WASHINGTON -- The International Monetary Fund's chief economist Thursday blamed U.S. protectionist farm tariffs for pushing up corn prices for U.S. ethanol production, which has caused large rises in world food prices.
Speaking to reporters, Simon Johnson, the IMF's new research director and chief economist, said the increase in food prices was also triggered by demand in rapidly growing emerging markets, but ethanol was the main cause.
He said demand for corn-based ethanol fuel, which has depleted U.S. grain stocks and pushed up prices, had caused wider economic problems for the United States by stoking inflation.
Johnson said it could have been avoided if the U.S. removed barriers to imports of Brazilian ethanol, which is sugar based and cheaper to produce than U.S. corn.
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"The ethanol issue was a completely unnecessary macroeconomic shock arising from protectionism, arising from an inefficient agricultural subsidy," Johnson said.
"If you want to subsidize your farmers, that's fine with me, that is a political decision, but there are much better ways to do it. This is one that has created some inflationary issues that have spilled into macroeconomic issues."
Powerful U.S. lawmakers have argued against deals to bring more Brazilian ethanol supplies to America because it may harm U.S. farmers. Together Brazil and the United States produce about 70 percent of all ethanol supplies.
U.S. food prices rose at a 6.2 percent annual rate over the first half of the year, compared to a gain of just 2.1 percent for all of last year.
The rise in U.S. food prices was a "significant short-term inflation shock" where expectations were affected by food and gasoline prices, Johnson added.
"There is an inflationary shock in the U.S., short-term inflationary expectations have presumably moved, while medium-term expectations have not, so people think the Fed will be able to control this," he said.
"There is nevertheless a spillover effect on other countries because corn prices are up globally, part of that is coming from the U.S., part from emerging market demand," he added.
Johnson said it was too early to know how higher global food prices had affected poor countries, but aid agencies had complained that food had become expensive to buy and was squeezing their budgets.
"We do expect there will be some supply response but it's definitely an issue of concern," he said.
Johnson said more research on the issue would be available in the IMF's World Economic Outlook in October, the fund's twice yearly health check on the global economy.
Turning to broader issues of protectionism, Johnson said he was disturbed by increasing protectionist sentiments in the United States, Europe and some other countries, especially at a time when the world economy is booming.
"What is going to happen when there is a downturn?," he said. "Responsible politicians should really back off this issue and be very careful. Protectionism is a very slippery slope and I understand it is attractive politically as a way to get support but it is also very dangerous."
He said ethanol case was an interesting example of how protectionism can affect a country's broader economy.
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