First fight inflation
Thursday, 12 May 2011
S K Biswas
Now-a-days the streets are abuzz with an alarming topic-the pressure of inflation on our daily life. Regardless of social classes, everybody is concerned about the problem. Ranging from the price of a needle to luxury cars, everything has gone up. How are we going to survive in this situation? Most of the major economic indicators are however very promising. Bangladesh has been achieving real GDP growth rate of around 0.5 per cent consistently over the last decade, which is moderate for a developing country. Population growth is much lower than experienced in the last two decades. National income has gone up to US$590 from below $200 in the early nineties. Foreign Direct Investment also increased significantly, from $92 billion in 1995 to $989 billion in 2006. So, what is going wrong? Is inflation the only adversary that is hindering progress? First, let us have a comparative look at the GDP and inflation rate over the years: GDP and Inflation growth rate (Source: Source: http:www.indexmundi.combangladeshinflation_rate_%28consumer_prices%29.html) GDP has grown over the last decade except in the year 2008 for some political glitches. Inflation was also in the peak that year. We all understand the major deviation for the year 2008. An interim government caused the fluctuation both in GDP and inflation rate, otherwise, the growth rate is positive which in general shows that the progress of this country is pretty clear. Now consider two other major components of macroeconomic indicators namely Gini Coefficient and the Consumer Price Index which indicates the effectiveness of any progress of a country. First, let us consider the Gini coefficient which is at present 33.2 per cent for Bangladesh, indicating that most of the production here belongs to a certain group of people. So, whatever the production is, it will have little effect on the lower earners of the country. And as far as the population distribution is concerned, this wealth is mostly concentrated in the capital city which means development is confined to one group at one division level. A ship can never sail into the deep ocean with just one propeller working. The consumer price index of the country has almost tripled within the last decade or so having an adverse effect mostly on food items. That means inflation has hit the low earning group rather than the top earners. So, it is clear that the growth of the country is not meaningful, as long as inequality exists. So what should we do in the present situation? First, any kind of economic growth will be followed by inflationary pressure which in Bangladesh can be controlled to some extent. But it is uncontrollable largely because the inflationary pressure emerges from factors in the rest of the world, like increase in oil, rice or gold prices, which we cannot influence. If we control the 'controllable' inflation of Bangladesh growth has to be sacrificed, because one of the major tools for suppressing inflation is to curb money supply to the economy. Restraining the supply would leave less money available for investment and thus hamper production. Secondly, business opportunities can be decentralised. to slow down internal migration, especially to the capital city. At present the effect of inflation is felt almost equally by every group of people whereas, the fruits of the growth go to a particular community. In my opinion, the choice should be clear; growth can be sacrificed, if it cannot be distributed equally. Let the people survive, make sure they are ready to accept growth, and then go for acceleration, otherwise, growth might boomerang -- as it is happening currently. (The writer is Assistant Director of the Bangladesh Bank. Views expressed above are his own)
Now-a-days the streets are abuzz with an alarming topic-the pressure of inflation on our daily life. Regardless of social classes, everybody is concerned about the problem. Ranging from the price of a needle to luxury cars, everything has gone up. How are we going to survive in this situation? Most of the major economic indicators are however very promising. Bangladesh has been achieving real GDP growth rate of around 0.5 per cent consistently over the last decade, which is moderate for a developing country. Population growth is much lower than experienced in the last two decades. National income has gone up to US$590 from below $200 in the early nineties. Foreign Direct Investment also increased significantly, from $92 billion in 1995 to $989 billion in 2006. So, what is going wrong? Is inflation the only adversary that is hindering progress? First, let us have a comparative look at the GDP and inflation rate over the years: GDP and Inflation growth rate (Source: Source: http:www.indexmundi.combangladeshinflation_rate_%28consumer_prices%29.html) GDP has grown over the last decade except in the year 2008 for some political glitches. Inflation was also in the peak that year. We all understand the major deviation for the year 2008. An interim government caused the fluctuation both in GDP and inflation rate, otherwise, the growth rate is positive which in general shows that the progress of this country is pretty clear. Now consider two other major components of macroeconomic indicators namely Gini Coefficient and the Consumer Price Index which indicates the effectiveness of any progress of a country. First, let us consider the Gini coefficient which is at present 33.2 per cent for Bangladesh, indicating that most of the production here belongs to a certain group of people. So, whatever the production is, it will have little effect on the lower earners of the country. And as far as the population distribution is concerned, this wealth is mostly concentrated in the capital city which means development is confined to one group at one division level. A ship can never sail into the deep ocean with just one propeller working. The consumer price index of the country has almost tripled within the last decade or so having an adverse effect mostly on food items. That means inflation has hit the low earning group rather than the top earners. So, it is clear that the growth of the country is not meaningful, as long as inequality exists. So what should we do in the present situation? First, any kind of economic growth will be followed by inflationary pressure which in Bangladesh can be controlled to some extent. But it is uncontrollable largely because the inflationary pressure emerges from factors in the rest of the world, like increase in oil, rice or gold prices, which we cannot influence. If we control the 'controllable' inflation of Bangladesh growth has to be sacrificed, because one of the major tools for suppressing inflation is to curb money supply to the economy. Restraining the supply would leave less money available for investment and thus hamper production. Secondly, business opportunities can be decentralised. to slow down internal migration, especially to the capital city. At present the effect of inflation is felt almost equally by every group of people whereas, the fruits of the growth go to a particular community. In my opinion, the choice should be clear; growth can be sacrificed, if it cannot be distributed equally. Let the people survive, make sure they are ready to accept growth, and then go for acceleration, otherwise, growth might boomerang -- as it is happening currently. (The writer is Assistant Director of the Bangladesh Bank. Views expressed above are his own)