Does a country need to be a big food importer to be impacted by international prices?

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ImageHigh food prices on the international markets are getting a lot of attention and are leading to different types of policy action in different countries. Discussions on the impact of international commodity prices on domestic prices often look at how much food countries import. The reasoning is that if countries are significant importers of food, domestic food prices are affected a lot by international prices, and if they are not significant importers, the impact of international prices should be limited.

In recent months I have come across several of these discussions. The most recent one was yesterday, in the Lex column in the Financial Times. Writing about the appreciation of the China’s Renminbi, Lex discusses the view of many, including we at the World Bank, that inflation concerns have strengthened the case for appreciation of the RMB. “But this belief, predicated in large part on China’s resurgent inflation, misses a key point. Consumer prices rose nearly 9 per cent year on year in February, largely as a result of rising food prices. A stronger currency would, however, do little to make food cheaper. China is largely self-sufficient in food, which accounts for just above 1 per cent of imports.“

I don’t agree with Lex. In my view, as long as markets are fairly open, with relatively low tariffs or other barriers, and infrastructure and entrepreneurialism is decent, countries’ food prices are strongly influenced by international prices. Indeed, if we expect oil prices to affect all countries with open energy markets, why would we not expect the same for international food prices? As shown in the figure below, China’s food prices are influenced considerably by international food prices, particularly since the integration and opening up of China’s markets upon WTO entry:


In late 2007, a China specific basket of food on the international markets was over 30 % more expensive than a year ago in US dollar terms. Because of the strengthening of the RMB against the dollar, this international price rise was less at about 25 % in RMB terms. China’s domestic food prices—the CPI component—were increasing at around 20 % year on year at that time. I would argue there is strong enough evidence that the appreciation of the RMB against the dollar has helped containing food prices.

This is in China, a country with good infrastructure and enough enterpreneurial firms that want to arbitrage between local and foreign markets. At first sight, I see similar price developments in many other countries, but I don’t know enough about them. Are there countries with open agricultural markets that do not see domestic food prices picking up?


Louis Kuijs

Macroeconomy - China

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