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As mentioned before, agricultural prices are very high right now. I some countries, affected poor people have rioted for their government to do something about it. So, what should it do?
Some governments in developing economies have already taken actions: price controls and export restrictions. Great, exactly what they should not do, attacking the symptoms: prices are high, and local production can be sold at such prices elsewhere and gets exported. But the root of the problem that creates this discontent is the poverty, not the high prices. Thus the answer is some sort of income support.
Why should prices not be prevented to increase? Because this will spur production. As Zimbabwe is dramatically showing currently, price controls dry up the supply. Why should borders be kept open? For the same reason: it encourages production, plus brings income home.
Monday, April 14, 2008
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5 comments:
And how are these developing countries supposed to provide income support? They are unable to raise any taxes to do so. All they can do is close borders and cap prices.
I agree such countries have trouble raising funds. But capping prices and closing borders is going to be counterproductive. Yet, this seems to have been the first reaction.
Has it ever happened that price controls or constraints to trade have proven positive? I cannot think of any example.
Firstly, a lot of developing countries have heavily regulated economies anyway. In many cases it is not new regulation, but changes to existing regulation: they are not moving away from a free market, they are just tweaking how things work a bit.
Secondly, supplies are inelastic in the short term: it takes at least a cycle from planting to harvest for supplies to adjust. For someone who is hungry today, this is a problem that can be faced another day.
Thirdly, how would you implement higher tax and income support third world conditions? I can see no way of doing in - certainly not here in Sri Lanka, and,a s far as I know, conditions are no more favourable elsewhere.
Someone is bound to say it, so I will say it first... "Story of the second-best".
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