Mukti

The fifth anniversary post — food price edition

Posted in economics, macro by jrahman on October 20, 2012

Zombie ideas are those that refuse to die, no matter how strongly you debunk them.  I suspect they exist in every discipline, but they’re particularly prevalent in economics.  Tax cuts will solve every economic problem, or globalisation is bad for the  so-called 99%, these are good examples in the western context.  Syndicates of corrupt businessmen and politicians — Tarique Rahman and his Hawa Bhaban cronies, or the army, or Mujib Coat wearing men –are behind high and rising food prices — that’s the zombie idea in Bangladesh.  For the past five years, I’ve been trying to slay this zombie idea, without much success.

In one of my first Forum pieces, I linked food price rises to the taka-rupee exchange rate — the basic idea is that rice market in Bangladesh is closely linked with that from India, and as taka depreciated against the rupee, domestic rice prices rose.  Of course, by early, food prices were rising globally, thanks to American biofuels subsidies — I wrote about it here.  By the end of 2008, with commodity prices tumbling world wide and taka appreciating against the rupee, I predicted that the incoming government would have a respite on the prices front.

And lo and behold, that’s exactly what happened.

This chart shows the three month moving average of retail price of a kg of coarse rice in Dhaka market.  In the three months to June 1996, when the first Hasina Wajed government assumed power, rice price averaged 14.60 taka/kg.  When she left office in July 2001, it was 13.36 taka/kg.  In the countryside, prices were even lower.  This was the origin of ’10 taka/kg rice’ boast.  When BNP was toppled from power in January 2007, average rice price in Dhaka was 19.22 taka/kg.  It rose to about 35 taka in mid-2008, before easing to 30.67 taka when Hasina Wajed returned to power.  And then it fell even further, to reach 23.52 taka/kg in September 2009.

What happened then was also predictable — and in fact, I did predict.  I also warned that the Bangladesh Bank faced a monetary policy challenged.  In the event, what happened was probably worse than what I feared.

 

 

In this chart, the red line is rice price (taka per kg), while the blue line is taka-rupee exchange rate.  Up until late 2009, the relationship is pretty clear — taka depreciates (appreciates) against the rupee, and a few months later the rice price rises (falls).  In 2010, rice prices started rising pretty much as taka started depreciating.  Then in 2011, rice prices shot up to record high, even though taka hadn’t depreciated that much.

What was happening?

Well, 2011 was a time of multiple monetary and financial shock to the economy.  The DSE bubble burst (that something peculiar was going on became obvious much earlier, and actions then would have spared us from the volatility of 2011).  The Bangladesh Bank printed money to pay for the government’s quick rental power plants.  The imported fuels needed for these plants pushed us towards a balance of payments crisis, and in the year to January 2012, taka depreciated by 17% against the dollar.  With double digit inflation (not just food prices, but all consumer prices), by late 2011/early 2012, the economy appeared to be overheating.

Even though I warned about the selection of Atiur Rahman as the Bangladesh Bank governor, if anything, I underestimated his inability to manage the monetary and financial system.  But even more importantly, I underestimated the current government’s ability to screw up basic macroeconomics, particularly given the role prices played in its 2008 political triumph.

The IMF programme seems to have bought a respite.  I don’t have rice price data beyond November 2011, but inflation has been easing steadily in 2012 — see the next chart.

 

Unfortunately, there might be problem ahead.  The next chart shows that global food prices, particularly cereal prices, are pretty high.

 

Even if the government can get the domestic policies right, high global prices will make it hard for the prime minister keep her promise.

And make no mistake, that video will feature prominently whenever, and under whatever rules, the next election is.

Bangladeshi politics, I suspect, will still be about the price of rice in 2013.

10 Responses

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  1. Raihan said, on October 21, 2012 at 3:48 am

    JR, I just heard you speak in youtube! What is wrong with you? Your accent is f***ed up!

  2. shafiq said, on October 21, 2012 at 2:01 pm

    Although droughts and irregular weather have claimed bad harvest of grain and corn in USA and Europe, rice harvest in 2012 has been quite good. Thanks to record production in East and South East Asia. Awami government will not face the wrath of ‘dalvat’ masses this winter. What happens next year is anybody’s guess.

    • jrahman said, on October 27, 2012 at 6:27 pm

      All street uprisings in our history have been in the winter. There is no Bengali Spring or Summer, because after March it becomes unbearable to march in the street. If the government can survive the winter then they’ll not worry about mass uprising. Whether it matters electorally is a different thing.

  3. My Complaint said, on October 26, 2012 at 8:37 pm

    Mr. J Rahman
    This is not promise. This is sleep of Tongue. Don’t take this serious. Ha. Ha.. Ha……

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  8. […] way the Bank’s policy inactions contributed to inflation.  As I’ve said many times before, the taka-rupee exchange rate is a key determinant of rice prices in Bangladesh.   Bangladesh Bank, and the government, should have anticipated that as taka […]

  9. […] the Bank’s policy inactions contributed to inflation.  As I’ve said many times before, the taka-rupee exchange rate is a key determinant of rice prices in Bangladesh.   Bangladesh Bank, and the government, should have anticipated that as taka […]


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