Macroeconomy

The question of whether China is overwhelmed by capital inflows has been asked for quite a while now. If a question continues to be asked, there is probably a good reason for it. Whether the answer is yes or no depends on how you look at it.

Brad Setser, in his highly recommended blog at RGE Monitor, has written a lot about the drivers of capital inflows into emerging markets and how they challenge fixed exchange rate policies.

Soaring food prices have suddenly become a major concern for policy makers in East Asia.  The price of rice - which provides one third of the region's caloric intake - is a particular worry.  Rice prices have been moving higher since around 2004, although this was from very depressed levels in the early years of the decade.  Prices surpassed $300 a ton in early 2006 for the first time since the late 1990s, kept moving higher, and then took off at an accelerating pace from late 2007:  up 11 percent in the the fourth quarter, then 56 percent in the first quarter of 2008 and then 61 percent in April 2008 alone. Prices touched over $1000 a ton on some days in April. Domestic food price and overall consumer price inflation has accelerated in most economies and the pace of poverty reduction in East Asia  in 2008 is - at a minimum - likely to slow .

There's been much talk in recent months about the revision of the International Comparison Program and the PPP (Purchasing Power Parity) figures derived from it. The Bank's China Quarterly Update launched in early February included a special section on the implications of this revision for China, and our own David Dollar explained here that the new PPPs show poverty in China has in fact reduced more than previously calculated.

For more details and full estimates, check out this site that includes explanatory sections on the Poverty PPPs, the methodology used, and the final results for Asia. Also, you can create and download your own data query here.

Last week China reported its first quarter GDP data.  Consumer inflation for the quarter was 8%, which is too high, but we already knew that.  The main news was that GDP growth came in at 10.6% year-on-year.  This is down from last year’s 11.7% rate, but higher than most forecasts for 2008 (including the Bank’s revised 9.4% forecast).  There was a healthy decline in the trade surplus for the quarter of about $5 billion or 10%.  The trade adjustment took a good form in that exports grew at a respectable 21% rate while imports surged 29%.  Most of this increase in exports was to the European Union, while growth of exports to the U.S. moderated to a 5% rate.  All of this looks to be in the direction of the rebalancing that China is trying to achieve.

High food prices on the international markets are getting a lot of attention and are leading to different types of policy action in different countries. Discussions on the impact of international commodity prices on domestic prices often look at how much food countries import. The reasoning is that if countries are significant importers of food, domestic food prices are affected a lot by international prices, and if they are not significant importers, the impact of international prices should be limited.

In recent months I have come across several of these discussions. The most recent one was yesterday, in the Lex column in the Financial Times. Writing about the appreciation of the China’s Renminbi, Lex discusses the view of many, including we at the World Bank, that inflation concerns have strengthened the case for appreciation of the RMB. “But this belief, predicated in large part on China’s resurgent inflation, misses a key point. Consumer prices rose nearly 9 per cent year on year in February, largely as a result of rising food prices. A stronger currency would, however, do little to make food cheaper. China is largely self-sufficient in food, which accounts for just above 1 per cent of imports.“

Web reporters were busy last week with news of soaring prices for grains and other agricultural commodities.  Economist.com posted an early entry with Food for Thought on March 27.  NYT.com ran this piece on March 29.  BBC.com followed on April 3, focusing on Asia with Asian states feel rice pinch.  The following day FT.com had posted an entire page titled: In depth: the rising cost of food, while Bloomberg.com’s Glenys Sim reported from Singapore.

World Bank President Robert Zoellick is calling for a New Deal for global food policy – a reference to the 1930s Great Depression-era initiatives of American president Franklin D.

"Testing Times Ahead" is the title of the World Bank’s just released April 2008 East Asia and Pacific Update.   As one of the team that put it together, I thought – before tottering off to bed – that readers might like a quick take - and a chance to comment - on some of the findings. 

Economic outlooks are always uncertain, to be sure, but the level of uncertainty about prospects for the world economy just now is extraordinary. That matters in a region as highly globally integrated as East Asia.   Forecasts for the US economy have been sliding lower for months but what’s less clear is how deep and protracted the downturn will be – underlying which are uncertainties about how much more widespread and intense the global financial turmoil that began last August will get.

In the Bank's recent China macro quarterly we included an appendix on the implications of the new PPP estimates for poverty analysis in China (PPP or Purchasing Power Parity).  Perhaps because it was an appendix it did not receive much attention. 

The new PPPs reveal that prices are about 40 percent higher than had been assumed under the old PPP, which was an academic guestimate.  Some researchers immediately applied the new PPP conversion factor for GDP to household data and came up with hugely higher estimates of the $1 per day poverty rate for China.  However, the World Bank does not use the GDP conversion factor in measuring poverty.  The research department of the bank will produce a conversion factor for poverty analysis that takes account of two important things:

(1) the basket actually consumed by the poor is different from the GDP basket; and

(2) the poor almost exclusively live in rural areas where prices are lower.