Placing the food-price crisis in the context of global economic

trends Horst Siebert

Bologna-Kiel

Economic Trends vs.

Unexpected Events

Trends

• Follow a pattern, an „economic law“

• For instance, the law of increasing scarcity

• Can, in principle, be forecasted

• Take a long development

Unexpected events

• Come as a surprise• Tsunami• Shift of preferences • Financial crises, bank runs, currency crises • Sudden cross-border migration• September 11,Terrorism • Unexpected consequences of geo-political shifts

Trends

• Population growth

• Aging

• Emerging markets, economic aspects

• Energy scarcity, normal mechanism: markets

• Global warming

• Shift in the lead currency?

Given situation in the World Economy

Regional structure of the world‘s gross domestic product, 2006

Source: World Development Report 2008.

Regional structure of world trade, 2005

Source: World Development Indicators 2007.

11

Horst Siebert

hsiebert@jhubc.it

Shares of world exports, 1975 -2006, United States,

Germany, Japan, China, Asian ’tigers ‘ and Russia

0

2

4

6

8

10

12

14

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Sha

re o

f w

orld

exp

orts

in p

erce

nt

China

Russia

United States

Germany

Asian 'tigers'

Japan

Demand effect of China ,2005 % of world imports

• 46 percent for iron ore• 36 percent for cotton wool, 23 percent for copper

ore• 21 percent for pulp and paper• 20 percent for rubber• 12 percent for plastic• 6.2 percent for crude oil. By way of comparison:

China’s share of world production stands at about 5 percent. (2005 data). In 1993 China did not need did not need to import crude oil.

Reasons for High Foods Prices

• Population growth drives up the demand for food and food prices

• Short-run supply factors, reduced supply?• Real income increase in China and India raises the price

of food• Rising engergy prices makes food production more

costly• Incentives for agro-fuel production drive up the price for

foods• EU- and US-Subsidies for agriculture have impeded

developing countries to built up their agriculture

Remedies

• We should eliminate distortions from agro-fuel and ag. subsidies

• The increase in the demand for foodstuffs is here to stay

• Higher food prices can only be prevented if agricultural productivity rises faster than demand

• Technological innovation crucial

This is a feast for inventionists

Remember the negative experience of price control in

central planning

Interventionism

• Ban the import of agro-fuels ?• Introduce national zoning for agricultural land

(only grains?, also vegetables, milk, animals? ) • Establish such zoning for the EU ?• Hayekian problem: the government does not

have the information • Define land use conditions globally? • Ban food exports? • All these measures will not stimulate innovation• Rely on market forces

Political short-term intervention cannot do it

• Politics must take into account the long-run implications of policy instruments, for instance distortions through agro- fuels

• Aim for a long-run solution. Short- run policy- instruments should not go against the long-run.

• National political approaches should not cause externalities to others (very tricky statement)

• BUT WE NEED AND WANT COMPETITION • We need a consensus on some common rules as in the

WTO

Unexpected events ?

• Financial crises, bank runs, currency crises

• Sudden cross-border migration, 4oo AD: German tribes

• Terrorism

• Political consequences of geo-political shifts

How do rules respond to geo-political shifts in the balance of

power• In the past, shifts usually have lead to

wars

• Example: Rise of Germany since 1871 >> Two World Wars

• Rise of Japan

• Rise of China, same story?

• We need rule systems and mediation for the shift in power