The economic outlook in 2011
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Ask any number of people on any Chinese street to identify the biggest economic problem China faces in 2011 and they, along with most analysts, will agree: inflation. They may all be wrong. This is not to deny that rising prices are currently a big worry for many households. When inflation is led by rising food prices, as it has been recently, poor consumers are hit the hardest because a larger share of their spending goes on food.
But it is often forgotten that the poorest families are frequently also food producers. For many of them, rising prices translate into higher incomes. It depends of course on exactly why prices are rising. If, for example, crops or animals are afflicted by disease, drought or flood, prices may surge but farmers could still be left worse off.
But those most worried over inflation tend to argue that other factors lie behind recent price gains. One view is that rapid growth in bank lending over the past two years is now - somehow - driving stronger demand for food. Another is that rising wages are the problem. The prices that have risen most rapidly are those of foods whose production is relatively labor-intensive, such as vegetables.
If so, it is hard to see quite why we should be so worried. Whether strong, loan-driven demand is funneling spending into farmers' pockets, or a tighter labor market is achieving the same end, the result is that income is shifting from better-off urban residents to those in rural areas. This shift should be welcomed. Inflation will only become a serious problem if it starts to spread beyond food. But there is little sign that that is happening.
We should not overlook the genuine difficulties faced by poor families in urban areas who undeniably are worse off when food prices rise. But the government is helping low-income households by boosting their income subsidies. By contrast, it should think twice about other measures now being implemented, such as controls to prevent retailers from increasing food prices, and releasing food stocks from its own reserves to improve supply. These help the urban poor, but at the cost of leaving the rural poor worse off.
