by Scott Cotter
While many of us are feeling the squeeze of higher prices, sponsored families supported by Children International now find themselves facing a real crisis.
Many already teeter between calamity and survival. To stay afloat, they often master the fine art of eking out an income in jobless communities through persistence, hard work and ingenuity. They've summoned the courage to keep going, and to work harder for just pennies a day.
Sponsorship helps by covering the cost of many basic necessities so families can focus their resources where they're needed most. But with every cent being stretched to the limit, the food crisis has pushed many over the line. Some remove children from school so they can work and provide additional income. They may forego medicine or health care for the sick, resort to collecting water from contaminated (and free) sources, or simply go hungry.
As this crisis unfolds, we're taking a closer look at those most affected - the poorest of the poor - and examining how rising prices are taking a toll.
The Bisa Family: Tabaco, Philippines
Ailene feels all alone.
Just a few months ago, lightning struck and killed her husband, Ronnie, as he fished to put food on the table and earn a living. In his absence, Ailene is raising three daughters - Ronilyn, Maria and Melody, ages 13, 8 and 4 - all by herself.
"We're still not used to my husband being gone," she utters. "My youngest keeps asking when he'll come back. I still can't believe how we're able to survive."
Scared - and terribly lonely - she has turned to the only things she knows for the survival of her family...laundry and weaving. The result of her hard work and mountains of worry is less than $5 a week. It's enough to buy a little fish, some rice and bread and a few vegetables; there's never anything left over for other necessities.
"We still haven't reached the point where my daughters have nothing to eat at all," she offers, "but we have experienced missing some meals. It doesn't matter if I don't eat as long as my daughters don't go hungry."
Ailene's two youngest, Marie and Melody, are sponsored and have recently been diagnosed with malnutrition. They're enrolled in Children International's feeding program in Tabaco, and Ailene says the school supplies and tuition, medical care and clothing helps alleviate some of the financial strain. Still, she adds, the future seems uncertain at best. "In the coming weeks, I'm not sure what will happen."
The Chisala Family: Lusaka, Zambia
The winds whip up a small dust cloud that tumbles across the patch of bare earth in front of the Chisala home before carrying it down the road and off toward other block dwellings scattered here and there.
It's lunchtime, yet in the compounds it is eerily quiet. Not a single person can be seen outside tending to a charcoal cook stove preparing something for lunch. There is no capenta (staple fish), there is no mealie meal (corn meal), not even a few withered vegetables to prepare.
Paul Chisala stands looking at the lifeless road and squints against the searing midday sun. Quietly, he laments the situation. "I can no longer buy a 25 kg bag of mealie meal because I can no longer afford it."
The Chisala family isn't alone. While rising food prices - as much as 75 percent - have devastated families around the globe, sub-Saharan Africa may be ground zero for this crisis.
Families already in trouble because of overwhelming unemployment, rampant disease and an undervalued currency survive on next to nothing. The average income in the communities Children International serves is just $20 a month.
The outcome is easy to see. Paul says his daughter, Kareen, 10, often goes to school hungry because they have nothing to feed her. Or, she refuses to go because her hunger leaves her feeling weak and unable to study.
"I have tried to look for a job, but there are no jobs," Paul reveals. "All I manage to get are part-time jobs. There are times when I go for two months without any work. I end up begging for food from my brother, who is a soldier."
Children International is attempting to alleviate the problems by supporting community schools where children can get breakfast before starting the day. This not only helps prevent more malnutrition and helps children concentrate, it gives families more incentive to make sure their children - children like Kareen -go to class.
The Lozot Family: Guatemala City, Guatemala
Olivia Lozot is known as "The Garbage Lady," an unflattering nickname she shrugs off without a thought.
Her family, she and her four children, eat and earn a living from what others throw away. "I have always worked," explains Olivia. "But now that I have small children, I can't get a job."
The family lives in one of Guatemala City's many slums, amidst a backdrop of gang warfare, drugs and depression. They have no electricity, running water or everyday comforts beyond two small beds. For a mother of four who can't read or write, there are few opportunities.
That's why Olivia makes her own. And her children, Ana, 15, Donal, 11, Marcos, 3, and Jesus, 1, are often there by her side. They look for nylons, glass bottles and aluminum cans ... anything they can sell.
"When we go to the dumpster," says Olivia, "I carry extra clothes because the smell of garbage gets in their clothes."
Although Olivia can't read or write, she wants her children to attend school. Donal attends school for children who work, going in the morning before he joins his mother and siblings in the garbage around noon. Ana, however, refuses to go, choosing instead to dig in the trash all day and care for her younger siblings.
"Sometimes, I feel sad and desperate," confesses Olivia. "I tell the children when there is food they can eat but when there isn't they must tolerate it."
Still, despite the difficulties, Olivia wants her children to someday realize a better life ... something that has always eluded her.
Children International's sponsorship program helps by reducing her expenses for school supplies, clothing, health and dental care and other basic needs. But as prices for basic necessities go up - especially for food - the money she could use to help them improve their future also remains elusive.
Making Do
As prices for food and other staples continue to send shockwaves throughout the global economy, families most affected - those earning just a few dollars a day - will have to learn how to cope. Many will work even harder than they do now. While others will simply be forced to do without.
Sponsorship is one answer, helping reduce the expenses families face for many of their most basic necessities. And your additional support can help assist families in critical need. Please call now or visit this link to make a donation to help ease the struggle families face during this food crisis.
About Children International:
Children International is a nonprofit, humanitarian organization that works to ease the burdens of poverty on children through one-to-one child sponsorship. Our programs and services provide health, educational, material and emotional assistance to impoverished children and families in 11 countries around the world.
Thursday, October 16, 2008
Bailout, fallout
From Business world Online:
Hold the cheering. The modest upturns — after major crashes — now being reported in global stock markets in response (possibly) to massive govern- ment bailout plans in the US, Germany, the UK, and France do not indicate that the present crisis is over. The sad fact is that the "rescue" packages do not resolve problematic conditions in the US and the networked rest of the world. These conditions still mean a deep US recession and a global economic slowdown that will affect everyone.
To realize why, one needs only to revisit how the US Federal Reserve Board’s easy money policy over the past several years brought the world to the mess it now finds itself. It began with easy credit causing American consumers to go on a home-buying binge, developers to embark on a construction rampage, aggressive Wall Street firms to "securitize" pools of even "subprime" home mortgages and peddle these as low-risk securities, and hitherto conservative savings and commercial banks to ignore their traditional credit standards and take on debt instruments whose risk-return character they did not fully appreciate. It continued with American spending leading to huge US trade deficits, with financial institutions in countries running huge trade surpluses with the US needing places to invest their dollars and parking these in high-yielding subprime mortgage notes insured via credit default swaps, with increased demand for American debt paper fueling an even greater production of the same, and with a steep inflationary spiral in the US. It ended with the housing bubble finally bursting, with real estate prices plunging, with homeowners failing or unwilling to make good on their mortgage payments on reduced-value houses, with insurance companies (like AIG) unable to make good on all their default guarantees, and with a financial tsunami raging through markets that had the sophistication (or was it naiveté?) to embrace exotic credit derivatives.
In effect, over the past several years, the rest of the world funded America’s consumer spending boom by lending America money. This is why banks and investment funds outside America are holding vast amounts of American debt paper and why they are now reeling from seeing these assets turn "toxic" and lose much of their value. The bailout plans supposedly address this problem.
The main elements of those rescue plans involve using public money to take toxic assets off the hands (and books) of private institutions and to inject additional capital to shore up the diminished equity of badly hit banks. What the bailout aims to do, in essence, is hold up prices of overvalued American securities by effectively introducing an artificial price floor. As I argued in my column three weeks ago ("Failure of nerve?") when the American plan was still being discussed in the US Congress, this will not work as expected. Astute investors would see through this and, consequently, would consider a government "rescue" as merely a short-term window for dumping bad assets before the supports collapse and prices drop even further.
In that September 25 column, I further argued that a US government rescue of Wall Street "fat cats" was the wrong thing to do, not only from a moral standpoint but also from a practical problem-solving standpoint. I said that spending an enormous amount of public money to take bad assets off the balance sheets of private financial institutions would simply hold back the equilibrating forces of the market from quickly pushing prices of these securities down to their intrinsic values. I thought that this would therefore only delay the restoration of some measure of certainty — the certainty that prevailing prices are reflecting what other investors actually think certain pieces of paper are worth — to an already frightened market and raise uncertainty to the level that leads to a selling frenzy. As it turns out, this is what has been happening. What compounds the problem is that governments of other countries whose own financial markets have been affected by the American tsunami have decided to throw substantial amounts of their own taxpayers’ money into bailing out private institutions of their own.
In fairness to the architects of these bailouts, their objective seemed merely to provide some temporary respite to allow the prices of overvalued American securities to ultimately stabilize in a less frenzied fashion and provide the institutions holding them the time to somehow make the capital adjustments that will cover the holes in their balance sheets created by the sudden dissipation of significant asset values. Much of the pressure, however, for extensive government action to "stabilize" markets appears to come from politically important financial players, both in the US and other countries, who just want the chance to get out before the market hits bottom and want as much of their losses as possible to be absorbed by taxpayers. No one can reasonably believe the rhetoric of these big moneymen that their concern is about the "system" surviving. Their only concern (I believe) is making sure that they themselves survive this sudden downturn that has caught them "long" on overpriced assets. What quick passage by developed-country governments — over public protests — of these rescue packages demonstrates is that, like moneymen everywhere, fat cats have greater clout with their government than the ordinary taxpayer.
In any event, much as bailouts of fat cats grates against all notions of fair play, this might be tolerable to the taxpayers who will pay for these bailouts if the expenditure of their money will actually fix what’s wrong with the financial system, both in America and in the networked rest of the world. The problem is that these bailouts only delay a real resolution. Markets don’t really turn back up until they have hit true bottoms.
I don’t believe that those bailouts will restore to investors the hoped-for level of confidence in American paper or in American institutions. I think that the confidence that has hitherto caused the rest of the world to channel its collective savings into America — thereby financing for years America’s expanding debt and fueling its housing boom — has already been irreparably damaged, at least for now. This is already evident. Investors all over the world are getting rid of American paper as quickly as they can and seeking refuge in commodities and other assets with more tangible values. Those with large holdings of American dollars must be scrambling for ways to convert these into assets denominated in other currencies. By now, everyone must have concluded that — given America’s persistent and increasing current account deficits — the American dollar must be seen as even weaker than it has been taken to be, and weakening. The US Fed will probably raise interest rates to slow down the momentum to sell dollars but that will also dampen economic activities in the US, aggravating its recession.
Necessarily, the end of easy credit and a drop in American consumption means that firms in countries now supplying the US with goods and services are going to experience serious contractions in demand. Since the US is the world’s biggest importer and consumer, a US recession means significant slowdowns in countries with export-driven economies. Moreover, given the protracted boom period in the US and the price heights reached in its inflationary spiral, this recession is likely to be long and deep.
The fallout will definitely affect us. Not as much as it will affect other countries, though, because we do not have large accumulations of American paper and our economy is not as dependent on our exports to America as others (the US accounts for only about 15 percent of our exports). Also, Filipinos have not been — fortunately, in an ironic sort of way — in any kind of consumer spending bubble, so there is nothing that can burst. Still, we need to brace ourselves. Even the wake of a tsunami can sweep flimsily built structures away.
Hold the cheering. The modest upturns — after major crashes — now being reported in global stock markets in response (possibly) to massive govern- ment bailout plans in the US, Germany, the UK, and France do not indicate that the present crisis is over. The sad fact is that the "rescue" packages do not resolve problematic conditions in the US and the networked rest of the world. These conditions still mean a deep US recession and a global economic slowdown that will affect everyone.
To realize why, one needs only to revisit how the US Federal Reserve Board’s easy money policy over the past several years brought the world to the mess it now finds itself. It began with easy credit causing American consumers to go on a home-buying binge, developers to embark on a construction rampage, aggressive Wall Street firms to "securitize" pools of even "subprime" home mortgages and peddle these as low-risk securities, and hitherto conservative savings and commercial banks to ignore their traditional credit standards and take on debt instruments whose risk-return character they did not fully appreciate. It continued with American spending leading to huge US trade deficits, with financial institutions in countries running huge trade surpluses with the US needing places to invest their dollars and parking these in high-yielding subprime mortgage notes insured via credit default swaps, with increased demand for American debt paper fueling an even greater production of the same, and with a steep inflationary spiral in the US. It ended with the housing bubble finally bursting, with real estate prices plunging, with homeowners failing or unwilling to make good on their mortgage payments on reduced-value houses, with insurance companies (like AIG) unable to make good on all their default guarantees, and with a financial tsunami raging through markets that had the sophistication (or was it naiveté?) to embrace exotic credit derivatives.
In effect, over the past several years, the rest of the world funded America’s consumer spending boom by lending America money. This is why banks and investment funds outside America are holding vast amounts of American debt paper and why they are now reeling from seeing these assets turn "toxic" and lose much of their value. The bailout plans supposedly address this problem.
The main elements of those rescue plans involve using public money to take toxic assets off the hands (and books) of private institutions and to inject additional capital to shore up the diminished equity of badly hit banks. What the bailout aims to do, in essence, is hold up prices of overvalued American securities by effectively introducing an artificial price floor. As I argued in my column three weeks ago ("Failure of nerve?") when the American plan was still being discussed in the US Congress, this will not work as expected. Astute investors would see through this and, consequently, would consider a government "rescue" as merely a short-term window for dumping bad assets before the supports collapse and prices drop even further.
In that September 25 column, I further argued that a US government rescue of Wall Street "fat cats" was the wrong thing to do, not only from a moral standpoint but also from a practical problem-solving standpoint. I said that spending an enormous amount of public money to take bad assets off the balance sheets of private financial institutions would simply hold back the equilibrating forces of the market from quickly pushing prices of these securities down to their intrinsic values. I thought that this would therefore only delay the restoration of some measure of certainty — the certainty that prevailing prices are reflecting what other investors actually think certain pieces of paper are worth — to an already frightened market and raise uncertainty to the level that leads to a selling frenzy. As it turns out, this is what has been happening. What compounds the problem is that governments of other countries whose own financial markets have been affected by the American tsunami have decided to throw substantial amounts of their own taxpayers’ money into bailing out private institutions of their own.
In fairness to the architects of these bailouts, their objective seemed merely to provide some temporary respite to allow the prices of overvalued American securities to ultimately stabilize in a less frenzied fashion and provide the institutions holding them the time to somehow make the capital adjustments that will cover the holes in their balance sheets created by the sudden dissipation of significant asset values. Much of the pressure, however, for extensive government action to "stabilize" markets appears to come from politically important financial players, both in the US and other countries, who just want the chance to get out before the market hits bottom and want as much of their losses as possible to be absorbed by taxpayers. No one can reasonably believe the rhetoric of these big moneymen that their concern is about the "system" surviving. Their only concern (I believe) is making sure that they themselves survive this sudden downturn that has caught them "long" on overpriced assets. What quick passage by developed-country governments — over public protests — of these rescue packages demonstrates is that, like moneymen everywhere, fat cats have greater clout with their government than the ordinary taxpayer.
In any event, much as bailouts of fat cats grates against all notions of fair play, this might be tolerable to the taxpayers who will pay for these bailouts if the expenditure of their money will actually fix what’s wrong with the financial system, both in America and in the networked rest of the world. The problem is that these bailouts only delay a real resolution. Markets don’t really turn back up until they have hit true bottoms.
I don’t believe that those bailouts will restore to investors the hoped-for level of confidence in American paper or in American institutions. I think that the confidence that has hitherto caused the rest of the world to channel its collective savings into America — thereby financing for years America’s expanding debt and fueling its housing boom — has already been irreparably damaged, at least for now. This is already evident. Investors all over the world are getting rid of American paper as quickly as they can and seeking refuge in commodities and other assets with more tangible values. Those with large holdings of American dollars must be scrambling for ways to convert these into assets denominated in other currencies. By now, everyone must have concluded that — given America’s persistent and increasing current account deficits — the American dollar must be seen as even weaker than it has been taken to be, and weakening. The US Fed will probably raise interest rates to slow down the momentum to sell dollars but that will also dampen economic activities in the US, aggravating its recession.
Necessarily, the end of easy credit and a drop in American consumption means that firms in countries now supplying the US with goods and services are going to experience serious contractions in demand. Since the US is the world’s biggest importer and consumer, a US recession means significant slowdowns in countries with export-driven economies. Moreover, given the protracted boom period in the US and the price heights reached in its inflationary spiral, this recession is likely to be long and deep.
The fallout will definitely affect us. Not as much as it will affect other countries, though, because we do not have large accumulations of American paper and our economy is not as dependent on our exports to America as others (the US accounts for only about 15 percent of our exports). Also, Filipinos have not been — fortunately, in an ironic sort of way — in any kind of consumer spending bubble, so there is nothing that can burst. Still, we need to brace ourselves. Even the wake of a tsunami can sweep flimsily built structures away.
Don't Blame Capitalism
From Washington Post
By Peter SchiffThursday, October 16, 2008;
Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.
For the political left, which has long championed the need for such limits, this crisis is the opportunity of a lifetime.
Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.
Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. Everyone wants to make money, but everyone is also afraid of losing what he has. Although few would ascribe their desire for prosperity to greed, it is simply a rose by another name. Greed is the elemental motivation for the economic risk-taking and hard work that are essential to a vibrant economy But over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow -- until it could grow no more.
Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.
Similarly, the FHA, Fannie and Freddie were created to encourage lending by allowing primary lenders to turn their long-term risk over to the government. Absent this implicit guarantee, lenders would probably have been much more conservative in approving borrowers and setting interest terms, and in requiring documentation of incomes and higher down payments. Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.
Interest rates contributed the most to creating the housing boom. After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.
Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.
And even today, as market forces deflate the credit bubble, the government is stepping in to re-inflate it. First came the Treasury's $700 billion plan to purchase mortgage assets that no one in the private sector would buy. Now it has recapitalized banks to the tune of $250 billion, guaranteeing loans between banks and fully insuring non-interest-bearing accounts. Policymakers say that absent these steps, banks would not be able to extend loans. But given our already staggering debt burden, perhaps more loans are not the answer. That's what the free market is telling us. But the government cannot abide solutions that ask for consumer sacrifice.
Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.
The United States reached its economic preeminence on the strength of its free markets. So far, the economic disaster exacerbated by government policies is creating opportunities for further government interference, which will lead to bigger catastrophes. Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.
The writer, who was economic adviser for Ron Paul's 2008 presidential campaign, is president of Euro Pacific Capital. He is the author of "The Little Book of Bull Moves in Bear Markets."
By Peter SchiffThursday, October 16, 2008;
Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.
For the political left, which has long championed the need for such limits, this crisis is the opportunity of a lifetime.
Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.
Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. Everyone wants to make money, but everyone is also afraid of losing what he has. Although few would ascribe their desire for prosperity to greed, it is simply a rose by another name. Greed is the elemental motivation for the economic risk-taking and hard work that are essential to a vibrant economy But over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow -- until it could grow no more.
Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.
Similarly, the FHA, Fannie and Freddie were created to encourage lending by allowing primary lenders to turn their long-term risk over to the government. Absent this implicit guarantee, lenders would probably have been much more conservative in approving borrowers and setting interest terms, and in requiring documentation of incomes and higher down payments. Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.
Interest rates contributed the most to creating the housing boom. After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.
Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.
And even today, as market forces deflate the credit bubble, the government is stepping in to re-inflate it. First came the Treasury's $700 billion plan to purchase mortgage assets that no one in the private sector would buy. Now it has recapitalized banks to the tune of $250 billion, guaranteeing loans between banks and fully insuring non-interest-bearing accounts. Policymakers say that absent these steps, banks would not be able to extend loans. But given our already staggering debt burden, perhaps more loans are not the answer. That's what the free market is telling us. But the government cannot abide solutions that ask for consumer sacrifice.
Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.
The United States reached its economic preeminence on the strength of its free markets. So far, the economic disaster exacerbated by government policies is creating opportunities for further government interference, which will lead to bigger catastrophes. Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.
The writer, who was economic adviser for Ron Paul's 2008 presidential campaign, is president of Euro Pacific Capital. He is the author of "The Little Book of Bull Moves in Bear Markets."
Tuesday, October 14, 2008
Farewell to the Tatas: Costs and benefits of the Tata-Singur Project, a detailed dissection of the deal
October 3, 2008
By Dipankar Basu, Sanhati. Open for comments
Summary of findings:
Costs: the total cost of the Tata-Singur project incurred by the exchequer, and hence ultimately the tax payers, will be approximately be Rs. 3000 crores on a net present value basis when we add up the costs pertaining to the land subsidy, the tax holidays, the soft loan, the real estate gift and the subsidized electricity using an interest rate of 11%. This is about 58% of the total realized industrial investment in the state of West Bengal in 2007.
Benefits: Maximum cap of 12,000 direct jobs with 10% unskilled employment, minus employment destruction. The other claim about the Singur project generating prospective investment in the future rests on equally shaky foundations. The question really boils down to whether the Tata plant can attract other major investments and lead to an industrial rejuvenation of Bengal. The example of Jamshedpur in neighbouring Jharkhand should be carefully looked at. Tata’s factories in Jamshedpur did nothing for the overall industrialization of the state of Bihar or now Jharkhand. It remained an enclave of industrial activity, without forging strong forward or backward linkages in neighbouring areas.
Tata’s net worth versus what they demand from tax-payers: If we add up the figures for the Tata Group’s overseas acquisitions, we arrive at a rough figure of $14,062 million, which converts to roughly Rs. 56,248 crore (using an exchange rate of Rs 40/$), and this is not even a complete list of Tata’s recent acquisitions. And, what does all this lead to? It inevitably leads us to the conclusion that a corporation which can invest more than Rs. 56,000 crores for acquisition of strategic foreign corporate assets requires the financial support of India’s impoverished taxpayers, to the tune of Rs. 1140 crores in real terms, to set up a small car manufacturing plant in India!
A discussion of TINA is given.
***************************
Introduction
Cost and Benfits
The Agreement
Land “Acquisition” and Use
Total Cost of the Project
Hidden Land Subsidy
Cost of Circumventing the Law
Soft Loans and Tax
Holidays
More Gifts from Santa: Real Estate and Subsidized Electricity
Adding up the Costs
What are the Benefits?
Oh! So Poor Tata
TINA Logic
Conclusion
Agreement between Tata Motors Ltd., Government of West Bengal and WBIDC
***************************
Introduction
Singur stands for many, often contradictory, things. It stands for the model of neoliberal industrialization that the Indian state is trying to push down the throats of it’s citizens at the behest of big capital. It stands for the unprincipled and populist politics of dormant right-wing forces. It stands for the abject surrender of an erstwhile communist party to the dictates of capital, the full flowering of a tendency that surfaced in the Indian political firmament circa 1967. But Singur also stands for the struggle of labour against capital, decidedly in confused and masked manners, but a struggle that has the potential to galvanize resistance against neoliberalism. When the Tata Group, forced by the long-standing struggle of the small farmers and landless labourers in Singur, was reported to be planning a move to Pantnagar in Uttarakhand, there were simultaneous reports of a possible Singur waiting for them in Pantnagar. A Singur in Pantnagar! That is the real significance of the struggle of the landless labourers and peasants of Singur.
Right from day one, the West Bengal government and the mainstream media has been building up the case for the manufacturing plant in Singur on the basis of half-truths and untruths. For a long time, the West Bengal government continued denying the fact that it had “acquired” a large tract of the proposed 1000 acres from unwilling farmers by using coercion, strong-arm tactics and certainly without their consent. Towards the later part of 2006, after considerable protests and a public hearing organized by intellectuals and activists, it had to finally accept it’s own earlier statements as false. Now it is known by all and sundry that 411.11 acres of the total 997.1 acres has been acquired without consent of the relevant farmers. For a long time, again, the West Bengal government continued denying the fact that most of the land that was sought to be “acquired” was fertile and multi-cropped agricultural land. It was only when earlier this year the Supreme Court pointed towards a possible violation of the Land Acquisition Act, responding to a petition filed for immediate halt of the Nano car project, that the West Bengal government finally accepted that it had been willfully misleading the public in this regard for so long; the SC had pointed out that acquiring and using fertile, multi-crop agricultural land for industrial purposes goes against even the Land Acquisition Act, which the West Bengal government was, paradoxically, trying to use to “acquire” that land. Now it has been established beyond any shadow of doubt that the land on which the proposed plant is to come up is, in the main, fertile, multi-cropped agricultural land. Another myth that had been in circulation for some time was the following: the land in Singur could not be used for agricultural purposes for most parts of the year because of water logging. This claim has also been contested and shown to be untrue. Now it is accepted by all serious commentators that the land had, before being fenced off by the West Bengal police, been in constant use throughout the year for growing various agricultural crops, and that it provided livelihood for more than 12,000 families. Even though these and other such claims of the West Bengal government and the mainstream media have been refuted point by point, over and over again, with facts and arguments and lot of patience and care, they keep turning up ever and ever again like bad coins. They will, as long as the social forces whose interest they represent continue their efforts to hegemonize society; and we will continue refuting them point by point, with patience and care and logic and facts.
But even when these particular canards are discounted, there seems to be a larger argument for industrialization that Singur purportedly represents. The West Bengal government and large sections of the mainstream media tend to equate Singur with industrialization and portray any and every opposition to Singur as opposition to industrialization. The apparent strength, or shall we say charm, of this argument becomes obvious when we see even an preeminent thinker like Amartya Sen falling for it. But this argument is deeply flawed. Opposition to Singur is not opposition to industrialization, it is opposition to neoliberal capitalist industrialization. Opposition to Singur is opposition to the conflation of industrialization with neoliberalism, a scenario where the State steps up it’s efforts to subsidize capital and shore up it’s profits while capital externalizes it’s costs onto labour and the environment with impunity. It is this model of industrialization that we oppose.
An alternative model of industrialization, as far as we can see, would operate in an exactly opposite fashion. It would tax capital and not subsidize it, prevent capital from externalizing it’s costs onto labour and the environment rather than facilitating it, intervene in decisions related to the choice of technique to be used in production, force private capital to do proper cost-benefit analysis before embarking on a (socially) costly industrial project, intervene through fiscal and monetary policy to maintain overall levels of aggregate demand and try to ensure full employment with living wages for workers. In the alternative vision, the State would use tax revenues to build infrastructure, provide social sector services and closely monitor and improve the well-being of the people. Singur, and the model of industrialization that it stands, takes us in the exact opposite direction; that is why it needs to be opposed. It destroys livelihoods tied to agriculture without creating compensating jobs in industry, it willfully snatches away fertile, multi-crop agricultural land for industrial purposes when so much fallow (and other unused and misused) land is there to be used, it externalizes the costs of production on the most vulnerable sections of the population and the environment, and all this while the State steps in to massively subsidize private capital even further. If, therefore, due to the struggle of the project affected people the Tata’s finally leave West Bengal, it should call for rejoicing not for middle-class chest-beating that is so much on display these days. For it would be one of the important victories in the emerging struggle against neoliberalism in India.Cost and Benfits
In this article we will try to study details of the costs and benefits of the proposed manufacturing plant in Singur on the basis of information that is available in the public domain. But a caveat is necessary. This is not a full blown cost-benefit analysis because we shall not venture to quantify the indirect benefits of possible net employment generation and the income that might arise from there. At this point, it is not even clear whether there will be positive net employment generation; it is not at all obvious, in other words, that the employment destruction entailed by the project will be exceeded by the employment generated by it. Moreover, a full cost-benefit analysis would require much more information than has presently been made available by the West bengal government; on the basis of the available information, which pertains mostly to the benfits that the West Bengal government plans to make available to the Tata’s, we shall mainly try to approximately quantify the costs to the exchequer, and ultimately to the people of the state.
A careful study of the details relating to the proposed project in Singur, to the extent possible by the publicly available information, is important for two main reasons. First, it is important to do a dispassionate analysis of the costs and benefits of this project; since the West Bengal government has been continually making largely unsubstantiated claims about the putative benefits of this project, it is high time we carefully analyzed the foundations of this claim. Second, this project is very much in line with the current trend of neoliberal capitalist industrialization in India anchored tightly in the visions of the Special Economic Zones (SEZs); hence a study of this project will highlight, and help us evaluate, many of the important characteristics of neoliberal capitalist industrialization that has been envisioned and aggressively pushed by the Indian state since the early 1990s. Parenthetically, one should also note how acceptance of the logic this project signals the gradual dissolving of social democracy in India: from”managing” the conflict between labour and capital, social democrats are increasingly moving towards “managing” labour for capital.
The main document that we will use for the purposes of this study is the text of the recent “agreement” signed between the Government of West Bengal, the West Bengal Industrial Development Corporation (WBIDC) and the Tata Motor Ltd. (TML) pertaining to the proposed manufacturing plant in Singur. By a careful analysis of the information contained in this document, and complementing this with some more information from other sources we will, hopefully, be able to arrive at a true picture of the costs and benefits of this project. But before we get into the nitty-gritty of the agreement, let us remind ourselves about the severe difficulties that we have faced over the past few years in just trying to get hold of the information that is relevant to this project. Recall that the details of the “deal” wasn’t made public initially because the West Bengal government believed it was a “trade secret”. Once this argument was properly trashed, the government shifted gears. During this period, it wasn’t made public despite repeated Right To Information (RTI) applications because, according to the government, the Tatas didn’t want it to be made public! Finally what has been made public, mainly because of pressure from the standing committee on industry of the West Bengal state assembly, are only parts of the “deal”; this all we have for the purposes of study and analysis. The TML filed a case in the Calcutta High Court and got a stay against the rest of it being made public. What is there in the rest of it? We, and the more than 12000 project affected families in Singur, can only guess. The entire episode, to say the least, is patently undemocratic, and makes a mockery of the intent of the recently passed Right to Information Act. One does not, of course, discern even an iota of concern about this important matter displayed by the “peoples’ government” in West Bengal!
To read the entire article click Farewell to the Tatas: Costs and benefits of the Tata-Singur Project, a detailed dissection of the deal at Sanhati
By Dipankar Basu, Sanhati. Open for comments
Summary of findings:
Costs: the total cost of the Tata-Singur project incurred by the exchequer, and hence ultimately the tax payers, will be approximately be Rs. 3000 crores on a net present value basis when we add up the costs pertaining to the land subsidy, the tax holidays, the soft loan, the real estate gift and the subsidized electricity using an interest rate of 11%. This is about 58% of the total realized industrial investment in the state of West Bengal in 2007.
Benefits: Maximum cap of 12,000 direct jobs with 10% unskilled employment, minus employment destruction. The other claim about the Singur project generating prospective investment in the future rests on equally shaky foundations. The question really boils down to whether the Tata plant can attract other major investments and lead to an industrial rejuvenation of Bengal. The example of Jamshedpur in neighbouring Jharkhand should be carefully looked at. Tata’s factories in Jamshedpur did nothing for the overall industrialization of the state of Bihar or now Jharkhand. It remained an enclave of industrial activity, without forging strong forward or backward linkages in neighbouring areas.
Tata’s net worth versus what they demand from tax-payers: If we add up the figures for the Tata Group’s overseas acquisitions, we arrive at a rough figure of $14,062 million, which converts to roughly Rs. 56,248 crore (using an exchange rate of Rs 40/$), and this is not even a complete list of Tata’s recent acquisitions. And, what does all this lead to? It inevitably leads us to the conclusion that a corporation which can invest more than Rs. 56,000 crores for acquisition of strategic foreign corporate assets requires the financial support of India’s impoverished taxpayers, to the tune of Rs. 1140 crores in real terms, to set up a small car manufacturing plant in India!
A discussion of TINA is given.
***************************
Introduction
Cost and Benfits
The Agreement
Land “Acquisition” and Use
Total Cost of the Project
Hidden Land Subsidy
Cost of Circumventing the Law
Soft Loans and Tax
Holidays
More Gifts from Santa: Real Estate and Subsidized Electricity
Adding up the Costs
What are the Benefits?
Oh! So Poor Tata
TINA Logic
Conclusion
Agreement between Tata Motors Ltd., Government of West Bengal and WBIDC
***************************
Introduction
Singur stands for many, often contradictory, things. It stands for the model of neoliberal industrialization that the Indian state is trying to push down the throats of it’s citizens at the behest of big capital. It stands for the unprincipled and populist politics of dormant right-wing forces. It stands for the abject surrender of an erstwhile communist party to the dictates of capital, the full flowering of a tendency that surfaced in the Indian political firmament circa 1967. But Singur also stands for the struggle of labour against capital, decidedly in confused and masked manners, but a struggle that has the potential to galvanize resistance against neoliberalism. When the Tata Group, forced by the long-standing struggle of the small farmers and landless labourers in Singur, was reported to be planning a move to Pantnagar in Uttarakhand, there were simultaneous reports of a possible Singur waiting for them in Pantnagar. A Singur in Pantnagar! That is the real significance of the struggle of the landless labourers and peasants of Singur.
Right from day one, the West Bengal government and the mainstream media has been building up the case for the manufacturing plant in Singur on the basis of half-truths and untruths. For a long time, the West Bengal government continued denying the fact that it had “acquired” a large tract of the proposed 1000 acres from unwilling farmers by using coercion, strong-arm tactics and certainly without their consent. Towards the later part of 2006, after considerable protests and a public hearing organized by intellectuals and activists, it had to finally accept it’s own earlier statements as false. Now it is known by all and sundry that 411.11 acres of the total 997.1 acres has been acquired without consent of the relevant farmers. For a long time, again, the West Bengal government continued denying the fact that most of the land that was sought to be “acquired” was fertile and multi-cropped agricultural land. It was only when earlier this year the Supreme Court pointed towards a possible violation of the Land Acquisition Act, responding to a petition filed for immediate halt of the Nano car project, that the West Bengal government finally accepted that it had been willfully misleading the public in this regard for so long; the SC had pointed out that acquiring and using fertile, multi-crop agricultural land for industrial purposes goes against even the Land Acquisition Act, which the West Bengal government was, paradoxically, trying to use to “acquire” that land. Now it has been established beyond any shadow of doubt that the land on which the proposed plant is to come up is, in the main, fertile, multi-cropped agricultural land. Another myth that had been in circulation for some time was the following: the land in Singur could not be used for agricultural purposes for most parts of the year because of water logging. This claim has also been contested and shown to be untrue. Now it is accepted by all serious commentators that the land had, before being fenced off by the West Bengal police, been in constant use throughout the year for growing various agricultural crops, and that it provided livelihood for more than 12,000 families. Even though these and other such claims of the West Bengal government and the mainstream media have been refuted point by point, over and over again, with facts and arguments and lot of patience and care, they keep turning up ever and ever again like bad coins. They will, as long as the social forces whose interest they represent continue their efforts to hegemonize society; and we will continue refuting them point by point, with patience and care and logic and facts.
But even when these particular canards are discounted, there seems to be a larger argument for industrialization that Singur purportedly represents. The West Bengal government and large sections of the mainstream media tend to equate Singur with industrialization and portray any and every opposition to Singur as opposition to industrialization. The apparent strength, or shall we say charm, of this argument becomes obvious when we see even an preeminent thinker like Amartya Sen falling for it. But this argument is deeply flawed. Opposition to Singur is not opposition to industrialization, it is opposition to neoliberal capitalist industrialization. Opposition to Singur is opposition to the conflation of industrialization with neoliberalism, a scenario where the State steps up it’s efforts to subsidize capital and shore up it’s profits while capital externalizes it’s costs onto labour and the environment with impunity. It is this model of industrialization that we oppose.
An alternative model of industrialization, as far as we can see, would operate in an exactly opposite fashion. It would tax capital and not subsidize it, prevent capital from externalizing it’s costs onto labour and the environment rather than facilitating it, intervene in decisions related to the choice of technique to be used in production, force private capital to do proper cost-benefit analysis before embarking on a (socially) costly industrial project, intervene through fiscal and monetary policy to maintain overall levels of aggregate demand and try to ensure full employment with living wages for workers. In the alternative vision, the State would use tax revenues to build infrastructure, provide social sector services and closely monitor and improve the well-being of the people. Singur, and the model of industrialization that it stands, takes us in the exact opposite direction; that is why it needs to be opposed. It destroys livelihoods tied to agriculture without creating compensating jobs in industry, it willfully snatches away fertile, multi-crop agricultural land for industrial purposes when so much fallow (and other unused and misused) land is there to be used, it externalizes the costs of production on the most vulnerable sections of the population and the environment, and all this while the State steps in to massively subsidize private capital even further. If, therefore, due to the struggle of the project affected people the Tata’s finally leave West Bengal, it should call for rejoicing not for middle-class chest-beating that is so much on display these days. For it would be one of the important victories in the emerging struggle against neoliberalism in India.Cost and Benfits
In this article we will try to study details of the costs and benefits of the proposed manufacturing plant in Singur on the basis of information that is available in the public domain. But a caveat is necessary. This is not a full blown cost-benefit analysis because we shall not venture to quantify the indirect benefits of possible net employment generation and the income that might arise from there. At this point, it is not even clear whether there will be positive net employment generation; it is not at all obvious, in other words, that the employment destruction entailed by the project will be exceeded by the employment generated by it. Moreover, a full cost-benefit analysis would require much more information than has presently been made available by the West bengal government; on the basis of the available information, which pertains mostly to the benfits that the West Bengal government plans to make available to the Tata’s, we shall mainly try to approximately quantify the costs to the exchequer, and ultimately to the people of the state.
A careful study of the details relating to the proposed project in Singur, to the extent possible by the publicly available information, is important for two main reasons. First, it is important to do a dispassionate analysis of the costs and benefits of this project; since the West Bengal government has been continually making largely unsubstantiated claims about the putative benefits of this project, it is high time we carefully analyzed the foundations of this claim. Second, this project is very much in line with the current trend of neoliberal capitalist industrialization in India anchored tightly in the visions of the Special Economic Zones (SEZs); hence a study of this project will highlight, and help us evaluate, many of the important characteristics of neoliberal capitalist industrialization that has been envisioned and aggressively pushed by the Indian state since the early 1990s. Parenthetically, one should also note how acceptance of the logic this project signals the gradual dissolving of social democracy in India: from”managing” the conflict between labour and capital, social democrats are increasingly moving towards “managing” labour for capital.
The main document that we will use for the purposes of this study is the text of the recent “agreement” signed between the Government of West Bengal, the West Bengal Industrial Development Corporation (WBIDC) and the Tata Motor Ltd. (TML) pertaining to the proposed manufacturing plant in Singur. By a careful analysis of the information contained in this document, and complementing this with some more information from other sources we will, hopefully, be able to arrive at a true picture of the costs and benefits of this project. But before we get into the nitty-gritty of the agreement, let us remind ourselves about the severe difficulties that we have faced over the past few years in just trying to get hold of the information that is relevant to this project. Recall that the details of the “deal” wasn’t made public initially because the West Bengal government believed it was a “trade secret”. Once this argument was properly trashed, the government shifted gears. During this period, it wasn’t made public despite repeated Right To Information (RTI) applications because, according to the government, the Tatas didn’t want it to be made public! Finally what has been made public, mainly because of pressure from the standing committee on industry of the West Bengal state assembly, are only parts of the “deal”; this all we have for the purposes of study and analysis. The TML filed a case in the Calcutta High Court and got a stay against the rest of it being made public. What is there in the rest of it? We, and the more than 12000 project affected families in Singur, can only guess. The entire episode, to say the least, is patently undemocratic, and makes a mockery of the intent of the recently passed Right to Information Act. One does not, of course, discern even an iota of concern about this important matter displayed by the “peoples’ government” in West Bengal!
To read the entire article click Farewell to the Tatas: Costs and benefits of the Tata-Singur Project, a detailed dissection of the deal at Sanhati
Secret report: biofuel caused food crisis
Aditya Chakrabortty ,The Guardian
Biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank report obtained by the Guardian.
The damning unpublished assessment is based on the most detailed analysis of the crisis so far, carried out by an internationally-respected economist at global financial body.
The figure emphatically contradicts the US government's claims that plant-derived fuels contribute less than 3% to food-price rises. It will add to pressure on governments in Washington and across Europe, which have turned to plant-derived fuels to reduce emissions of greenhouse gases and reduce their dependence on imported oil.
Senior development sources believe the report, completed in April, has not been published to avoid embarrassing President George Bush.
"It would put the World Bank in a political hot-spot with the White House," said one yesterday.
The news comes at a critical point in the world's negotiations on biofuels policy. Leaders of the G8 industrialised countries meet next week in Hokkaido, Japan, where they will discuss the food crisis and come under intense lobbying from campaigners calling for a moratorium on the use of plant-derived fuels.
It will also put pressure on the British government, which is due to release its own report on the impact of biofuels, the Gallagher Report. The Guardian has previously reported that the British study will state that plant fuels have played a "significant" part in pushing up food prices to record levels. Although it was expected last week, the report has still not been released.
"Political leaders seem intent on suppressing and ignoring the strong evidence that biofuels are a major factor in recent food price rises," said Robert Bailey, policy adviser at Oxfam. "It is imperative that we have the full picture. While politicians concentrate on keeping industry lobbies happy, people in poor countries cannot afford enough to eat."
Rising food prices have pushed 100m people worldwide below the poverty line, estimates the World Bank, and have sparked riots from Bangladesh to Egypt. Government ministers here have described higher food and fuel prices as "the first real economic crisis of globalisation".
President Bush has linked higher food prices to higher demand from India and China, but the leaked World Bank study disputes that: "Rapid income growth in developing countries has not led to large increases in global grain consumption and was not a major factor responsible for the large price increases."
Even successive droughts in Australia, calculates the report, have had a marginal impact. Instead, it argues that the EU and US drive for biofuels has had by far the biggest impact on food supply and prices.
Since April, all petrol and diesel in Britain has had to include 2.5% from biofuels. The EU has been considering raising that target to 10% by 2020, but is faced with mounting evidence that that will only push food prices higher.
"Without the increase in biofuels, global wheat and maize stocks would not have declined appreciably and price increases due to other factors would have been moderate," says the report. The basket of food prices examined in the study rose by 140% between 2002 and this February. The report estimates that higher energy and fertiliser prices accounted for an increase of only 15%, while biofuels have been responsible for a 75% jump over that period.
It argues that production of biofuels has distorted food markets in three main ways. First, it has diverted grain away from food for fuel, with over a third of US corn now used to produce ethanol and about half of vegetable oils in the EU going towards the production of biodiesel. Second, farmers have been encouraged to set land aside for biofuel production. Third, it has sparked financial speculation in grains, driving prices up higher.
Other reviews of the food crisis looked at it over a much longer period, or have not linked these three factors, and so arrived at smaller estimates of the impact from biofuels. But the report author, Don Mitchell, is a senior economist at the Bank and has done a detailed, month-by-month analysis of the surge in food prices, which allows much closer examination of the link between biofuels and food supply.
The report points out biofuels derived from sugarcane, which Brazil specializes in, have not had such a dramatic impact.
Supporters of biofuels argue that they are a greener alternative to relying on oil and other fossil fuels, but even that claim has been disputed by some experts, who argue that it does not apply to US production of ethanol from plants.
"It is clear that some biofuels have huge impacts on food prices," said Dr David King, the government's former chief scientific adviser, last night. "All we are doing by supporting these is subsidising higher food prices, while doing nothing to tackle climate change."
Biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank report obtained by the Guardian.
The damning unpublished assessment is based on the most detailed analysis of the crisis so far, carried out by an internationally-respected economist at global financial body.
The figure emphatically contradicts the US government's claims that plant-derived fuels contribute less than 3% to food-price rises. It will add to pressure on governments in Washington and across Europe, which have turned to plant-derived fuels to reduce emissions of greenhouse gases and reduce their dependence on imported oil.
Senior development sources believe the report, completed in April, has not been published to avoid embarrassing President George Bush.
"It would put the World Bank in a political hot-spot with the White House," said one yesterday.
The news comes at a critical point in the world's negotiations on biofuels policy. Leaders of the G8 industrialised countries meet next week in Hokkaido, Japan, where they will discuss the food crisis and come under intense lobbying from campaigners calling for a moratorium on the use of plant-derived fuels.
It will also put pressure on the British government, which is due to release its own report on the impact of biofuels, the Gallagher Report. The Guardian has previously reported that the British study will state that plant fuels have played a "significant" part in pushing up food prices to record levels. Although it was expected last week, the report has still not been released.
"Political leaders seem intent on suppressing and ignoring the strong evidence that biofuels are a major factor in recent food price rises," said Robert Bailey, policy adviser at Oxfam. "It is imperative that we have the full picture. While politicians concentrate on keeping industry lobbies happy, people in poor countries cannot afford enough to eat."
Rising food prices have pushed 100m people worldwide below the poverty line, estimates the World Bank, and have sparked riots from Bangladesh to Egypt. Government ministers here have described higher food and fuel prices as "the first real economic crisis of globalisation".
President Bush has linked higher food prices to higher demand from India and China, but the leaked World Bank study disputes that: "Rapid income growth in developing countries has not led to large increases in global grain consumption and was not a major factor responsible for the large price increases."
Even successive droughts in Australia, calculates the report, have had a marginal impact. Instead, it argues that the EU and US drive for biofuels has had by far the biggest impact on food supply and prices.
Since April, all petrol and diesel in Britain has had to include 2.5% from biofuels. The EU has been considering raising that target to 10% by 2020, but is faced with mounting evidence that that will only push food prices higher.
"Without the increase in biofuels, global wheat and maize stocks would not have declined appreciably and price increases due to other factors would have been moderate," says the report. The basket of food prices examined in the study rose by 140% between 2002 and this February. The report estimates that higher energy and fertiliser prices accounted for an increase of only 15%, while biofuels have been responsible for a 75% jump over that period.
It argues that production of biofuels has distorted food markets in three main ways. First, it has diverted grain away from food for fuel, with over a third of US corn now used to produce ethanol and about half of vegetable oils in the EU going towards the production of biodiesel. Second, farmers have been encouraged to set land aside for biofuel production. Third, it has sparked financial speculation in grains, driving prices up higher.
Other reviews of the food crisis looked at it over a much longer period, or have not linked these three factors, and so arrived at smaller estimates of the impact from biofuels. But the report author, Don Mitchell, is a senior economist at the Bank and has done a detailed, month-by-month analysis of the surge in food prices, which allows much closer examination of the link between biofuels and food supply.
The report points out biofuels derived from sugarcane, which Brazil specializes in, have not had such a dramatic impact.
Supporters of biofuels argue that they are a greener alternative to relying on oil and other fossil fuels, but even that claim has been disputed by some experts, who argue that it does not apply to US production of ethanol from plants.
"It is clear that some biofuels have huge impacts on food prices," said Dr David King, the government's former chief scientific adviser, last night. "All we are doing by supporting these is subsidising higher food prices, while doing nothing to tackle climate change."
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