ADB warns on Asian inflation
Updated
Rising food and fuel prices is worrying the Asian Development Bank, which has listed inflation as a "major worry" for the region.
The ADB said inflation could undo the progress made over the past twenty years, as it exceeds the earlier-predicted 5.1 percent level. ADB Managing Director Rajat M Nag says rising fuel and food prices were the chief dangers behind inflation that affected what he calls "Asia's Good Growth Story".
Presenter: Sen Lam
Speaker: Mark Thirlwell, director of the Intenational Economy programme at the Lowy Institute in Sydney
THIRLWELL: Well I think the banks are certainly right to be warning that Asia now faces an inflation problem. If we look across the region we can see a clear pattern of rising prices, led by extremely rapid price increases for food and oil, and at the same time it's also clear that many of the region's central banks have been running very loose monetary policies with policy rates lower than the actual rate of inflation in many cases. And finally, and it's a point that the ADB itself makes, rising prices don't just threaten macro-economic stability, they've also got really important social consequences. Asia's home to many of the world's poorest people and they're particularly vulnerable to increases in the price of food and energy.
LAM: And so may we assume then that the countries most at risk are the poorer countries of for instance ASEAN?
THIRLWELL: I think that's definitely a big part of the story, I mean certainly inflation's a problem right across developing Asia at the moment. But there are big differences across the countries as well. For example if you look at the component that's been driven by rising oil prices then if you're a net oil importer, so a country like the Philippines or India or Thailand, this is a particular concern. If you're a big oil exporter like Vietnam or Malaysia you're actually getting some gains. But when you look at food prices it's the case that this is particularly politically sensitive and it's particularly sensitive for countries which have large numbers of very poor people. And again if you look across India, Indonesia, the Philippines, it's been an issue there. We've already seen for example food riots in the Philippines.
LAM: Indeed what about India, I mean it's got a mixture of both poor and increasingly quite rich society. How is it coping with inflation, how at risk is India do you think?
THIRLWELL: Well India is an economy where high inflation has always been politically very, very sensitive because of the large number of very poor people who are very vulnerable to price rises. And of course in the case of India we know that by May next year we have to have a new election, so the political class there are acutely aware of this. That partly explains I think the fact that the Indian Central Bank, the RBI has been quite aggressive now in hiking interest rates and trying to dampen down inflation, we've seen that happening. Part of the issue now that India faces is that this is complicated by a weakening exchange rate and some issues over capital flows. So there is a policy challenge there but the Indian monetary authorities are now sort of stepping up to the plate.
LAM: And India together with Malaysia and Indonesia I understand recently cut fuel subsidies because of the rising price of oil. Might that not make it worse for the poor?
THIRLWELL: That's right; well a lot of these countries have been faced with sort of quite a nasty dilemma. One of the ways that they've been trying to limit the impact of rising food and energy prices is through government subsidies, but as prices have got higher and higher and higher the budgetary burden of those subsidies has also started to get very, very high. And for economies in particular like India, which already has sort of quite large budget deficits and a lot of public debt, the fiscal burden of doing that has got very difficult. I think where we're at now is that there's increasing pressure to figure how you can tailor the subsidies more effectively so generalised subsidies for example across food and energy, which is sort of benefiting everybody has just become too expensive. What there's now pressure on government to try and figure out how to do is how you target help at the very poorest in those economies, which in the case of India is a huge proportion of the population, where you target those and try and give them some protection from the price rises.
LAM: Indeed and it is the poor who are likely to suffer the most but if inflation continues to rise do you think we might see a return to the Asia of the 1960s of starving people and increased poverty?
THIRLWELL: Well I think we're still hopefully some way off that yet, but it's certainly the case that a sustained rise in the prices of basics like food, like energy and fuel if you look across Asia if you put food and energy together for the average poor person that's something like 60 to 75 per cent of their total consumption basket. So a sustained increase in that does put very real pressure on Asia's success so far in bringing down poverty, and it's something that the development banks like the Asian Development Bank and the World Bank are getting increasingly concerned about. So there are important social risks that are raised by this.
