Silver Lining In High Food Prices

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Project Syndicate

Today's soaring commodity prices scream a fundamental truth of modern life that many politicians, particularly in the West, don’t want us to hear: the world’s natural resources are finite, and, as billions of people in Asia and elsewhere escape poverty, Western consumers will have to share them.

Here is another truth: the price mechanism is a much better way to allocate natural resources than fighting wars, as the Western powers did in the last century.

The United States’ ill-considered, biofuels, subsidy programme, demonstrates how not to react.

Rather than acknowledge that high fuel prices are the best way to inspire energy conservation and innovation, the Bush administration has instituted huge subsidies to American farmers to grow grains for biofuel production. Never mind that this is inefficient in terms of water and land use.

Moreover, even under the most optimistic scenario, the US and the world will still be relying mainly on conventional fossil fuels until the hydrocarbon era comes to an end (which few of us will live to see).

Last but not least, diverting vast tracts of agricultural land into fuel production has contributed to a doubling of prices for wheat and other grains. With food riots in dozens of countries, isn’t it time to admit that the whole idea was a giant, if well-intentioned, mistake?

Another wrong turn is the proposal recently embraced by presidential candidate Hillary Clinton to temporarily scrap taxes on gasoline.

As laudable as it may be to help low-income drivers deal with soaring fuel costs, this is not the way to do it. The gas tax should be raised, not lowered.

The sad fact is that by keeping oil prices high, Opec is doing far more for environmental conservation than Western politicians who seek to prolong the era of unsustainable Western consumerism.

Of course, it isn't just the cost of oil that is high, but all commodity prices, from metals to food to lumber. Prices for many commodities have doubled over the past couple of years. Oil prices have risen almost 400 per cent in the last five years.

The proximate cause is a global economic boom that has been stronger, longer, and more broad-based than any in modern history.

Asia has led the way, but the past five years have been the best Latin America and Africa have enjoyed in decades.

Some politicians also complain about speculators who are trading commodities on complex and growing markets that allow them to bet on whether, say, future demand from emerging markets is likely to outstrip future supply.

But why is this a bad thing? If “speculators” are bidding up today’s commodity prices because they realise that future generations are going to want commodities too, isn’t that healthy?

High prices for commodities today mean more supply for future generations, while at the same time creating an incentive to develop new ways to conserve on consumption. Again, high prices are helping in ways that Western politicians seem afraid to contemplate.

While surging commodity prices are helping poor farmers and poor resource-rich countries, they are a catastrophe for the urban poor, some of whom spend 50 per cent of their income on food.

One element of the solution is to compensate the very poor for the higher cost of survival. Over the longer term, more money for fertiliser, and other aid to promote self-sufficiency, is also essential.

Kenneth Rogoff is the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University. He was also the former Chief Economist at the IMF.

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