Living with High Prices: A Policy Brief

Date: May 2008
Type: Reports
Country:
Subject:
Series: Pacific Studies

Description

The strengthening in world commodity prices that became so pronounced in late 2007 and early 2008 may prove to be a new phase in world markets. Prices for the key commodities traded in the Pacific are projected to remain much higher than we are used to. This is because structural changes in the world economy are shifting the demand-supply balance in commodity markets.

The high world prices are a boost for some Pacific Island nations because their commodity exports are now worth much more. But, at the same time, high commodity prices are a problem for other Pacific Island nations. The cost of fuel, wheat, and rice imports has risen substantially, or soon will. A higher cost of imports adds to the cost of living, placing additional pressure on the disadvantaged. Higher airfares caused by high fuel costs could result in the region’s all important tourism industry losing momentum.

Recent increases in world prices may lead to a 10% reduction in the spending power of low-income households in some Pacific Island nations, and an additional 5% of their population may dip into poverty during 2008.

Local foods can help buffer the region against turbulence in world markets by replacing high-priced imports. High prices will provide the incentives that the agriculture sector needs to increase production, a reaction that will ultimately help reduce food prices. Agriculture, however, has been neglected in recent decades and will take some time to rebuild. The surge in food prices highlights the importance of ending this neglect and paying more attention to the rural economy. Emergency food relief may well be needed over the year by those on low cash incomes and without the option of growing their own food.

This policy brief has been prepared by the Asian Development Bank to help the region manage the adjustment to high prices. The policy brief describes the situation internationally and in the Pacific. It looks at what regional governments and development partners can do to help lessen the problems created by high prices. It also looks at what can be done to capture the benefits that high price offer, particularly to local food producers.

Contents

  • Foreword
  • Summary
  • Commodity Prices Have Risen Dramatically 
  • Drivers of High World Prices
  • Prices in the Pacific
  • Winners and Losers
  • Adjusting to High Prices
  • References