Straits Times 8 Apr 08;
Economist warns: If left unchecked, inflation could lead to series of problems
TOKYO - FORGET Bear Stearns. Ignore what Federal Reserve chairman Ben Bernanke and United States Treasury Secretary Henry Paulson are up to. Take your attention away from which hedge fund is about to blow up. Think about rice.
The price increase of rice - the staple food for about three billion people - to a record last week is the real crisis in the fastest-growing region.
That's not all. 'Food is just the tip of the iceberg,' says Mr Ifzal Ali, chief economist at the Asian Development Bank (ADB) in Manila. 'We see signs of overheating emerging everywhere in Asia.'
There are two other forces behind Asia's inflation surge, both of which have been building for years. One is asset-price gains that have their roots in low-interest-rate policies from Washington to Tokyo. The other is wages as Asians command higher pay and companies encounter skilled-labour shortages.
It's a kind of horror scenario. Yet what is most noteworthy about it is how surprised many investors and economists are.
Given how the Bank of Japan and the US Federal Reserve have trimmed interest rates over a number of years, these price trends were predictable.
Ditto for Asia's build-up of currency reserves, which are seeping into the money supply.
Also, given Asia's rapid growth, it stands to reason that wages would be rising. The ADB says Asian inflation may reach the highest in a decade this year.
What may surprise many is how rising food prices are less of a cyclical phenomenon than a secular one. For economists like Mr Ali, who have been warning about this for years, it is disheartening to see so little focus on increasing investments in agriculture techniques and technologies.
'The party with high growth and low inflation, the age of innocence, is over,' Mr Ali says. 'Governments now need to buckle down if they are to be able to fly higher again in the future. If this trend isn't arrested and reversed, it could well lead to the end of poverty reduction in Asia.'
Strong words, indeed. And yet, today's bout with inflation could markedly set back a region that has spent 10 years recovering from the Asian crisis. Central banks will have little choice but to raise interest rates, a dynamic that would slow growth and hurt equity markets.
Governments are in for a rougher time. The rise in commodities since the start of the decade has been largely masked by subsidies and export controls. That is becoming too expensive now as prices soar and leaders have a grim choice to make: vastly increase debt levels or let the public bear the brunt.
Food costs alone are a clear and present danger. In many Asian countries, Mr Ali says, food and edible oils account for 60 per cent of the consumer price index (CPI). Even before recent increases, Asian families on average shelled out 50 per cent of income on food. That portion is rising now.
Economists in the US and Europe often focus on 'core' inflation, which excludes food and energy. That's impossible in developing Asian economies. Looking at core CPI only masks what Mr Ali calls a 'pauperising effect' knocking back hard-won gains in living standards.
And then there are what he calls 'speed bumps to growth' that are fuelling inflation. Big increases in prices of everything from cement to steel will complicate Asia's need to improve roads, bridges, ports and telecommunications. It is an odd twist of fate that in improving infrastructure to restrain inflation, all that building activity could further fuel it.
'This inflation issue has a direct impact on basic well-being,' Mr Ali says. 'That's why it is so politically and socially explosive.'
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