BOSTON—China will struggle to pay the combined costs ofsubsidized food and fuel while trying to rebuild Sichuan, experts say. Yet, the government ismaintaining its commitment to price controls even as reconstruction costs rise.
On May 28, China’sMinistry of Commerce reported progress in the country’s fight against inflationafter farm produce prices fell 0.7 percent in medium-sized and large cities,marking the seventh weekly decline in a row.
But this decline made only a partial dent in the high costsof food, which climbed 22 percent by April from a year before.
In order to spur farmers to produce more without boostingprices, the government agreed in March to pay 25 billion yuan ($3.6 billion) innew subsidies on top of a 30 percent increase already budgeted for 2008. TheState Council also added 95 billion yuan at the start of the year.
The government has also been keeping a freeze on fuelprices, forcing it to pay compensation to oil refiners. This week, state-ownedSinopec said it had received subsidies of over 7 billion yuan for April alone.So far this year, the government has paid nearly four times the amount it paidfor all of 2007.
Multiple pressures
China’s State Council has meanwhile ordered anacross-the-board budget cut of 5 percent to raise 70 billion yuan ($10 billion)for reconstruction. At the same time, the National Development and ReformCommission (NDRC) has ordered price controls on food, transport, and housingmaterials for the quake zone, which may spark demands for more subsidies.
In an interview with Radio Free Asia, Harvard Universityeconomist Dale Jorgenson said, “They can’t be doing all this simultaneously.It’s just going to make the situation worse and worse.”
“They’re in trouble, and that’s why they ought to graduallyrelease the controls” and let prices rise, Jorgenson said.
Jorgenson said that earthquake relief and recovery must havethe highest priority. But he also warned against the consequences if thegovernment continues paying to keep consumer prices in check during therecovery period.
“This is really going to create a severe budgetary problemfor them. And they’ve got to figure out some way to relieve it by eliminatingsome of these less necessary things, like these subsidies to food andfuel—especially fuel.”
These multiple pressures should prompt the government toreconsider its economic policies, Jorgenson said.
‘Useless’ policies
Mikkal Herberg, research director for the energy securityprogram at the Seattle-based National Bureau of Asian Research, said that China’sgovernment has fallen back on its traditional command structure to cope withboth the earthquake and the economy.
“This is a political structure that’s always been drivenheavily by administrative controls and state direction in a crisis,” he said.“When you have an earthquake, this is something the old system is well-suitedfor.”
But command-and-control policies are likely to prove uselessin dealing with market forces of supply and demand, Herberg said.
“If you look at problems like what to do about higher foodprices, higher fuel prices, and other things, this old administrative andmarket-control approach doesn’t work very well,” he said.
Herberg said that growing subsidies for food and fuel alsomake it harder for the government to establish rational economic policies.
“The subsidy problem gets bigger. Bills get bigger for allthese things, and so the political and social costs become higher, and it’smore difficult to begin making those reforms.”
Original reporting byMichael Lelyveld. Edited for the Web by Richard Finney.