Along with an unsettled political situation, increasing acts of violence perpetrated by extremist groups operating from the country’s tribal areas and the quick unraveling of the model of economic growth pursued by the administration of President Pervez Musharraf, Pakistan has received another sharp jolt to its economy.

This was delivered by an unprecedented increase in commodity prices. While the increase in the price of oil has occurred over a relatively long period of time, that of some agricultural commodities was sudden and unexpected. In 2007, the price of wheat rose 77 and rice 16 per cent.

According to a special report by the magazine, The Economist, these were the sharpest increase in agricultural prices in history. In 2008, the rate of increase has accelerated. Since the start of the year, “rice prices have soared 141 per cent; the price of wheat by 25 per cent in one day.”

There is a consensus among experts that the rise in the price of agricultural commodities – not just food grains but of other products as well – was caused mostly by changes in demand, not by decreases in supply. Two factors have been important. Continuing growth of the Chinese economy and an acceleration in the rate of growth of the Indian economy have brought about significant changes in the pattern of demand in these two countries.

As people become more prosperous they start consuming more meat and other livestock products. It takes a great deal of food grain to produce meat and milk and the demand for fodder increases. The other influence on the rise in prices is the generous subsidies provided by Europe and the United States to the manufactures of bio-fuel.

While the increase in the price of oil may have turned the production of bio-fuels economical, it is by no means certain that running automobiles on these fuels benefits the environment. Some scientists believe that it takes more energy to produce bio-fuels than the energy generated by them.

Because of these changes, “food prices have undergone a paradigm shift and will not drop back to pre-crisis levels for at least 10 years, putting long-term pressure on governments facing the food crises.” This conclusion was reached by the Organisation for Economic Cooperation and Development (OECD), and the United Nation’s Food and Agriculture Organizasion (FAO), in their joint report, Agricultural Outlook, 2008 – 2017.

Compared with average prices for 2006-07, the report forecast, that in 2017 the price of wheat, adjusted for global inflation, will be two per cent higher and rice one per cent higher. What is especially worrying for Pakistan is the forecast that according to which prices of oil seed – a major import for the country – will be up by 33 per cent. Experts also agree that this time around, the increase in prices will not be reversed. (See the table.)

“As opposed to other instance of sharp increases in agricultural commodity prices that have rapidly, dissipated, we could be facing higher price for some time. Without exception, average real prices are likely to remain above those observed during 1985-2007,” says the FAO/OECD report.

The recent surge in food prices has ended a period of 30 years in which food (and also other agricultural commodities) were cheap, farming was subsidised in rich countries and international food markets were wildly out of shape. There is, in other words, a paradigm shift; an enduring change in sectoral terms of trade in favour of agriculture. This poses two important questions: how to benefit the farming community in order to achieve the potential agriculture has in a country such as Pakistan? And how to protect the poor who spend a significant amount of their small disposal incomes on food?

How soon would the farmers in the developing world respond to the change in their terms of trade? This won’t happen quickly: farmers always take a while to respond. But in the relatively slow reaction by the farming community, the governments have also played a part. They have done that mostly for political reasons. Of 58 countries whose agriculture price policies are followed by the World Bank, 48 have imposed price controls, or provided consumer subsidies, or adopted export restrictions, or made adjustments in import and export tariffs. The state in the developing world could play a role in benefiting from the dramatic adjustments in food prices of recent years.

It is not surprising that the agriculture systems in rich countries respond much more rapidly to price changes than those in the developing world. Governments in developed economies have been much more willing to help the farmers – in many they have political power that out weighs the proportion of their combined income in the national economy by a wide margin – while those in poor countries are inclined to protect the urban poor.

Given these policy biases, extra food supplies needed to balance the sharp increase in demand may come from the farmers in America, Europe and other big agricultural producers. This is already happening. America’s winter wheat plantings in 2007 were up by four per cent and the 2008 spring area sown is likely to be even more.

The FAO forecasts that the wheat harvest in the European Union will rise by 13 per cent in 2008. The new supply-demand equilibrium may end up resembling the old one, with world food availability depending on a small number of suppliers in developed countries and continuing distortions in food trade such as export subsidies and dumping.

Ideally the most significant part of the additional supply needed should come from the world’s 450 million smallholders. All of these are in the developing world; most of them in South Asia. Such a supply responses is desirable for a number of reasons.

First, it will help to alleviate poverty. Some 75 per cent of those who subsist on incomes of less $1 a day depend on smallholder farming. Increasing the productivity of these farms would increase the income of the poor and help them to move out of poverty.

Second, it would be economically efficient in terms of the return on investment. As The Economist put it in its special report cited above, “it would be easier to boost grain yields in Africa from two tons per hectare to four than it would be to raise yields in Europe from eight tons to ten. The opportunities are greater and the law of diminishing returns has not set in.”

Third, a strategy focused on obtaining a supply response from smallholder farming would also be environmentally friendly. The smallholders manage a large proportion of world’s water and vegetation cover. Looking after both will have enormously beneficial consequences form the perspective of environment.

But will such a response materialise? “In a perfect world the response to higher prices is higher output. In the real world, however, this isn’t always the case,” says a recent report issued by the International Food Policy Research Institute, (IFPRI). Farming in the developing world is full of market failures and does not always respond to prices signals. Governments often intervene with unhappy results.

The consequence of many public policies, including those adopted by Pakistan in the past, was that agricultural productivity and output languished while the poor continued to pay high prices for food. In the paradigm shift, policymakers in Pakistan have an opportunity to increase agricultural output, alleviate rural poverty while protecting the urban poor. But that will need a complete overhaul in the government’s approach to the development of agriculture.