Reining in food-price induced inflation
Thursday, 28 August 2008
It was articulated in a workshop organised by the World Bank (WB) office in Dhaka last Tuesday that there was a reversal in poverty reduction trend during the last two years in Bangladesh. There was an otherwise steady drop in poverty attained during the first half of the current decade -- or until 2005 -- from reasonable and uninterrupted economic growth of around 6.0 per cent. The results of different surveys that were carried out recently were presented in the workshop, alongwith the WB's own assessment of the poverty-related situation in Bangladesh. The findings thereof show some 4.0 million people who had earlier risen above the poverty line in terms of their standard of living were pushed back below the poverty line in the last couple of years.
The main reason for this slide in the poverty conditions was identified as inflation, specially that of in the food-related items. The prices of basic staple foods such as rice and wheat increased substantially and sharply in this period. The workshop focused on the aspect of one-fifth of the income of poor household getting eroded from higher food prices. There is no denying that this assessment of the food-price related aggravation of poverty is a significant one. The same should have taken into account other developments peculiar to the Bangladesh situation that feeds inflation from a spurt in the prices of staple foods. Traditionally, prices of all kinds of basic goods and services for survival were seen to be vitally linked to the price of rice. Whenever rice price goes up by one notch, spontaneously the sellers of all kinds of essential goods and services tend to raise prices of their own products and services as a compensation mechanism. They say that they do this as they have to buy food grains at higher prices. Thus, a rickshaw puller is seen abnormally raising his fare charge for the same travel distance on the excuse that he must earn more to pay for the basic food for survival.
According to economic laws, prices of goods and services usually are pulled up by scarcities and greater demand. The opposite is indicated under conditions of plentiful availability of goods and services. However, in the Bangladesh situation, the same rules may not apply neatly. Here, even the overflowing supply of goods do not bring down prices, mostly because such prices are related to factors such as the one of higher prices of food grains. This provides the fuel and justification for raising the prices and charges of other non-food goods and services.
Therefore, inflation management and poverty alleviation strategies need to address this core issue of food price-induced inflation. The prices of food grains should be decreased or kept stable. This cheaper food grain availability must cover the greatest number of the poor so that such adverse backward progression as the sliding down into poverty of some 4.0 million people can be prevented for good. Government has provided wider social safety nets this year to provide food grain at much below the market rate to the poor. All of these programmes need to be not only very efficiently run but it is important to try and expand them to include a greater number of the poor than was conceived earlier. This objective can be met now that the WB and other donors are associated with the social safety net programmes.
Government must also keep on improving its operations to deliver inputs for agricultural production to farmers in time and at affordable prices. The various subsidies to farmers should be similarly maintained and improved upon. These activities would be of great value in keeping production costs low that in turn can be expected to be reflected in lower price of food grains in markets. This can then cause a deceleration in the food-price induced inflation.
The main reason for this slide in the poverty conditions was identified as inflation, specially that of in the food-related items. The prices of basic staple foods such as rice and wheat increased substantially and sharply in this period. The workshop focused on the aspect of one-fifth of the income of poor household getting eroded from higher food prices. There is no denying that this assessment of the food-price related aggravation of poverty is a significant one. The same should have taken into account other developments peculiar to the Bangladesh situation that feeds inflation from a spurt in the prices of staple foods. Traditionally, prices of all kinds of basic goods and services for survival were seen to be vitally linked to the price of rice. Whenever rice price goes up by one notch, spontaneously the sellers of all kinds of essential goods and services tend to raise prices of their own products and services as a compensation mechanism. They say that they do this as they have to buy food grains at higher prices. Thus, a rickshaw puller is seen abnormally raising his fare charge for the same travel distance on the excuse that he must earn more to pay for the basic food for survival.
According to economic laws, prices of goods and services usually are pulled up by scarcities and greater demand. The opposite is indicated under conditions of plentiful availability of goods and services. However, in the Bangladesh situation, the same rules may not apply neatly. Here, even the overflowing supply of goods do not bring down prices, mostly because such prices are related to factors such as the one of higher prices of food grains. This provides the fuel and justification for raising the prices and charges of other non-food goods and services.
Therefore, inflation management and poverty alleviation strategies need to address this core issue of food price-induced inflation. The prices of food grains should be decreased or kept stable. This cheaper food grain availability must cover the greatest number of the poor so that such adverse backward progression as the sliding down into poverty of some 4.0 million people can be prevented for good. Government has provided wider social safety nets this year to provide food grain at much below the market rate to the poor. All of these programmes need to be not only very efficiently run but it is important to try and expand them to include a greater number of the poor than was conceived earlier. This objective can be met now that the WB and other donors are associated with the social safety net programmes.
Government must also keep on improving its operations to deliver inputs for agricultural production to farmers in time and at affordable prices. The various subsidies to farmers should be similarly maintained and improved upon. These activities would be of great value in keeping production costs low that in turn can be expected to be reflected in lower price of food grains in markets. This can then cause a deceleration in the food-price induced inflation.