Saturday, May 03, 2008

The Uproar Over Bush's Comments

Today's paper reported President Bush commenting on Indian food consumption as a cause for the growth in international prices. Here is what the Hindu reported.

At an interactive session on economy in Missouri, Mr. Bush argued that there were many factors for the present crisis, only one of which was investment in biofuels such as ethanol.

"Worldwide there is increasing demand. There turns out to be prosperity in developing world, which is good. It’s going to be good for you because you’ll be selling products in the countries, you know, big countries perhaps, and it’s hard to sell products to countries that aren’t prosperous. In other words, the more prosperous the world is, the more opportunity there is", he said.

"It also, however, increases demand … There are 350 million people in India who are classified as middle class. That’s bigger than America. Their middle class is larger than our entire population. And when you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up", he said.

I see nothing objectionable here but for some reason that I do not comprehend, apparently, all political parties in India have gone ballistic about it. Several comments as reported are chronicled below.

Jairam Ramesh: It shows how wrong President Bush is in his understanding of economics — first he blamed India and China for spiralling oil prices and now he is blaming India for increased food prices. There should be limit to this kind of talk.

Prakash Karat: This is adding insult to injury. Mr. Bush is covering up the U.S. policy of subsidising and promoting bio-fuel out of crops like corn — the major reason for the shortages and spurt in food prices.

D.Raja: Ridiculous and smacking of an imperialist mindset. Probably Mr. Bush does not know about a vast majority of our people who do not even get enough food.

Congress (no name mentioned): how could anyone blame poor India for eating better and causing shortages when in fact it was a net exporter of food and self-sufficient for several decades?

Prakash Javadekar: [These remarks are] irrelevant. This is similar to Ministers blaming global prices for inflation in India, which is not dependent on imported food. The global population has not doubled overnight and it is the business of planners in India and the world to ensure that food supply remains secure. Perhaps Mr. Bush has his eye on his domestic constituents in an election year and [at] a time when the U.S. economy has slowed down.

M.A.Naqvi: The remarks are “unwarranted” since the majority of Indians need more nutrition not less.

Shakeel Ahmed: The U.S. is perhaps agitated that India has banned exports of some food items to check domestic inflation and ensure adequate supply.

Manish Tewari: Since the 70s India has been self-sufficient in food grains. The view that global food shortage is a result of enhanced consumption is erroneous.

Reading his comments, I certainly do not get the impression Bush is blaming anyone for the price rise. He is simply articulating the causes for it as facts. Are Indian leaders so hypersensitive that they take umbrage at even the most innocuous of comments? Or are they unable to distinguish between the two?

Contrary to Karat's claim, Bush did not say that diversion of foodgrains towards biofuel production is not a cause. As for the validity of the President's comments, read this post by Posner and this one by Gary Becker, two prominent economists at the University of Chicago (the latter is also a Nobel Laureate). Becker highlights how the price rise came about without a population growth and how the World Bank's index of food prices increased by 140 percent from January 2002 to the beginning of 2008, and a full 75 percent just since September 2006 - this phenomenon has been several years in the making and is not a sudden 2008-summer occurence both of which contradict Javadekar's implied notion of it happening overnight. As for whether rising incomes are responsible, here is what he says:

...[Rise in food prices] is only a little related to the rapid expansion in world incomes in recent years. Rather, the boom in petroleum prices and subsidies to ethanol and other biofuels are the most important forces explaining the recent increase in food prices.

...The Malthusian forces of population and income growth ontributed only a little to explaining the big increase in grain prices since 2002. The large rise of world food prices came after food prices had been either stable or declined for many years. Although incomes in China and India, countries that account for almost 40 percent of the world's population, did grow rapidly during this decade as well as during the 1990's, global consumption of corn, wheat, and rice grew more slowly since 2000 than during the five years earlier. To be sure, the slower growth in consumption is partly the result of the rapid increase in grain prices. However, if an unusually large increase in world wide demand for grains to use as feed for animals and for human consumption explained the rapid increase in these prices, consumption should have grown more rapidly during the later period, even after adjusting for any induced increase in grain prices.

Here is what Posner says:

The demand for agricultural products has grown, though not as a result of population growth; instead as a result of increased demand for ethanol and other biofuels, and for food that requires more agricultural acreage to produce. Today, besides people and pigs eating corn, our motor vehicles "eat" corn that has been converted into ethanol. And in China and India, which together contain a third of the world's population, increased wealth has led to an increased demand for meat, in China for beef. Cattle eat corn and other crops and are in turn eaten, but the amount of crops consumed in this process is several times greater than the amount that would be consumed if people ate the crops directly, rather than indirectly by eating vegetarian farm animals. China's consumption of beef, which has been growing rapidly for a number of years, is expected to grow 4 percent this year - yet it will still be only about 15 percent of U.S. beef consumption per capita.

It may be that the rising grain prices reflect in some measure greater meat consumption. While I find Becker's view that consumption trends do not justify the theory of higher incomes being responsible persuasive (that echoes the views of Indian leaders as well), the issue, at the very least, is debatable. The President's comments are plausible even if incorrect and and certainly not preposterous or even otherwise outside the realm of possibility. The political storm is therefore unwarranted.

9 comments:

Anonymous said...

The very same poiticians were not really in the limelight, when our finance minister unfairly attributed the inflation situation to the global tendencies, giving himself and his government a clean chit for what ills of inflation we are facing. these people speak with a forked tongue, especially the Commies.

S.Thyagarajan

pilid said...

Dear Thyagarajan,

The finance minister was right in that the price rise does have much to do with a wider global trend. The communists and the BJP have been outrightly contesting this view but saying that the government is using this as an excuse to not take enough measures to shield Indian consumers from this phenomenon. The opposition is quite aware that to completely protect the consumer will require the government to reverse many of the market reforms it has introduced in recent years, a suggestion that it is unlikely to meet. That suits them well as it is the perfect 'aam aadmi' issue to make political capital out of.

Anonymous said...

Dear PILID,

The question should assume proportions beyond correctness, in this matter. The Governments have not totally opened up the economy of the Country and even today it is calibrated. Even today the tax regimes are so handled to protect the economy and to selectively target the industries not towing the government line. Even today there are subsidies galore, where the benefit does not necessarily enure only to the common man. In short there is so much structural deficiency within the country,which lacks so much of the ministers attention.

It is maybe allright to point out the global situation to the Indian Inflation context, but to repeat adnauseum that the global situation alone has compounded the situation, I am afraid, is missing the woods for the trees.

S.Thyagarajan

Dirt Digger said...

Pilid,
Great post, very detailed analysis as is becoming your hallmark.
I really liked the section where you literally made Javedekar look like an idiot with evidence from leading experts like Posner and Becker.
As usual the media drops the ball by not doing their research and simply catches sound bytes from the politicos.
D.Raja, as usual looks up his communist dictionary and slams the US with a imperialistic tag.
Can he not grow up and use some other adjective?

pilid said...

Dear Thyagarajan, as you correctly note, we are still far from a free wheeling-dealing style market economy. There are also a number of bottlenecks at various levels in every sector. There are no doubt various measures that the govt. of India can and is taking though the extent of their usefulness and their consequences continue to be debated.

Thanks for the complement dirt digger. Today's editorial in the Indian Express makes a similar point. Desipundit also has links to a couple of blogs (here - this one by Gurmeet is more informative and here) that show how prominent economists even from the left such as Jeffrey Sachs have held the rising demand and protectionism by India and China to be responsible. Also see this op-ed in Foreign Policy by its editor-in-chief on the impact on world resources of the growing middle class in India and China and this article in the Economist in December 2007 analyzing the causes of rise in food prices.

Tarun Mitra said...

You are correct. We Indians are hypersensetive about anything said about us by USA. Better not give any relevance to the comments made by such idiot.

pilid said...

Thanks for your comment, Tarun. I agree that these comments were unwarranted.

Anonymous said...

Check this out --> http://www.hindu.com/2008/05/07/stories/2008050755301200.htm
Apparently Chindu believes that US is targetting India and China.

pilid said...

Anon, thanks for the link. Today's readers' comments published by the paper both today and yesterday also show that it likes to feed anti-American anger however misdirected it may be. Maybe the majority of those who wrote to the paper are genuinely upset about Bush's comment but one did not see people's sentiments being similarly aired freely over Tibet which should say something about its inherent bias.