An excellent, succint piece by Jyoti bhai on DP Blog, on Inflation and food prices, that breaks down the issue, and even makes a few policy prescriptions that largely make sense to me. It’s a follow-up to Rumi bhai’s great post on his blog a few days ago. Required reading, both. As they say - check them out!
I really liked Jyoti bhai’s tracking of the Rupee-Taka exchange rate and food prices in the two countries. (I’m too lazy to do this right now, but deflating the food price with the exchange rate would further clarify the story that JB’s telling.)
I particularly found illuminating JB’s argument about food buffers, and how the Agriculture and Food Ministries messed up the process. I do hope JB does follow-up posts in the future on this issue, particularly the WB’s role in the failed process…
It’s been a while (eight years!) since I did macroecon, and I’m sure JB will find my questions to be more amateurish and immature than usual. JB says that the Taka should appreciate. I tend to agree with him that the impact upon exports won’t be too bad (particularly if it is combined with the impact of less port and strike-induced delays.) But won’t the appreciation of the taka have to be accompanied by an increase in the interest rates and a tighter monetary policy? What are the pros and cons of this at this moment?
(Before I lose the mental train that has just pulled into the desolate station that is my head: I wonder if anyone’s done an Alesina-type political business cycle analysis of the Bangladeshi economy, or for the Indian economy for that matter…)
I was a little more unsure about JB’s telling of the syndication part of the story. Wouldn’t we want to look at the short-run price elasticitiy of demand of various food stuffs? I would think that the elasticity of rice (and for that matter, most things that go into a basic Bangali meal) - at least in the short-run - is pretty low. It’s steeper for ilish maach, I would think, and there JB’s analysis does apply. In the long run, I guess people can substitute rice with other things (“Aloo khele mota hoi, e kothati shotto noi. Beshi kore aloo khan, bhaater upor chaap koman.” Interestingly, I haven’t seen public service announcements of this nature on BTV in the last few years…)
I also wish JB had said more about the argument that’s been made that the disruption of food supply networks because of the government’s anti-corruption drive has had some role to play in the recent rise in prices.
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August 18, 2007 at 5:39 pm
AsifY
Trust me Saif, in terms of amateurishness your questions don’t compare with some I put to JB last night!:) Who knew “elasticity” was going to become such an important factor in our relations with India?
August 19, 2007 at 9:23 am
Syed
Saif,
1. Taka exchange rates with different currencies have to be managed differently based on their respective role as a primarily export currency or a primarily import currency….for us five currencies matter…USD, Euro, Yen, Indian Rupee and Chinese Currency [Indirect, as its pegged with dollar in a band]. Planned appreciation of the Taka cannot be done through interest rates as they’re a blunt instrument. This has to be done with an effective short term government paper/bill and or repo market denominated in these different currencies. This will require the development of a fixed income market for DOMESTIC investors and not taxing the interests they receive on these. Secondary benefit will be vast improvement in cross currency hedging skills of domestic and international operators in the economy. Portfolio return should increase as a result while the volatility should decrease for the overall market.
2. Food buffer has to be rebuilt to some extent. But much more important is to build a modern commodity exchange that trades agricultural and other commodity futures contracts [ again denominated in several currencies] as well as weather derivatives. This will greatly smooth the supply and pricing of agricultural produce.
3. Foreign land has to be leased for both food and fuel crops as the government is already doing with Myanmar [ A process started during Khaleda time].
4. A national security council has to be formed ASAP who’d look at national security as a wider problem…not just military or law and order security. Food and water security and threats from natural disasters and their prevention/recovery costs have to be part of national strategic planning. There needs to be emergency response plans for immediate time lined implementation for commonly faced/probable disasters like floods, cyclones, civil wars, terrorists atttacks, famines due to either domestic crop failure or international food shortage/price inflation etc. besides the usual plans of Burmese incursion or an Indian invasion:-)
5. There is considerable “stickiness” created by habit and preference in the elasticity of staple foods for mono-grain cultures like ours. This has to be addressed by grassroots education campaign to promote diversity of edible grains as well as through the promotion of mixed agriculture/inter cropping to increase both the supply of vegetables and farmers’ income..
August 19, 2007 at 1:24 pm
fugstar
on 5. and stickiness.
Come roza time, desh is going to go crazy as aubergine and onion prices cause ‘market harm’. I wish it wasnt so hard to change habits as strong as diet, i think there would be women empowerment bucks to it too, as preparation is amazingly long and involved.
On the strange people who unfairly profit out of these commodities.
The general is junior to an awful lot of retired comrades, if they were to be involved (theoretically), how could anybody touch them?
August 19, 2007 at 4:06 pm
Saif
Syed, good points all.
1. You are absolutely right about the need for a more effective policy surrounding government paper. Right now Bangladesh doesn’t even have an yield curve.
I don’t know too much about the taxation of secondary market trading of the banks. I do know that there’s a lot of repo activity that the foreign exchange desks at the treasuries of the banks do… We do need more of this - and other secondary market operations too like swaps etc. But under the current capital market conditions in Dhaka, are difficult to achieve.
2. An alternative strategy to “building” up a commodity exhcnage might be to open up the food economy to existing markets, allowing local traders to trade contracts in established markets.
3. Similarly, easing controls on importing foodstuff might be a better/most cost-effective strategy to leasing foreign land. I say might - because it’s likely the case that the land lease prices in Myanmar are not market- but politically/diplomatically-driven… That gives me pause though. Do I trust our foreign service to get us the best possible deal?
4. You are absolutely right that there is need for better planning. Particularly in an economy like ours, market interventions in food grains need to take a similar hue as a central bank’s intervention in money markets. I would argue that it might be better to tie central banking and food buffer activities together in the regulatory regime, rather than national security. I do think there are problems with “national security”-fying every national challenge.
5. Yes - but you’re talking about long-term (and not short-term) elasticity. It’s possible that the case that long-term elasticity takes care of itself through market signals rather than through expensive education campaigns targetted at preferences. I can see the place for educating producers with new techniques and crops - and even providing support to allow the first movers to experiment. And I can see the role of education in spreading information about the nutritional value of different foodstuffs. But I don’t know if “preferences” themselves are affected by national “awareness” campaigns.
(”Stickiness” - fugstar, syed - is what econ-types would refer to when they talk about price elasticity.)
Fugstar - in your last paragraph you’ve alluded to something I am hoping to post on somewhere along the line! I need to gather my thoughts on this. Gun-jumper!
August 19, 2007 at 5:41 pm
fugstar
I am prone to an imam khomeini attitude to economics (ie. there is no such thing).
talking of allusions and fairy tales
http://fugstar.blogspot.com/2007/05/sultans-new-armour.html
I dont think its gone mordor just yet. but them hobitsies…
August 19, 2007 at 8:56 pm
AsifY
I particularly liked Khomenei’s attitude towards rock and roll, Sunnis and Azeris myself……
August 20, 2007 at 9:13 am
Jyoti
Saif, thank you for kind words. Sorry couldn’t reply earlier as I’ve been preoccupied with the supply side issues of the economy that pays my bills (unfortunately not that of Bangladesh).
I agree with Syed on the 1st and 2nd point, and with Saif on the 3rd and 4th point. Smeone in UV has commented at length about the 4th point.
August 20, 2007 at 11:44 am
Jyoti
An Alesina or Ed Glaeser type analysis of political business cycle of emerging markets sounds like an excellent PhD topic. Perhaps you guys should give up law/history/pol sci and return to the dark side.