Facing inflation, Asia gets more aggressive

As social unrest grows over rising food and fuel prices, policymakers from Thailand to Indonesia are raising interest rates.

from the June 11, 2008 edition

Page 2 of 2

Page 1 | 2

Factories in Vietnam have seen a wave of strikes over low wages, and some workers have quit jobs and returned to villages where living costs are lower, says Jonathan Pincus, chief economist for the United Nations in Hanoi. As authorities tighten monetary policy and tackle high prices, the result may be a slowdown. "There is a need to trade off some growth to bring down inflation this year and I think that the government recognizes this," he says.

To defuse social pressures, Asian governments have tried to ease the burden of rising prices with targeted handouts. These are more effective than subsidies on pump prices, provided they are properly administered, say economists. Thai Finance Minister Surapong Suebwonglee said Monday that, starting next month, he would provide food coupons to low-income families after inflation hit a near-decade high of 7.6 percent in May.

Some governments are also promising to curb discretionary spending. Malaysian Prime Minister Abdullah Badawi, who has been under pressure to quit since an election setback in March, has tried to dampen anger over last week's fuel hikes by vowing to cut perks for government ministers and reducing their overseas travel.

Contrast with 1997 financial crisis

While some observers in Asia have drawn parallels between the inflation spike and the 1997-98 financial crisis, the differences are telling.

Ten years ago, overheated economies ran budget deficits that led to a run on pegged currencies and a collapse in confidence. Today, many Asian governments are running capital surpluses and sitting on huge foreign reserves while their currencies have gained against a weak dollar.

This is one reason why policymakers in Thailand are wary of raising rates and attracting capital inflows that push up the currency, says Chris Bruton, managing director of Dataconsult, an independent consultancy in Bangkok. But the risk of social unrest over food prices weighs heavily in Thailand, where antigovernment protests are on the rise. "If you take the political equation into consideration, you have to fight inflation first," he says.

Standing at an outdoor food market, Pranee Malhotra can see the impact for herself. A few months ago, her daily spending on vegetables to feed her family of four came to some $2. Today, it's over $3. "Everything is going up. Oil and rice are going up. It's affecting all of us, especially poor people," she says, before dropping a note into the begging bowl of a Buddhist nun.

 

1 | Page 2