Sunday, June 5, 2011

Asian Economies: Caught in Inflationary Spiral




Middle East unrest and the nuclear crisis in Japan had raised expectations of higher oil and food prices in the region. As a result, inflation is a big bug around the region ranging from commodity inflation, wage inflation and asset inflation.

Developing Asia is a diverse group of economies including China and India. It is also home to two-thirds of the world's poor and thus the region is most vulnerable to the effects of price increases. Estimates indicate that a 10 percent rise in domestic food prices would raise the number of poor in developing Asia by about 64 million, or more than 7 percent. As these people tend to spend more of their incomes on food and will be hit harder by rising food prices. Asian Development Bank’s latest report titled - Asian Development Outlook, warn that high inflation is a direct threat to stable and inclusive growth since rising domestic prices can lead to social tensions. Rising food prices threaten to send more people into poverty. As some Asia's emerging economies are showing signs of overheating which reiterate the need for further policy tightening and more flexible foreign exchange rates to tackle growing inflationary pressures.  


Developing Asia led by China and India shown resilience throughout the global recession is now consolidating recovery and rapid expansion. Although both the economies are continue to lift regional and global growth, inflation remains one of biggest challenges. Growing inflationary pressure is not only destabilizing the region’s growth path but also proving to be a big challenge particularly for the China and India. Moreover, the region is facing possible threats to growth from a weak US economy, sovereign debt problems in the European countries, higher oil prices stemming from Middle East unrest and Japan’s recovery from the devastating earthquake and tsunami.
                      
                                 

Beyond Rate Hikes
Experts say higher interest rates alone may not be enough to tamp down price pressures. They recommend that policymakers should adopt a variety of measures to curb inflation, including allowing greater flexibility in their currencies and capital controls. The ADB suggest that China, in particular, could do more to tighten monetary policy. Even Beijing raised interest rates for the fourth time since October 2010 inflation is still hovering at around 5 percent. Similarly, India has done eight interest-rate increases in the past 12 months and high inflation (food inflation is at 8% at the end of March) has become new normal and has remained above RBI's comfort level over a year now.ADB predict that inflation could accelerate further in coming months.


A Brighter Spot
Despite inflationary pressures, comparatively Asia will still be a brighter spot than the developed world. In 2010, the region comprises one third of the economic output but it had two thirds of the world's economic growth. Going forward, there are a lot of external factors on which the relative performance of Asia will be judged. These include how quickly the US economy recovers, easing of Middle East unrest and sovereign debt crisis in the Europe. Nevertheless, reports indicate that Asia will continue to outperform the developed world, whose economies remain weak after the 2008 global financial crisis. That said; hope we will not see a recession in the West again, at least for the next four to five years which might slow down the Asia’s growth story.

Tags: Asian Economies, Inflation, Food Prices, Developed World, Food Inflation, Social Unrest. China, India.

N Janardhan Rao, Senior Economist.


No comments:

Post a Comment