Focussing on a grim scenario

A new IMF study that looked at the impact of soaring food and oil costs on the global economy echoes the grim findings of the United Nations and other world bodies. Although the deleterious consequences of high commodity prices are felt across the globe, it is the poor and developing countries that are bearing the brunt of the food and fuel inflation. Oil prices, now in the region of $146 a barrel, are unlikely to come down in the near future. As the biggest oil producer Saudi Arabia says, the world might well have to live with the high oil prices. Some countries, especially those that depend on imports are, in the IMF’s words, “at a tipping point.” Poor countries would become poorer. Almost all of them are paying billions of dollars to import food and fuel. If food prices rise further some governments would no longer be able to feed their people and at the same time maintain macroeconomic stability. Higher energy and food costs are already eating into the budgets of many cash-starved countries, denting their growth prospects. Sooner than later, most of them will be confronted with a deterioration in their public finances and balance of payments, apart from unacceptably high and politically destabilising levels of inflation. Poor countries that are highly dependent on food imports are particularly vulnerable to rising food prices. The international community collectively has a crucial role in alleviating the distress.

Unfortunately, recent experience shows that global cooperation is not forthcoming even while dealing with critical issues such as food shortage and climate change. For instance, at the Rome summit on food, the United States denied that diversion of food crops for generating biofuels was a significant cause for food shortage. The Doha development round has not moved forward mainly because of disagreement over scaling down of agricultural subsidies by the U.S. and the EU. The IMF report calls for the global food market to be kept open. Many countries including India have clamped down on food exports to ease domestic supply. Given that food inflation will remain a big threat to price stability in many countries, it is unlikely that their governments will completely open food trade. Realising that each country has certain unique features, the IMF does not advocate uniform policy responses to the shock. While recognising that some countries might have some leeway in their budgets to pay for imports, it suggests that others need to be helped by the international community.

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