food prices

China’s economic outlook and policy implications: normalization

(Available in Chinese)

This is the first blog post I write after revisiting China’s recent economic developments, the outlook, and policy implications as part of writing our latest China Quarterly Update. After this general overview I will in a few days write one on some interesting medium term trends on relative prices and the relative importance of external trade in China’s economy (they are also discussed in the Quarterly).

The term “normalization” has been used a lot lately in relation to the composition of growth and macroeconomic policy stance, also in China. But it is hard to avoid it. During 2010, China’s composition of growth started to “normalize”—as in look like it typically does—after the spectacular developments in 2009, when a massive government-led domestic demand surge offset a huge contraction in exports. Later in 2010, the macroeconomic policy stance also started to “normalize”. I guess many of us use the word “normalization” to describe or prescribe a macro policy stance that would be in line with the “normalized” economic outlook, as opposed to a particularly tight stance.

Higher prices have been making headlines in Thailand. Although wages and farm incomes are up, so are the prices of eggs, milk and fried rice. I am definitely feeling the pinch: the price of my favorite beverage—coconut water—has surged following a beetle infestation.

As prices go up, so does the pressure on the government to reign in the spiraling cost of living. But as we discussed in the recently released Thailand Economic Monitor - April 2011, the current inflation challenge is especially tough to tackle.

China’s food prices – why have they trended up and what lies ahead?

(Available in Chinese)

Food prices have received a lot of attention recently. Understandably, much of the attention is on recent developments and short term prospects. But in this blog post I try to look back at some longer term trends, in order to look further ahead.

Since the early 2000s, food related prices have trended up (Figure 1). The deflator of agricultural value added has risen 8% per year on average since 2000, after falling during the second half of the 1990s. Producer Price Index (PPI) food prices (factory gate) have risen much less because prices of other inputs into the food processing industry have gone up less and rapid productivity growth in food processing has dampened the transmission of higher raw food prices.

The recent rise in China’s inflation has grabbed attention of the public and policymakers alike. Consumer price inflation rose to 5.1% in November. This is higher than we are used to in China, although it is modest in an emerging market perspective. To determine the best policy response to the rise in inflation it is important to know its cause and how much inflation we should expect in the coming 12 months. It is also good to decide what an acceptable rate of inflation is for a country like China.

Remember the food and fuel crisis that preceded the global economic and financial meltdown? Many in the advanced economies have long forgotten it; people in developing countries have very vivid memories. Are we about to relive the crisis?

As China’s economy seems to be recovering, many people here have expressed concerns about inflation. I was able to air my views on the subject in an Op-Ed in China’s main English language newspaper, the China Daily, together with two other experts.

A little more than a month ago, the UN's Food and Agriculture Organization (FAO) introduced a database tool and a press release highlighting a rather disconcerting trend. As the global economic crisis worsened, food prices have fallen at an international level. But, surprisingly, the cost of food has not dropped at the same rate, or at all, in poor developing countries, according the FAO.

The new online tool allows for anyone to easily keep track of food prices in 55 developing countries, comparing the data on both domestic and international levels and tracking change over time. In East Asia, the tool includes data from China, Mongolia, Philippines, Thailand and Vietnam.

I am struck that the release of this data seems to be the first time I’ve heard of this trend. And apparently, even the experts aren't sure what is causing food prices to stay high for those who can least afford it. On his blog, Oxfam’s Duncan Green quoted FAO's Henri Josserand:

"The reasons for this 'stickiness' are not fully understood at this time. We hypothesize that there are several factors, possibly interacting in complex way. So far, we have not found any set of explanatory variables that apply to the whole sample. Actually, we are pretty sure that understanding the reasons will require in-depth analysis at the national or regional levels."

FAO says it hopes the database will provide information for "policy and decision-makers in agricultural production and trade, development and also humanitarian work." Hopefully, this database will help bring attention to high prices and food shortages in the places that can least afford them.

A rice seller in one of Cambodia's markets. The price of rice, a staple food for Cambodians, has doubled between July 2007 and July 2008.

Last week, I attended a very interesting seminar by the Cambodia Development Research Institute (CDRI). They presented the result of their recent study on the impact of high food prices (which the World Bank and several others financed). I found the results, presented by CDRI’s Chan Sophal, very interesting, showing the complexity of the question.

The simple reaction is that higher price of food is bad for the poor. CDRI is able to confirm some of this by tracking prices (the price of rice doubled between July 2007 and July 2008) and reminding us that food accounts for two thirds of consumption for a poor family. And there will be little substitution effect to other goods (even within food, most of the caloric intake comes from rice, also very difficult to replace–although CDRI shows that Cambodians in part shifted to lower quality rice to make up for the higher price).