Thursday, January 20, 2011

That Witch, Inflation Eats Our Earnings Away

Title: That Witch, Inflation Eats Our Earnings Away
Raj Patel of wrote this article about inflation. Yes we can blame external shocks, mainly high fuel and commodities prices, oil, coal, grains etc. Natural disasters that affect production of food and commodities are also to blame. Increased affluence in some countries also stokes the demand for food, hence stoking inflation.
China, India, ASEAN countries and Brazil have become more affluent lately, and the first thing people spend more when they are richer, is more quality food, clothing and housing, which translates to more demand on commodities.
I agree with Mr Patel and the World Bank that freer market helps lower prices in urban areas, whatever that cannot be produced locally at a competitive and cheap price, can be imported. But that would kill off local production, contributing to a higher price of the said produce in the future. Well designed public feeding and public works programmes gives people jobs, but this requires government spending which is inflationary.
In the short term, government and policy makers has to accept that commodity prices will stay high. Hence government must handle this issue of feeding the people and fair distribution of food. Hence well designed programme that feed the poor and hungry is necessary, even if that will mean higher government spending. Food grant and welfare payment for the poor and also public works programmes that will provide jobs. A content population would less likely to stir unrest. Yes it is inflationary.
In the medium term, investment must be made in food and commodity production, food doesn’t grow in an instant, land must be plough first before seeds planted. Infrastructure for farming has to be built. Without these new investments in food production, food production cannot increase and cannot meet increased demand.
What is more important, the country’s economic structure must be rearranged, more focus on food and commodity production as a larger portion in GNP. It is all well that the country has been steadily increasing industrial and service sector production to earn higher and higher incomes, but this has been at the expense of agricultural production which feeds the populace. So it’s no surprise that food prices have been steadily increasing. This call for new government policies that encourage food production, as well as incentives that encourage food production.
Look at Tunisia lately,,
1. High youth unemployment, and high unemployment overall.
2. 1 in 40 adult male is a policeman, which translate to high proportion government servant.
3. The economy has high proportion in service sector, ie resorts, hotels that cater for European tourists.
So the seeds of Tunisian discontent can be summarised in high food prices, unemployment and envy of wealth. What are worse the ruling elite displays their wealth, ill-gotten or not.
If we learn anything from this, we must handle these issues of unemployment, inflation, high food prices and unfair distribution of income immediately.

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