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How rising food prices are impacting the world

High grain costs, caused by severe drought, are hitting dinner tables from Guatemala to China. But the world has learned valuable lessons since the food shocks of 2008. Will it be enough to prevent social unrest?

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Food prices matter deeply in Indonesia. In 1998, a regional financial crisis sent the economy, employment, and Indonesian currency tumbling, just as an unusually deep El Niño-related drought undercut local agricultural production.

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As a result, the price for food, both imported and locally produced, soared and the number of people living below the poverty line doubled in one year, from 33 million to more than 66 million. The economic decline led to mass protests and rioting in many cities, drove Indonesia's longstanding dictator Suharto from power, and created an economic hole that took the country a decade to climb out of.

Social unrest seems unlikely to break out this time around. Inflation appears to be under control, and the country has emerged as one of the great success stories of the late 20th century. In 1970, more than 60 percent of the country's people lived below the government's official poverty line, and average life expectancy was 45 years. By 1998, only 10 percent of the population was below the poverty line, and life expectancy was 65 years.

"Indonesia is now rich enough that they can screw up the management of the food economy in a way that they couldn't afford to years ago," says Timmer.

Still, the price of tofu matters, and Indonesia is going to suffer some economic consequences this year. Already, in July, the government was forced to scrap a 5 percent import duty on soybeans after tofu and tempeh producers briefly went on strike.

The government is also seeking to revive the role of the Bureau of Logistics (Bulog), a government agency tasked with managing food prices that was a hive of corruption and mismanagement under Mr. Suharto. Most of its functions were phased out in the past decade in favor of market-oriented policies.

In early September, the government announced that Bulog would build 28 new food warehouses, and President Bambang Susilo Yudhoyono has been pushing for the agency to regain its control over the prices of rice, sugar, soybeans, and corn.

While that's alarmed international economists who view price controls as doomed to failure and prone to creating market distortion, it's a signal of how urgently Indonesia, like other countries, is looking for answers to the new era of punishing food prices.

"High prices are not that bad if they gradually increase," says Arif Husain, an economist and senior analyst at the UN's World Food Program. "But what hurts people is excessive price volatility, because what that does is affect people's decision-making ability. This is the third price shock in five years."

Tommy Muhasim is one who is suffering. He runs a small tofu factory in south Jakarta – a simple structure that consists of sheet metal draped over wooden pillars. Inside, young men bend over giant concrete stoves fueled by wood-burning fires.

In all, 14 men work here, toiling two shifts a day. When orders are good, the factory runs from 8 a.m. to late in the evening. Since the price of soybeans has risen, however, orders have declined dramatically.

"For us it's hard to raise the price because we pity the people around here," says Mr. Muhasim, in a room with only six bags of beans waiting to be processed. "Many factories like this one have closed because they can't afford to buy soybeans."

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One region analysts will be watching particularly closely for any signs of new upheaval is the Middle East. A recent study by the New England Complex Systems Institute, a Cambridge, Mass.-based think tank, concluded that food prices are a key indicator of political unrest in the region – as evidenced by the Arab Spring, which was triggered in part by widespread frustration over escalating food costs. The authors worry that continuing upward pressures on foodstuffs will unleash a new round of unrest.

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