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Managing the Effects of Higher Food and Fuel Prices

The twin food and fuel price hikes, now compounded by the global financial crisis, are impacting world macroeconomic stability, and policy responses have generated fiscal pressures in many developing countries. The second ECA GDLN event on the food and fuel price crisis in ECA countries took place on October 9 th , with Armenia, Albania, Kazakhstan, Russia, Serbia, and Tajikistan participating, along with experts in Washington.

Food Crisis
Sanjay Kathuria, Gary Fine, Donald Mitchell and Arvind Subramanian
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Food Crisis

The event focused on recent trends and key determinants behind higher food and energy prices and what has been the impact on the poor and vulnerable, as well as appropriate tools for managing inflation, and the effects of different policy options on inflation management.

Donald Mitchell, lead economist and head of the commodities team of the Bank's Development Prospects Group, provided an update on the latest global crisis development, in particular how most commodity prices have peaked and begun to decline due to the slowing of economic growth and the current financial crisis. Oil prices especially have declined sharply from almost $150 a barrel to less than $90 a barrel as a result of the demand slow down.

According to Mitchell, food prices have begun to fall in the last few months, and are expected to continue falling. The interrelationship between food prices and oil prices is currently unprecedented, and shows that the sharp decline in oil prices leads to the lower food prices. Fertilizer prices, however, continue to remain at very high levels, although the projection is that they start to decline because of the fall in food and energy prices. Because of the financial crisis and its increasing impact, the current economic forecast indicates a much slower growth in developing countries and a much deeper recession in the industrial countries which, in turn, leads to a sharply lower forecast of commodity prices.

Arvind Subramanian, senior fellow at the Peterson Institute for International Economics and Center for Global Development, presented policy options for addressing inflationary shocks, focusing on three issues: the origins of the current inflation problem, the possible national responses to the inflationary shocks, and potential international responses that would aid individual countries in better addressing the shocks.

Subramanian said that general considerations for countries responding to inflationary shocks include such issues as the importance of inflation in a society and the tolerance level of that society for inflation. He said that an important policy that has contributed considerably to food price inflation is the current biofuels policies in the U.S. and the EU. The stagnant agricultural production has also contributed to recent food price increases, and there is a need to boost agricultural research.

According to Subramanian, policy options for small open economies of Eastern and Central Europe will present rather difficult choices because of the many objectives these countries might have and the trade offs they might be forced to accept. The policy responses, therefore, should be geared to the particular country circumstances.

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