There was recently a meeting (seems like all they do here is have meetings) discussing the rising prices here in Yemen, especially food. The government took a lot of heat, but they managed to sidestep the main things that the government is doing. As Milton Freidman once famously said, “Inflation everywhere is always a monetary phenomena.” What this means is that if everything goes up by 20% (to pick a number), it is because more money was added to the national money supply. The central bank does this through open market operations (in the US this is done by the fed buying and selling Tbills, This also affects the bond market and interest rates as well. I don’t know if there is an equivalent vehicle in Yemen.) Typically, the devaluation of the currency (i.e. inflation)in a big way is done to engage in seniorage. That is the act of deflating the currency deliberately in order to pay back debts. If the government takes out a loan of a million dollars in the form of Tbills, it is very tempting to inflate everything in order to pay for it. In simple terms, the government just prints enough money to pay for it. Of course the more money that is in the system, the less any particular dollar is worth. Some people accuse China of doing this in order to keep their goods “cheap” on the international scene. If they are it is quite misguided. Devaluing your currency has some pretty bad effects on the people living in that country, living with inflation is never a good thing…
There is general inflation going on in Yemen, and the central bank is to blame. Nobody seems to have mentioned that though. Most of the criticism came in the great, “Why doesn’t the government do something?” The government is doing something… it just isn’t what you like. If this keeps up, I expect jobs to start offering to pay in US dollars, UAE dirhams, or Euros instead of Riayls.
Most of the clamor is over food prices. People claim that food has risen faster than the general level of inflation. People were clamoring for the government to keep watch on the private sector who is pricing things at supposedly unconscionable rates knowing that Yemenis will pay “whatever the cost” for food. That last part is forgivable but still makes me shake my head. If people are willing to pay anything, why aren’t kabobs 1,000,000 dollars a piece? People aren’t willing to pay anything, but they are willing to pay the prices that are currently offered. Participants in the meeting claim that the private sector is what needs to be watched since, and this is a quote, “There are only a handful of people that control the importation of food and they control the prices.” AHA! I was right! There are only a handful of possible reasons for this. The first is that the companies are charging the competitive rate and prices will not fall unless the price of the supply drops. No one thinks that this is the case. Another possibility is that there is some sort of barrier to companies that want to compete in this market. Competition, especially from a foreign company, would cause prices to fall. The barrier would have to be made by the government. There isn’t a business out there that can stop a competitor from opening unless they have bought protection from the government. If these companies have indeed raised their prices faster than the rate of inflation (and thereby boosting their bottom line), that is a very good business opportunity for someone else. Something is preventing those competitors from coming in and the government has it’s fingerprints all over it. I do wish that basic econ was taught in schools…