Luis Alberto Moreno, Guest Writer

Luis Alberto Moreno, president of the Inter-American Deve-lopment Bank

As families in Latin America and the Caribbean see a growing slice of their income disappear at the grocery store, the region risks erasing a whole decade worth of social progress.

Food budgets are being hit hard, with rice doubling in price between January 2006 and March 2008 and wheat rising to 163 per cent.

The full impact will depend on national patterns of imports and exports and external factors like increased demand in Asia and crop subsidies in rich countries.

But without any mitigating measures, some 26 million individuals could fall back into extreme poverty, according to estimates by the Inter-American Development Bank.

Relief programmes

Life would become even harder for the 71 million Latin Americans already below the poverty line.

The region's governments are rushing to announce programmes that offer relief to consumers, and in this anxious environment almost any measure is well received.

But the hard truth is that many of the most popular recipes for fighting food inflation could leave a bitter aftertaste.

Today, some of the region's grain producing nations, for example, are banning exports or raising export taxes in a bid to keep domestic supplies high and prices low.

Other governments are imposing price controls and trying to stamp out speculation and hoarding. Several countries are spending billions in direct subsidies for food and other essentials like water and electricity.

Such measures will almost certainly backfire over time. Price controls and excessive export taxes punish farmers and discourage production when it is most needed.

Food subsidies

Direct food subsidies often benefit middle- and upper-class consumers. And government intervention in production or distribution chains tends to decrease efficiency and foster corruption.

The good news is that Latin American governments have an opportunity to pioneer a smarter response to the food crisis - one that offers both short- and long-term advantages.

Over the last 15 years, Latin America has become a leader in the development of 'conditional cash transfer' or CCT programmes.

These offer modest regular payments to low-income families. In return, parents must ensure their children get proper schooling and medical care.

Pathbreaking programmes

Following the example of pathbreaking programmes like Oportunidades in Mexico and Bolsa Familia in Brasil, nearly a dozen Latin American countries have in recent years adopted conditional cash-transfer programmes as a central component of their poverty-alleviation strategy.

Studies show that cash transfers increase school attendance, improve nutrition and prevent some diseases at a modest cost to taxpayers. Indeed, CCTs are now being studied and replicated around the world.

New York Mayor Michael Bloomberg launched a similar programme known as 'Opportunity NYC'.

Building on this success, governments should now use their existing cash transfer programmes to increase payments to families that are hardest hit by food inflation.

This approach has several advantages over other types of subsidies.

CCTs directly improve the purchasing power of the poor, instead of unintentionally bene-fiting wealthier consumers.

By enabling people to buy more food, such programmes will also encourage additional food produc-tion instead of penalising farmers.

Market forces - and not govern-ments - will identify demand for specific crops.

Empirical studies have shown that the first effect of cash transfers to the poor is increased expenditure on food and more diverse diets.

Infants and small children are more likely to get a balanced nutrition that improves their long-term prospects.

Finally, unlike other subsidies, conditional cash programmes do not create new interest groups.

When a family exceeds pre-defined income and welfare parameters, they 'graduate' from the programme.

This way, CCTs provide focused and flexible assistance to those who actually need it.

Costa Rica, El Salvador and Mexico have already taken steps to use their CCT programmes to provide food relief, and several other countries are studying similar alternatives.

Cash transfer programmes may not be a feasible solution for extremely poor countries like Haiti because they would consume too large a share of the budget and could jeopardise economic stability.

The poorest countries, in Latin America and elsewhere, will continue to need direct help from donor governments.

Those donors could also lead by example. Instead of flooding their booming farm sectors with subsidies that further distort the international food market, they could opt for financial aid that helps the neediest and encourages local production.

Luis Alberto Moreno is president of the Inter-American Development Bank. Feedback to business@gleanerjm.com.