Amartya Sen on rising food prices

Nobel laureate Amartya Sen writes in the NYT that the demand driven food crisis would eventually end:

[...]It is a tale of two peoples. In one version of the story, a country with a lot of poor people suddenly experiences fast economic expansion, but only half of the people share in the new prosperity. The favored ones spend a lot of their new income on food, and unless supply expands very quickly, prices shoot up. The rest of the poor now face higher food prices but no greater income, and begin to starve. Tragedies like this happen repeatedly in the world.

[...]Much discussion is rightly devoted to the division between haves and have-nots in the global economy, but the world’s poor are themselves divided between those who are experiencing high growth and those who are not. The rapid economic expansion in countries like China, India and Vietnam tends to sharply increase the demand for food. This is, of course, an excellent thing in itself, and if these countries could manage to reduce their unequal internal sharing of growth, even those left behind there would eat much better.

But the same growth also puts pressure on global food markets — sometimes through increased imports, but also through restrictions or bans on exports to moderate the rise in food prices at home, as has happened recently in countries like India, China, Vietnam and Argentina. Those hit particularly hard have been the poor, especially in Africa.

There is also a high-tech version of the tale of two peoples. Agricultural crops like corn and soybeans can be used for making ethanol for motor fuel. So the stomachs of the hungry must also compete with fuel tanks.

[...]The global food problem is not being caused by a falling trend in world production, or for that matter in food output per person (this is often asserted without much evidence). It is the result of accelerating demand. However, a demand-induced problem also calls for rapid expansion in food production, which can be done through more global cooperation.

[...] While population growth accounts for only a modest part of the growing demand for food, it can contribute to global warming, and long-term climate change can threaten agriculture. Happily, population growth is already slowing and there is overwhelming evidence that women’s empowerment (including expansion of schooling for girls) can rapidly reduce it even further.

What is most challenging is to find effective policies to deal with the consequences of extremely asymmetric expansion of the global economy. Domestic economic reforms are badly needed in many slow-growth countries, but there is also a big need for more global cooperation and assistance. The first task is to understand the nature of the problem.

Links of Interest

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The Growth Report on Asia

• Nine of the 13 countries that have been successful in achieving sustained high growth are from Asia: China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Singapore, Taiwan (China) and Thailand.
• These nine high-growth countries all share common characteristics: engagement with the global economy, macroeconomic stability, high rates of saving and investment, the market allocation of resources, and credible and capable governments.
• Many of these Asian economies (Hong Kong, Japan, Korea, Singapore, and Taiwan) grew all the way to high-income levels.
• The region seems to be able to anticipate and change its policies on growth, Korea’s evolution from labor-intensive manufacturing to a more knowledge-based and capital-intensive economy being one example.
• Asia’s saving rates are seen as a strong engine for growth, with many Asian countries having saving rates 20 percentage points higher than Latin American countries, for example.
• High savings rates in Asia are due to macroeconomic stability, fewer dependents to take care of, and more direct measures, such as mandatory saving schemes.
• Foreign Direct Investment and the transfer of knowledge are very successful in Asia, one example being Malaysia, which has attracted multinationals to its three electronics clusters.
• Public investment in infrastructure is also viewed as a hallmark of many Asian economies accounting for 5 to 7 percent of GDP or more.
• Resource mobility is also seen as key, with governments not resisting the market forces that pull people into the urban areas. In Malaysia, agriculture’s share of employment fell from 40% in 1975 to 15% in 2000.
• Growth requires committed, credible and capable governments. Reform teams in countries, such as Singapore, Japan and Korea, were able to chart a program for growth.

Recommendation for Asia:

• Establishing a mechanism to coordinate policies of the growing number of influential countries – particularly in Asia - and to safeguard the stability of the global financial system.

There is good event on discussion about about the report at PIIE (organized by CGD). The full report is here. It would be interesting to hear what Hausmann and others have to say about this big report. Here is what Larry Summer has to say about similar report launched earlier.

Frank on the Invisible Hand stuff

Higher gas prices is good, irrespective of what Smith implied with the "invisible hand"!:

The production and consumption of many other goods, however, generate costs or benefits that fall on people besides buyers and sellers. Producing an extra gallon of gasoline, for example, generates not just additional costs to producers, but also pollution costs that fall on others. As before, market forces cause production to expand until the seller’s direct cost for the last unit sold is exactly the value of that unit to the buyer. But because each gallon of gasoline also generates external pollution costs, the total cost of that last gallon produced is higher than its value to consumers.

The upshot is that gasoline consumption is inefficiently high. Suppose that pollution costs are $2 for the last gallon consumed, but that its $4 price at the pump is just enough to cover its direct production costs. Reducing production and consumption by a gallon would then cause consumers to lose fuel that they value at $4, which would be exactly offset by the $4 in reduced production costs. The $2 in reduced pollution costs would thus be a net gain for society.

That simple example captures the classic breakdown in the invisible hand when a product’s market price doesn’t reflect all its relevant social costs and benefits. In such cases, the simplest solution is to discourage consumption by taxing it.

Doing so would not only raise revenue to pay for public services; it would also make the allocation of society’s resources more efficient — hence economists’ almost universal dismay when Senators John McCain and Hillary Rodham Clinton recently proposed eliminating the federal tax on gasoline for the summer.

The stated aim of their proposal was to ease the financial burden of sharply higher gasoline prices. But adopting inefficient policies is never the best way to help people in financial distress.

Efficiency is important because any policy that enlarges the economic pie necessarily lets everyone have a bigger slice than before. Economists opposed suspending the gas tax because doing so would make the economic pie smaller.

Robert Frank explains more here.

Free and Shared Wireless

Free and shared wireless:

Three years ago, aiming to create a global wireless network, he founded FON, a company based in Madrid that wants to unlock the potential power of the social Internet. FON’s gamble is that Internet users will share a portion of their wireless connection with strangers in exchange for access to wireless hotspots controlled by others.

The swaps, in theory, would allow “Foneros” to have ubiquitous, global wireless access while traveling for business or pleasure. But despite $55.2 million in backing from such corporate heavyweights as Google and BT, the former British Telecom, as well as newer enterprises like Skype and a handful of venture capital firms, FON and Mr. Varsavsky are still missing a crucial ingredient: scale.

At the moment, there are just 830,000 registered Foneros around the world, and only 340,000 active Wi-Fi hotspots run FON software. Because it’s built upon the concept of sharing Wi-Fi access, FON works well only if there are Foneros everywhere.

More here.

Bad summer for job seekers!

This is not a good news:

As the forces of economic downturn ripple widely across the United States, the job market of 2008 is shaping up as the weakest in more than half a century for teenagers looking for summer work, according to labor economists, government data and companies that hire young people.

This deterioration is jeopardizing what many experts consider a crucial beginning stage of working life, one that gives young people experience and confidence along with pocket money.

More here ( "Toughest Summer Job This Year Is Finding One")

Japan opens borders to Nepali workers

Good news for Nepali labor force:

...Japanese officials have agreed to accept Nepali semi-skilled and skilled trainee workers for employment with different business enterprises in Japan, said a top Nepali official.

...Japan is expected to absorb Nepali workers mainly in the industrial and agriculture sectors.

... workers having knowledge of Japanese language and culture, good work experience and the skills that can be capitalized by the home country in future will be favored while selecting them for jobs.

...Under the understanding, the trainee workers will get two years of training and one year of internship at work places in Japan, with handsome pay. He said during their trainee period the workers can earn between Rs 80,000 and Rs100,000 per month as allowance, excluding overtime, depending on the status of the employing companies.

More here.