Wednesday, 4 May 2011

The serious consequences of "supply and demand" in China

The natural reaction of a farmer to an increase in the price of a crop is to plant more of it for the following year. Supply and demand.

The difficulty comes in realising that you are not the only one thinking the same thing - the result is price bubbles leading to price crashes.

The role of the "middle man" or "supply chain" is particularly interesting in this story. Is this merely a lack of information on behlaf of the farmer? The introduction of widespread mobile phone technologies should help.

But what about the road tolls? There are some interesting economics to dig into here.

The Diplomat covers the story:

China’s Unhappy, Uneven Growth [The Diplomat]


But one incident stands out for me as representing an issue the government should be particularly ashamed over – the suicide of a farmer in Shandong Province.

When the prices of vegetables surged last year, the farmer in question cultivated large numbers of cabbages, believing that this particular vegetable could fetch a good price this year. However, he discovered that no one would buy his crop because too many people had already grown the vegetable, the wholesale price of which had plunged to a low of 8 Chinese cents per pound.

The despair became too much for the farmer as he watched his cabbages rot, and he committed suicide by drinking pesticide.

His death captured the public’s attention, especially after it was found that although the wholesale price of cabbages was eight cents, they were being sold for a dollar on the market. So, who has been pocketing the difference? The answer is found in the distribution chain.

For a plate of vegetables to be placed on the dining table, it has to go through numerous processes, including testing, approval, loading, wholesale and distribution. The most important significant cost in all this is logistical, namely road toll fees. Some netizens have calculated that the toll fees incurred in sending a batch of vegetables from Sichuan Province to Beijing is about 5,000 renminbi.

All this means that people living in the cities don’t see any fall in the price of vegetables, despite the low price paid to farmers. In fact, inflation just keeps rising – the growth in the consumer price index in March climbed to 5.4 percent year on year.

Back to the farmer who killed himself. In my view, the government needs to ask itself this: Why is the price of vegetables causing farmers AND consumers in the cities such misery?

The government has stressed that it will try to ensure its citizens lead happy lives. However, a recently concluded survey showed that 70 percent of those polled said they didn’t feel they have a good life.

This one high-profile death should therefore serve as yet another warning to the government that the development of China – now the world’s second-largest economy – is leaving many people behind.


No comments: