Understanding the Impact of High Food Prices in Latin America

Since the late 1980s, almost all Latin American countries have adopted a series of far-reaching economic reforms, especially trade, financial, and capital account liberalization. Increased economic openness has gone hand in hand with large financial inflows—particularly in the first half of the 1990s—and has brought new sources of economic growth. As a result, economies grew, inflation declined, and there was a big surge in foreign cap- ital inflows. Although overall growth slowed after 1995, the region has expe- rienced strong growth in the past five years, the best sustained performance since the 1970s. With the exception of a handful of countries, this economic growth has been accompanied by relatively modest inflation. Despite these positive results, virtually all Latin American countries share similar problems: uneven economic growth, unacceptably high poverty and malnutrition rates, and lagging agricultural growth. More than 60 percent of the region’s poor live in rural areas, where slow economic growth, unequal distribution of assets, inadequate public investment and public services, and vulnerability to natural and economic shocks are major policy issues. The 2007–08 food price crisis exacerbated these problems. Prior to the cri- sis, the region was considered relatively stable and capable of absorbing exter- nal shocks, thanks to its higher foreign exchange liquidity; decreased public sector and external borrowing needs; exchange rate flexibility; lower exposure to currency, interest rate, and rollover risks in public sector debt portfolios; and improved access to local-currency loans. Nevertheless, the food price cri- sis severely affected most of the Latin American countries in terms of inflation, especially food inflation.