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88 CHAPTER 4


For non-oil exporting developing countries, the effects were especially severe. Foreign reserves were increasingly eaten up by oil, food, and fertil- izer imports, with the depreciation of the U.S. dollar providing only a limited buffer. Rising imports costs were also exacerbated by Organization for Eco- nomic Cooperation and Development (OECD) policies. Real volumes of food aid—especially U.S. aid—had declined markedly, because rising grain prices meant that the cost of procuring a given volume of food aid had essentially doubled. In 1974 U.S. food aid was less than 40 percent of the average vol- ume provided in the late 1960s and early 1970s (Grant 1975). Rising fertilizer prices were also exacerbated by implicit export bans in OECD countries (Ward 1974; Grant 1975) and by large nonfarm usage of fertilizers. Even well after the 1975 World Food Conference—which tried to convince wealthy countries to divert fertilizer exports to developing countries—fertilizer sellers still dis- criminated toward selling to American buyers, and the U.S. and other OECD governments did not attempt to reduce nonessential uses of food and fertil- izers. Small farmers in developing countries that had adopted Green Revolu- tion strategies suffered especially severely, because their strategies centered on the production of fertilizer-intensive wheat and rice varieties and they were dependent on small retail outlets at the very end of the fertilizer supply- distribution chain. Shortages of fertilizer and oil were arguably the primary cause of the poor 1974 winter wheat harvest in India, which only totaled 23 million tons in contrast to a projected yield of 30 million tons (Grant 1975).


Similarities between the 1972–74 and 2008 Crises


Table 4.1 compares the principal causes of each crisis. The three most impor- tant factors in both cases were rising oil prices, the associated decline of the U.S. dollar, and large demand shocks. As noted above, the oil shock was actu- ally larger in the early 1970s, although oil prices were increasing from a low base. Abbott, Hurt, and Tyner (2008) find that real rest-of-the-world prices changed about three-quarters as much as nominal U.S. dollar prices in 1972– 74, which is less than in the current crisis but still significant. As for demand shocks, which fall more in the purview of agricultural policies than of price movements of oil and U.S. dollars, these were from different sources in each crisis, but the shocks in question were of remarkably similar magnitudes. In 1972–74 the demand shock came from the USSR, which, following its own crop failure that year, purchased more than one-quarter of U.S. wheat production in 1972. In 2005–08 the primary demand shock came from the U.S. biofuels industry, which also absorbed one-quarter of U.S. production in 2007, this time in maize. Consistent with this story is that the 1972–74 crisis was char- acterized by large price increases in wheat rather than in maize, whereas the reverse was true of the 2008 crisis.


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