Reducing Uncertainty Is Top Priority for IMF Chief Economist
The current crisis reveals an interesting paradox: increasingly complex rating tools, practices and systems are regularly developed on markets to reduce uncertainty, maximize risk/profit ratios and protect players from such major hazards. However, if one recognizes that the common knowledge of mechanisms motivating market forces is improving, the current uncertainty now affecting most markets is not only still noteworthy but its consequences can be even more devastating than in the past. Consequently, reducing uncertainty now seems to be the main goal for the international community.
The International Monetary Fund (IMF) Chief Economist, Oliver Blanchard, develops this viewpoint in a January 29, 2009, guest article1 in the British publication The Economist and underscores the severely harmful repercussions of excessive uncertainty for the global economy, particularly on financial markets where the ensuing confidence crisis is especially devastating. “Crises feed uncertainty. And uncertainty affects behavior, which feeds the crisis,” writes Olivier Blanchard. The economist thus advocates policies focusing on reducing uncertainty to restore confidence.
This denotes indeed a clear and pertinent analysis that should be applied to agriculture, which more than any other economic sector, exhibits a structural and destabilizing uncertainty…
For Olivier Blanchard, the unusually high readings of the Vix2index––showing an average stock market price volatility three times higher in October 2008 than during the two previous years––added to the swiftness and extent of growth forecast adjustments by the IMF3 and the frequent use of the word “uncertainty” in the media, illustrate an unusual climate of uncertainty that stunts the economy. The macroeconomic consequences are far-reaching: in today’s complex and unstable environment, economic agents adopt extremely prudent behavior that paralyzes economic channels and prevents both consumption and investment, which in turn feeds the crisis.
We have thus come full circle.
Based on this analysis, Olivier Blanchard advocates as top priority the implementation of policies aiming to tackle the root of the problem: the development of such climate of uncertainty. Regarding financial markets, he recommends establishing a floor on the price of troubled assets to restore confidence and offset credit crunch. Accordingly, Blanchard draws attention to market malfunctions and the need to establish corrective mechanisms that allow markets to perform better.
Besides the fact that it shows a change of attitude, the IMF chief economist’s analysis of the current global crisis, and the means to solve it, is particularly interesting because of its connotations. For if uncertainty is an inherent component of markets, whichever they may be, it is more or less noticed according to economic fields, some of which, such as agricultural markets, are experiencing a structural uncertainty that generates price hyper-volatility.
Three major factors can be brought forward to explain the specific exposure of agriculture to uncertainty. First, agriculture deals with live matters for which epizootic disease and climate hazards play a significant role. Then, and this results from the preceding point, farmers cannot know, when they select production types, the volume or the quality they will achieve, or even the price they will get for their products. Lastly, one must add one of the inherent features of agricultural markets: the irreversible nature of farmers’ decisions (and not only investment decisions), contrary to the strong reversibility of decisions made by investors and speculators active on such markets. This quasi-structural uncertainty generates a permanent price volatility that can be linked to circumstantial hyper-volatility in case of an obvious climate of uncertainty. This is the situation we are facing today.
The circumstantial hyper-volatility we are monitoring in financial markets is thus a structural characteristic of agricultural markets and includes every risk it generates for food security and supplies.
Reducing uncertainty to solve the crisis is a necessary condition to stimulate the economy. It is crucial for the IMF to make every effort to initiate a global political awareness on the issue and implement appropriate policies. However, one must hope that this awareness––barely there in financial markets––is also applied to agricultural markets, a matter of urgency illustrated by the recent food crisis. Following the anti-crisis measures advocated by Olivier Blanchard, it is now high time to initiate a global policy to reduce uncertainty in agricultural markets, as momagri has been advocating since its creation.
by momagri Editorial Board
1 The Economist, “(Nearly) nothing to fear but fear itself”, 29 janvier 2009, http://www.economist.com/finance/displaystory.cfm?story_id=13021961
2 The Chicago Board Options Exchange (CBOE) Volatility Index (Vix) rates the level of price volatility on stock markets. It is based on a selection from the Standard & Poor’s 500 index.
3 In October 2008, the FMI published a 2009 growth forecast of 2.2 percent; In January 2009, only three months later, the organization lowered its forecast to 0.5 percent.
|