[OPE-L] IMF explains about rising food prices

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Sat Dec 08 2007 - 20:26:43 EST

IMF chief economist Simon Johnson has a little homily on food prices:

"Food is a relatively small part of what people consume in most advanced economies-about 10-15 percent on average, and some of that relates to processing and distribution rather than the cost of the raw material-and is therefore a small part of the consumer price index. Food is a much larger component of the consumer price index in many poorer countries. For example, in China and other emerging markets, food is about 30 percent of what consumers buy, and, in many low-income developing countries, it is 50 percent or more. This means that the same global increase in the prices of corn, wheat, milk, and meat immediately becomes higher inflation in poorer countries.
Still, the implication is that monetary policy in middle-income and developing countries will need to be tighter-with higher interest rates-than it would otherwise be (of course, there may also be non-market-based policies, such as price controls, that lead to distortions). This will tend to increase the interest rate differential between poorer and richer countries, which are tending toward lowering interest rates. This will, in turn, tend to increase the so-called global carry trade, in which people borrow in a currency with a relatively lower interest rate (for example, yen) and invest in a currency with a relatively higher interest rate (for example, developing country currencies).
There's nothing wrong with capital flowing from rich to poor countries-in fact, if it happens in the right form and with deliberate speed, it can definitely help development. But the IMF's work on financial globalization emphasizes a very important health warning: if you get too much capital, too fast, and in too footloose a fashion, there can be serious consequences for your economic stability and growth.
The really bad news is for poor people in urban areas. Quite aside from considerations of macroeconomic policy, the impact of high food prices on these people is straightforward and downright painful. They need to pay more for what they eat. With population growth continuing in many poorer countries, rising food prices will put increasing pressure on the budgets of the very poorest." http://www.imf.org/external/pubs/ft/fandd/2007/12/straight.htm

The first problem with this IMF analysis is that the "average" expenditure of food in "advanced economies" is a grand average of all households and all income earners; poor people in rich countries generally spend a larger percentage of their disposable income on food, and poor people on average have larger families, but this is not captured in the CPI grand averages. It is however discernible even in statistical averages for the food-rich, eat-out US. 

According to the US CES brackets, a 2006 household spending an average $20,709 a year committed an average 14.7% to food purchases (40.8% away from home), while a household spending an average $82,294 a year committed an average 11.3% to food purchases (48% away from home). I should add here however that the wealthiest US households spend on average three times as much money on food as the poorest households do (expensive restaurants, quality foods etc.). If the wealthiest households adopted the dietary habits of the poorest US households, they'd be spending only 3.7% of their total annual household expenditure, on average ftp://ftp.bls.gov/pub/special.requests/ce/standard/2006/income.txt

The second problem is that if the "carry trade" favours poor countries because of higher interest rates, this does not mean at all that the foreign capital will be invested there in longterm job-creating production that generates income for the local population. The foreign money is there in the banks of the poor country, mainly for the shortterm gain to be had from the interest rate differential. Indeed, the hypothesized higher interest rates in poor countries would, precisely, tend to be a disincentive for such productive investment, simply because the cost of investment capital rises. It's not for nothing that investors get the jitters of even the hint of a slight increase in interest rates, in rich countries. Why should the story be any different in poor countries? 

Finally, if, as a result of strong rises in food prices, political and social tensions increase in poor countries, the "carry trade" will not necessarily place large funds in poor countries, because their safety may not be guaranteed in a politically volatile or unstable situation, in which a currency could be suddenly devalued. All very well to chase higher interest rates, but if the currency is suddenly worth a lot less, you're not ahead in the deal. So then if you do take the risk, it would be more likely in the form of a shortterm placement - but insofar as the banker in the poor country is at all responsible, he will not use much of the hypothetical additional funds available through this to finance longterm local investments, since the foreign money could be withdrawn at short notice.

From an ecological point of view, rising food prices aren't good news, because it means that poor people will try to survive and feed themselves by any means necessary, whatever anybody may say about the environment, global warming etc. You can "think green" till you are blue in the face, but these people will rip into anything to survive.

FAO comments that: "For the group of Low-Income Food-Deficit countries (LIFDCs), 2007 cereal production is forecast to increase only marginally... if the largest countries, China and India, are excluded, overall cereal output for the remaining countries is expected to register a significant decline. Together with an anticipated reduction in quantities imported by these countries in 2007/08, this will lead to lower per caput cereal food and feed consumption. Despite the smaller volumes to be imported from world markets, the cereal import bill of LIFDCs will, however, increase sharply for the second consecutive year due to higher prices and freight rates... 37 countries worldwide are currently facing food crises. http://www.fao.org/newsroom/en/news/2007/1000723/index.html http://www.fao.org/docrep/010/ah877e/ah877e02.htm

According to FAO, an estimated 850 million people worldwide are deprived of enough food. That's nearly 13% of the world population, or about one in eight people alive on the planet. 

From a Marxist point of view, of course, a structural increase in food prices means a decline in the value of labour-power.


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