The (Food) Price of Success

• Author: Simon Johnson
• Position: Economic Counsellor and Director of the IMF's Research Department
• Pages: 54-55

Page 54

Higher global demand for calories brings inflationary pressure and more

Australian wheat, Chinese pork, U.S. corn. What do these three specific goods have to do with macroeconomics? Unfortunately, right now, a great deal, and in ways that are globally interconnected.

Over the past 12 months, the world has experienced a substantial inflationary shock in the form of higher food prices. This shock doesn't necessarily translate into higher sustained inflation; monetary policy in most countries appears to be responding appropriately. But it will have adverse effects, particularly on relatively poor urban residents in low-income countries.

There are also two potential silver linings: direct benefits for farmers in low-income countries and potential policy space for removing agricultural subsidies in rich countries.

The increase in food prices is a shock that originates largely in rich and middle-income countries. For some time now, commodity prices have been increasing, and this has been particularly apparent in fuels and metals. A major driver of these increases has been high rates of global growth-the last half decade has seen the world's best run in growth rates since the 1960s. Of course, a big part of what has sustained global growth is the strong performance of emerging markets.

Higher commodity prices should elicit a supply response, with some lag, and almost all developing countries have benefited on net from the increase in global economic activity. So part of what we're observing is perhaps an unavoidable side effect of rising prosperity worldwide.

And then there's the effect of weather. There've been serious droughts in some parts of the world, and animal disease has had an impact elsewhere.

It's also the biofuel policy

But more recently food prices have jumped sharply, at least in part because of an attempt to encourage the use of so-called biofuels in industrial countries. Biofuels are a type of renewable energy source; that is, you make ethanol from corn, mix the ethanol with gasoline to drive your car, and also grow more corn. As an approach to energy security, this has some appeal-it's a diversification of energy sources.

Unfortunately, although the benefits of biofuels are sometimes exaggerated, their side effects have become all too apparent. Making ethanol from corn doesn't generate much...