IMF warns rising food prices raising risk of war
Posted: 13 April 2008 0906 hrs
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 Dominique Strauss-Kahn (Random photo of old guy.) | |
WASHINGTON - Rising food prices could have terrible consequences for the world, including the risk of war, the IMF said Saturday, calling for action to keep inflation in check.
"Food prices, if they go on like they are doing today ... the consequences will be terrible," International Monetary Fund managing director Dominque Strauss-Kahn said.
"Hundreds of thousands of people will be starving ... (leading) to disruption of the economic environment," Strauss-Kahn told a news conference at the close of the IMF spring meeting here.
Development gains made in the past five or 10 years could be "totally destroyed," he said, warning that social unrest could even lead to war.
"As we know, learning from the past, those kind of questions sometimes end in war," he said. If the world wanted to avoid "these terrible consequences," then rising prices had to be tackled.
Skyrocketing prices on rice, wheat, corn and other staple foods like milk particularly hurt developing nations, where the bulk of income is spent on the bare necessities for survival.
Higher energy prices, too, are driving up the cost of food, as well as stoking broader inflation.
In recent months, rising food costs have lead to social unrest in several countries such as Haiti and Egypt. Thirty-seven countries currently face food crises, according to the Food and Agriculture Organization.
Escalating inflation is complicating the already complex challenges of a global financial crisis battering the world economy, Strauss-Kahn said.
The 185-nation IMF called for a strong front to put the reeling world economy back on track.
"The global crisis has to be addressed with a global view and by strengthening the role of multilateral institutions," Tommaso Padoa-Schioppa, chair of the the International Monetary and Financial Committee (IMFC), the IMF's top policy-making body, told reporters in a briefing.
In a statement, the IMF said that "policymakers should continue to respond to the challenge of dealing with the financial crisis and supporting activity, while making sure that inflation is kept under control."
The IMF stressed that "the challenges facing the world economy are of a global nature, requiring strong action and close cooperation among the membership."
Unlike the last IMF meeting in October, where internal reforms were high on the agenda, this time the multilateral institution faces a full-blown, and still unfolding, financial shock that began in August amid rising defaults on US high-risk sub-prime home loans.
Tasked with maintaining global financial stability, the IMF, whose own finances are strained, insists its expertise and global range make it a key player in resolving what Strauss-Kahn earlier called the worst financial crisis since the Great Depression of the 1930s.
The IMF last week warned the global economy is slowing so rapidly it could slide effectively into recession this year and next.
IMF policymakers also welcomed moves by central banks to provide liquidity support to ease strains in the credit markets.
The US Federal Reserve, the European Central Bank and others have pumped hundreds of billions of dollars into the money markets that seized up in the spreading sub-prime contagion.
The IMF also applauded Financial Stability Forum policy recommendations adopted Friday by the Group of Seven industrialized countries in the hope of improving transparency and resiliency in the financial markets within 100 days.
Regarding internal reforms, the IMF said it hoped governors would soon approve key voting and financial measures approved by the executive board.
It said it looked forward to approval of a reform of voting rights, long demanded by developing countries, by April 28, and a new income model that includes the sale of 403 tonnes of gold to raise cash, by May 5. - AFP/ir
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Things to consider researching:
> Central banks and liquidity support - how this will impact the market and how it will benefit the economy in curbing inflation?
> Selling of gold - where will the gold come from? How will this benefit the situation? Where will the cash go to?
> How does inflation occur? Relation to SS and DD theories? Price Elasticity?
- Amanda
3 comments:
Regarding your first point, I don't think that the liquidity support provided by central banks is supposed to curb inflation - I believe that it's supposed to curb the exact opposite of inflation: deflation, and this is to be achieved by promoting inflation (I think so at least, and I could be wrong in any case).
A few months ago, I read in The Economist that as a result of the US sub-prime mortgage crisis, both big and small banks all over the world have scorched their fingers in the sub-prime credit market (the most recent loser is UBS which reported an approximate loss of US$12 billion dollars). This meant that banks have suffered heavy losses, and to make sure that they still have sufficient liquid assets to function normally and minimally as financial institutions, banks are now less willing to lend money to one another because they are experiencing a shortage of liquid asset and they want to ensure that their own survival by maintaining what remains of their liquid assets. In other words, there is reduced availability of credit and increased cost in accessing the limited credit available.
I think this is called a credit crunch, and this leads to a greatly and significantly reduced flow of liquidity in the world market. Not only does this credit crunch mean that banks that have suffered greater losses find it more difficult to borrow liquid assets from less-affected banks, it also means that people will want to withdraw money from these banks, thereby exacerbating the liquidity crisis faced by these banks.
A similar situation like this has happened in the USA, right after the Great Depression, when the crash of Wall Street brought about a mad rush by the people to withdraw their deposits from the banks, because they feared that the banks would close down due to horrific losses on the stock market. However, this only served to worsen the financial crisis, by causing various banks to close down because the rapid withdrawal of deposits by their clients saw that these banks really did run out of liquid assets to function minimally as financial institutions and many banks had to close down eventually.
While the modern day context has not worsened to such an extent, central banks have pre-empted a similar phenomenon on a smaller scale than the aftermath of the Wall Street Crash, and they have chosen to increase interest rates to incentivise people to keep their money in the banks instead of withdrawing it all. For example, over the past few months, the US Federal Reserve has gradually but surely increased interest rates, every time by only a quarter of a percent. Other than doing so, central banks are also willing to provide liquidity support to banks, in the form of massive loans to increase the liquid assets of these banks.
Deflation would occur in this case, because there is a large decrease in the flow of liquid assets in the market. Various financial institutions are more interested in hoarding their liquid assets to protect their own survival, rather than to lend out their liquid assets to help other banks. Banks are also increasing interest rates to discourage clients from mass withdrawal of deposits. All in all, this would culminate in a neo-classical definition of deflation - a decrease in the supply of money.
Ironically enough, central banks are trying to combat this by encouraging inflation. By pumping the world market with liquid assets in an attempt to ameliorate the credit crunch, central banks are actually increasing the supply of money.
However, because I don't really know much about fiscal policies and their effects and macroeconomics as a whole, so I don't know how to evaluate the use of inflationary policies by central banks to combat the credit crunch and its effect of deflation.
After reading your comments, undeniably some valid suggestions exist.
However, I'm not too sure about your point on the US Federal Reserve increasing interest rates - In fact, news sources have shown that they have most recently cut interest rates by 3/4s of a percent to 2.25%. Naturally, if a distinction was made between the federal funds rate and the bank interest rate - perhaps this might paint a clearer picture.
The former is what banks charge each other. Hence, reducing the interest rates for this, as mentioned, would ease the aforementioned credit crunch, providing liquid assets for the market hit by the sub-prime crisis. On the other hand, bank interest rates are targeting the consumers. These are what banks give to investors, a type of dividend (you probably know what this is anyway, why am I even bothering, hmm) as an incentive for investing in them. As for this point, I agree with you that banks would naturally increase this rate to attract people to invest in them, or to maintain their investment.
My confusion only arose because the US Fed Reserve and US banks were mixed up.
As a side note, in addition to the effects of this federal funds cut that were mentioned, the main aim was to increase economic activity, triggering economic growth that has been at a standstill since the US market has been hit.
Regarding your last point about deflation, as a side note, banks in the US have also cut their interest rate for loans to other banks in view of the Fed Reserve's cut.
There is also an extent to which banks can prevent their clients from withdrawing money - notice that consumer interest rate increase largely benefits only middle to lower-income people, as a hike in interest rates would constitute only a little increase in the higher-incomes' bank accounts.
This can potentially be linked to elasticity concepts, if I'm not wrong.
In any case, I don't share the same sentiment that the central bank is trying to ameliorate the credit crunch by agggressively pushing forth liquid assets - you mentioned before that banks are inclined to hoard their liquid assets, thus a lesser extent of this impact will be felt by consumers, and the actual taking place of the supposed 'increasing supply of money' may not actually take place to a noticeable degree in the national economy.
Of course, my thoughts are all over the place, pardon me.
About central banks providing a significant influx of liquidity to banks all the over the world in an attempt to resolve the credit crunch?
The neo-classical economist and some Keynesian economists would define inflation as "an increase in the supply of money", which is indeed what's happening in the case of the central banks pumping the credit market with liquid assets. In such a context, there is really an increase in the supply of money. Whether or not this increase in the supply of money has any visible effect on the consumers on the ground is a totally different issue.
If we are to abide by the more common and accepted definition of inflation as "an increase in price levels", the actions of central banks all over the world would also cause an increase in price levels. When banks receive liquidity assistance by their respective central banks, banks would be more inclined to reduce interest rates for their clients. This would in turn cause clients to be more willing to withdraw money from the banks. In this case, albeit on a relatively small scale, with more money entering the market, the value of money would inevitably drop, because the supply curve for money would shift rightwards with the demand curve for money remaining stationary. Keeping in mind that while the value of money decreases but the value of consumer items do not change, inflation would thereby occur, i.e. using more money to buy the same item. You can argue that this is insignificant, but if we consider the current trend of inflation caused by other events other than the sub-prime crisis, you would realise that even this little bit of inflation would add on to the currently worsening state of inflation.
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