as they used to be. Their agricultural sector is now much more competitive.

Indonesia is a totally different situation. El Niño had a devastating impact—two years of drought, the worst in this century. There have been two consecutive years of declines in rice production. When we looked at the situation in January and February, there seemed to be potential for widespread famine. The Indonesians deserve credit—once the severity of the situation became clear to them, they started emergency measures to get imports flowing again, including booking new contracts for rice imports. In March, Indonesia imported 800,000 tons of rice in that one month. That’s just staggering—no country has come close to that figure before. For all of 1998, they will almost certainly import a total of 5 million tons of rice.

So Indonesia, because of the drought, is coping through massive imports. But you also have to get purchasing power into people’s hands. They’re doing that through massive, labor-intensive public works projects.

NEWS & VIEWS: Will slower economic growth lead to slower growth in food demand and consumption? Will it lead to a redistribution in food consumption, for example, away from meat?

Yes, with lower incomes, people will consume less of those high-value products. In the shorter term, they can’t afford corn and soybeans to feed livestock and poultry. The broiler industry has basically gone bankrupt. The problem is very severe in Indonesia, but this is also true elsewhere. In addition, in recent years there has been a substantial change in consumption away from rice and toward imported wheat. Because of the high cost of importing wheat, we should see a fairly substantial shift in the other direction—away from wheat and back to rice consumption.

NEWS & VIEWS: How are countries helping individuals cope?

In Korea, people are rich enough that family safety nets and a bit of government assistance will see them through without great social unrest. In Thailand, there is much more reliance on falling back on rural families. People are migrating back to rural areas, and there has been a fall in consumption in Bangkok. My sense is that rural areas will cushion the impact.

Indonesia will have the hardest time. With two years of drought, rural coping mechanisms are exhausted. Compound that with unemployed urban workers going back to rural areas. The busses are full in both directions. It is not even clear what direction net migration is on Java right now. We do know that there has been a massive increase in the vulnerable population. There has been roughly a doubling of people below the absolute poverty line, from about 10 percent of the population to 15 to 20 percent. A rise of 10 percent is about 20 million people. This is poverty that pushes you below having enough to eat. Rice, soybeans, and kerosene are the three key elements in the market basket for the poor. Those are being heavily subsidized for the first time in many years.

The size of the rescue effort in Indonesia really has to be very large. Just the rice imports will cost $1.5 billion. Historically every million tons of “emergency” rice imports has caused prices to go up by $50 per ton. With 5 million metric tons that would mean a doubling of prices. But so far this year, there has been enough rice in the world market that the price has not gone up significantly, mostly because of very good crops in Thailand, Viet Nam, and South China. But if the drought continues in Indonesia and they have to arrange even more imports later in the year, the world market price of rice is likely to rise significantly.

On the other hand, there are now incredibly powerful incentives for Indonesia to grow more rice. In 1999, if the weather is good, they might not import any rice at all. If they do stop importing, it could lead to a collapse in the world market next year in rice. We have to monitor that very carefully.

NEWS & VIEWS: What are the implications of this crisis for the rest of the world?

To a significant extent, it depends on whether Japan is brought down by the crisis. If Japan goes into a severe recession, that could spill over into the global economy. The U.S. stock market is highly vulnerable to changes in earnings. A downturn in the stock market could be the trigger for a significant recession here. My sense is that U.S. investors are in a state of denial. If anything really shakes them up, the response could be pretty violent. I think this really is the year of living dangerously.

There could be a significant threat to U.S. agricultural exports, since Asia has been the biggest source of growth for U.S. agricultural exports. For example, Indonesia was the largest importer of U.S. apples, but imports are now zero. The United States will get very aggressive about trade financing to maintain access to those markets. We could see something bordering on agricultural trade wars.

We could also see a U.S. reassessment on the role of food aid. If Asia can’t buy food, the United States may find ways to simply give them the food as aid. The food aid convention is being renegotiated in 1999. The United States will have to come up with a position. This should be an interesting story to watch.

NEWS & VIEWS: Is the current crisis likely to have a long-term impact on the region?

In the long run, I see two things now. These are not primarily macroeconomic but are more related to political economy. One is the value of increased transparency. Foreign investors will not come back unless they have more information and trust that information. Korea and Thailand have moved in that direction, while Indonesia has resisted. Second is the importance of better governance and accountability to the domestic population. If you think about why Indonesia has been far and away the worst affected, the big difference is governance. The Thais elected a reform government, as did Korea. In Indonesia, Suharto said we’re going to do business as usual. That stance cost him credibility with his own people. So, for the region as a whole, there should be a lot more public voice in government affairs.

Perhaps the most important long-term impact will be on how development specialists think about the “Asian miracle.” These societies did not repeal the laws of economics, but their high savings rates and attention to rural development allowed “crony capitalism” to misallocate vast resources in the industrial and property sectors, without devastating effects on the rate of economic growth. The key lesson then is that in a capitalist system there had better be a financial system that allocates capital efficiently.

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