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THE
International Monetary Fund (IMF) has urged
middle-income and developing countries, including the
Philippines, to tighten monetary policy to cope with
high food prices brought about by the worldwide adoption
of biofuels.
IMF
chief economist Simon Johnson said poor people in urban
areas will suffer the brunt of high food prices brought
about by countries’ adoption of biofuels. Tightening
monetary policy, with higher interest rates, would be
advisable for countries like the Philippines, Johnson
said.
“The
implication is that monetary policy in middle-income and
developing countries will need to be tighter—with higher
interest rates—than it would otherwise be. Of course,
there may also be nonmarket-based policies, such as
price controls, that lead to distortions. This will tend
to increase the interest-rate differential between
poorer and richer countries, which are tending toward
lowering interest rates. This will, in turn, tend to
increase the so-called global carry trade, in which
people borrow in a currency with a relatively lower
interest rate [for example, the yen] and invest in a
currency with a relatively higher interest rate [for
example, developing-country currencies],” Johnson
explained.
Johnson
said the adoption of biofuels by many countries has
recently sharply increased food prices; and that while
biofuels would mean a diversification of energy sources
for the energy sector, some benefits of biofuels were
“exaggerated.”
The IMF
economist explained that biofuels are a type of
renewable energy source, citing as an example ethanol
which comes from corn. Ethanol can be mixed with
gasoline for automobiles.
“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 net energy—you use almost as much oil
producing and transporting the ethanol as you’d use to
generate the equivalent amount of gasoline. It also
doesn’t significantly reduce carbon emission. But it
does drive up the price of corn,” Johnson said.
Johnson
said higher food costs would have a significant negative
effect on emerging countries like
China,
where food accounts for around 30 percent of consumer
expenses; and in many low-income developing countries
where food expenses account for as much as 50 percent or
more of household costs.
He said
poor people in urban areas would especially be affected
by the sharp increase in food prices. While people who
produce enough food for themselves as well as markets
may benefit from higher food prices, the urban and rural
poor would not.
“With
population growth continuing in many poorer countries,
rising food prices will put increasing pressure on the
budgets of the very poorest,” Johnson said.
“The
really bad news is for poor people in urban areas. Quite
aside from considerations of macroeconomic policy, the
impact of high food prices on these people is
straightforward and downright painful. They need to pay
more for what they eat,” he added. |
