Price control, subsidy and inflation
Monday, 11 February 2008
Shamsul Huq Zahid
It is not Bangladesh alone. Most developing countries have started feeling the heat of the soaring food prices in the global market.
The volatility of the global food market could well be understood from the recent decisions of the Indian government on export of rice. In October last, the Indian government slapped restriction on import of non-Basmati rice and later relaxed it fixing the export price at $500 a tonne. But on Friday last it imposed ban on export of non-Basmati rice. The decision has infuriated the rice traders and exporters but the Indian government, apparently, has taken the decision for the sake of the country's own food security.
Many developing countries have already fallen back upon an old yet hazardous way of addressing the problem of soaring food prices. They have imposed price controls.
The Chinese government last month asked the producers of a number of food items to seek official permission before raising prices. Thailand reportedly is taking similar actions. Russia is trying to put price-cap on certain types of bread, eggs and milk. Mexico and Venezuela also have introduced similar price caps.
Malaysia is setting up a national price council to monitor food costs and planning to build up stocks of major food items as food-price inflation in major developing countries has reached at an annual rate of 11 per cent, up from 4.5 per cent in 2006. The rise in food prices is partly attributed to increased demand from emerging markets and higher oil prices that have contributed to the rise in cost of transportation of food items.
Farmers in some countries are diverting their crops for producing biofuels like ethanol and diesel. Besides, the people of some emerging economic have developed the propensity to consume more because of their newly-found affluence. For instance, Chinese demand for soybeans has increased to about 47 million tonnes from 11 million tonnes in 1990. This has happened with India in case of consumption of cereals.
Bangladesh in the backdrop of food inflation reaching over 13 per cent has resorted to market intervention but it is yet to put cap on prices of food items-a practice which is increasingly becoming popular in many developing countries. The governments in these countries are trying to tame the growing resentment of the people over soaring food prices. Bangladesh government is now making available rice among the poor and lower middle class in a limited scale at subsidized prices. But that has not helped much in bringing down the prices of rice within the reach of the common man. The prices of most other food items have gone well beyond the consumers.
The economists, however, are strongly opposed to price control or subsidized distribution of food items since, according to them, price controls encourage hoarding and can lead to short-term supply shortages. They are of the opinion that price controls could trigger sharp increases in inflation later when governments are eventually forced to withdraw such intervention.
The other aspect the economists tend to point out that price controls have the potential to create an artificially high demand situation because they encourage panicky consumers to buy more.
The Bangladesh administration is yet to apply price control mechanism despite growing resentment among the people about soaring prices of food items but it has been doing the same indirectly. It is providing subsidy to fuel, fertilizer and also to rice, the main staple. Had the government followed the market-based pricing policy for fuel and fertilizers, the food prices would have increased manifolds because of the impact of the same on cost of production at the growers' level.
The donors, however, are very much sceptical to subsidies provided in any form by the poor third world countries to help the poorer sections of their populations. The multilateral donors in particular are opposed to state subsidies since the same fuel inflationary pressure that ultimately hurts the poor most.
Shantayanan Devarajan, World Bank's chief economist for South Asia, the other day while talking to the FE had expressed the similar view. He did not like the way the Bangladesh government had been providing subsidy and maintained that subsidies were fuelling inflation. The WB economist felt that the use of the traditional tools, including fiscal and monetary polices, and market-based price adjustment of fuel oils could help rein in soaring inflation.
Contrary to what has been observed by the WB economist, the government has decided to almost double the amount of subsidies allocated in the national budget for the current financial year (2007-08). The estimated amount of subsidy this fiscal would be around Tk. 120 billion as against the original budgetary allocation of Tk. 60 billion. The government reportedly has decided against increased bank borrowing to meet the demand for higher amount of subsidies. It is most likely that the annual development programme (ADP) would have to bear the main brunt. The Tk. 260 billion ADP has already been pruned by Tk. 40 billion. It may come under further downsizing on the plea of its poor implementation rate. The rate of execution of projects under the ADP until December last was a record low. This has come as a surprise to many. For, the execution of ADP projects is supposed to be higher in an environment where political influence-peddling is virtually non-existent.
The economists, including Mr. Devarajan, are theoretically right on price control and subsidies. But can the governments in poor developing countries afford food riots or famines by sticking to so-called economic theories?
The fiscal and monetary policies that the WB economist found effective for taming inflation have already been tried by the Bangladesh government. But those have failed to create any impact on the soaring prices of essential commodities.
So far as the price situation is concerned, it is an emergency. A government worth its name cannot hold itself back from taking immediate measures to tackle prices for fear of future impact of such measures. If China, Malaysia, Thailand, Mexico, Russia and many other emerging economies could go for price control, there is no reason for Bangladesh to hesitate to spend some money from the state-coffer as subsidy to help the poor and low income people in these days of soaring prices of food items. However, it must be ensured that the subsidy money really benefits the main target groups.
It is not Bangladesh alone. Most developing countries have started feeling the heat of the soaring food prices in the global market.
The volatility of the global food market could well be understood from the recent decisions of the Indian government on export of rice. In October last, the Indian government slapped restriction on import of non-Basmati rice and later relaxed it fixing the export price at $500 a tonne. But on Friday last it imposed ban on export of non-Basmati rice. The decision has infuriated the rice traders and exporters but the Indian government, apparently, has taken the decision for the sake of the country's own food security.
Many developing countries have already fallen back upon an old yet hazardous way of addressing the problem of soaring food prices. They have imposed price controls.
The Chinese government last month asked the producers of a number of food items to seek official permission before raising prices. Thailand reportedly is taking similar actions. Russia is trying to put price-cap on certain types of bread, eggs and milk. Mexico and Venezuela also have introduced similar price caps.
Malaysia is setting up a national price council to monitor food costs and planning to build up stocks of major food items as food-price inflation in major developing countries has reached at an annual rate of 11 per cent, up from 4.5 per cent in 2006. The rise in food prices is partly attributed to increased demand from emerging markets and higher oil prices that have contributed to the rise in cost of transportation of food items.
Farmers in some countries are diverting their crops for producing biofuels like ethanol and diesel. Besides, the people of some emerging economic have developed the propensity to consume more because of their newly-found affluence. For instance, Chinese demand for soybeans has increased to about 47 million tonnes from 11 million tonnes in 1990. This has happened with India in case of consumption of cereals.
Bangladesh in the backdrop of food inflation reaching over 13 per cent has resorted to market intervention but it is yet to put cap on prices of food items-a practice which is increasingly becoming popular in many developing countries. The governments in these countries are trying to tame the growing resentment of the people over soaring food prices. Bangladesh government is now making available rice among the poor and lower middle class in a limited scale at subsidized prices. But that has not helped much in bringing down the prices of rice within the reach of the common man. The prices of most other food items have gone well beyond the consumers.
The economists, however, are strongly opposed to price control or subsidized distribution of food items since, according to them, price controls encourage hoarding and can lead to short-term supply shortages. They are of the opinion that price controls could trigger sharp increases in inflation later when governments are eventually forced to withdraw such intervention.
The other aspect the economists tend to point out that price controls have the potential to create an artificially high demand situation because they encourage panicky consumers to buy more.
The Bangladesh administration is yet to apply price control mechanism despite growing resentment among the people about soaring prices of food items but it has been doing the same indirectly. It is providing subsidy to fuel, fertilizer and also to rice, the main staple. Had the government followed the market-based pricing policy for fuel and fertilizers, the food prices would have increased manifolds because of the impact of the same on cost of production at the growers' level.
The donors, however, are very much sceptical to subsidies provided in any form by the poor third world countries to help the poorer sections of their populations. The multilateral donors in particular are opposed to state subsidies since the same fuel inflationary pressure that ultimately hurts the poor most.
Shantayanan Devarajan, World Bank's chief economist for South Asia, the other day while talking to the FE had expressed the similar view. He did not like the way the Bangladesh government had been providing subsidy and maintained that subsidies were fuelling inflation. The WB economist felt that the use of the traditional tools, including fiscal and monetary polices, and market-based price adjustment of fuel oils could help rein in soaring inflation.
Contrary to what has been observed by the WB economist, the government has decided to almost double the amount of subsidies allocated in the national budget for the current financial year (2007-08). The estimated amount of subsidy this fiscal would be around Tk. 120 billion as against the original budgetary allocation of Tk. 60 billion. The government reportedly has decided against increased bank borrowing to meet the demand for higher amount of subsidies. It is most likely that the annual development programme (ADP) would have to bear the main brunt. The Tk. 260 billion ADP has already been pruned by Tk. 40 billion. It may come under further downsizing on the plea of its poor implementation rate. The rate of execution of projects under the ADP until December last was a record low. This has come as a surprise to many. For, the execution of ADP projects is supposed to be higher in an environment where political influence-peddling is virtually non-existent.
The economists, including Mr. Devarajan, are theoretically right on price control and subsidies. But can the governments in poor developing countries afford food riots or famines by sticking to so-called economic theories?
The fiscal and monetary policies that the WB economist found effective for taming inflation have already been tried by the Bangladesh government. But those have failed to create any impact on the soaring prices of essential commodities.
So far as the price situation is concerned, it is an emergency. A government worth its name cannot hold itself back from taking immediate measures to tackle prices for fear of future impact of such measures. If China, Malaysia, Thailand, Mexico, Russia and many other emerging economies could go for price control, there is no reason for Bangladesh to hesitate to spend some money from the state-coffer as subsidy to help the poor and low income people in these days of soaring prices of food items. However, it must be ensured that the subsidy money really benefits the main target groups.