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.

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