April 2013 newsletter – letter to the editor

Dear Sir

Wilfred Beckerman (Newsletter no. 160 January 2013) emphasises the role of commodity prices in the inflation and subsequent dis-inflation of 1978-83 and argues that the ‘victims’ of the downswing were ‘primary product producers in the poor countries’. However, a very large part of primary product imports to rich countries consist of oil, and most oil exports came then as now from countries that were not poor. Indeed, declines in energy prices are in general helpful to people on low incomes worldwide. And the distributional impact of falls in other primary product prices is mixed, with for example falls in food prices benefiting poor city-dwellers at the expense of low-income rural producers.

Aside from these distributional issues, it is worth noting that the fall in oil prices in the early 1980s (and beyond) saw the impact of deflationary macro policies augmented by measures to reduce energy intensity of output, as well the normal operation of price signals, which triggered major investment in oil and gas fields that would have been uneconomic at earlier low prices. The effect was to create a two-decade oil glut with Brent equivalent prices averaging around USD 30 (adjusted to today's US consumer prices) from 1984 to 2004.

All this is thoroughly relevant to the current monetary cycle as the world struggles with the aftermath of the expansionary central bank policies of 2001-6 which (in the US, and UK) explicitly chose to ignore direct oil inflation. This facilitated the shift of the world from oil glut to oil shortage, as Asian demand surged. The result was a near-quadrupling of oil prices from the USD 30 mentioned above, to USD 110 average since 2008. This enormous adverse supply shock clearly exacerbated the financial crisis, arguably was part of its cause, and can be seen as a major drag on recovery since then.

The conclusion is that primary product prices are a core part of the transmission mechanism for rich-country macro policies, but tend to be ignored because of a co-ordination failure in which policy-makers are too focused on domestic effects. Changing global co-ordination processes to recognise this should surely be a key conclusion of any review of the 1981 policy decisions, and indeed of those in 2001-6. Any resulting improvement in stability of primary product prices should benefit not just high-income countries and primary producers, but also the poor consumers of those products.

Giles Keating
Credit Suisse and St Catherine's College, Oxford
(Postal address: 1 Cabot Sq,, London E14 4QJ, phone 02078881328)

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