Agflation is baaaaaack!

Posted in economics, politics by jrahman on September 23, 2010

Agflation — inflation of food and agricultural products — is back.  In the first half of 2010, food prices in Bangladesh higher by over 10% compared with their levels a year earlier (Chart below).  This meant a food price inflation faster than at any time under the last BNP government.  

For a government elected in large part because of its commitment to keep prices stable (the famous 10 taka kg rice pledge), this is not a good look.  Ironically, high inflation is not the government’s fault.  But it still deserves blame for actions and inactions that may make matters worse, with unattractive political consequences.

First things first.  High prices are not Awami League’s fault.  Food prices have risen by more in our neighbouring countries since the beginning of 2009, as is shown in the chart below.

In fact, food prices have risen in the global market, according to the Food and Agriculture Organisation’s figures in this period — see below.

In fact, the government has been lucky — things could have been worse.  Cereal prices were slugglish in the global market over this period, until very recently.  And taka hadn’t appreciated by as much against the Indian rupee as it did in 2008 (chart below) — as argued here, taka-rupee exchange rate is a key determinant for our food prices.  In fact, more recent slight depreciation probably help cushion against the sharp rises in food prices in India.

The government was also lucky earlier in its term, when it received an unexpected honeymoon from the falling commodity prices in the global market — a side effect of the Great Recession. 

Did it use the lucky break wisely?  That’s a subject of its own post.  But the break is over.  And I suspect we won’t be seeing any more difficult decisions from this government.  If you have a list of difficult things that you wanted AL to do, feel bad because they won’t happen. 

This is because, unless the world heads into another major recession, high prices are likely to stay.  Anecdotally, prices have continued to climb in recent months. 

The thing is, we don’t know exactly by how much, because the BBS hasn’t told us. 

We are nearly ending September, but the latest BBS inflation figure is for June.  All major South and Southeast Asian coutries — whose statistical agencies are comparable with ours — have inflation figures for August.  There was a general rise in food prices in those countries.  Bangladesh should be no exception. 

So why is BBS silent?  On conditions of anonymity, a senior BBS official has told me that they are afraid of publishing a figure that may damage the government’s image.  After this, can you blame them? 

It seems that BBS is afraid to say that its estimates for weak harvest last year has come true.  It’s also afraid to say that aman might be weaker too.  And it’s afraid to state the obvious that food prices are high and rising. 

While the government doesn’t deserve the blame for initial price rises, it definitely seems to be guilty of hiding its face in the sand.  In fact, it also deserves the blame for harping on about ‘syndicates, corrupt businessmen, and conspirators’.  There is simply no evidence that these ‘nefarious forces’ are behind high prices — my stories are here, while a more formal academic account by World Bank’s Zahid Hussain and Sanjana Zaman finds:

Reported concentration ratios are rather low by international standards and at best suggest the presence of loose oligopolies. It is possible that these large players implicitly or explicitly collude to provide price leadership, but the study sheds no light on how these players actually operate. If the existing players are making “excess profits”, what is preventing entry of new players to compete for these profits? There are no legal or policy barriers to entry. It would be hard to argue that there may be “natural” or technological barriers. The source of the market failure is not clear…

Corrupt businessmen or anti-liberation forces are not the problem here.  There are specific economic reasons, with economic solutions.  If the government isn’t willing to listen to evidence-based argument, it will deserve the ignonimity of public opprobrium.  Even if it’s not at fault, it will be blamed for high prices.  And it will lose in the court of public opinion.

The thing is, as the late Ahmed Safa said, AL’s victory is its alone, but when it loses, the whole country loses.

(A slighly different version is posted in UV).

Update: 30 Sep 9.22am Dhaka time.

The video of 10 taka kg rice promise (hat tip, DS)

14 Responses

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  1. Diganta said, on September 24, 2010 at 11:52 pm

    I saw price index a few days back and felt that Bangladesh is lucky that there’s no impact on rice prices this time. But if it continues this way, sooner or later rice price would start to increase out of cascading effect.

    Besides, cotton prices are also on the rise and it’s not a good news for Bangladesh.

    I agree to last part of your post. Because of a highly politicized atmosphere, BSS can not always provide us with the statistical transparency that we must have. Not all problems has a political root and cannot be solved politically. Blaming the Govt for each of these are actually equivalent to push illiterate population of Bangladesh into a deeper hole.

    • jrahman said, on September 28, 2010 at 12:43 pm

      Thanks for the FAO link. The third chart is from there. Bangladesh has been quite lucky so far, but at some point luck will run out.

  2. Diganta said, on September 24, 2010 at 11:56 pm

    Here’s where I tracked the rice price, forgot to add the link in my previous comment.

  3. DS said, on September 28, 2010 at 6:30 pm

    Jyoti bhai,

    Thanks for bringing this back into focus again. Don’t remember if I sent you this: . MA Taslim touches on some of the points you’re making about bureaucratic production of statistics vs political image control.

    A few thoughts about the post: I see that the hike in food prices was driven mainly by sugar and dairy prices, while the price of cereals actually dived there for a bit. Given our “aggregate diet”, we’ve been lucky indeed. Do different countries get different weights based on average consumption patterns of different kinds of food?

    Re: 10 kg. price of rice, first the video evidence which you should have linked to :). Secondly, I think it’s a good thing for your economics/lay readers to understand what that promise actually entails given that rice was trading around tk. 20/kg at that time – negative inflation. From that first chart we see that hasn’t happened in BD for the past ten years, and that’s something we need to emphasise. That isn’t a workable promise to keep prices stable, but to keep them low (and, perhaps, affordable). It’s a pretty bad promise, but a much better slogan than “mulyobriddhi hotey dibo na” – moidan politics at its best. I know her advisors/ministers have contradicted her on this, and this is precisely why.

    • jrahman said, on September 30, 2010 at 9:33 am

      Thanks for the Taslim link and the video. I hadn’t seen either before.

      Taslim is spot on here:

      “…the simplest answer requiring the minimum number of assumptions was of course a shortage of rice (or excess demand) in the market. The ordinary law of the market then explained the price hike. The problem, however, was that the agriculture ministry precluded this answer by claiming a record harvest of the aman crop. Consequently, people sought answer to the conundrum with additional assumptions such as syndication and hoarding.”

      On the video and politics of it — well,I don’t begrudge a politician seeking election reducing complicated policy positions into simple sound bite. We have maidan politics, westerners have their news clips. That’s fine. I do, however, have a problem when the same politicians refuse to accept facts and prefer their fantasies over reality. The Agriculture Minister is simply refusing to admit the reality. And that’s an ugly development.

      As for the question about different weights for different countries, don’t think FAO does it. Of course the country indices by national statistical agencies have different weights.

      • DS said, on October 3, 2010 at 4:42 am

        Re moidan vs news clips – agreed to an extent. But don’t Western politicians usually avoid soundbites related to prices and concentrate more on increasing incomes and affordability? Given the huge role of expectations in managing inflation, that seems more prudent. I know its two ways of looking at the same thing, but somehow trying to managing price expectations seems riskier than trying to manage income expectations. Am I being completely wrong-headed here?

  4. Rumi said, on October 3, 2010 at 8:24 am

    Jyoti and DS ( well I haven’t heard of this name in many many years…), Bangladesh apparently is not far behind the west where the sound bites have embraced the Moydan/ field politics. The specific clip you are talking about has already been used in the moydan. In last big BNP meeting in Paltan moydan, this specific clip was shown in massive screen beside the podium. ( The morons however don’t understand that the audience in Paltan do not need to see the images, the folks who won’t attend Paltan need to see it. )

    • DS said, on October 13, 2010 at 8:56 pm

      “many many years” – at best months Rumi bhai! 🙂 Will try to be more active and keep in touch.

  5. jrahman said, on October 7, 2010 at 9:08 am

    DS, we haven’t seen sustained inflation in the West since the 1970s, so the soundbites haven’t been about it. Back in the bell bottom days, they too talked about ‘keeping the cost of living low’.

    And yes, it is easier to manage expectation of income gain than anything on the prices front. In an emerging economy like Bangladesh, price level will rise — that’s an inevitable part of development process (look up Balassa-Samuelson Theorem). So our politicians should definitely talk about affordability, and not the crude form of populism seen here.

    Rumi bhai, it is indeed an importat point that people who don’t go to Paltan in fact drive opinion, and BNP needs to pay attention to this group (not just on this issue, but everything).

    • DS said, on October 14, 2010 at 2:14 am

      Fair enough on the soundbites front. Need to go back to the Carter/Wilson sound bites then. 🙂 Thanks for the Balassa-Samuelson tip. Do you really think that’s what’s driving inflation in BD as opposed to other factors?

      • jrahman said, on October 17, 2010 at 12:50 pm

        No. B-S is perhaps very likely a small part of our inflation. What I was trying to say is that given B-S, prosperity would be accompanied by higher prices, and thus this kind of populism is not needed.

  6. […] minister in this regard. I hope we’ll succeed in containing it.  At least he accepted the reality, instead of blaming the anti-liberation forces (aka BNP) for […]

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