IICA: European crisis to have greater effect on net food importing countries in the Americas

San José, Costa Rica, November 4, 2011 (IICA). The heavy indebtedness of several European countries and their inability to honor these debts, in addition to the weak economic growth in the United States, could lead to a recession that would have repercussions in Latin America and the Caribbean in the short term, especially in net food exporting countries, with the impact being even greater in net food importing countries, in the medium and long terms.

This opinion was stated in a technical note distributed by the Director General of the Inter-American Institute for Cooperation on Agriculture (IICA), Victor M. Villalobos, to agricultural authorities throughout the hemisphere.

The note reads “Not all countries of the region have the same capacity to respond to a crisis; some are more vulnerable than others because of their heavy dependence on food and energy imports, low monetary reserves and high levels of indebtedness and fiscal deficit.”

According to the note, in the last two years the countries of Latin America and the Caribbean have enjoyed a strong recovery following the crisis of 2008, thanks to capital flows, record prices for commodity exports, sound policies and steady growth in domestic credit, all of which resulted in 6% economic growth in 2010, which, according to the International Monetary Fund, is expected to be 4.5% in 2011.

The note adds “It is reasonable to expect that the slowdown in the world economy, and a likely recession, will make it difficult for the countries of the region to maintain the current level of economic growth; indeed, it may below 4.5%.”

There are five channels of transmission through which the heavy indebtedness of several European countries and weak economic growth in the United States could impact several member states of IICA:

• Decline in imports in the developed countries; 
• Low interest rates, which discourage production, pushing the prices of agricultural goods upwards; 
• Swings in the dollar exchange rate, which cause variations in international prices and the introduction of speculative capital; 
• Oil prices and their effect on other raw materials; 
• A global context characterized by risk and uncertainty.

The situation in Europe and the United States also creates challenges and opportunities for agriculture in Latin America and the Caribbean, according to the note, which must be addressed with effective, comprehensive policies. These challenges are:

• To avoid trade distortions, which can increase domestic prices and affect food and nutritional security in the countries. 
• To prevent increases in the international prices of food from increasing inflation at the national level. 
• To strengthen domestic markets in light of the possible decline in exports to Europe and the United States. 
• To address the imperfections in the market that prevent lower international oil prices from being transmitted to other products and inputs. 
• To respond promptly to declines in agricultural demand in other nations, such as China, and promote intraregional trade. 
• To encourage domestic production of food, in particular in those net importing countries in a vulnerable macroeconomic position.

“It is time to take advantage of the strengths of the region, designing polices aimed at lowering transaction costs, promoting more efficient and sustainable use of natural resources, improving infrastructure and investing in human capital and in innovation, which are more long-term proposals, to enable agriculture to contribute to food security and efforts to reduce poverty in the hemisphere,” said Villalobos.

For more information, contact: 
rafael.trejos@iica.int