Memorandum submitted by Dr Edward Clay,[91]
Overseas Development Institute
WFP: THINKING BEYOND
THE CURRENT
FUNDING CRISIS
Overview
1. The Executive Director of WFP (ED), Ms
Josette Sheeran, has recognised that the present crisis offers
a unique opportunity to engage with recipient countries and donors
to make the WFP into an agency which has an enhanced and more
effective role within the international system.[92]
The ED has explicitly acknowledged WFP's dependence on voluntary
funding. But in asking how the UK, the European Union and donors
more widely should respond now and in helping to frame a new longer
term strategy for WFP, there is a need to acknowledge frankly
the underlying reasons why WFP is facing such a serious funding
crisis.
2. WFP is partly just the victim of unforeseeable,
massive increases in commodity prices. But its long established
strategy of relying excessively on voluntary contributions in
the form of unassured surplus commodities from some donor countries,
especially the US, is the other important contributory factor,
an uncomfortable issue that needs to be recognised and addressed.
Some suggestions are made on how the UK and other donors might
respond to the current funding crisis and the underlying resourcing
issue.
Food prices: an uncertain prospect[93]
"When is a bend a trend?" (Professor
Sir Alec Cairncross)
3. The short term (1-2 year) outlook for
food prices is highly uncertain. Almost everyone has been caught
by surprise in the last six months by how fast and far prices
have risen. This has been variously ascribed to record stock lows
and consumption highs, the diversion of grain and oilseed feedstocks
to biofuel production and the accelerating demand for grain-fed
meat. The prevailing wisdom now is that, against this strong demand
scenario, aggregate foodgrain supply response in the short term
will be insufficient to pull prices down very much.
4. Views on the medium and long-term outlook
appear divided. There are those who see an inherently higher supply
elasticity (due to input mobilisation, infrastructure investment
and genetic improvements—presumably a mix of private and
public sector responses to the higher prices and humanitarian
risks). Others are convinced that the fundamentals of agricultural
resource use and production structures are undergoing a "permanent"
major shift (eg towards larger scale units, which are slower coming
on stream but are ultimately less price responsive) and as a consequence
food prices will stay high for at least a decade or more. The
WFP's own prognosis reflects this presumption that prices are
likely to remain high.
5. There is nevertheless a risk of a major
correction—a sharp fall in prices and even the accumulation
of what may prove to be transient surplus stocks. There has been
a flow of highly speculative hedge funding into both hard and
soft commodities as a safe home after the sub-prime mortgage debacle.
So movements in financial markets and the oil price are also key
variables. They are probably linked, to the extent that a weakening
oil price would reduce soft commodity prices, which in turn could
cause an outflow of hedge funds, thus exacerbating any soft commodity
price falls. Meanwhile, it seems that OPEC now thinks the "proper"
price for oil is at least $100/barrel. Biofuels as a new market
has yet to establish itself and could experience volatility, especially
if there were a short term weakening of oil prices. This is a
situation of extreme uncertainty, because so many different inter-connected
markets are currently "unstable".
6. In these circumstances it is desirable
to ask how WFP and the donor community would respond if prices
were to fall sharply and there were a rapid but build up of stocks.
There have been serious efforts in the stalled Doha Round to ensure
that food aid ceases to be a potentially source of distortion
in recipient country and international markets. There is also
an opportunity in addressing the short term funding crisis to
reach an understanding about the organisation's future strategy
so that it does not again become a vent for donor surpluses.
The problem of moral hazard
7. The way in which WFP has been funded
leads to a problem of moral hazard. The General Funds after approval
by the Executive Board as a target on a biennial basis were perpetually
undersubscribed. In these circumstances, there has been a powerful
temptation to accept any contribution in kind to sustain the programme's
global presence. Unfortunately, some of these donor commitments
reflect short-term availability of commodities that are contingent
on both low prices and high stocks levels. WFP was set up to provide
development food aid and relief on the presumption of continuing
structural surpluses. This assumption broadly held from 1963 until
1972 and again from 1976 until the early 1990s. So long as there
were structural surpluses, then a hand-to-mouth funding of what
are long term development projects was feasible. However, if there
is a global price spike or surpluses temporarily disappear then
the development programme in particular is vulnerable to enforced
cutbacks.
8. Those donors with more flexible budgets
also come under pressure to make up the difference. In effect
they are confronted with the contingent liability to ensure continuation
of the programme. This is what happened during the 1970s World
Food Crisis (1973-75) which provides the closest parallel to the
current situation. European bilateral donors and the EU were drawn
into playing a larger role in sustaining WFP.
9. Two developments have exacerbated the
problem of moral hazard. First, the considerable expansion of
protracted relief operations (since the late 1980s) creates a
portfolio of activities that are expected to continue for one
or more years. So the funding crisis threatens these humanitarian
activities too. Second, WFP persisted with an opportunistic strategy
of accepting short-term commitments to launch what are in effect
longer term development projects (cf. a financial intermediary
borrowing short and lending long). This strategy is viable provided
the short-term funding in aggregate is relatively assured, as
it was in the early days of the WFP. For example dairy development
projects were launched on the presumption of the continuity of
EC dairy surpluses in the 1970s and 1980s even though the Commission
was only able to budget on an annual basis. Unfortunately WFP
continued with this strategy even when it appears increasingly
likely that we have entered an era of transitory surpluses.[94]
This became apparent during the 1990s with a period of tight cereal
markets (1995-96) quickly followed by a return to overhanging
surpluses in 1998-99.
10. The WFP was not alone in failing to
recognise the changing circumstances which undermined the long
established surplus based resourcing strategy. The availability
of US surpluses, including cereals, vegetable oil and milk powder
in 1998-99 was seen by one of the founding fathers of WFP, former
Senator McGovern, as the opportunity to launch a food aid based
food for education (FFE) and child nutrition initiative. This
initiative followed some evidence of success in pilot conditional
food assistance projects—distributing food to poor families
on the understanding that children, especially girls, would enrol
and continue to attend primary schools. This became the USDA organised
McGovern-Dole initiative with initially annual budgeting commitments.
USAID also promoted FFE initiatives using its food aid budget
(PL480 Title II). The WFP along with US based NGOs were strongly
encouraged to act as the channel for this programme, reliant on
imported US commodities and processed foods.
11. Part of WFP's development portfolio
that is now threatened includes FFE projects in both low and middle
income countries such as Colombia. Understandably WFP wishes to
sustain the whole portfolio of PROs and development projects through
the current crisis. Poorer families are being disproportionately
affected by rising food prices. Many very likely have problems
of access too. Farmers will give priority to their own families
and the wealthy are privileged customers.
A constructive response to the funding crisis
12. In responding to the current crisis
there is a need to ask hard questions. Should DFID, the EC and
indeed like minded donors now provide additional support to sustain
food-based development projects whose viability is partly threatened
by the rising cost and decreasing availability of tied food aid?
13. Are existing projects actually the
best vehicle for assisting poor households affected by the rising
cost of and problems of access to food? There are targeting
issues. There are also practical issues of whether, for example,
specific FFE and nutritional projects are easy to supply without
assured if costly imports of processed food aid. There may be
practical issues of procuring and distributing food from the local
market or organising alternative probably commercially purchased
imports. There may be other better ways of temporarily assisting
the poor—for example providing budgetary support to governments
of some of the countries worst affected by the combined food and
oil price shock. This could ensure imports to prevent domestic
price spikes and continuity of supply, and increasing funding
of other forms of social safety net, including cash transfers.
If resources are scarce, and so is organisational capacity, there
may have to be a triage approach to existing programmes, especially
those in middle income and rapidly growing countries with a capacity
to meet additional import costs and fund their own safety nets.
14. The crisis provides a genuine opportunity
to rethink the role of food-based social safety nets and projects
to promote investment in human capital by the poor in poorer communities
and poorer areas (education, nutrition and health for small children).
In future the first issue to address should be whether food assistance
is the appropriate way to provide social protection to the poor
or promote human development?
15. The second issue, as WFP's "Purchase
for Progress" initiative suggests, is—should food-based
development programmes in low income countries be based initially
on the presumption that that the food must be locally sourced?[95]
Where there may be a need for imported food this should be through
the market rather than relying on unassured food aid. The global
food economy appears to have moved into an era of rising longer
term real prices and short-term volatility. There will be surpluses,
but these are likely to be transitory. Certainly those responsible
for US agricultural trade policy appear to be working on a similar
assumption. In drafting the current Farm Bill and in WTO trade
negotiations both USDA and Congress have robustly defended the
retention of all the different food aid instruments that could
be used to manage and export surpluses including those currently
not in use because of the tight market situation. There is a need
to avoid a repetition of the mistakes of 1998-2001.
16. There is now a genuine opportunity to
make changes of lasting significance. Here past efforts to reform
food aid offer lessons. The opportune moment to achieve lasting
changes is in a crisis situation. Something has to be done. Vested
agri-business interests in developed countries are probably less
resistant to change in a tighter market with expectations of continued
high prices. The EU, the UK and European states were able to radically
transform food aid, severing ties to internal agricultural policy
in tighter markets of the mid 1990s. Unfortunately at an international
level impetus to bring about change within WFP weakened with the
return of surpluses in 1998-99.
17. What should be done beyond food-based
famine relief? Emergency aid will remain the humanitarian
priority. Nevertheless, far more can be achieved with cash as
markets become more integrated, more people work, live and buy
their food in an urban or peri-urban wholly cash based economy.
Those affected by crises need to obtain water, soap, fuel, to
replace or repair homes, equipment and clothing. WFP shows increasing
interest and should take a lead in needs based assessment of humanitarian
crises and in organising assistance in whatever ways are appropriate.
Protracted relief should be shifted to the greatest extent possible
to a cash basis.
18. What should be the role of food assistance
outside of emergencies? Clearly school meals can play an important
complementary role where there are buildings, textbooks and trained
teachers who are paid. However, this should be planned as part
of strengthening and widening educational opportunities for the
poor. The basics of education will presumably have first claim
on scarce financial resources. Financial instruments may be a
more effective and efficient way to provide incentives to attendance—fee
waivers, free materials and even cash transfers to poor households.
There is considerable scope for supporting nutritional improvement
as the recent special series of articles in the Lancet demonstrate.[96]
19. What goes up quickly will probably
come down with a bump. The limits on agricultural production
are being lifted everywhere. The draft US Farm Bill includes extra
funding for agricultural support. Highly speculative fund flows
have been mentioned. A correction is surely inevitable, but when?
Since we cannot be sure, a real challenge is to think ahead of
the curve and to avoid a return to business as usual. "The
re-emergence of transitory surpluses could lead to the re-occurrence
of all the old problems of food aid acting as a vent for these
surpluses. For example, WFP and NGOs could find themselves once
again expected to handle more food aid on behalf of some donors,
but with considerable uncertainty about medium-term resourcing
prospects and lack of complementary financial resources.[97]
20. What can DFID and the UK government
do as a substantial bilateral donor, as a member of the EU, and
through engaging with developing countries?
— Work with WFP at country level
as part of a like-minded group to facilitate rapid assessment
in ensuring appropriate support to country programmes that are
currently in jeopardy, but conditional on a rapid reappraisal
of:
— the appropriateness of food assistance
as a form of social protection to the poor affected by the current
joint food and energy price shock; and
— developmentally effective and efficient
sourcing of food assistance.
— An assurance especially to least
developed countries that the intention is to ensure that the real
value of aid will be maintained or increased is a key to success
in making proposals to make WFP more effective.
— Sustain efforts at an international
level to end the trade and market distorting effects of food aid.
If the Doha Development Round goes into hibernation, then the
draft modalities for food aid proposed for eliminating trade distortion
could still be taken up as the basis for a renegotiated Food Aid
Convention, as well as limiting admissible forms of support to
WFP.
— Show continued willingness to
provide additional funding to WFP to facilitate changes in its
programme.
* Above all, see the crisis as an opportunity
for institutional renewal within the UN, including a rationalisation
of overlapping mandates. For example a collective response to
WFP's 2008-09 funding crisis could be associated with a statement
of understanding about the institutional and strategy changes
that were envisaged.
91 Dr E J Clay is Senior Research Associate, Overseas
Development Institute, London (e.clay@odi.org.uk ) and most recently
lead author of the study-OECD, 2006. The development effectiveness
of food aid: does tying matter? Paris. ISBN: 9264013466. Back
92
Ms Josette Sheeran, Executive Director, UN World Food Programme,
Testimony to the European Parliament Development Committee, Brussels
Thursday 6 March 2008. This paper adopts the distinction between
food assistance-activities involving food-based support to specified
final recipients and food aid as internationally funded and either
locally or internationally sourced commodity aid used either to
provide food assistance or sold on local markets to provide local
currency support. Back
93
This section draws heavily on an exchange of e-mails with Dr Martin
Evans and a Mark W Rosegrant, Director, Environment and Production
Technology Division, IFPRI, Implications of Rising Food Prices
for Agricultural and Rural Development Issues, Presentation
to the Annual Meeting on sustainable development, World Bank,
World Bank, Washington DC 21 February 2008. Back
94
Konandreas, Panos 1987. Responsiveness of food aid in cereals
to fluctuations in supply in donor and recipient countries.
In M Bellamy and B Greenshields, eds Agriculture and economic
instability, Aldershot, UK, Gower. and Panos Konandreas, Ramesh
Sharma and Jim Greenfield, 2000. The Uruguay Round, the Marrakesh
Decision and the Role of Food Aid. In Clay, Edward J and Olav
Stokke (eds). Food aid and human security. London: Frank
Cass. Back
95
WFP, 2008. An Overview of Purchase for Progress Connecting
Low-Income Farmers to Markets. Draft Briefing Paper, Rome. Back
96
The Lancet series on maternal and child undernutrition
are available electronically at http://www.globalnutritionseries.org/ Back
97
Plus ca change plus ca la meme chose? A quotation from
Clay Edward and others. 1997, The future of food aid: a policy
review ODI, London, written at the end of the last cereal
price spike. Back
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