CONSEQUENCES OF THE CRISIS 77


production during this period by 16.8 percent for maize, 12.4 percent for rice, and 8.5 percent for wheat. Particularly strong was the supply response in China and India, both of which increased their public agricultural spending by about 20–30 percent in 2008. As might be expected, the response from major exporting nations was even stronger, especially for maize and wheat production, which increased by 25–30 percent. Production increases in rice were more limited, which is consistent with the hypothesis that smallholders (who dominate rice production) have less scope to respond. However, other factors could account for the sometimes sluggish response of rice. First, the increase in rice prices arrived late in the crisis and the bubble burst quickly. Rice producers may have rationally identified the rice spike as a short-term bubble that would soon collapse. Second, as discussed above, export restrictions were highly prevalent in rice-producing countries, and most Asian countries insulate domestic markets from international price movements. Thus in most rice-producing countries the incentives to increase production were limited by government policies and not necessarily by lack of responsiveness from smallholders. Third, Asian rice producers are much more dependent on fertilizers than smallholders from other regions. In coun- tries where fertilizers are highly subsidized and/or their export is restricted so that fertilizer prices do not rise much (such as in China and India), supply response in rice production was quite high (about 10 percent for both coun- tries) despite the modest increase in the price of rice. In other countries with fertilizer subsidies, supply response was also significant. In Malawi, maize production increased by 50 percent. In Nigeria maize and rice production increased by 17.9 percent and 30.7 percent, respectively. Ethiopia, where food inflation has been high for several years, is also estimated to have expe- rienced rapid growth in maize production in 2008/09 (52.7 percent). Of course, with rising fertilizer prices on international markets, domestic subsidies have become very expensive. Gulati and Dutta (2009) report that India’s fertilizer subsidies have almost doubled from 2000–01 to 2006–07 and will most likely double again in 2008–09. In Malawi direct program costs to govern- ment and donors were just less than US$91 million before the food crisis, total government expenditure was 25 percent over budget, and subsidies comprised 40 percent of the Ministry of Agriculture budget and more than 5 percent of the national budget (Dorward et al. 2009). With the rise in fertilizer prices, fer- tilizer subsidies constitute a significant threat to the fiscal balances of the government. In Nigeria fertilizer subsidies made up 50–70 percent of federal government expenditure during 2000–05, so rising costs were once again a sig- nificant drain on the public coffers (Mogues et al. 2008), although Nigeria is of course much better off fiscally because of the oil boom.


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