Complete Property Market Updates of Singapore

June 10, 2008

Dealing with Asia’s inflationary scourge

Filed under: General — Propertymarketupdates @ 3:51 am

IT’S not growth, not exports and not the current account balance. As Asian Development Bank (ADB) chief economist Ifzal Ali puts it, rising inflation is ‘THE issue’ facing Asia today.

Just about every Asian economy is witnessing the ugly resurgence of inflation. Vietnam, where inflation is running at close to 20 per cent, tops the league. China’s inflation, at close to 9 per cent, is the highest in 11 years. Indonesia’s is more than 8 per cent, only slightly higher than India’s. Over recent months, inflation has also accelerated in Hong Kong, the Philippines, Thailand – and also here in Singapore, where it is at a 26-year high.

The inflation facing Asia is all the more pernicious for the fact that it is driven in part by higher food prices, particularly for rice and wheat. And as the ADB points out, food price inflation is ‘the most regressive of all taxes’ because it hurts the poor the most. Asia’s poor spend a high proportion of their income on food – as much as 60 per cent in some countries. As food prices rise, hundreds of millions could be pushed further into poverty. Food price inflation could, in short, reverse poverty reduction across large parts of Asia. In urban areas, inflation can trigger wage-price spirals as well as social unrest. It can also devastate a country’s competitiveness – a danger to which Vietnam, in particular, stands greatly exposed.

Unfortunately, the policy options to tackle the problem are not straightforward. Artificial fixes like price controls create other problems, like high fiscal costs – the burden of which becomes greater the more prices rise. Export controls on foodgrains, which some countries have imposed, are beggar-thy- neighbour in nature and also have the defect of discouraging production and encouraging consumption – precisely the opposite of what is needed. High interest rates to curb inflation tend to trigger capital inflows, which add further to liquidity if not sterilised – as well as complicate exchange rate management. And raising reserve requirements for banks is of limited effectiveness, as the experience of China and India shows.

Asian countries thus need to seriously rethink their inflation management, which is now the top policy priority. Allowing faster exchange rate appreciation is one underexploited option that China and India, in particular, should consider.

Carefully targeted (as opposed to generalised) food subsidies – for example, through food-stamp programmes – is another underused policy. Allowing farmers to benefit from higher prices and increase production (instead of discouraging them through price controls) is also important – as is more investment in agriculture, a long neglected sector in many Asian countries.

To the extent that inflation is a global problem that has its roots in credit expansion and a weakening US dollar, Asian countries cannot defeat it. However, they can act to control it and mitigate its worst effects.

Source : Business Times – 14 May 2008


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