August 30, 2004

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Think rice, think inflation

The Sydney Morning Herald has an article saying one of the key causes of the world's next bout of inflation will be because of Chinese farmers. The arguement runs that China's armies of surplus labour are quickly being absorbed, leading to labour shortages and bottle-necks in some parts of China. This is forcing up wages just as food prices are rising due to less farmable land (as factories replace farms) and a shrinking pool of rural labour (because money have already left for the cities). Rising agricultural subsidies complete the picture. Rising rural standards of living and wages means less leaving to join the armies of migrant labour.

In other words, as China becomes more prosperous, especially in more rural areas, the labour surplus will evaporate. It seems only partially true. China's inflation problem is more likely to have come from rising energy and commodity prices combined with an economy that was growing too fast. However these changes in the structure of its labour force will have long term implications. The problem is these are 10-15 years from today, whereas creeping inflation is a problem now. And the article seems to miss a key point, which is the large number of underemployed people still "working" in state-owned enterprises.

However the most important thing is the simplest: the article simply reflects China's growing wealth. What it forgets is the extremely low base it is coming off - China can afford to grow (albeit sustainably) at a rapid clip for many years without sparking inflation. There are plenty of other causes to blame - a partial tightening in China's labour market is not.

posted by Simon on 08.30.04 at 01:15 PM in the




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