Bottling the genie of runaway inflation
Saturday, 27 October 2007
Mahmudul Haque
The rate of inflation-- which has an umbilical relationship to costs of living -- is rising higher and higher in Bangladesh. From a little over 2.0 per cent in the early nineties, the rate of inflation, according to the latest available official estimate of it, has dipped slightly below the double digit. Even a month ago, the rate was above 10 per cent. But this official estimate of inflation is considered to be a conservative one. According to most other reliable private estimates, the rate of inflation is well above the double digit.
A leading economist of the country stated in a recent seminar that inflation is putting on a reverse the gains that were made in the struggle against poverty in the decades of the eighties and nineties. Poverty alleviation in large measure boils down to people having more disposable incomes in their hands after buying the basic necessities for survival. But that disposable income of the greatest number in the population who have an existence below the poverty line or close to it, have been decreasing progressively. In many cases, people are not having any disposable income left after buying the bare consumption goods for daily living or paying the charges of essential services at costs that have been going up and up without a pause. They are finding it difficult to cope with the soaring costs of living from their income and have resorted to borrowing or turned indebted in many cases.
Rising prices or charges respectively for goods and services are not problems in a setting where the money incomes or disposable incomes of people also tend to rise well above the rate of inflation leaving them with their purchasing power intact or in better positions. But this has not been the case in Bangladesh. Here, inflation has been rising steadily but purchasing power has not even caught up with the rate of inflation not to speak of overtaking the rate of inflation. Thus, in many cases, people have been worse off with their eroded purchasing power.
Savings and investments are the stepping stones to economic advancement and it can mean both individual economic advancement and national economic advancement. A man who patiently saves taka one million over a period of fifteen years to see the value of his saving halved or less by inflation, will not progress far in doing things of value with the saved amount. In fact, repeated such experiences might even turn off his desire to save. Nationally, the cumulative decline in the value of savings of individuals means much less institutionally saved amounts available to undertake investment activities adequately to give a spur to economic growth.
The rate of inflation needs to be on the low side for the full cycle of savings and investments to turn successfully. This is as much true for the individual as it is for the national economy. For example, let us take the above example of the person who has saved up taka one million over a period of fifteen years with the aim of ultimately buying a plot of land and building a house in it. The motivation of this person to go ahead with his plan will remain if he finds out at that stage that the value of one million taka in constant prices is nearly the same after fifteen years. If, on the contrary, he finds that the value of taka one million is half of what it used to be fifteen years ago or this amount of money will now buy only half of the construction goods needed because of rise in their prices whereas he could buy double the goods with the same amount of money fifteen years earlier, then he may feel demotivated enough to give up his plan.
What such cases can mean for the economy? A house to be constructed by the individual is not only an individual decision. It has implications for the economy as well. A decision to build the house means creation of demand for construction materials as well as their actual purchases, employment of workers, financing activities by financial institutions and other activities of an economic nature. But the economy would be denied the benefits of all of these activities and demands once the decision to build the house gets cancelled and the cancellation is due to price rise or inflation. The case of the house is only an example. There can be hundreds of thousands of such cancelled decisions of a diverse nature affecting adversely overall economic growth or the national economy from the lower level of investments.
Considering all of these and more, it is imperative for the government to do far better than it so far has, to bring inflation under a tight leash with an appropriate blend of policies. It is equally important to address with an iron hand the non economic factors such as confidence among the businesses, syndication formation, profiteering and hoarding which are helping to escalate prices and charges of goods and services respectively.
The rate of inflation-- which has an umbilical relationship to costs of living -- is rising higher and higher in Bangladesh. From a little over 2.0 per cent in the early nineties, the rate of inflation, according to the latest available official estimate of it, has dipped slightly below the double digit. Even a month ago, the rate was above 10 per cent. But this official estimate of inflation is considered to be a conservative one. According to most other reliable private estimates, the rate of inflation is well above the double digit.
A leading economist of the country stated in a recent seminar that inflation is putting on a reverse the gains that were made in the struggle against poverty in the decades of the eighties and nineties. Poverty alleviation in large measure boils down to people having more disposable incomes in their hands after buying the basic necessities for survival. But that disposable income of the greatest number in the population who have an existence below the poverty line or close to it, have been decreasing progressively. In many cases, people are not having any disposable income left after buying the bare consumption goods for daily living or paying the charges of essential services at costs that have been going up and up without a pause. They are finding it difficult to cope with the soaring costs of living from their income and have resorted to borrowing or turned indebted in many cases.
Rising prices or charges respectively for goods and services are not problems in a setting where the money incomes or disposable incomes of people also tend to rise well above the rate of inflation leaving them with their purchasing power intact or in better positions. But this has not been the case in Bangladesh. Here, inflation has been rising steadily but purchasing power has not even caught up with the rate of inflation not to speak of overtaking the rate of inflation. Thus, in many cases, people have been worse off with their eroded purchasing power.
Savings and investments are the stepping stones to economic advancement and it can mean both individual economic advancement and national economic advancement. A man who patiently saves taka one million over a period of fifteen years to see the value of his saving halved or less by inflation, will not progress far in doing things of value with the saved amount. In fact, repeated such experiences might even turn off his desire to save. Nationally, the cumulative decline in the value of savings of individuals means much less institutionally saved amounts available to undertake investment activities adequately to give a spur to economic growth.
The rate of inflation needs to be on the low side for the full cycle of savings and investments to turn successfully. This is as much true for the individual as it is for the national economy. For example, let us take the above example of the person who has saved up taka one million over a period of fifteen years with the aim of ultimately buying a plot of land and building a house in it. The motivation of this person to go ahead with his plan will remain if he finds out at that stage that the value of one million taka in constant prices is nearly the same after fifteen years. If, on the contrary, he finds that the value of taka one million is half of what it used to be fifteen years ago or this amount of money will now buy only half of the construction goods needed because of rise in their prices whereas he could buy double the goods with the same amount of money fifteen years earlier, then he may feel demotivated enough to give up his plan.
What such cases can mean for the economy? A house to be constructed by the individual is not only an individual decision. It has implications for the economy as well. A decision to build the house means creation of demand for construction materials as well as their actual purchases, employment of workers, financing activities by financial institutions and other activities of an economic nature. But the economy would be denied the benefits of all of these activities and demands once the decision to build the house gets cancelled and the cancellation is due to price rise or inflation. The case of the house is only an example. There can be hundreds of thousands of such cancelled decisions of a diverse nature affecting adversely overall economic growth or the national economy from the lower level of investments.
Considering all of these and more, it is imperative for the government to do far better than it so far has, to bring inflation under a tight leash with an appropriate blend of policies. It is equally important to address with an iron hand the non economic factors such as confidence among the businesses, syndication formation, profiteering and hoarding which are helping to escalate prices and charges of goods and services respectively.