The argument is that emerging markets are accounting for the largest portion of the 'growth' in demand for fuel and food. By subsidizing the prices for food and fuel, those governments allow their citizens access to these goods at cheaper prices than might otherwise be in place, therefore causing these countries to consume more. The G8 wants these prices to float to dampen that demand. It is obvious the global middle class is growing and with that comes increased consumption as more of the world is afforded access to the American mentality of consumption through growth of international trade and productivity.
But there is no mention of curbing the consumption of citizens and companies of the G8 themselves who doubtlessly account for the vast majority of consumption now.
By requesting the governments of emerging economies to lower their subsidies, the G8 is essentially demanding that the world's poorer citizens handle the brunt of higher prices disproportionately so that the nations in the G8 don't have to see their ways of life change.
(Rerefence a recent article in Foreign Policy "Can the World Afford a Middle Class?")
Indonesia and others have recently announced such price increases and lowering of subsidies. The effects of this are to desocialize those governments' efforts to ensure their citizens access to the very goods (at affordable prices) that Americans have come to assume were a born right. Countries such as Pakistan and China recognize that such price controls keep massive portions of their populations above the poverty line.
I have argued that Americans, and by default the other industrialized nations as well, will have to see their way of life limited, their consumption levels pulled back, as the global middle class increases its consumption.
What is evident however is that the world's richest NEED the ranks of the world's poor to swell. Capitalism thrives on the failures of the masses. Our government doesn't use price controls, it is true; instead we use an arsenal of other mechanisms such as tax credits and subsidies to artificially lower the prices we Americans pay for many goods such as gasoline. Exxon noted that although they are recording record profits, they are 100% reliant on the $28 billion in tax credits they received in order to properly invest in infrastructure.
These policies highlight the shallow arguments about 'Free Markets': There is no such thing. The US subsidizes farming, airlines, big oil, and many other industries so that our companies have an unfair advantage in the global economy yet touts the value of free and open markets and borders for trade?
The world's emerging participants should have equal right to execute policies that most benefit their citizens. The G8, therefore, should focus on policies that lower demand in their own nations, and NOT put pressure on the poorest nations to curb their demand.
As other countries begin to benefit from precisely the rigged structure the US has enjoyed for a long time, we will see more and more language about the 'death of free market ideals' substituted by protectionist ideologies, to best ensure the 'American way of life' for the world's richer citizens.
Rising prices in the poorest economies will only ensure the world's poor stay where they are. It is evident therefore that poverty alleviation is definitely not a priority and that the World Bank's mandate to accomplish this is purely a veil behind which hides the ugly truth that those in power know they actually don't want to see these consumers empowered to consume more. It is a threat to their seats at the top of the world.
We are beginning to see defiant acts of protest around the globe as citizens voice their opposition to the continued divergence between the rich and the poor. I have asked the question countless times before and it is still quite applicable: How far can the gap between rich and poor go before the poor revolt? How many people have to lose affordable healthcare in the US before they demand change? 100 million more than the current 47 million? People rise up when they don't have food and water. We are heading towards a lagerhead and these demands by the G8 highlight the deliberate unspoken agenda of the world's richest nations to keep getting richer at the expense of raising the quality of life for the world's poorer citizens.
What's next? Will the US and others create a body akin to the WTO that will prosecute emerging economies for consuming too much and put consumption caps in place? It is certainly not uncommon for the US to develop mechanisms to allow it unfettered access to consume as much of world's resources as it wants. Now that others in the world seek those same level of consumption, it is seen as unsustainable.
The US consumes $9 Trillion of goods and services annually. Maybe that is where limits on consumption need to begin? A fractional reduction here would certainly balance out the growth in emerging markets' consumption patterns. But can the G8 swallow that, remains to be seen?
Note: I have argued that the US dollar should be strengthened, even artificially through Central Bank manipulation as this is one of the few variables that can lower the skyrocketing prices of oil and other commodities which are traded in US dollars. That theory is beginning to play out and should give the world a short-term breather. Unfortunately, the long term trends remain that these prices will eventually rise much higher than they currently are, unless the world falls into a global recession, which essentially is the event when the world's population independently chooses to consume less and prices will fall, potentially dramatically.
Note: I want to follow up on my piece last week about the Bush/McCain policy of deficit spending, after I received comments from readers. Yes, it is true that the US has used deficit spending (borrowing from the future) in other circumstances such as during the eerily-similar-to-today era of the Vietnam war. But it seems to me the current deficit spending is unparalleled and the benefits are not being distributed to the masses except through the idea that 'We are safer' while private corporations reap the fiscal benefits.
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G-8 Urges Emerging Markets to Cut Oil, Food Subsidies (Update1)
By Gonzalo Vina and Shamim Adam
June 14 (Bloomberg) -- The Group of Eight nations called on emerging markets to cease subsidizing the price of oil and food amid concern such support was propelling demand and prices higher.
``It is imperative to remove supply side constraints and export restrictions, replace general food subsidies in developing countries with well-targeted help for the poorest,'' G-8 finance ministers said in a statement after meeting today in Osaka, Japan.
Governments in Asia, where about 600 million people survive on less than $1 a day, have been divided between the need to rein in surging prices and to shore up growth. The G-8 today said price rises have ``severely hit many low-income importing countries'' and that they expect demand to stay high.
Price controls on food and fuel have long been policy tools in nations with large populations living in poverty, including India and Indonesia. Reducing support for energy prices would also help the struggle against climate change by sending a ``price signal'' to reduce consumption.
Still, rising energy and commodities prices are increasing the subsidy bill and putting pressure on national budgets, forcing the region's governments to pass on the costs of gasoline, grains and even poultry to consumers.
`Growing Concern'
``There is growing concern on part of the G-8 about the impact of rising food and energy prices,'' said U.K. Chancellor of the Exchequer Alistair Darling. ``Particularly in relation to food, this is something governments can solve.''
Indonesia's President Susilo Bambang Yudhoyono, facing elections in 2009, raised fuel prices in May for the first time in almost three years. The government would have to spend 190 trillion rupiah ($20 billion) on subsidies if fuel prices were not increased, the government said.
Southeast Asia's largest economy may also stop subsidizing makers of soybean-based food products next year and end a policy that helps poor families to buy cooking oil.
In Malaysia, Prime Minister Abdullah Ahmad Badawi's embattled government on June 5 raised gasoline prices by 41 percent and diesel by 63 percent, the steepest increase since May 2004. Fuel prices have been increased seven times since Abdullah became premier in October 2003.
Oil Record
Record oil prices would have increased subsidies by 51 percent this year to 53 billion ringgit ($16 billion), the government said last month. Malaysia has also scrapped a price cap for chickens, the Star newspaper reported on June 5.
India, Sri Lanka and Taiwan have also raised fuel costs in the past month.
``We commend several emerging market economies for their recent moves in this direction,'' G-8 ministers said.
Others aren't budging, choosing to allow deficits to widen to keep food and utility costs affordable for their people.
Philippine President Gloria Arroyo's government last month said it would delay its plan to balance the budget to 2010 as it boosts rice subsidies and investment to spur growth. Arroyo also reduced power, toll and mobile phone rates while creating subsidies for public transport and programs to help the poor buy rice and pay electricity bills.
The Philippines' deficit may widen for the first time in six years to as much as 75 billion pesos ($1.7 billion) in 2008 before easing to 40 billion pesos next year, according to the government.
Subsidizing Food
Pakistan's government in its budget on June 11 said it will spend about 295 billion rupees ($4.4 billion) to subsidize items including food, power and fertilizer in the year starting July 1. Almost half of Pakistan's 160 million people are at risk of running short of food due to rising grain costs, according to the United Nations World Food Program.
China, too, is holding steady, saying last month that it had no plans to lift fuel-price caps. Consumer prices in the world's most populous country rose 7.7 percent in May.
Fuel-price increases in Asian countries such as Sri Lanka, Indonesia and Malaysia are too miniscule to have a ``meaningful'' impact on global oil demand growth, Goldman Sachs Group Inc. said in a June 3 report.
Price increases in China, which accounts for 9 percent of total oil demand, would have a larger impact on consumption and may lower Asian usage by 30,000 barrels a day for the rest of 2008, Goldman said.
To contact the reporters on this story: Gonzalo Vina in Osaka, Japan at gvina@bloomberg.net; Shamim Adam in Singapore at sadam2@bloomberg.net
Last Updated: June 14, 2008 05:44 EDT
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