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Political costs of a commodity bubble

Political costs of a commodity bubble
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First Published: Thu, Jun 12 2008. 12 22 AM IST
Updated: Thu, Jun 12 2008. 12 22 AM IST
The resignation offer of South Korea’s government and Malaysian unrest both stem from unstable and rising commodity prices. Such fluctuations make even competent governments look helpless, destabilizing them and raising the probability of bad outcomes.
South Korea’s political crisis was ostensibly caused by the government’s April decision to remove a 2003 ban on US beef imports, in the hope that this would persuade the US Congress to ratify the US-Korea Free Trade Agreement.
However, simultaneously soaring food and fuel prices have brought protests and threats of strikes and driven the government’s approval rating below 25% — unusual for a legislature and president elected with large majorities only months ago.
In Malaysia, fuel subsidies had become an intolerable fiscal burden. However, a 41% petrol price rise has brought threats of mass protest, further endangering the weak but recently elected administration of Abdullah Ahmed Badawi.
In both cases, commodity price upheavals have caused sharp reversals in voter opinion expressed only a few months before, prematurely ending the political “honeymoon” which new governments can normally expect. Violent price fluctuations cause hardship for consumers that can quickly take the form of political outrage, while saddling policymakers with the reputation of weakness or incompetence.
Such price tsunamis eliminate the advantage of economically capable governments over the inept ones, and increase the probability of economically populist or extremist regimes emerging from the chaos.
Violent price fluctuations thus have a negative political effect as important as their negative economic effect of bankrupting otherwise viable economic entities. Even dramatic positive fluctuations can weaken apparently stable regimes. That was the fate of the Shah of Iran in the 1970s.
Western monetary and fiscal policies, responding to domestic crises such as the subprime mortgage meltdown, should avoid even the possibility of destabilizing international commodity markets. The political costs of a commodity bubble are vastly greater than those of a mere housing crisis.
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First Published: Thu, Jun 12 2008. 12 22 AM IST