Research and Development Technical Assistance (R&DTA) of Asian Development Bank (ADB) has launched a research and development technical assistance (TA) project, which will seek to monitor financial, fuel, and food markets and study the implications of volatility in these markets for the macroeconomic and social development of the Developing members countries (DMCs), including Pakistan.
According to R&DTA sources, this project will undertake extensive research based on high-frequency data of commodity and financial markets to improve understanding of the underpinnings of such markets and of the factors influencing the volatility of prices. It will also analyse past and current trends, and use robust econometric models to predict the future movements in these markets.
R&DTA sources mentioned that the impact of the project would be effective policy development based on extensive research on finance, food, and fuel markets. The project, by providing DMCs with this information and analysis, will strengthen the links between research and policy-making and help raise the reputation of ADB as a producer of knowledge outputs not only related to Asia but related to the global economy as well.
R&DTA sources observed that the project's expected outcome will be an improved understanding of the macroeconomic and social impact of rising and volatile commodity prices and financial market uncertainties, and of the trends and issues underlying these markets.
Knowing more about the market underpinnings of various commodities will equip ADB to provide better policy advice to its DMCs in terms of adapting to and mitigating the impact of commodity price volatility. While thorough analysis of the financial markets can help ADB member countries institute proper measures to prepare for or even prevent another financial crisis.
Moreover, the project will shed light on the macroeconomic and social impact of natural disasters and other supply shocks as they affect the prices of basic necessities and constrain access to credit. R&DTA sources pointed out that the ongoing global financial crisis and the steep commodity price rise that hit markets in early to mid-2008 have adversely affected the economic performance and prospects of developing Asia.
According to the Asian Development Outlook 2009, the regional slowdown is threatening to increase the number of the absolute poor-those who live on $1.25 or less a day-by more than 60 million people in 2009. In addition, high commodity prices can push millions more in the region back below the poverty line. The Asian Development Bank (ADB) estimates that a 30% increase in food prices will raise the number of the poor by 9 million in the Philippines and 22 million in Pakistan.
This is because food composes at least 60% of the consumption basket of the poorest segment of the region's population. Rising global commodity prices also threaten macroeconomic stability through spiralling inflation, greater fiscal burden of subsidies, and possible exchange rate depreciation in commodity-importing countries. ADB plans to increase its lending by more than $10 billion in 2009-2010 is meant to address this demand at least in part.
ADB's assessments of the global economic environment and views on the region's prospects are also being sought more and more often by borrowing country authorities and other development partners. ADB requires more up-to-date information and economic analysis to provide such assessments. Moreover, the requests go beyond the regional outlook to include ADB's views on global economic prospects and forecasts of key financial, energy, and commodity market movements.
With ADB establishing a reputation as a knowledge institution, such requests for analysis are likely to continue beyond the horizon of the current crisis. Commenting over the Finance, food, and fuel crises, R&DTA sources mentioned that before the global financial crisis began in 2008, the world economy had to deal with the difficulties brought about by a spike in fuel and food prices.
The food and fuel crisis may not be over and there are indications that prices could again rise sharply in 2010. In addition, natural disasters such as droughts, floods, typhoons, and earthquakes cause supply-side shocks that can lead to food and fuel price increases. Furthermore, a crisis that affects people's ability to meet their basic needs is a serious threat to social cohesion and can lead to riots and political instability, as has been seen in diverse places such as Egypt and Haiti.
The global financial crisis helped ease some of the inflationary pressures by reducing the demand for goods, but it continued to hamper development and poverty reduction by stifling the DMCs' ability to ensure continued economic growth. Commenting over the Sustainable growth, R&DTA sources said that some of the important reasons behind the food and fuel crisis of the late 2000s are supply-side constraints.
In particular, the prices of petroleum, wheat, maize, and rice skyrocketed partly because of concerns about the sufficiency of future supply and about supply continuing to outstrip demand. What is more, climate change and global warming are thought to cause more and stronger typhoons, desertification, and seawater inundation, leading to loss of agricultural production and damage to crops and infrastructure.
Measures to improve food security and promote wider use of renewable energy sources thus need to be prioritised. In the short term, addressing these concerns requires a thorough analysis of the supply chain and logistics to determine whether prices reflect the relative scarcity of the commodity and to discourage price speculation.
In the long term, the sustainability of fuel and food markets will need to be addressed, and prices may need to reflect the cost of investments in sustainable energy sources and food technology. In response to the crisis in finance, food, and fuel markets, R&DTA sources mentioned that the governments in many countries-both developed and developing-have instituted social protection measures.
From price controls in the Russian Federation to unconditional cash transfers in the Philippines and export bans in India, such social protection measures are often costly and distort the allocation of resources. As such, effective monitoring of the crisis is an essential tool for policy makers to determine if and when social protection measures may be eased out.
Understanding the underpinnings of global financial and commodity markets can facilitate co-operation by exploiting differences between regional economies. The regional economies are in varying degrees of financial market development. Encouraging co-operation among these economies can facilitate the use of savings from surplus economies as investment in deficit economies, R&DTA sources concluded.