In this week's meeting of G8 leaders, rising food prices will likely dominate the discussion. Director of economic policy studies Kevin A. Hassett examines fundamental policy changes that are needed to address current threats to the world's poor. Although many developed nations have recently pledged new aid for areas struggling with food shortages, protectionist trade policies continue to inhibit the world’s poorest countries chances of sustainable growth. 

Senior Fellow Kevin A. Hassett

This week, as the Group of Eight countries meet to discuss global problems, there is one sad truth you can put your money on: The G-8 will continue to fiddle while the developing world burns.

Over the past several decades, remarkable progress has been made against poverty around the globe. According to World Bank data, the number of extremely poor people shrank to fewer than a billion in 2004 from about 1.5 billion in 1981.

These gains are attributable to countless positive developments, including the spread of the rule of law, the demise of communism, and technological change. Yet the positive trend may well be about to reverse itself because of soaring food and energy prices.

The question is no longer whether the developed world needs to act urgently. The focus now is on what to do.

As a practical matter, there are short-term and long-term challenges. We need to make sure famine doesn't spread rapidly this year. We also need to enact policy changes that ensure that emergency relief won't be required next year and thereafter.

The wealthy nations have responded well to the former. But the political might of entrenched interest groups seems poised to thwart the real reforms that are needed.

One sign of how bad the short-term scenario is getting was the urgency with which World Bank President Robert Zoellick last week challenged G-8 members to increase their aid to developing nations.

"Extreme Poverty"

Rising food and energy prices are ''threatening to drive over 100 million people into extreme poverty,'' he said. Such a move, he added, would ''reverse the gains made in overcoming poverty over the last seven years.''

The scale of the short-term problem is evident in the avalanche of resources Zoellick believes would be required to avoid a humanitarian nightmare. Fully $10 billion is needed, he argued, to create a short-term safety net.

Why so much? According to the World Bank, food prices have risen 83 percent since 2005, and such an increase makes paying for enough food for subsistence an almost impossible challenge for far too many people with low and stagnant incomes.

As G-8 members gather, it seems certain this increase in short-term aid will be agreed upon. Indeed, much praiseworthy action has already been taken.

At the United Nations Food and Agriculture Organization's Food Security Summit in early June, the U.S. pledged $5 billion over the next two years to aid countries struggling with food shortages. Other top donors during the summit were France, pledging $1.5 billion over the next five years, and the U.K., pledging $590 million.

Fundamental Fix Needed

All together, the UN's Food and Agricultural Organization has gotten a total of $18.36 billion in pledges from donor countries.

But short-term food aid will do little to fix the fundamental problem. Agricultural subsidies and trade barriers in developed nations have historically stifled the growth of the agricultural industry in poor nations. The problem is especially acute in Africa, which would be the natural trading partner of the obscenely protectionist Europeans.

As food prices have soared, you would think poorer nations would benefit, as they tend to have the land and cheap labor that would favor specialization in agriculture. But such specialization has never occurred, largely, economists agree, because of protectionist policies in the developed world.

Untradeable Goods

One study by the Institute of Economic Affairs in Britain found that European Union agricultural policies have reduced African exports of milk products by more than 90 percent, livestock by almost 70 percent, meat by almost 60 percent, non-grain crops by 50 percent and grains by more than 40 percent.

High world food prices will only drop if higher output is achieved. Higher output in developing countries is of little value if a large share of the crop is essentially untradeable.

Higher prices should stimulate a tidal wave of investment, yet poor countries are cash-starved by definition. If the developed world announced today it would suspend all trade barriers (and end its own unnecessary subsidies) for agricultural products, then capital would flow to the developing world with unprecedented speed and force.

And by next year, you could be sure prices would be lower, and output higher.

But such a move has zero chance of taking place. Entrenched agricultural interests, especially in Europe and the U.S., are far too powerful. There have been many attempts to do something about this well-known problem for decades, including the latest so-called Doha round of multilateral trade negotiations, which seem to be sputtering to an end. They have all failed.

Too Inconvenient

So as the G-8 meets to discuss the food crisis, you can expect much self-congratulation over the aid that will be promised. But the tough choices and difficult policy changes that are necessary to address the long-term challenges will once again be ignored.

It's just too inconvenient for the rich nations to wean themselves from shameful and morally indefensible agricultural policies.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.