Foreign exchange, food security, and financial crises in Indonesia and the Philippines

I. Introduction

Few economic events of the past fifty years were more dramatic than the Asian financial crisis of 1997-98. Economic and political circumstances in Thailand, South Korea, Malaysia, Indonesia, and the Philippines produced severe currency depreciation and recession previously unknown to the region. While the causes and consequences of the crisis are thoroughly addressed elsewhere (for example, Woo, Carleton, and Rosario 2000; Pesenti and Tille 2000; Kamin 1999), a largely unexplored issue is the impact on food security. On the one hand, depreciation and recession make it difficult for low-income households to obtain adequate food supplies (Rosegrant and Ringler 1998; Barichello 1998; Booth 1998; Mya Than 2001). Depreciation also increases the relative price of traded goods, including most agricultural commodities, so that the crisis countries should experience increases in rural income, food production, and long-term food security (Barichello 1998; Booth 1998).

A third potential issue is unique to food-importing countries. During a financial crisis, capital flight and financial contagion cause the capital account to become negative and require an offsetting surplus in the current account, assuming foreign exchange reserves are negligible. In principle, this adjustment occurs via increased export revenues or decreased import expenditures, though Higgins and Klitgaard (2000) confirm that import expenditures and import volume decreased substantially during the Asian financial crisis. If staple food imports also decrease, available food supplies would fall and harm short-run food security. A similar scenario occurs when price or production shocks increase the cost of food imports compared with available foreign exchange supplies.

This article explores the connection between foreign exchange supplies, food security, and the financial crisis of 1997-98 in Indonesia and the Philippines. Of all the Asian crisis countries, Indonesia and the Philippines are examined separately because of their low per capita incomes and vulnerability to short- and long-term food insecurity. Both countries are also highly dependent on cereal consumption and are net cereal importers, with food grains comprising the bulk of cereal imports. Section II of the article reviews prior studies regarding balance of payments shocks and food security. Section III constructs a working definition of food security and examines the specific conditions in Indonesia and the Philippines. The methodology, data, and regression model are described in Section IV, followed by estimation results in Section V. The article concludes with implications for food security and balance of payments policies.

II. Background

Previous studies of foreign exchange supplies and food security primarily address compensatory financing issues. Compensatory financing allows countries experiencing short-term food shortages to obtain foreign exchange for food imports at favourable terms from the International Monetary Fund (IMF) or other institutions. Valdes and Konandreas (1981) show that countries not normally dependent on food imports must occasionally use a significant share of their export revenues for food imports during price or production shocks. Goreux (1981) explains how the IMF's compensatory scheme for stabilizing export revenues from the 1970s could be modified to accommodate cereal imports during consumption shortfalls. (1) Huddleston et al. (1984) examine the IMF's Compensatory and Contingency Financing Facility (CCFF) and find potential for offsetting temporary and sudden food import shocks. Others are less supportive of the CCFF (Green 1983; Green and Kirkpatrick 1982; Kumar 1989; Diakosavvas and Green 1998), arguing that it gives too much attention to stabilizing export revenue and insufficient attention to food consumption.

An implicit question in the above studies is whether foreign exchange supplies actually constrain food imports. Hemphill (1974) finds that the total quantity of imports in developing countries greatly depends on foreign exchange supplies. Huddleston et al. (1984) compare the import cost of stabilizing food consumption to foreign exchange supplies in eighteen developing countries. They explain that when this ratio is high, food security is threatened for countries lacking access to international capital markets. Both Kirkpatrick (1985) and Green and Kirkpatrick (1982) argue how price or production shocks present an immediate need for food imports which may not be feasible when foreign exchange supplies are low. Kirkpatrick and Diakosavvas (1986) examine this hypothesis and find that foreign exchange supplies affected food consumption stability in nearly all of sub-Saharan Africa between 1965 and 1983. Similarly, Diakosavvas (1989) shows evidence that foreign exchange availability was one of many factors which affected food insecurity in forty-nine developing countries from 1966-86. This study should be considered an extension of Kirkpatrick and Diakosavvas (1986), with similar methods applied to Indonesia and Philippines. Their methods are easily modified to test whether the recent financial crisis affected the relationship between foreign exchange supplies and food security.

Open Security Exchange formed

A new industry partnership is trying to formalise the links between physical and IT security in an effort to provide companies with more rounded protection.

The Open Security Exchange is a partnership of IT security companies and more traditional vendors such as smartcard and fire alarm manufacturers, including Computer Associates, Gemplus, HID, and Tyco Fire and Securities Software House.
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The partnership is looking for more members to become involved. BAE and Pinkerton have already signed up, and a meeting of a further 35 potential partners has taken place.

"We want partners who bring resources to the table," said Simon Perry, vice president of security strategy for Computer Associates.

"We're after active partners and are screening out anyone who's just in this to make marketing noise. Partners will be developing the interoperability specifications and best practice documents. They must also commit to producing specifications-compliant solutions."

In the US, and increasingly in Europe, companies are appointing chief security officers with responsibility for the whole enterprise, Perry explained. However, the majority of these come from an IT background and have little or no experience with physical security issues.

In a simultaneous announcement Computer Associates and Pinkerton have formed a strategic alliance to develop joint physical and IT security services. According to Pinkerton research barely a third of companies have formal procedures for such systems.

The proposed Open Security Exchange standard will focus on three areas of interaction. The ability to correlate the reporting of IT and physical security systems for audit purposes will be built in. This will be tied to increasing the effectiveness of physical security ID, like smartcards and security tokens.

Finally the organisation is looking to build improved access control to both types of systems to manage the extent of employee access.

But Neil Barrett, technical director at security specialist IRM, sounded a note of scepticism. "I'm undecided as to the need for this," he said.

"There are lots of security organisations, and operations like www.humanfirewall.org have a pretty good record in this area. That being said, the solutions-based approach can be useful - but we'll have to see how this group develops."