Factors Behind the Food Price Increase in 2008

Currently the world food prices are increasing rapidly. This food price increase or inflation due to food price increase is a crucial economic and social problem in the developed and in particular in the developing world. Economists of different school of thought have different explanations for this food price increase or inflation due to food price increase particularly in 2008. In addition, their solution for the current food price increase is not anonymous.

It is obvious this is an important problem for the world because if not solved adequately it may cause political and social instability particularly in the third world as most of the population cannot afford to purchase adequate quantities of food if food prices increase continuously as their per capita income is very low compared to the developed world. It may also disrupt world trade because of slowing of economic growth in third world and they may have less purchasing power to buy goods from the developed world and indirectly it will affect the developed world in a global economy.

Popular economic argument for the current food price increase

The Economists who believe in the market economy and price mechanism to allocate resources explain the current increase in prices are due to increase in demand for food because of India and China as they are becoming a major consumer of grain and other meat products because their impressive economic growth recently compared to their previous economic growth rates. As well, due to energy crisis and the increase in oil prices and the use of ethanol and bio fuels are decreasing the production of food because the land is allocated to the production of bio fuels rather than the production of food in the developed world and the decrease in food production in the third world due to environmental problems, trade problems and draught issues as well as land is absorbed for other uses than agriculture due to rapid industrial development. As the demand increases and supply is decreased or become more inelastic then according to supply and demand the price will increase in the short term. These Economists believe the market will resolve this food price increase as the price mechanism will adjust demand and supply so that food supply will be increased partially due to the high prices and farmers may find ways to reduce costs and increase production by better farming practices and food technology. In addition demand may reduce because consumers may substitute food products, which are cheaper and economize their consumption to maximize their utility as rational consumers in a competitive market economy.

Alternative economic argument for the current food price increase

In the paradigms of heterodox economist and some radical environmental economist point of view the food price increase is due to the current global economic system to address the environmental issues of rising temperature and market failure in this area and environmental issues impact on weather patterns and the occurrences of severe draughts and the disruption in food production and the practices of multinational companies and monopoly practices and trade issues in agriculture as the developed world subsidize its farmers and its effect on the farmers in the third world and the increase in oil prices due to the dependency on oil by the developed world and inadequate investment in alternative energy sources to address the climate change issue. That is in their argument market forces alone will not solve the current food price increase alone because of these critical structural issues of the current world economic system and the working s of market system, which is less than optimal due to many imperfections in the market and the process of accumulation in a market economy which causes excessive concentration of the mode of production in the hands of few capitalists and private monopolies. In their view, the current food price increase cannot be solved if the current climate change issue is not addressed adequately and government involvement in the economy and international co-operation and transforming the current global economic system from the current globalization process, which creates winners and losers in the same time.

Conclusions

The arguments by the market economists are not the only explanation for the current food price increase in 2008. There are other arguments for the current food price increase in 2008. The alternative argument cannot be ignored because the market failure to address the environmental issue is a fact and in practice to resolve this issue is complex and it takes time and international co-operation is necessary and it is not easy in practice. If the climate issue is not addressed by the international community then there is a possibility the food price increase will not be temporary but may become a permanent issue and may cause instability in the economic and social arena. The market mechanism to address these issues will not be adequate and government must play a role to rectify this market failure. In addition, the trading system in agriculture must address adequately so that food prices can be reduced by increased production and efficiency and sustainability of agricultural practices. In addition the oil price issue also must be addressed in an environmentally sustainable manner. Market alone will not solve this problem because markets have their limitations and weaknesses to resolve such issues, which are more complex than only demand and supply issues.

The heterodox and radical environmental economist paradigms cannot be ignored as thir arguments have some credibility and empirical validity as well theoretical complexity than the market economist arguments for the current food price increase.