The silver lining in high commodity prices
By Kenneth Rogoff
Today's soaring commodity prices scream a fundamental truth of modern life that
many politicians, particularly in the West, don't want us to hear: the world's
natural resources are finite, and, as billions of people in Asia and 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 biofuels 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 George W Bush administration has instituted huge subsidies
to American farmers to grow grains for biofuel production. Never mind that this
is hugely inefficient in terms of water and land usage.
Moreover, even under the most optimistic scenario, the United States and 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, isn't 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, the Organization of the Petroleum Exporting
Countries 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 past five
years. The proximate cause is a global economic boom that has been stronger,
longer, and more broad-based than any in modern history.
Asia has led the way, but the past five years have been the best that Latin
American and Africa have 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
today's commodity prices because they realize that future generations are going
to want commodities, too, isn't 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 Africa had 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 Asia and other emerging nations begin to
consume a larger share of the global pie.
True, when today's 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 today's 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 International Monetary
Fund.
(Published with permission of the
Global Policy Innovations program at the Carnegie Council for Ethics in
International Affairs.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
