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The Surge in Food Prices and Inflation in Asia

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The Surge in Food Prices and Inflation in Asia

by Matt Robinson, Moody's Analytics, 03 February 2011
topics:
Risk Management
tags:
exports food price inflation imports price controls tariffs
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  • Governments in Asia are under growing pressure to respond to rising food prices.

 

  • Subsidies, tariff reductions and export bans may succeed short term in dampening price spikes.

 

  • Such measures, however, distort markets and increase pressure on government finances.

 

  • Policymakers need to focus on removing supply-side impediments that keep food prices high.
 
Protests in Egypt might seem distant to an Asian audience, but dissatisfaction regarding food price inflation is no less real in the Asia-Pacific region. Exacerbated by recent supply-side disruptions in key agricultural regions, growing demand from increasingly affluent populations in many emerging economies is exerting constant upward pressure on food prices. Governments are under increasing pressure to respond.
 
Policymakers in Indonesia last week suspended import duties on wheat, fertilizer and other food-related items in an attempt to dampen acute food price pressures. India has banned the export of many kinds of rice, beans (pulses) and cooking oils to contain inflation, while several local governments in China have started imposing price controls on some items to alleviate pressure on household budgets. Talk about introducing or extending subsidies abounds in a number of countries.
 
But these measures are temporary and have limited success in reducing food price inflation in the longer term, and sometimes they ultimately prove to be self-defeating. Subsidies, tariff reductions and export bans distort efficient market behavior, while increased spending and lost revenue place further pressure on already-strained government fiscal balances.
 
Monetary policy has a role to play in preventing elevated food prices from spilling over into broader inflationary pressures. But higher interest rates also dampen economic growth and investment, lessening prospects for increasing living standards and reducing poverty.
 
Other government policies aimed at addressing the supply side will be far more important in dealing with food price inflation over the longer term. Investment in technology; improved farming techniques; upgraded distribution, storage and logistics chains; and removal of physical and regulatory bottlenecks will be imperative to encourage supply, expand output and improve productivity, thereby arresting upward food price inflation pressures.
 
Microeconomic reforms, such as structural reform of state-owned enterprises, more efficient regulation of monopoly infrastructure, and streamlined agricultural regulation will also be necessary to reduce inefficiencies and boost private investment in expanded infrastructure capacity.
 
Matt Robinson is a senior economist in the Sydney office of Moody’s Analytics, a division of Moody’s Corporation. Commentary produced by Moody's Economy.com is independent and does not reflect the opinions of Moody's Investors Service Inc., the credit ratings agency which is also a subsidiary of Moody's Corporation.
 
Orignal Author: 
Matt Robinson, Moody's Analytics
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