Agriculture Reference
In-Depth Information
port more than 6 million tons of rice in the wake of the worst drought in recent
history with very little impact on the world rice market (Timmer 2002).
Second, although it is still high compared to domestic markets, price
volatility in the international market has shown significant decline in the past
two decades, particularly in the 1990s. Dawe (2002) has demonstrated that the
average absolute value of annual rice price change has declined from 24 per-
cent during 1965-1981 to just 11 percent between 1985 and 1998. The author
attributes the increased stability to three factors: increased production stability,
a deeper world market (both noted above), and the commercial orientation of
several major exporters. These patterns suggest that rice prices are likely to re-
main relatively stable in the future.
Ability to Participate in the International Market
Another justification for state intervention, very significant in the 1960s, was
that most of these countries had little foreign currency reserve and their food
security greatly depended on food aid. The severity of the problem is demon-
strated by plotting the value of cereal imports (commercial plus food aid) as
percentage of foreign currency reserves (Figure 2.1).
11
Notice that, until about
the early 1970s, cereal import values exceeded foreign currency reserves in In-
dia and Indonesia and constituted a high proportion of total reserve in Pakistan
and the Philippines. In Bangladesh, cereal import value was higher than foreign
currency reserves as late as 1987. These numbers clearly demonstrate the crit-
ical link among foreign currency reserves, food aid, and food security. Clearly,
without food aid, the countries would have encountered serious food security
problems until about the late 1970s.
The link between foreign currency reserves, food security, and food aid
was clearly manifested in India when that country was hit by two consecutive
droughts in the mid-1960s. In 1966, the country needed more than 10 million
tons of food to feed its population and had about US$419 million in its reserves.
Thus its spending its entire reserves could buy only 6.76 million tons of wheat
at current prices (US$62 per ton). Therefore, when the United States cut off
food assistance under PL 480, the situation turned into a crisis. The leaders of
India had to appeal to the United States to reconsider food aid; the United States
eventually bailed out India by supplying more than 8 million tons of food aid.
This experience severely strained Indian national pride, and attaining food self-
sufficiency quickly became the top priority of the government's policy agenda
articulated in the Fourth Five-Year Plan.
A review of the trends in foreign currency reserves and import capacity,
defined as the export value of goods and services deflated by import price in-
11. Foreign currency reserves do not include gold, special drawing rights, and funds with
the International Monetary Fund (IMF). Cereal imports include government imports, food aid, and
other commercial imports.
