Friday, November 07, 2003

Someone on the Chinapol list made an insightful comment on the grain price liberalization issue. He said that as the share of urban resident's income spent on food declines, the shock of price liberalization would decrease. The Chinese government can certainly raise prices slowly and not cause too much political problems.

The problem with this is this: The only point I would like to raise is that price reform is extremely tricky business, especially if it is done gradually. If you liberalize prices slowly, farmers or wholesalers would expect prices to rise further and would prefer to hoard grain rather than release it to the market. So, as we see in some cases in Eastern Europe, supply actually diminished after partial price liberalization. This of course exacerbates inflationary pressure. Has anyone done an estimate of how much grain prices would rise if liberalization took place over-night? I know the SPC is in the anti-hoarding business, but how effective is it? Thank you in advance for addressing these issues.

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