Rises in the east: Could Asia buckle under the burden of inflation?
Monday, 23 June 2008
Chris Giles and Raphael Minder
UNTIL six months ago, most Asian countries could boast of strong growth and moderate inflation. It was a record the rest of the world looked on with a mixture of respect and envy.
The main concern across the region was how the credit crisis on both sides of the North Atlantic would hurt Asia's export-driven economies. The expectation was that the effects of a US and European slowdown would be mitigated by growing demand within Asia and, in any case, that weakening demand elsewhere would keep the lid on price pressures.
When Indonesia cut interest rates last December, for example, policymakers were clear about where they thought the dangers lay. "We don't have to worry as the government has taken steps to contain inflation," said Hartadi Sarwono, deputy governor of the central bank.
But those calculations have been thrown off course. Inflation, not lower US consumer demand, has proved to be the biggest external shock for Asian economies. With inflation's relentless rise has come the fear that Asian governments lack the ability - and more importantly the political will - to stop higher domestic and imported prices from devastating their economies.
The dangers are difficult to overstate. They range from political turmoil - as basic goods are priced out of reach of Asia's poorest people - to the possibility of a new economic bust, as authorities are forced belatedly to take radical measures to curb persistent inflation.
At the heart of the dilemma for Asian governments is a basic contradiction. Economists and western policymakers know that the modern way to beat inflationary pressures is to engineer slower growth and thus a degree of economic insecurity, so companies and employees think twice about bidding up prices and wages. But the bedrock of support for Asian administrations, the region's governments believe, has been the rapid growth that has over the past decade brought living standards steadily closer to the levels enjoyed in Europe and North America.
China, which has been a net oil importer since 1994, in the middle of this month reported a fall in consumer price inflation. But that was the one small piece of good news on prices in the region for months. For developing Asia as a whole, consumer price inflation hit 7.5 per cent in April, close to a 9
UNTIL six months ago, most Asian countries could boast of strong growth and moderate inflation. It was a record the rest of the world looked on with a mixture of respect and envy.
The main concern across the region was how the credit crisis on both sides of the North Atlantic would hurt Asia's export-driven economies. The expectation was that the effects of a US and European slowdown would be mitigated by growing demand within Asia and, in any case, that weakening demand elsewhere would keep the lid on price pressures.
When Indonesia cut interest rates last December, for example, policymakers were clear about where they thought the dangers lay. "We don't have to worry as the government has taken steps to contain inflation," said Hartadi Sarwono, deputy governor of the central bank.
But those calculations have been thrown off course. Inflation, not lower US consumer demand, has proved to be the biggest external shock for Asian economies. With inflation's relentless rise has come the fear that Asian governments lack the ability - and more importantly the political will - to stop higher domestic and imported prices from devastating their economies.
The dangers are difficult to overstate. They range from political turmoil - as basic goods are priced out of reach of Asia's poorest people - to the possibility of a new economic bust, as authorities are forced belatedly to take radical measures to curb persistent inflation.
At the heart of the dilemma for Asian governments is a basic contradiction. Economists and western policymakers know that the modern way to beat inflationary pressures is to engineer slower growth and thus a degree of economic insecurity, so companies and employees think twice about bidding up prices and wages. But the bedrock of support for Asian administrations, the region's governments believe, has been the rapid growth that has over the past decade brought living standards steadily closer to the levels enjoyed in Europe and North America.
China, which has been a net oil importer since 1994, in the middle of this month reported a fall in consumer price inflation. But that was the one small piece of good news on prices in the region for months. For developing Asia as a whole, consumer price inflation hit 7.5 per cent in April, close to a 9