As I’ve just mentioned in a separate post, today is crunch time for the Waxman-Markey climate bill in the House, and so everyone’s watching the few remaining undecided Democrats, many of whom have big coal interests in their states. One set of Democrats that’s firmly in the ‘decided’ column, though, is the farm-lobby – who will be busting out cold beers and chucking ribs on the grill this weekend if the Bill passes. 

Not long ago, the farm lobby were adamantly opposed to the bill, which they feared could increase their input prices, especially fuel for on-farm energy use. Moreover, the mighty corn lobby was especially unhappy that it wasn’t invited to the cap and trade party, as National Corn Growers Association President Bob Dickey made very plain on May 18th:

“After reviewing the legislation, we can see the bill does not clearly provide for a mechanism by which corn growers can sell carbon credits on the market. We strongly believe the bill will increase input costs without specific opportunities to offset those additions. We cannot support the American Clean Energy and Security Act in absence of the provisions that we have explained in some length to the Committee.”

Well, that was then. The bill now includes an amendment submitted by House Agriculture Committee chairman Collin Peterson, which will:

• create a market for agricultural offsets that allows the sector to take part in cap-and-trade;
• have this market regulated by the US Department of Agriculture, not the Environmental Protection Agency; and
• explicitly exempt agriculture from having an emissions cap of its own.

Oh dear. As Fiona Harvey notes in yesterday’s FT, the problem with crediting emissions savings from land use changes is that the numbers are so damn uncertain: “working out whether a given soil is storing or releasing carbon is a minefield. It requires complex evaluations of soil conditions carried out over long periods, and efforts to verify whether the farmer has implemented the relevant agricultural techniques”. 

There’s also the small matter that agriculture itself is responsible for 7% of US emissions, she notes – which makes it a shame that those emissions are explicitly excluded.

The bill also sweeps under the carpet the huge issue of indirect international land use changes arising from biofuels. Back in February last year, a major study from Princeton University found that if you take account of “the carbon emissions that occur as farmers worldwide respond to higher prices and convert forest and grassland to new cropland to replace the grain (or cropland) diverted to biofuels”, then

corn-based ethanol, instead of producing a 20% savings, nearly doubles greenhouse emissions over 30 years and increases greenhouse gasses for 167 years.  Biofuels from switchgrass, if grown on U.S. corn lands, increase emissions by 50%.

So how does the bill deal with this? Ben Geman in the NY Times yesterday:

[The bill] contains a separate agreement that blocks EPA — for at least six years — from including emissions from international indirect land use changes when weighing biofuels’ carbon footprint under the 2007 Renewable Fuels Standard.

No wonder Bob Dickey now sounds more cheerful:

“We appreciate the dedication Chairman Peterson has shown to U.S. corn growers and the agriculture industry during this legislative process. He has been a true champion for our industry during negotiations.”

Indeed.

The report’s key diagnosis is that while food prices have fallen significantly from their peak last year, they remain acutely problematic for poor people and por countries at their current levels – and poised to resume their upwards climb when the world emerges from the downturn.  Accordingly, the last thing policymakers can do at this stage is to heave a sigh of relief – on the contrary, they need to treat the current easing in prices as a window of opportunity in which to agree the comprehensive, long-term collective action needed to ensure food security for all in the 21st century.

Long term demand drivers, above all a population set to reach over 9 billion by mid-century and the rising affluence and expectations of a growing ‘gloal middle class’ are half the story, with the World Bank forecasting 50% higher demand for food by 2030. 

On the other hand, scarcity issues will present increasing challenges on the supply side.  Oil prices are also set to resume their climb after the downturn, given that investment in new production has collapsed as oil prices have fallen, setting the stage for a future supply crunch; food prices can be expected to follow them, as biofuels, fertiliser prices and transport costs all play their part.  Climate change, water scarcity and competition for land will all also push prices upwards.

So what needs to be done?  The report sets out a ten point agenda for action at the international level and in developing countries, but overall I think of the challenge in four key areas.

The first is to get a 21st century Green Revolution underway, and fast.  Spending on agriculture by aid donors and developing country governments has collapsed over the last 25 years; it’s a similar story on R&D. At the same time, we need to move from today’s input-intensive model of agriculture to one that’s instead knowledge-intensive. People always ask whether that means GM crops, and I don’t rule out that they may have a part to play; but for equitability and social resilience, I think more ecologically integrated approaches (like integrated soil fertility management) often score higher. 

Second, we need to scale up social protection systems in developing countries. Today, nearly a billion people don’t have enough to eat.  But as you can see from the fact that about the same number of people are overweight or obese, the problem is not that there’s insufficient food to go around; rather, it’s that poor people find food prices beyond their reach. Social protection systems are a better bet for developing countries than price controls or economy-wide subsidies because they target help where it’s needed (and don’t break the bank) – but as yet, only 20% of the world’s people have access to them.

Third, we’ve got a lot to do in the trade context.  One option that policymakers ought to be thinking about is a globally coordinated system of food stocks -  a bit like the IEA’s emergency stocks in the oil context – as a way of building resilience to the spate of export restrictions we saw last summer when panic over food prices really set in.  They also need to think about ways of that trade rules can help manage the risk of export suspensions, given that WTO trade rules were really built to resolve disputes over market access, not security of supply.  But at the same time, it remains imperative for developed economies – above all the EU and US – to reform their iniquitous farm supprt policies, which structurally undermine developing country agriculture.

Finally, there remains the observation that (as Gandhi once put it), there’s enough for everyone’s need, but not for everyone’s greed. The global consumer class has barely begun to recognise that its western diet, rich in meat and dairy products, is far more resource intensive than everyone else’s diet – whether you’re looking at grain intensity, water use, energy consumption or greenhouse gas emissions.  That doesn’t mean everyone has to be vegetarian – but there are nonetheless fundamental issues of fair shares involved.  Exactly the same point applies on biofuels: not all biofuels are bad, but inefficient options like corn-based ethanol simply have no place in a sustainable or equitable agriculture system.

I finished this project with the conclusion that the worry that prompted me to do this work in the first place – that scarcity issues would make the future outlook for food much, much harder – is well supported by the data. But in spite of that, I’ve also come away feeling more hopeful than I did when I got started. 

Part of the reason is a deeper understanding of the astonishing story of innovation that lies at the core of the history of agricuture – without which there is no way on earth we could have increased our numbers from 5 million to 6 billion – and of the prospects for more such innovation in the future.  But at the same time, I also finished the project with a firm conclusion that technical innovation on its own isn’t sufficient.

Innovation always creates winners and losers. We saw that in the agricultural context with the 20th century Green Revolution (which despite huge improvements in yield also put huge numbers of agricultural labourers out of work; benefited larger farmers first and small farmers only later, if at all; and for the most part bypassed Africa altogether). So the other side of the coin is all about politics.  It’s not enough for the world’s food system to become more productive, more resilient and more sustainable, though it needs to do all of those things; it also needs to become more equitable.

Admittedly, I found little evidence so far of the political will needed to make that a reality, either in developing countries or at the global level. But the reason why even then, I still feel more hopeful now than when I started the project, is the realisation that creating the more equitable food system that we need isn’t that far out of reach. 

It wouldn’t take huge sacrifice; we know more or less what we need to do; with sleeves rolled up, I don’t think it’s remotely absurd to think that we could do it within a decade. And actually – in cheerful defiance of the gloomy clouds gathering overhead – I think we might actually do it.

You can download my talk here (with pictures, references etc) – or the text only is available below the jump. There’s a webcast too.

Headlines:

• It’s going to be a tough year. The financial meltdown has a long way to go, and the downturn is risking turning into a global depression.
• Trade is a bell wether. Protectionist pressures are already on the rise. If they gain traction, take that as a warning of a wider loss of confidence in global institutions.
• The unravelling of global economic imbalances could prove corrosive to the international order. If countries start to devalue to protect exports, expect a tit-for-tat dynamic to kick in.
• Scarcity issues (energy, water, land, food, atmospheric space for emissions) remain the key medium term driver of global change. Commodity prices will spike again as soon as there’s recovery.
• The downturn has stemmed the uncontrolled growth of emissions, but also lessened the chance of a robust global deal on climate.
• Economic bad times could well drive increased conflict. A major new security threat might be the fabled black swan – hitting just when the global immune system is already overloaded.
• If we experience a long crisis (or a chain of interlinked crises), we are likely to see either a significant loss of trust in the system (globalization retreats), or a significant increase in trust (interdependence increases). 
• You need to stretch time horizons to get the latter – shared awareness (joint analysis of risks and challenges), as a basis for shared platforms (loose coalitions of leaders), which can lobby for a shared operating system (a new international institutional architecture).
• 2009 sets a challenging agenda for the G20 (financial reform and economic recovery – but framed by a broader vision on climate, resources, security etc.)…
• …the G8 (caucus of rich countries able to tee up Copenhagen and kick start development assistance if developing countries begin to teeter)…
• …the UN (especially Ban Ki-Moon’s proposed high level ‘friend’s group’ on climate, but also as a fora for getting to grips with scarcity issues)…
• and the Bretton Woods institutions and the WTO (first of all ensuring they keep their heads above water, then looking to ‘save globalization from itself’).
• Oh and be ready for the backlash – people are angry and rightfully so, but that may well lead us down some populist blind alleys.

2009 – A Year for International Reform
Talk to the Reforming International Institutions – Meeting the Challenges of the 21st Century conference
David Steven, 21 January 2009 

Introduction

In the run up to November’s G20, I published A Bretton Woods II worthy of the name, a paper co-authored with my colleague, New York University’s Alex Evans.

In a nutshell, our argument was that leaders needed to respond to extreme global stress by:

• Becoming more ambitious in their attempts to reform the international system, despite temptations to focus narrowly on fire fighting a growing number of immediate problems.
• Focusing on the long-term in order to increase the basis for co-operation, thinking in decades where national interests tend to converge, rather than in years where often they will not.
• Working towards integrated solutions, and not imagining that a ‘global deal’ on finance could be divorced from the other big deals that must be struck on trade, security, climate and other resource issues.

This paper, prepared for presentation to the United Nation’s University and UK Foreign Office conference on International Institutions Reform in Tokyo, expands these points.

It has been written at the beginning of a critical year for the international system – a year of great peril, but also of some promise. Threats are building up globally, many of which are poorly understood and will strain our capacity for collective action. International institutions, as currently constituted, risk being overwhelmed. We could end the year confronted by a ‘new isolationism’.

But there are also opportunities to carve out an effective response. After all, a crisis always provides the conditions in which desperately needed reforms can best be achieved.

But policy-makers will find it much easier to work together if they focus on the big picture, or what Wittgenstein called ‘the single great problem’. Without ambition, long-term goals, and integration across issues, 2009 will go down in history as a year of lost opportunities – and possibly mark the point that a short-term international crisis turned into a much more deep-seated decline.

The financial crisis

So how can we expect 2009 to unfold?

First, it is a given that the financial crisis will continue to unravel, revealing some devastating economic consequences.

Japan knows better than most how pernicious a banking shock can be – and how long lasting. Her experience, however, is far from unique. On average, banking crises take around four to five years to unravel in a developed country, and cost around 12% of GDP to resolve – emerging economies tend to feel more pain, but get through the crisis slightly faster.

Their economic impact is also considerable. In a review of the fallout from past crises, Carmen Rheinhart and Kenneth Rogoff find that on average:

• 35% is lost from house prices and 55% from equities.
• Unemployment rises by 7% and output falls by 9%.
• Government debt increases by 86%.

The past does not predict the future, of course, but it should make us wary. The pattern, as Japan found, is for policy-makers to underestimate the seriousness of the problem and for financial institutions to spend years refusing to confront their predicament head on. The required psychological shift is a profound one.

Throwing money at the problem is, in many ways, the easy bit. Much more demanding is the process of unpicking and revaluing the poorly-understood risks that are at the heart of the financial sector’s difficulties. This is a process that has barely begun.

Back in April last year, I presented on multilateral reform to heads of state at the Progressive Governance summit. Then, bold action was promised to sort out the ‘bad’ from the ‘good’ banks, but nine months’ later that is only beginning to happen.

Instead, many countries have pumped money into their financial institutions, without having the tools to force these institutions to identify, value and dispose of toxic liabilities.

This mistake is likely to prove costly. As Ben Bernanke admitted last week, large quantities of “troubled, hard-to-value assets” have now become the primary obstacle to the financial system’s recovery. The UK and US are both now working on new mechanisms to tackle these toxic assets.

Meanwhile, the US Treasury’s Troubled Asset Relief Program (TARP) has been subjected to some fierce criticism. The Congressional Oversight Panel, for example, identified:

• ‘Significant gaps in Treasury’s monitoring of the use of taxpayer’s money’
•  A lack of clarity in asset evaluation, making it unclear whether the Treasury is able to distinguish between ‘healthy’ and ‘unhealthy’ banks, and
• ‘Shifting explanations’ of the fund’s purposes, leading the Panel to the conclusion that the Treasury does not have a clear strategy for spending the funds.

The situation in the US is not atypical; its system is simply unusually willing to wash dirty linen in public. Stimulus packages also pose risks, as they must be assembled and dispersed at high speed. Finding productive investment opportunities is a significant challenge.

We have already seen a massive market failure. The danger is that a similarly sized policy failure will now be layered on top.

The trade challenge

The trade system is also well worth keeping a close focus on.

It offers the best early warning system we have for any widespread loss of confidence in global integration. Protectionist pressures are already on the rise, as happens in every serious downturn. In 2009, will they overwhelm the will of governments to contain them?

If they do so, we may rue the opportunities that were missed on trade in 2008. In April, at the Progressive Governance Summit, there was genuine enthusiasm for returning to, and completing, the Doha Development Agenda. But the talks still collapsed in July, in a row between India, China and the US.

China thought the rich countries had been ‘selfish and short-sighted’, while Japan attacked the emerging economies for failing to recognise their new responsibilities. They had failed to think about the world economy as a whole, while pursuing narrow national self-interest.

At the G20 in November, Doha was back on the agenda, with heads of state promising a framework agreement by the end of the year. By mid December, however, Pascal Lamy had decided it would be dangerous even for ministers to meet, believing that an acrimonious failure could threaten not just the round, but the WTO system itself.

And the bad news spread beyond Doha. Russia, India, Indonesia, Brazil and Argentina – all G20 members, and key swing voters in the multilateral system – had announced restrictive trade measures within weeks of the G20, despite a promise to “refrain from raising new barriers to investment or to trade in goods and services.”

Doha, then, has become the ‘zombie’ trade round, staggering on, but never quite dying. Few expect that it can now be revived. But who knows? Given its resemblance to a B-movie, perhaps it will lurch back into life at the very moment when all hope appears to have been lost.

An alternative view is that the content of Doha doesn’t matter that much. As Paul Krugman has argued, “World trade is already so free, we’re really talking about stuff at the margins.”

But Doha has, at the very least, great symbolic importance. It is a yardstick for our ability to strike complex global deals; shows the extent of the world’s commitment (or otherwise) to developing countries; and – above all – acts as a bellwether for global confidence in free trade itself.

Global imbalances

If the global trade system is to come under a sustained attack in 2009, this will happen as global imbalances – built up over the past decade – unravel, revealing divergent interests between producer and consumer countries, and particularly between China and the United States.

Currency may well be the main battleground, with countries tempted by competitive devaluations as export markets shrink and domestic producers beg for protection.

Since the mid-1990s, we have seen:

• A ‘savings glut’ in Japan and old Europe, and more recently in China and the oil producing countries.
• A ‘money glut’ in the United States and a few other countries.

Effectively, US consumption was fuelled by a potent combination of cheap imports and cheap money, leading to a surge in consumption and debt. The causes for this were to be found both in the US and globally.

Within the US, monetary policy was lax (in part, as a response to previous economic shocks). From overseas came an avalanche of dollars, as China and other countries recycled their surpluses back into the US economy in order to stop their currencies from appreciating.

The debate as to who should be blamed for the imbalances – savers or borrowers – is a fruitless one. The arrangement was symbiotic, or to borrow language from those who treat addiction, an example of co-dependence.

More pertinent were two questions. Were the imbalances sustainable? And if not, could they be unwound in an orderly fashion? The answer to the first was ‘clearly not’. Much now depends on whether a gradual and controlled rebalancing is possible.

China is entering a critical period. The country has massive surplus capacity now the American consumer has stopped spending. Its exports have fallen fast and have much further to go. It is vulnerable to falls in the dollar, which will worsen its terms of trade while devaluing its massive dollar holdings ($1.94 trillion at the end of 2008).

Finally, there are signs that so-called ‘hot money’ may be beginning to flow out of the country, with analysts estimating that $120-140bn of capital left the country in the last quarter of 2008. China’s own banking system has significant weaknesses, despite recent efforts to address non-performing loans.

Some of the tensions can be seen in a fascinating interview in last month’s Atlantic magazine with Gao Xiqing, Chief Investment Officer at the China Investment Corporation, the sovereign wealth fund that manages the riskier part of China’s foreign exchange reserves.

Gao had harsh words for the Americans (“the simple truth today is that your economy is built on…the gratuitous support of a lot of countries”). He also provided an insight into how unpopular Chinese investment in the US can be at home. China’s citizens ‘hate’ its support of rich Americans (“people eating shark fins” at the expense of “poor [Chinese] people eating porridge,” he claims).

It seems unlikely that the Chinese can boost domestic consumption rapidly enough to soak up declining exports – though they must do what they can. A worrying prospect is that the Chinese government will devalue to prop these exports up. That would mean that Western stimulus dollars, euros and pounds were flowing to Chinese producers. It is hard to imagine anything more politically explosive in the current climate.

The US would almost certainly react to protect its producers, with Europe tempted to follow suit. The worst case would be the emergence of a nasty zero sum dynamic in the international arena – a series of tit-for-tat measures that are politically compelling in the short term, but lead to a marked, and even disastrous, loss of collective welfare over longer time scales.

The politics of scarcity

2009 will also see the world continue to grapple with the impact of a set of scarcity issues that are perhaps the most important long-term drivers of global change.

These issues have enormous geopolitical relevance (oil), are growing causes of poverty and conflict (food, water, land), and/or demand unprecedented levels of international collective action (climate change).

Neither can they be seen in isolation, as was shown by last year’s short, but pronounced, commodity boom. In the spring of 2008, oil prices spiked, reaching $147 dollars per barrel in July. Food prices also increased alarmingly, sparked to a large degree by the price of oil. Inputs such as fertilisers had risen in price, while biofuels were an increasingly strong competitor for productive land.

In rich countries, recent analysis suggests that higher energy prices were a significant factor in turning an incipient slowdown into a deep and painful recession. In poorer countries, rising commodity prices had seriously destabilising effects, with food riots across Africa and Asia.

The response: a wave of resource nationalism, with over thirty countries introducing export restrictions. Even with lower prices, countries have continued to try and protect their security of supply. Middle income food importers have signed long-term land deal with other – usually poorer – countries, while producers are re-examining the merits of self-sufficiency.

In the medium term, the drivers for commodities remain upwards. Population growth, economic development, underinvestment in supply, a lack of water, competition for land, and climate change are all likely to increase prices and volatility.

We therefore find ourselves in a damaging triple-bind:

• On the one hand, resource price shocks are likely when times are good, acting as a repeated challenge to economic recovery.
• On the other, political progress may prove hard in both good and bad times. When prices are high, national responses will be favoured. When prices are low, economies will probably be suffering too. Other priorities will thus seem more important.

Recent experience with climate change illustrates the problem. In the boom years, global emissions shot up, rising 2.9% a year between 2000 and 2006, compared to a figure of less than 1% that was assumed in the models that formed the basis of the Stern Review. Surveying this trend, analysts from the Tyndall Centre argued that “it is difficult to envisage anything other than a planned economic recession being compatible with stabilization at or below 650ppm.”

Now, of course, we have that recession – though it wasn’t planned. The IEA expects demand for oil to fall by around 0.6% next year, though the drop could be much more dramatic than that. Emissions will decline roughly in line with energy demand (though probably not as rapidly given substitution by dirtier forms of fuel). In theory, this should make emissions restrictions easier to swallow.

But yet, as we saw in Poznan, the reverse is true, with many governments arguing that a tough climate deal should be delayed until the economy recovers. At the same, investment in low carbon technologies (at least from the private sector) is also suffering.

The logic is insidious and, if unchecked, will have catastrophic long-term consequences, as countries persuade each other that it’s never a good time for a robust climate deal.

The security threat

Finally, with the economy on all our front pages, it is easy to disregard the potential impact of security threats on the world in 2009, and on prospects for international co-operation.

That would be a mistake. The situation in the Middle East again seems unsustainable, at a time when oil producer countries are coping with what was, for them, a very unwelcome decline in the oil price. Iran’s nuclear ambitions are a threat not just to Israel, but to many of its competitors in the Arab world, and indicate the ongoing threat from proliferation.

Key middle income countries, meanwhile, are experiencing extreme distress. Pakistan, for example, has been battered by fall-out from its highly ambiguous role in the Bush administrations ‘war on terror’; by the commodity price crunch which pushed large numbers of Pakistanis back into poverty; and by the credit crunch, which left it needing an IMF bailout.

Many other countries are feeling similar impacts. Higher food prices in 2008 are estimated to have pushed an additional 130-155 million people into poverty. That shock had barely worked its way through the system, before the financial crisis hit. The World Bank estimates that developing country growth will slow to 4.5% in 2009, well below recent levels. Many analysts are significantly more bearish.

2009 could see a wave of countries get into serious trouble. If so, the IMF may well struggle to cope, given that its reserves are only around $200bn. It can probably respond to a handful more crises in smaller, poorer countries. If a larger emerging market were to get in trouble, it would need new money and fast. Trouble for a major developed country would quickly take us into unknown territory.

Weak growth in the developing world is likely to fuel conflict and state failure, with poor countries facing a ‘demographic disaster’ if they fail to provide economic opportunities for growing numbers of young adults. There is a compelling link between income and civil war, while sudden income losses weaken the legitimacy of the state and exacerbate competition between groups for scarce resources.

The results are countries that are a threat to themselves, to their neighbours, and – as havens for terrorists – to the rest of the world.

Now is a good time to remember that Nassim Nicholas Taleb has said that the financial crisis is not a black swan, because it was too predictable that it would happen.

An unexpected security deterioration in one or more regions is precisely the kind of additional stress that could derail international efforts to tackle other problems. Terrorism is another potential threat that can be corrosive to international alliances, of course, while avian flu would see countries rush to close their borders, in a futile attempt to isolate themselves from the threat.

This, then, is not a time to lose focus on these risks. Instead, the question to ask is: how will global systems cope at a time when they are already compromised by a number of other serious stresses?

Lessons from Bretton Woods

Given the dramatic prospects we face in 2009, it’s tempting to look at past crises to see what historical precedents tell us about what is happening today.

In the run up to the G20 last year, a number of European governments became excited by the prospect of a grand redesign of the multilateral system. Gordon Brown and Nicolas Sarkozy were particularly enthusiastic about the prospects for Bretton Woods II – and have taken this energy into the G20 process.

The first Bretton Woods conference aimed, in the words of John Maynard Keynes, to find “a common measure, a common standard, a common rule” that would govern all parts of the economic system.

The impetus for agreement sprang from the exhaustion of the second world war; a decade of thinking and preparatory work by Keynes and others; and the ability of the United States – in its pre-Cold War period of undisputed hegemony – to impose agreement where necessary.

Today’s conditions are very different. Many policymakers are still in denial about the depth of the problems we face. There are few, if any, well-developed packages of solutions. And the United States is in no position to insist on a programme of global reform.

Perhaps then, a better example is the crisis that ended the Bretton Woods system – the so-called ‘Nixon Shock’ of 1971 when the US President broke the link between dollar and gold.

Although Nixon blamed speculators for his decision, in fact the problems were structural – global imbalances that are strikingly similar to today’s. Post-war European recovery had led to large US deficits and, with fixed exchange rates, the Europeans had little choice but to recycle dollars into US government debt, of which there was plenty, given America’s need to fund an expensive war in Vietnam.

The result was a series of runs on US gold reserves and growing pressure to devalue the dollar. Policy was made up on the hoof. Nixon’s shock decision to break the link with gold was taken with little preparation or forethought. The President spent less time on the policy itself, than he did on worrying whether he should interrupt a popular television programme to announce it to the American people, and the world.

So what happened? Predictably, the dollar went into a steep decline, losing around a quarter of its value against a basket of European currencies. And inflation was let loose, despite US attempts to control prices and wages. The resulting inflationary spiral was not tamed until the 1980s and only then through the ‘Volcker recession’.

Natural resources were also involved. The oil shock of 1973 can be seen, in part, as a response to the depreciation of the dollar, as Arab countries protected an oil price that, when denominated in gold, had seen a three-fold decline.

The Nixon shock illustrates the dangers of unilateral and reactive policy-making; and also the power of unintended consequences. In our response to a crisis, we often sew the seeds for the next breakdown, and can easily exacerbate not dampen volatility.

Stagnation in the thirties

For pessimists, however, comparison with the 1970s is not sufficiently dramatic. They prefer to reach for the stock market crash of 1929 and the subsequent ‘great depression.’

A few months’ ago, these were comparisons were regarded as distasteful, maybe even a little hysterical. In April last year, the IMF was predicting only a minor slowdown for Europe and a recovery in the US starting in 2009.

No longer. Now, rich countries are clearly all in a deep recession. The question is whether it will be U-shaped (deep but with a gradual recovery) or L-shaped (ongoing stagnation). As one economist quipped recently, it’s now too late to avoid 1929. Instead, we must focus on avoiding the mistakes of 1930, 1931 and 1932.

What were those mistakes? Deflation exacerbated by policy, of course. But also a tit-for-tit recourse to protectionism, as global trade came to a halt, and a series of sovereign debt defaults, leading to the collapse of the international financial system.

It is tempting to imagine that the period was a time of international policy paralysis, with policymakers simply unaware of the risks they were running. Far from it. There were plenty of attempts to tackle problems on an international level, culminating in a World Economic Conference in 1933 that brought 66 nations together.

The summit was supposed to launch a global ‘new deal’ – or, at least, that was what the Europeans were hoping for. But there was no shared platform to bind Europe, the UK and the US together. Franklin Roosevelt – just elected in a landslide – was focused on problems at home.

To European fury (and the discomfit of his own delegation), the new President derailed the summit with the so-called ‘bombshell message’, sent from a yacht where he was enjoying a vacation. It was to be the last attempt to forge a global approach to reform before Bretton Woods.

Surveying the conference’s wreckage, Keynes’s conclusion was a sobering one. 66 countries could never be expected to agree, he thought. Only a ‘single power or a like-minded group of powers’ could prevail – and only then if they were equipped with a new understanding of the world’s systemic problems, and a new toolbox with which to tackle them.

The first globalization

The 1930s offers salutary lessons to policy makers. However, it does encourage them to believe that our current troubles are purely economic in their nature – and can be solved through some deft re-regulation and a generous dose of stimulus.

This creates a real danger that other pressing issues will be kicked into the long grass for how ever long a recovery takes. This would be a mistake, especially given the strong links between economic and other global challenges.

To underline this point, it is worth looking back beyond the thirties, to the period before the First World War, when the world had its first experience with globalization and enjoyed unprecedented mobility of capital, goods and people.

It was then that Norman Angell argued in The Great Illusion that major wars were now almost inconceivably because of “the delicate interdependence of our credit-built finance.”

For Keynes, looking back, globalization then appeared “normal, certain, and permanent, except in the direction of further improvement.” But yet the forces that were to lead to war were already building:

The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.

Rapid social, technological and economic development had brought about a new paradigm of ‘industrial war’. Countries were enmeshed in a system of diplomacy that was intricate in its operation, but in which levels of mistrust had steadily grown.

The result, in 1914, was the destruction of the European world order and a period of chaos that took two world wars and the intervening depression to resolve.

Today, the second period of globalization faces similar challenges and contradictions.

Modern economies are dynamic but unstable, as we have found out. Technological diffusion is putting unconventional weaponry in the hands of a growing number of states. Inevitably, non-state actors will also find some way of getting in on the act.

Power, meanwhile, is shifting to countries where most people are still poor, at a time when resource constraints are beginning to bite. Economies must decarbonise at a speed that will make the industrial revolution look pedestrian. Even so, the chances of disruptive climate change are now worryingly high.

The challenge then is to use the current systemic shock as an impetus for fundamental reform. The danger is that, as in 1914, the basis for international co-operation will disappear, just when globalization most needs to be ‘saved from itself’.

Signals from the future

Last year, in a paper for the United Nations University, I argued that international co-operation on climate depends on ‘signals from the future’.

Alex Evans and I have developed this work further, in a project for the UK’s Department for International Development that explores the radically different institutional architecture that will be needed to deliver a low carbon future.

One of our central arguments is that action taken on climate today is fundamentally influenced by expectations of what will happen in the future:

• If countries, companies and citizens expect a slow transition to a low carbon economy, then they have a strong incentive to block any climate deal, and to free-ride on carbon reduction measures implemented by others.
• On the other hand, if they expect the transition to happen rapidly, their incentive is to lead the change (in order to avoid misallocated investment, and to lead emergent industries), while supporting strong action against free-riders.

An effective climate deal, then, is something of a self-fulfilling prophecy. With strong signals from the future, policy-makers are likely to behave in a way that makes a deal easier to achieve. In contrast, weak signals will lead to a vicious cycle and intense zero sum competition.

This argument can, I believe, be applied more generally to today’s international challenges. Let us characterise current international co-operation as medium trust, with considerable commitment to globalization, but relatively weak institutional arrangements for controlling the global system.

If we experience a long crisis (or a chain of interlinked crises), we are likely to see either a significant loss of trust in the system (globalization retreats), or a significant increase in trust (interdependence increases). The status quo is not likely to be stable over the medium-term.

Which way we move depends, above all, on our time horizons. Do they shorten, as countries focus on immediate domestic political concerns? Or do they lengthen, as institutions are built that can last a generation or longer?

The three ‘shareds’

Lengthening time horizons requires countries to work from a comprehensive view of the risks and challenges the world faces, and its opportunities for solving them.

This is why we need a new diplomacy – one that focuses its resources not on bilateral relationships, but on multipolar responses to global threats and challenges.

This is a diplomacy of ideas, not one of narrow self-interest, and it should take us a long way from the old geopolitics. In the new paradigm, countries need to co-operate to build a vision for the international institutions that we need, not just today, but over the next generation. They need to identify and further shared interests.

The goals of this diplomacy, then, are to build:

• Shared awareness – a joint analysis of future challenges, one that is sufficiently broad to bring together economic, security and scarcity issues, and that has buy-in not just from governments, but from non-state actors too.
•  Shared platforms – coalitions of countries that begin to harmonise their domestic policies and commitments (whether on banking reform, or climate change, or investment in agriculture), and use this as the basis for lobbying for more fundamental international reforms.
•  A shared operating system – new global frameworks and institutions, with a mandate to deliver security and sustainable growth over the long-term.

As Alex and I argued in our paper for the Progressive Governance summit, we need to drive through a programme a multilateral reform that focuses on delivering results, not restructuring organisations.

 This means building an international system that:

• Aims, over the long term, to manage risk and increase resilience.
• Embeds national sovereignty in a deeper context, in which the need for cooperative action between states is recognised and acted upon.
• Overcomes fragmentation between silos and distributes, as widely as possible, the responsibility for creating global public goods.
• Rebuilds international organizations, making them much more flexible, responsive, and able to interface with non-state global networks.

Building the platform

So what might this look like in practice?

The first priority is for the US, Japan and Europe to start acting as if they have a shared interest in a more stable, equitable and sustainable future. We have been through a period of US overreach and unilateralism, coupled with muddle and passivity from its key allies. That has to end.

The Obama administration will clearly be a breath of fresh air. It can be expected to:

• Develop the US’s piecemeal and reactive bailout into something that has greater coherence and strategy.
• Signal a more co-operative and less confrontational security stance.
• Begin the process of legislating on climate change, with the US potentially matching European commitment on the issue.

This will create considerable diplomatic space – across the UN system; at the G20, of course; but also at the G8, which will have a reduced, but important, role as a caucus for richer countries.

For the rich countries, the priority is to use domestic delivery to build a basis for international agreement. This is true for financial reform, trade, and action on climate and other resource issues.

But, assuming positive moves from the US, will Europe and Japan respond in kind? Or will they take a ‘wait and see’ approach to Obama’s overtures? The question is critical to the ongoing relevance of the post-1945 alliance.

Even united, the world’s traditional powerbrokers cannot act alone. They will need China, India and the other emerging powers not as reluctant negotiating partners, but as substantive contributors to a new global order.

Broader involvement becomes more, not less, important should the BRICs find themselves in serious economic trouble as the financial meltdown proceeds.

This will require more established powers to show considerable (and uncharacteristic) humility. In East Asia, memories of the financial crisis of the late 1990s are fresh. Bailout packages then came with stringent conditions and much lecturing from the international community. Countries were told there was no gain without much pain.

Things are very different today, now that rich countries are in trouble. Stimulus is all the rage, not austerity. The doctrine of deregulation has also been shattered, but it is as yet unclear what will take its place.

2009 will be a year that heads of state spend more time together than ever before. This time will be wasted unless the intellectual spadework is done to prepare for their discussions.

That means creating a vision for where globalization goes from here. Built into this vision, we need a renewed emphasis on the resilience and coherence of global systems. We cannot simply ‘redraw the organogram’ – the need for reform is much more fundamental than that.

Good signs

I want to end by sketching out some sense of what would constitute progress in 2009. This is not a comprehensive agenda for the year, just some positive signals that countries are choosing a long term, high trust and co-operative approach, not slipping into tit-for-tat, reactive and protectionist responses.

We should expect the G20 to:

• Embed its work on finance and economy within a broader vision of global reform and not simply focus on technical issues.
• Make clear its expectations for a deal on climate at Copenhagen and set out some parameters for the ambition of that deal.
• Make a shared commitment to a green stimulus, with arrangements to quantify the impact of stimulus packages on carbon productivity.
• Mandate the IMF to monitor the re-pricing and allocation of toxic assets, improving cross-border visibility of the pace of financial restructuring.
• Agree that members should report, on a quarterly basis, steps they have taken to control the financial crisis.
• Begin to develop a ‘super sherpa’ system to improve the capacity of Heads of State to cope with their growing responsibility for global issues.

From the G8, meanwhile, we should expect:

• A clear signal from each member state as to what it is prepared to offer to ensure an effective climate deal.
• Equally clear signals from the ‘+5′ countries (Brazil, China, India, Mexico and South Africa) on how they plan to reduce emissions over the long term.
• A renewed pledge to meet development commitments, especially as poor countries suffer growing impacts from the financial crisis.
• Reporting on national delivery of key G8 commitments in area such as climate and trade.

From the United Nations, we require:

• Renewed leadership from the Secretary General on climate, especially through the SG’s high-level ‘Friends Group’.
• A concerted effort to explore the shape and content of a climate deal, using previous High Level Panels as a precedent.
• A process that explores the global institutions needed to deliver a post-2012 climate deal (this could build on the model provided by the Task Force on the Global Food Security Crisis).
• An exploration of how global stocks of food and other commodities can be increased, using the International Energy Agency’s co-ordination of strategic oil reserves as a model.
• An initiative by the Security Council to explore the security implications of financial instability and growing resource scarcity, as part of a renewed commitment to forging a new global security consensus.

This year could be an exceptionally tough one for the Bretton Woods’ institutions and the WTO. As a minimum, we should therefore look to:

• Strengthen the IMF and World Bank to ensure they can cope with the risk of a cascading series of national liquidity crises.
• Defend the current free trade system and maintain confidence in the WTO.

Looking forward, the Bretton Woods’ institutions must address their lack of legitimacy in large parts of the world, while developing:

• An enhanced global surveillance function (though this must incorporate a new openness about the limits of economic forecasting).
• Tough international norms for the regulation of financial institutions.
• A framework that allows debtor countries to restructure their debts in a controlled fashion.
• Enhanced arrangements for working with the rest of international system to improve resilience in the face of short and medium term challenges.

Finally from the WTO, we should look for:

• A renewed attempt to breathe life into Doha, perhaps as part of a broader ‘grand bargain’ on finance and climate.
• An analysis of the relationship between trade and scarcity issues, exploring action to discourage export barriers and related restraints to trade.
• An analysis of how the world trade system can best be integrated with a comprehensive framework for emissions control.

Human drivers

Finally, I want to close with a warning.

We will make a grave mistake in 2009 if we persist in treating the world’s challenges as primarily technical ones, and we neglect the underlying human drivers.

The world’s economic and financial problems have deep-seated psychological and behavioural dimensions. As Paul Krugman has argued, “the expectations, even the prejudices of investors, [have] become economic fundamentals – because believing makes it so.”

Our security challenges result from the fact that conflicts are now fought ‘among the people’ rather than just between nation states.

Scarcity issues, meanwhile, trigger powerful popular responses – and could easily lead to debilitating conflicts within and between countries over how limited resources can be fairly distributed.

But we live at a time when public trust in governments is being shattered.

In a recent international poll, only half of respondents believe their leaders are up to the task of designing a suitable response to the financial crisis. Confidence was lowest here in Japan, the country that has the longest experience of financial turmoil.

In this atmosphere, populist movements are certain to thrive. We ignore them at our peril, as they will rarely support international action and, even if they don’t attain power, they may exert a blocking vote.

That makes it vitally important that reforms are designed in the open, not cooked up behind closed doors. Whatever solutions we come up with, they must emerge from a new engagement with citizens and efforts to develop domestic political conditions that allow international commitments to be made.

That means a concerted attempt to:

• Reach out to influencers and opinion formers at a national level, to debate and make the case for a new multilateralism.
• Build a narrative and vision that will communicate to a wider public the need for international approaches to global problems.
• Develop social protection systems that will insulate citizens from international volatility and instability.

Ultimately, any international reform agenda must be about the needs of global citizens. Lose sight of this fact and, however attractive new policies appear in prospect, in practice, they will fail.

For references, see PDF version.

For a while now, there have been whispers that the Tories don’t really buy into the idea of an independent DFID – and that perhaps (gasp!) they might be considering merging it back into the Foreign Office, where it resided until 1997. Well, following last week’s Independent interview with Conservative aid spokesman Andrew Mitchell, we can put that notion to rest: “We are very committed to DFID continuing as an independent department of state”, says he.

So, a ringing endorsement of DFID, then?  Er, not quite.  Here’s the full context:

The shadow International Development Secretary, Andrew Mitchell, said DFID had begun to encroach on the work of other departments and to come “perilously close” to setting its own foreign policy, a role he said should be reserved for the Foreign Office. He said the Foreign Office will be given much greater influence over the use of overseas aid should the Tories win the next election …

“There are times when DFID comes perilously close to pursuing its own foreign policy and that is not right,” Mr Mitchell said. “Foreign policy is decided by the government and the Cabinet, led by the Foreign Office, and DFID should not be an alternative to this. We are very committed to DFID continuing as an independent department of state. But we would make it more of a specialised development department and a little less like an aid agency,” he said.

That left me wondering just which specific instances Mitchell was thinking of in arguing that DFID was coming close to having its own foreign policy.  Iraq? Afghanistan? Climate change? (Thinking that Paul Wolfowitz might not be such a great idea for President of the World Bank?) Sadly, we don’t know.  Earlier today I called his office to ask him to elaborate, but he declined to say more.

This is a shame, on two counts. First, because it’s a cop out.  For the Opposition front bench spokesman on international development to argue that the Department he shadows has come ‘close to pursuing its own foreign policy’ is a serious claim – and one which he ought to be prepared to substantiate.  To fail to do so leaves him open to accusations of offering soundbites rather than reasoned argument.

More fundamentally, though, it’s a shame that Andrew Mitchell wouldn’t elaborate because this debate needs to be had.  There are big questions about DFID’s relationship with the Foreign Office, and how coherent UK foreign policy as a whole is now, or could be in the future.  And to be fair, most people in the aid sector trust Andrew Mitchell and think he’s one of the good guys (indeed, one suggestion I heard today was that Mitchell’s interview was part of a settlement thrashed out between him and Shadow Foreign Secretary William Hague – whereby having DFID ‘brought to heel’ was the price Mitchell had to pay for the Conservatives committing to keep DFID independent, with its budget intact).

So what to make of the substance of Mitchell’s argument?  Well, NGOs – and many within DFID – will have alarm bells ringing in their ears at the notion that “the Foreign Office will be given much greater influence over the use of overseas aid ” under a Conservative government.

After all, last time that was the case it didn’t work out so well: just look at the Pergau Dam, a hydroelectric project in Malaysia that hoovered up £230 million of British aid, with negligible impact on poverty (“an abuse of the aid system” is how DFID’s former Perm Sec Tim Lankester described it), but a fat pay-off for the British firms involved in construction.  It was precisely to prevent such abuses from recurring in future that Labour enacted the International Development Act, which enshrines in law that DFID’s budget is only to be used for purposes of poverty reduction.

Today, though, various commentators – including, now, Andrew Mitchell – wonder whether the pendulum has swung too far.  Fine, aid should be about poverty reduction – but couldn’t DFID be a little more flexible in how this is interpreted?

And in fact, there’s often something to these arguments. It’s only recently, for example, that the UK development community has really accepted that conflict prevention is a core part of poverty reduction – pretty extraordinary, when you reflect on the impact that conflict has on prospects for achieving the MDGs in places like Congo, Sierra Leone or Sudan. On the other hand, there’s also a big risk of throwing the baby out with the bathwater.  Is the aid budget really there to repatriate failed asylum seekers to refugee camps in developing countries, for instance? Someone once thought so…

But in a larger sense, to zone out immediately on the implications of Mitchell’s comments for the aid budget is perhaps also to miss the point. In most developing countries, it’s not at all clear that the principal obstacle to development is the lack of aid cash, however much Bono and Jeff Sachs might want us to think so (though there are exceptions). More fundamentally, development prospects depend on:

1) the quality of the country’s institutions, its governance, its political process; and

2) all the ways in which actions taken elsewhere in the world affect prospects for development in the country – e.g. emitting carbon, selling arms, providing tax havens, imposing one-size-fits-all aid conditionality, diverting food to biofuels, subsidising EU and US agriculture, and so on.

And this is where I think Andrew Mitchell’s argument is a missed opportunity. Fine, if you think DFID is just a tube through which to funnel money into developing countries then by all means clip its wings, put it back in its box, and leave the politics to the big boys over at King Charles Street. But if, on the other hand, you think that delivering development involves being politically sophisticated – both in partner countries and on the global stage – then a strong, independent-minded DFID, with views of its own about foreign policy, is an absolute sine qua non.

To be sure, the fact remains that DFID’s relationship with the FCO is probably overdue for a review.  But to begin that process from the premise that DFID needs to be brought to heel is not the right starting point. If we’re honest, after all, FCO is just as capable of dysfunctionality as is DFID.  And if DFID is sometimes a bit too cocksure about its mission in the world, FCO is sometimes pretty unsure of what its role is in a world of transboundary issues in which every government department has its little bit of foreign policy.

The real problem is not, as Mitchell argues, that DFID has begun to ‘encroach’ on other areas of foreign policy; it’s that everyone is encroaching on everyone.  The old organisational silos simply don’t match the reality of a world in which the borders between areas of policy are as porous as those between countries.  Even if DFID were abolished tomorrow, the FCO still wouldn’t be in charge of foreign policy – because European integration and globalisation have between them scattered foreign policy from one end of Whitehall to the other.

By extension, where I do agree with Andrew Mitchell is where his interview ends up – with the need to ask what a coherent, integrated approach to all foreign policy issues would look like (something David and I have written about before – here’s the note on same that we did just before Gordon Brown became PM).  This is a much bigger issue than just DFID’s relationship with the FCO (and actually, I think that most people in DFID would welcome the chance to have this big picture discussion – if only the old guard at FCO could restrain themselves from rattling DFID’s cage and bringing all the old fears back to the surface).

Still, perhaps we’ll get there in the end.  As chance would have it, discussions of what a more integrated foreign policy strategy might look like are just getting underway as the Government embarks on the second iteration of its National Security Strategy, due for publication some time this summer.  As I write, I’m at a Wilton Park conference organised by several UK government departments, which will be feeding in indirectly to that review.  While naturally respecting Wilton Park’s firm rules about discussions being off the record, I don’t think I’m giving away any state secrets if I report that the DFID and FCO officials who are here, at least, seem to be able to work together rather well. Finding the right context for discussions of shared futures is half the battle, it seems.

Steven Chu – Nobel prize laureate in Physics – is Obama’s new energy secretary. He’s freaked out by climate change, and believes that energy efficiency should be a key part of our response.

I cannot impress upon you how important energy efficiency is… Buildings can be incredibly more efficient…We feel that buildings can be better than a factor of two energy efficient, more like a factor of four to five energy efficient, and pay for itself in less than fifteen years.

If Chu can do anything significant on energy efficiency while in post, it will be a big deal. Have a look at the McKinsey cost curve where huge emissions cuts are available ‘below the line’ – in otherwords, cuts that should more than pay for themselves.

These cuts can be found across all sectors (residential, 26%; commercial, 10%; industrial, 39%; energy transformation, 16%; and transport, 10%) and reveal a rat’s nest of market failures. Many – though important in aggregate – are simply “too small to be a priority” for individual consumers and businesses.

This is not a techical problem, though Chu likes those too. (He predicts plunges in the cost of solar and is a booster for second generation biofuels, though not ethanol – “good stuff, but I’d rather drink it”.)

To make any progress, he’s going to have to get to grips with the human drivers that are the most neglected part of our response to climate change (think: behaviour, organisations, incentives, institutions – and on the latter, read Douglass North’s classic Nobel Prize speech).

This is a huge challenge, especially for a fusty government bureacracy (and maybe also the Nobel prize winning tech-head who will now lead it). Chu is therefore going to need outside help. He should be looking to pull together a dream team of people who know about people (economists, psychologists, political scientists, marketeers etc) – and ask them to build a model that will influence not just the US, but the rest of the world as well.

He’ll then need to work hard to build political consensus for a raft of regulatory and legal changes – with the aim of applying the right mix of price signals, subsidies, and new regulations to the problem. Then he’ll need to maintain public support as he attempts to reengineer the way both businesses and individuals operate.

Can it be done? Given how little progress we’re making on emissions, I don’t see there’s any choice. My fear, of course, is that we’ll just pile a heap of policy failures on top of the existing market failures. Let’s hope Chu sets out some stretching metrics – and keeps coming back to whether they’ve been achieved.

Rich governments and corporations are triggering alarm for the poor as they buy up the rights to millions of hectares of agricultural land in developing countries in an effort to secure their own long-term food supplies.

Click on the map to enlarge.

First, donor countries are going to be facing a dramatically different situation in their public sector budgets from next year. With the US Treasury’s $700 billion bailout plan now approved by Congress, the incoming US Administration will face a budget deficit of up to a trillion dollars next year, rather than $300 bn as planned.  Other donors will find their budgets constrained too – by falling growth, lower tax revenues and probably also higher public debt.  In the UK, for example, public borrowing next year is likely to have to rise from an expected £43 bn to £100 bn or more.

All this means that governments will have less to spend – so we should start worrying now about what that means for development assistance.  While it remains to be seen whether those governments that have committed to spending 0.7% of national income on aid will row back on those commitments, it now looks much likelier that for example climate adaptation costs will come out of aid budgets, rather than being additional to 0.7% – as they should be.

This shift will be compounded by the second implication of the credit crunch: change in public attitudes.  So far, the full impacts of the financial crisis have yet to hit the real economy in developed countries.  But when they do, they will accelerate a switch that we can already see, towards more priority on issues that are ‘close to home’, and less on global issues like development and climate change.

Third, the financial crisis will obviously hit growth in developing countries.  Monday’s stock market falls hit developing country exchanges hardest: the benchmark MSCI emerging markets index, for example, fell 11% as investors fled for safety.  Meanwhile, the debate about whether developing countries in Asia and Africa have ‘decoupled’ from developed countries seems to be ending, with the conclusion that developing country growth is not immune from a downturn in the wider global economy.

And fourth, a reduction in commodity prices for the duration of the global downturn (however long that may be) as demand for them falls.  As I’ve mentioned, futures prices for grain crops are already falling; we can expect that trend to be supported by falling energy prices, which will reduce some of the pressure on food that’s come via fertiliser prices, transport costs and demand for crops as biofuels.

That said, let’s be clear: the fall in commodity prices due to a global downturn does not mean that we’re out of the woods for good on high food and fuel prices. As Javier Blas notes in the FT today, the downturn also means that necessary investment in increasing supply will be put off.  As soon as we’re out of the dowturn and demand starts going up again, we’ll discover that there’s been no shift in the underlying supply fundamentals – and hence that the stagflation drivers we were all worrying about until the credit crunch really began in earnest are just waiting where we left them.  Let’s hope policymakers use the current easing as a moment of opportunity to start getting long term policy frameworks in place to manage high commodity prices a bit better than we did over the last two years.

A briefing by Andrew Dorward and Colin Poulton, published in June by the Future Agricultures consortium, gives chapter and verse.  Between May 2006 and May 2008, here’s what prices did for selected key foods and fertilisers:

Cotton – up 29%

Beverages – up 41%

Wheat – up 61%

Maize – up 108%

Rice – up 185%

Urea (a key nitrogen fertiliser) – up 160%

DAP (a major phosphate fertiliser) – up 318%

The underlying causes cover both sides of the supply / demand line.  On the demand side, there’s the basic fact that the need for fertilisers is soaring as a result of higher food prices and demand for crops as biofuels. 

On the supply side, energy costs are a huge factor (especially in the case of nitrogen fertilisers); some fertiliser exporters (like China) have imposed export controls; and in the background, there are capacity limits to increasing production, especially for phosphates – a point that has the peak oil crowd already thinking hard about the concept of peak phosphorus.

None of this, needless to say, is good news for farmers, who according to the paper find themselves hit twice: once on the affordability of fertilisers when purchasing them, and then again (given food / fertiliser price differentials) on their profitability when using them. 

Dorward and Poulton argue that in the short term, it’s still worth developing country governments’ while to subsidise fertiliser use, even if the rates of return are lower – and that donors need to step up fast with additional financing (a proposal that the World Bank signalled its openness to in its ten point plan on food).  Dorward, Poulton and the Bank all agree that the question of getting them to the right place – fast – is as important as the question of who picks up the bill.

In the longer term, the paper suggests, the focus needs to be on more integrated soil fertility management with greater use of organic materials [i.e. compost and manure] together with smarter use of inorganic fertilisers – an area of work that the big agricultural research institutes like CIMMYT are already focusing on heavily.  Moving towards more integrated soil fertility management already makes sense for reasons of environmental sustainability.  If fertiliser prices fail to fall in the longer term, these areas of research are also going to be one of the critical front lines in feeding 10 billion of us.