The
Silver Lining in High Commodity Prices
by Kenneth Rogoff
Cambridge Todays soaring commodity prices scream a
fundamental truth of modern life that many politicians, particularly in the
West, dont want us to hear: the worlds natural resources are finite, and, as
billions of people in Asiaand elsewhere escape poverty, Western
consumers will have to share them. Here is another truth: the price mechanism
is a much better way to allocate natural resources than fighting wars, as the
Western powers did in the last century.
The United States ill-considered bio-fuels subsidy program
demonstrates how not to react. Rather than acknowledge that high fuel prices
are the best way to inspire energy conservation and innovation, the Bush
administration has instituted huge subsidies to American farmers to grow grains
for bio-fuel production. Never mind that this is hugely inefficient in terms of
water and land usage.
Moreover, even
under the most optimistic scenario, the USand the world will still be relying
mainly
on conventional fossil fuels until the hydrocarbon era comes to an end (which
few of us will live to see). Last but not least, diverting vast tracts of
agricultural land into fuel production has contributed to a doubling of prices
for wheat and other grains. With food riots in dozens of countries, isnt it
time to admit that the whole idea was a giant, if well-intentioned, mistake?
Another wrong
turn is the proposal recently embraced by two American presidential candidates
to temporarily scrap taxes on gasoline. As laudable as it may be to help
low-income drivers deal with soaring fuel costs, this is not the way to do it.
The gas tax should be raised , not lowered. The sad fact is that by keeping oil
prices high, OPEC is doing far more for environmental conservation than Western
politicians who seek to prolong the era of ecologically unsustainable Western
consumerism.
Of course, it is
not just oil prices that are high, but all commodity prices, from metals to
food to lumber. Prices for many commodities have doubled over the past couple
of years. Oil prices have risen almost
400% in the last five years. The proximate cause is a global economic boom that
has been stronger, longer, and more broad-based than any in modern history.
Asiahas led the way, but the past five years
have been the best Latin American and Africahave enjoyed in decades.
Broad-based commodity shortages often begin to emerge
at the end of long global expansions, and in this respect, the present boom is
no different.
Some politicians also
complain about speculators who, more and more, are trading commodities on
complex and growing markets that allow them to bet on whether, say, future
demand from emerging markets is likely to outstrip growth in future supply. But
why is this a bad thing? If speculators are bidding up todays commodity
prices because they realize that future generations are going to want
commodities, too, isnt that a healthy development? High prices for commodities
today mean more supply for future generations, while at the same time creating
an incentive to develop new ways to conserve on consumption. Again, high prices
are helping in ways that Western politicians seem afraid to contemplate.
Admittedly, the
global commodity price boom has had profound, albeit enormously complex and
uncertain, effects on poverty. While surging commodity prices are helping poor
farmers and poor resource-rich countries, they are a catastrophe for the urban
poor, some of whom spend 50% or more of their income on food.
One element of
the solution is to compensate the very poor for the higher cost of
survival. Over the longer term, more
money for fertilizer, and other aid to promote self-sufficiency, is also
essential. The World Bank, the United Nations, and even the Bush administration
have moved to help, albeit in small measure relative to the scale of the
problem. Of course, it should be noted that if economic reform in resource-rich
Africahad been proceeding at the same pace as in Asia, the era of soaring
commodity prices might
have been postponed for another century.
For now, though,
instead of whining about high commodity prices, governments should be shielding
only their very poorest citizens, and letting the price spikes serve as a
wake-up call for the rest of us. The end to Western consumerism is not yet at
hand, but high commodity prices are a clear warning that big adjustments will
be needed as Asiaand other emerging nations begin to consume
a larger share of the global pie.
True, when
todays global economic boom ends, as it inevitably will, commodity prices will
plummet, easily 25%, quite possibly 50% or more. Western politicians will
cheer, and many pundits will express relief that less money will be flowing to
undemocratic countries in the developing world.
But todays era
of high commodity prices is not just a bad dream that should be forgotten when
it ends. High prices send a real message about scarcity in a globalizing world.
Those who ignore it, especially by blocking market forces, are making a tragic
mistake.
**
Kenneth Rogoff is Professor of Economics and Public Policy at Harvard
University, and was formerly chief economist at the IMF.
Copyright:
Project Syndicate, 2008. http://www.project-syndicate.org/commentary/rogoff42
[Non-text portions of this message have been removed]
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