Govenrment and Business Environment Case Study

Rising Food Prices in China: A Storm Gathering Around 'Piggy Bank'?

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Abstract:
Inflation in China is very often taken to be as common as flying horses. Naivety be spared, if it stems from the general understanding that market forces are seldom scot-free in a controlled economy. More so, if one is talking about something declared as a part of national security. But, here is the truth. In 2007, inflation in China recorded 6.5%, the highest in 11 years - mainly due to price increase in pork, a Chinese staple. A country which boasts to be the world's largest producer of pork, was hit hard by blue-ear disease, killing as many as a million pigs in 2006 and increasing the prices of an important ingredient in pig feeding, corn. Consequently, the raising food prises stirred public agitation. None would be more sensitive to inflation than the ruling Communist Party, which rose to power in 1949 by the catastrophic inflation that destroyed the credibility of its nationalist rivals. Also it has to remember how two decades ago, inflation incited broader discontent that culminated in the Tiananmen Square protests of 1989. Worried establishment did take measures to contain inflation that have ironically been self-defeating. This case study can be used to debate whether the central banks (and even governments) can focus on the 'core' commodity prices, rather than the entire basket, to contain inflation.

Pedagogical Objectives:

• To study the negative effects of liberalisation in China
• To analyse the effects of food crisis on inflation
• To understand the concept of trade surplus - and analyse its impact (if any) on inflation
• To understand the relation between decline in real interest rates and inflation rise.

Keywords : Chinese Economy, Food Security, Food Crisis, Household Responsibility System, Interest Rates, Retail and Wholesale Indices, Human Development Index, Economic Reforms in China, Inflation, Microeconomics Case Study, Income-Expenditure Pattern, Five Year Plans, Monetary Policy, Fiscal Policy, Consumer Price Index