Business

Saturday September 26, 2009

Food and commodity crisis may follow, says economist

By YEOW POOI LING


KUALA LUMPUR: A food and commodity crisis may develop next if policymakers do not take proactive measures to hedge their risk, says economist Dr Abbas Mirakhor.

“We have seen how commodity indices have grown out of bounds, creating a shortage in supply. The fundamental problem is food policy is mixed up with energy policy,” he told StarBizWeek in an interview yesterday.

»We have seen how commodity indices have grown out of bounds , creating a shortage in supply«DR ABAS MIRAKHOR

Agriculture products like corn and soyabean are now an alternative of energy besides being food sources.

“We’re potentially facing a food crisis and nothing is being done about it. Commodity traders can sell in time before taking delivery of any hard asset goods. It’s a lot of hot air but there are real consequences,” he added.

To mitigate the risk of supply shortage and high prices, Asian countries, especially those highly dependent on food imports, should become major players in the commodity market, he said.

“They can develop future demand to ensure enough supply. If suppliers are aware of potential future demand, they would be more inclined to produce. By developing commodity markets, they ensure a more predictable relationship between supply and demand,” he added.

Mirakhor, formerly executive director of the International Monetary Fund, is here for the Securities Commission- University Malaya Visiting Scholar Programme.

His lecture on Tuesday will touch on the lessons of the current crisis for Islamic finance.

Islamic finance’s basic principle is premised on having liabilities that are backed by the equivalent of assets, hence disallowing asset bubbles and price shocks as seen in previous crises.

“In Islamic finance, the assets and liabilities inflate or deflate together. When assets are subject to price shocks, the liabilities will also deflate as the system will adjust automatically,” Mirakhor said, adding this alleviated the formation of an inverted pyramid, in which huge liabilities sat atop a small base of real assets.

He said Islamic finance would be widely adopted if the system could demonstrate that it’s more efficient in supplying capital for growth and at a much lower cost structure.

However, such adoption needs to be supported by a global, universal regulatory framework that would ensure public interest is protected.

“Until we have such framework, we can’t claim that Islamic finance has a more stable, alternative system,” Mirakhor said, adding that existing Islamic finance standards did not provide consistent advisory decisions and ensure adoption and enforcement.

“Islamic finance is not old enough; it is only 40 years old versus the 400 years of conventional system. We do not have assurance that this system will not face crisis because regulatory failure could also exist in Islamic finance,” he said.

The current crisis had shown the consequences of unreasonable deregulation, reliance on theories like efficient capital market hypothesis and having limited instruments for so many economic objectives, he said.

“Interest rate alone is insufficient to address economic growth, price stability and the development of capital market instruments, which was what the US Federal Reserve was trying to do,” he said, adding that fiscal policy, for example, could be a growth instrument.

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