The Korea Herald


Asian economies in danger of ‘overheating’

By 이현주

Published : March 7, 2011 - 18:32

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Experts warn subsidy spree may store up trouble for the future

KUALA LUMPUR (AFP) ― As prices of food and fuel reach historic highs, Asian nations with a wary eye on Middle East uprisings are doling out subsidies that experts warn are storing up trouble for the future.

Robust Asian economies largely escaped the global downturn, and are now in danger of overheating, stoked by low interest rates, demand from increasingly affluent citizens, and a flood of capital from depressed Western economies.

Supply shocks caused by severe weather are also fuelling inflation that has seen the price of basic commodities spiral ― an irritation for Asia’s growing middle class but a matter of life and death for its countless poor.

The U.N.’s food agency said last week that world food prices have now hit record levels, and that oil price spikes triggered by the revolutions in the Middle East and North Africa could push them even higher.

From regional giants China and India to emerging tigers Indonesia and Vietnam, governments are trying to soften the blow with a raft of populist measures including subsidies, cash handouts and price controls.

The factors fuelling the “Jasmine Revolution” that has felled the leaders of Egypt and Tunisia, and threatens a civil war in Libya, are not mirrored across Asia, with its emerging democracies and rapid recent economic growth.
A customer looks at a fruit stall in New Delhi, India. (Bloomerg) A customer looks at a fruit stall in New Delhi, India. (Bloomerg)

But regional governments are twitchy over the mayhem in the streets of Tripoli and Cairo, and anxious to head off dissent which could see them dumped at the ballot box even if not unseated in a revolution.

“Political unrest, social unrest and high food prices have gone hand in hand across the region,” said Glenn Maguire, chief Asia economist at Societe Generale.

“Governments in India have lost power due to the price of onions ... So I think a politically savvy leadership would definitely be attuned to what’s happening with the cost of the most basic foods.”

In Malaysia, the coalition government paid a heavy price for winding back heavy fuel subsidies, a decision that tore the lid off brewing discontent and helped the opposition make unprecedented gains in 2008 elections.

With new polls tipped for this year, citizens who have tasted the power of the ballot box are making it clear that inflation and the continuing undoing of price controls will again be a key issue.

“The removal of subsidies has really affected our family. It’s okay for the rich people but we live off our daily wages,” said Che Hamsuri Che Jaafar, a 48-year-old taxi driver, as he waited for a fare outside a Kuala Lumpur hotel.

“I wake up at 5am and go to sleep at 11pm and work the whole day, but I barely make enough to feed my family of five. The government must understand the hearts of the people. They must ease our suffering or face the same kind of response they got in 2008.”

In India, where the cost of onions ― a staple in most traditional dishes ― doubled in just a few days last year, there have already been large rallies over inflation, heaping pressure on the government to act.

In its recent budget, food and fuel subsidies were largely maintained, and social spending was raised by 17 percent as part of a range of measures to reduce imbalances and retain the support of its core poor supporters.

“With its back to the wall, the government is doing what is absolutely necessary for its survival,” said Surjit Bhalla, chairman of the Oxus Investments fund management firm, writing in the Indian Express newspaper.

China’s inflation has remained stubbornly high for months. The U.N. food agency said that prices for rice and wheat flour are 23 percent and 16 percent above their levels a year ago despite government moves to cool the increases.

In November subsidies were ordered for low-income households and last week plans were announced for cash subsidies to be made routine at times of high inflation, at a level “not lower than” the extra living costs.

“Price rises can easily spark people’s discontent and even lead to grave social problems if they are linked to corruption or graft,” Premier Wen Jiabao said in a recent online interview.

Hong Kong’s red-hot economy has sparked worries about soaring property and food prices, and its February budget took aim with measures including an electricity subsidy and rent relief for public housing tenants.

In the face of rising anger over a growing wage gap, authorities offered a $770 contribution into Hong Kong’s retirement fund which was upgraded to a cash handout to residents by popular demand.

Singapore’s pre-election budget was also packed with inflation-era sweeteners, including more than a billion dollars in grants aimed at low-income earners, while the middle class will also receive tax cuts and rebates.

But the largesse has caused unease for observers who say that even though Asian governments, with their large budget surpluses, can afford the programs right now, their actions will worsen the inflation crisis in the long term.

“They’re only postponing the problem, not resolving it. Politicians like to be re-elected so they will do this thing but it’s not necessarily good for society,” said Ilian Mihov, economics professor at INSEAD in Singapore.

Subsidies and price controls can distort markets by encouraging even higher levels of consumption, and the latter can remove the incentive for production to increase.

If they are not carefully targeted, governments can also end up underwriting the cost of fuel and basic foods for those who can afford to pay, as well as the poor.

“The best thing would be to have greater production of food and oil, and the thing that helps people produce more is if prices are higher,” said Mihov, pointing to oil shocks in decades past that triggered intensive innovation.

HSBC’s Asia economist, Wellian Wiranto, said the current raft of populist measures will leave inflation relatively contained as long as they continue.

“But subsidies also function as a ‘dam’ to hold back price rises, and short-term consumption and longer term efficiency may not adjust,” he said.

“This dam may also ‘break’ at some point, when the budget gets hurt too much, then the adjustment will be resultantly more shocking.”