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lanacion.com | Economía | Jueves 24 de julio de 2008

FOOD PRICE INFLATION

What’s Causing Global Food Price Inflation?


Mark Thoma | Jul 23, 2008

This research argues that India, China, and speculators are not the cause of the food price explosion, the cause is biofuel support policies. Thus, since the "OECD’s recent report on the economic assessment of biofuel support policies has clearly shown that their effectiveness is disappointingly low," the conclusion is that governments should reconsider their biofuel support policies:

What’s causing global food price inflation?, by Stefan Tangermann, Vox EU: Global food prices have exploded since early 2007, causing major social, political, and macroeconomic disruption in many poor countries and adding to inflationary pressure in the richer parts of the world.[1] Concerns about high food prices have been expressed at the highest political level, including during the recent G8 summit on Hokkaido.

What has caused the explosion of food prices? Several culprits have been blamed.

* Newspapers have cited an internal World Bank document as having found that 75% of the price increase was due to biofuels.
* Several governments and commentators see speculation as a major driving force.
* A widely held view has it that rapidly growing food demand in the emerging economies is pushing up global food prices.

Which contributions have these or other factors made to rising food prices?

New evidence on the causes

The OECD has carefully looked at market developments and analysed the implications of biofuel support policies. The analytical framework used is a large-scale partial equilibrium model of agricultural commodity markets in all major countries and at the international level, with detailed representation of the multitude of policy instruments affecting these markets, including those targeting biofuels.

Results were published recently in the OECD-FAO Agricultural Outlook, a paper on the causes and consequences of rising food prices, and a report on the economic assessment of biofuel support policies. The evidence is pretty clear.

It’s not China’s and India’s demand

Food demand in China, India, and other emerging economies is rising as their incomes grow. However, domestic food production in most of these countries is growing in parallel. China, for example, has been a consistent and growing net exporter of cereals (including rice). The Agricultural Outlook expects China’s net cereals exports to decline only very gradually in the coming decade. For India, the picture is similar, though there was significant variability in its net trade position in the past. In short, growing food demand in the major emerging countries cannot be held responsible for the rise in world market prices for cereals.

Market panic, and more specifically “speculation”, may well have played a role on derivative markets for agricultural commodities. The amount of capital invested and the number of transactions observed in these markets has increased very significantly in recent times. Activity on futures markets may, to some limited extent, have spilled over into spot markets.

No hard evidence that “speculation” boosted the spot price

Yet, there is no hard evidence that “speculation” has added much to the price increase on spot markets. After all, it is only when “speculators” actually buy produce on the spot market that they can drive up the price, and this would have to be reflected in growing stock levels – but stocks appear to have declined throughout the period of rising prices.

A different type of panic, though, has without doubt contributed to food price inflation – the barriers to exports that some food exporting countries have imposed in order to keep domestic food prices under control. Yet, the precise effect that this form of government panic has had on short-term price movements is very difficult to quantify.

OECD analysis clearly shows that two factors external to agriculture and food have had, and will continue to have in the years to come, a significant impact on the rise of global food prices.

* The rapid increase in crude oil prices and energy prices more generally has significantly raised the costs of producing and shipping agricultural products.
* The weak dollar has contributed to driving up dollar-denominated commodity prices in international trade.

But there is also one policy-made ingredient in the story – the high and growing level of support provided to the production and consumption of biofuels.

Policy-made causes: Biofuels

The use of agricultural products, in particular maize, wheat, and vegetable oil, as feedstock for biofuel production has expanded dramatically in recent years. Between 2005 and 2007, i.e. in the period when food prices began to explode, nearly 60% of the growth in global consumption of cereals and vegetable oils was due to biofuels. Global output of cereals and vegetable oil did not decline during that period, but just grew slower than the rapid expansion of use.

In a situation of depleted stocks and very low demand and supply elasticities, this gap between use and output growth has pushed prices up very strongly. As a large part of the use expansion was due to biofuels, there cannot be any doubt that biofuels were a significant element in the rise of food prices. More specifically, in North America and Europe biofuels cannot be produced, and would be very little used, in the absence of government support through subsidies, tax breaks, tariffs, and use mandates. In other words, biofuel support policies have contributed greatly to the rise in global food prices.

Future price developments: High but not this high

With this perspective on what has happened in the recent past, it is clear that some of the factors identified will continue to play an important role in future developments on agricultural markets.

The OECD-FAO Agricultural Outlook expects prices on international agricultural markets will not remain at the extremely elevated level seen in the first half of 2008. However, prices are not expected to fall back to the low levels observed before the price hike either. For the 2008-17 period, average prices for major agricultural products are projected to remain some 10% to 50% higher in real terms than on average over the past ten years.

The contributions that individual factors are expected to make to this higher level of prices are clarified in the Agricultural Outlook through scenario analysis, the results of which are shown in Figure 1. Again it is evident that biofuels will be an important driver of future food prices. In the absence of further growth in biofuels production (not to speak of a decline), international market prices of wheat, maize, and vegetable oil could be some 6%, 12% and 15% lower than projected under baseline assumptions.

Figure 1 World food price projectionsvox72220081.gifSource: OECD-FAO Agricultural Outlook, Chapter 2. It is worth noting that the baseline for these projections does not even include the impacts of more recent biofuels policy initiatives such as the Energy Independence and Security Act of the United States and the European Union’s Directive on Renewable Energy. If the further expansion of biofuels production and use due to these initiatives were included, the impact of biofuels on global agricultural prices would be even higher.ConclusionIn summary, several factors are behind the recent dramatic increase in food prices. But one of them is clearly a result of deliberate policy decisions, i.e. to support the expansion of biofuels production and use. The OECD’s recent report on the economic assessment of biofuel support policies has clearly shown that their effectiveness is disappointingly low, with public support costing between $960 and $1700 per tonne of greenhouse gas emissions saved. In a situation like that, governments have good reasons to reconsider their biofuel support policies if they want to help to calm food prices down.[1] See Esther Duflo on winners and losers from high food prices, Arvind Subramanian on policy responses, and

POLITICA MONETARIA

The dangers of increased transparency in monetary policymaking
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Ellen E. Meade and David Stasavage | Jul 18, 2008

Since the mid-1990s, there has been a trend towards greater transparency in economic policymaking – particularly with respect to monetary policy – and a number of central banks, including Sweden’s Riksbank and Britain’s Bank of England, have adopted a very transparent monetary policy regime known as inflation targeting. The United States does not subscribe to inflation targeting, but the Fed has also become much more transparent about its policymaking and operations over the past 15 years.Economists have argued that greater transparency is beneficial, improving democratic accountability by making it easier to judge whether a central bank is committed to its announced policy and improving policy effectiveness by facilitating the interpretation of policy changes (see the very accessible review of the discussion by Posen 2002).

But greater transparency of central bank policymaking – in which committee deliberations are made more open to the public – may prevent the full and frank discussion needed to make the best decisions. In a recent paper (Meade and Stasavage 2008), we compare discussions of the Fed’s Federal Open Market Committee (FOMC) before and after committee members knew that all statements would eventually be made public. Our empirical results indicate that after 1993, when FOMC participants knew that their deliberations would be made public, they were less likely to challenge then Fed chairman Alan Greenspan. This suggests that greater transparency hindered free deliberation and may have permitted Greenspan's views on interest rates to dominate US policymaking. In the discussion of the current crisis in credit markets, some have suggested that US interest rates were too low for too long.

Closed doors and open minds

Concern about the effects of open deliberations is not new. Speaking about the secrecy rule that prevailed during the US Constitutional Convention of 1787, James Madison emphasised that full publicity would have made members more reluctant to express their true opinions freely. Madison saw secrecy as having been critical to the Convention’s ultimate success.

Fed policymakers expressed similar concerns when, in 1993, the US Congress pressured them to become more open about their decision-making process. At issue was whether the Fed would agree to publish verbatim transcripts from meetings of its Federal Open Market Committee (FOMC). In Congressional testimony, Alan Greenspan argued against publication, saying that the FOMC “could not function effectively if participants had to be concerned that their half-thought-through, but nonetheless potentially valuable, notions would soon be made public” even with a publication lag of five years. Greenspan noted further that the character of the meetings would change with transcript publication, from lively, useful sessions to bland, sterile ones. In the end, the Fed made the change and subsequently decided to make all of its meeting transcripts available. Transcripts of all FOMC meetings and conference calls from 1978 through 2002 are currently available on the Fed’s web site.

In our paper, we look at whether more information provided by the central bank to the public about monetary policy deliberations can affect the deliberation process itself and ultimately stifle useful debate. We employ a theoretical model in which policymakers care both about making the right policy decision and about how they are viewed by the public. We show that it is possible that policymakers could hold back during deliberations for fear of looking uninformed or incompetent if they know that the content of their discussions will eventually be released to the public. If this happens, then monetary policy might be adversely affected. Thus, the benefits of increased transparency would need to be assessed against the resultant damage to the policy process.

Unique aspect of FOMC transcripts: the tapes that weren’t destroyed

Our research employs a unique aspect of the situation and the transcripts themselves to analyse whether the publication of meeting records has affected the Fed’s deliberations. FOMC meetings have been recorded for more than 30 years so that the Fed staff can write meeting minutes after every meeting. (An account of each FOMC meeting has been published in some form following each meeting since 1936, but these published accounts have been short, non-attributed records of meeting discussion.) Policymakers knew about the recording but thought the tapes were destroyed after the minutes were written. Thus, transcripts exist from a time when policymakers did not know that their deliberations would be made public. We compare deliberations before 1993, when Fed officials believed their remarks were private, with deliberations after 1993, when officials knew that all statements would eventually be made public.

In our empirical analysis, we use a dataset collected from the transcripts themselves that codes verbal messages of each meeting participant and characteristics of the participants, including their name, Fed district, years of experience, and whether they are an official voter at the meeting and, if so, whether the official vote cast agreed with the verbal message sent during discussion. (In the Fed system, votes rotate in a fixed fashion for some policymakers, so that only 12 of the 19 officials vote at any given meeting).

Over the time period that we examine (1989-1997), Chairman Greenspan presented his proposal for the setting of the policy interest rate first and then solicited other meeting participants for their views. After all the participants had expressed their opinions, an official vote was taken on the policy proposal. We focus our analysis on the willingness of the meeting participants to express verbal disagreement with Greenspan’s proposed policy before and after 1993.

The empirical results provide clear evidence of a change in the character of FOMC deliberations – policymakers were less likely to express verbal disagreement with Greenspan’s proposal after 1993. This remains the case even after other potential influences on officials’ views, such as a variety of measures of the current economic environment as well as Fed forecasts for inflation, are taken into account.

We tested the robustness of these empirical results using supplementary hypotheses. First, while the publication of transcripts may have affected FOMC deliberations, it should have had no impact on the votes of policymakers because the votes were published both before and after 1993. We tested the votes in our empirical model and found that votes were unaffected by the release of the transcripts. Moreover, a policymaker should have been less likely to switch his view on the policy proposal between the discussion and the vote – for example, verbally disagreeing with the proposal but voting in favour of it – once the transcripts became public. Our empirical results also accord with this.

Conclusions

Our empirical findings are supported by a number of parallel observations about the changing character of FOMC debate since 1993. While before 1993, FOMC discussions were characterised by frequent “off the cuff” remarks and interruptions, since 1993 there has been an increase in prepared statements that may result in less real deliberation. Our results have significant implications for the design of monetary policy institutions, as well as for the operation of committee-based government decision-making more generally.

References

Meade, Ellen E. and David Stasavage (2008). “The Dangers of Increased Transparency in Monetary Policymaking,” Economic Journal April, 695-717.

Posen (2002). “Six Practical Views of Central Bank Transparency”, http://www.iie.com/publications/papers/posen0502.pdf

CHINA, INDIA, WORLD ECONOMY

ndia, China and the World Economy
Nirvikar Singh | Jul 22, 2008

Despite the financial crisis and the associated gloom, I firmly believe that the world economy is on the threshold of a new era. Many people realize this, of course, though from different perspectives: the software developer in the United States feels his job is threatened, the call center employee in India finds a new lifestyle, European and American business schools look to Singapore for greener educational pastures, and third world immigrants make up sizable fractions of the populations of many industrialized countries. Some have argued that globalization is nothing new – that we saw it all a hundred years ago – but today’s low costs of physical transport and (especially) of information transfer will have much deeper impacts than before.
Another new development is the rise of China, which looms large on the world’s radar as a low cost producer of an enormous quantity and variety of manufactured goods. Japan’s rise through the 1980s created plenty of worry in the United States: China is ten times as big and still has a long way to go in its growth. Some researchers have drawn parallels between what is happening now – with China’s export-led growth, the dollar’s role as a reserve currency, and the US current account deficit – and the period of Europe’s spectacular post-war growth, when US external economic policies also supported that process. But that was a recovery – Europe had been economically advanced since the Renaissance. China’s rise will bring about a world economic order that has not been seen for 500 years or more.
India has the potential to be yet another global growth pole. India and China both realize this of course, and the prospects of gains from trade and cooperation have spurred historic moves towards resolving the sources of past political and strategic tensions (and with the glimmer of a hope of extending this change to relations with Pakistan). ‘India’s software and China’s hardware’ is one popularly perceived complementarity. India’s management and China’s labor might be another one, at least in some contexts. With all their differences, one commonality between both countries has been their relative shift from state to market as driver of economic growth. The two countries also have similar concerns about growing economic inequality.
In India, somewhat old-fashioned rhetoric about the links between globalization, the market and inequality still persists, driven by the ‘old left’. Responses based simply on extolling of the virtues of the market for economic growth do nothing to resolve these concerns. At a different level, Gurcharan Das goes back to Aristotle to stress the importance of the middle class, and praises the role of this brash new class in India, while writers such as Pavan Verma (The Great Indian Middle Class) and Pankaj Mishra (Butter Chicken in Ludhiana) are disturbed and even repelled by this class’s lack of social concern. Policy discussion in India often has this flavor of a college debate, with eloquence overriding analysis.
In an important paper, published in 1998 in an obscure economic journal (Keio Economic Studies), Abhirup Sarkar provided an important component of the analytical underpinnings of the kinds of policy approach that India’s current Prime Minister and Finance Minister have articulated in recent years. The essence of the model is as follows. The middle class is distinguished from the rich and the poor not only by their income levels, but what kinds of goods they purchase. These middle class consumption patterns are important in affecting the extent of innovation, and the extent of innovation is what drives growth. Sarkar shows that simple redistribution policies will not break an equilibrium where the economy is stuck in stagnation. Instead, raising enough of the poor to the middle class by improving their productivity is what works. Thus, there is room for the perspective of Milton Friedman as well as Amartya Sen in such an analysis: the market does its work, provided the initial conditions are right. But the easiest or most obvious policies are not necessarily the ones that the government should follow.
Putting the above in concrete terms, policies to improve the human capital of the poor, or, more broadly, their capabilities, are exactly the right ones, if the model is to be a guide. This is precisely where India lags seriously behind China, in areas such as health, nutrition, and education. The policy focus should be squarely on how the government can achieve this better than it has over the last 50 years. Getting the government out of the habit of meddling in all kinds of things where it has no business, or which are lower priorities, would certainly help. Reorganizing government to be more transparent and accountable cannot hurt either.
This is not the end of the story, however. Public goods, such as infrastructure and law and order, matter for private productivity. This is another important role for government (which can easily be added to Sarkar's model, complementing, not replacing, the market. The problem in India is again how to do this efficiently in practice. The middle class has been used to a low level of public goods, and has dealt with government inefficiency through de facto private provision, following the lead of the elite in essentially seceding from participation in the requisite collective action. This has to change in India, else it will end up more like Latin America than East Asia. Latin America has high inequality and a narrow middle class, and governments there have never achieved sustained, broadbased growth.
India can do better, and it is up to the middle class to make it happen, because it wields disproportionate influence on government policy, and sets expectations for government performance. A few years ago, Karnataka’s chief minister claimed that, “Bangalore cannot become Singapore.” But I think it can, if the government does its job well. And India can be China, or rather, China plus political freedom. India’s middle class, as it swells in numbers through market-driven growth, has to shoulder the responsibility to make it happen. For India's middle class, my slogan is: L’état, c’est vous.

FMI: PERU A BAJAR INFLACION

FMI: El Perú debe utilizar todos sus instrumentos para reducir la inflación

19:16 | El organismo internacional destacó la buena marcha de la economía y las reformas estructurales que ayudaron a conseguir el grado de inversión

Washington, EE.UU. (EFE).- El Fondo Monetario Internacional (FMI) alabó el "admirable" desempeño de la economía peruana, aunque instó al país a seguir utilizando todos los instrumentos monetarios a su alcance para reducir la inflación hasta su nivel objetivo.

Esas fueron algunas de las conclusiones de la revisión de la economía peruana por parte de los funcionarios del FMI como parte del acuerdo crediticio que tiene con el país.

Las conclusiones, recogidas en el conocido como Artículo IV, llaman la atención sobre las tasas récord de crecimiento registradas por el Perú, la mayor creación de empleo y la significativa reducción de la pobreza pese a los mayores riesgos en la economía global.

El FMI destacó que la buena marcha de la economía peruana, apuntalada por las políticas prudentes de las autoridades y por las reformas estructurales en el país, ayudaron a que el país consiguiera recientemente la categoría de grado de inversión.

Según el Fondo, resulta clave que el Gobierno de Perú mantenga esos esfuerzos para poder de esa forma conseguir crecer a largo plazo y reducir la pobreza.

Los economistas del Fondo destacaron que las autoridades peruanas siguen concentradas en mantener la estabilidad macroeconómica y llamaron la atención sobre los esfuerzos de las autoridades monetarias para mantener la inflación a raya.

Por lo demás, el Fondo destacó que en el futuro será importante reformar la ley que rige las operaciones bancarias para poder aumentar los requisitos mínimos de capital de las instituciones microfinancieras.

Asimismo, el FMI considera que el incrementar el límite legal para las inversiones extranjeras por parte de los fondos de pensiones ayudaría a reforzar los mercados domésticos de capital.

El Fondo celebró también el nuevo marco legal para pequeños negocios, que describió como un paso positivo que ayudará a reducir la informalidad y que permitirá ofrecer a los trabajadores un mejor acceso a la seguridad social y a prestaciones médicas.