Friday, 4 March 2011

Don’t dismiss the impact of speculation

By Neil McCulloch

Last week’s Economist article on the food crisis (“Crisis Prevention”, 26 February 2011) has generated much debate within the development blogosphere – read Oxfam’s Duncan Green’s analysis and The Economist’s John Parker’s response for a couple of examples.

I was disappointed that the article so readily dismissed the role of speculation in driving up food prices using Friedman’s old argument that “for every buy, there is a sell”. It’s particularly surprising since The Economist has written repeatedly about the role of asset price bubbles in exacerbating the current financial crisis. 

Since Friedman’s work more than 50 years ago, economists have developed strong theoretical foundations showing how rational asset price bubbles can inflate for long periods of time (certainly long enough for a family to starve). Moreover, there is considerable evidence that speculation in assets linked to commodity prices had an important role in driving up prices in the last food price crisis in 2008 – see the United Nations Special Rapporteur on the Right to Food.

It is right, therefore, that the G20 should seek appropriate forms of regulation to discourage the formation of commodity price bubbles, in addition to addressing the trade and agricultural policy issues the article mentions.

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