Eating is getting expensive not only in India, but elsewhere in Asia too. The latest alert on this was sounded by the Indonesian President Susilo Bambino Yudhoyono. Speaking at the opening ceremony of the Association of Southeast Asian Nations (Asean) summit, President Yudhoyono highlighted the exorbitant rise in food and energy prices, and the dangers that such a rise poses for millions of people across Asia. Referring specifically to the impact of high prices on real incomes, the President expressed his concern over a sharp increase in poverty in Asia if the trends continued.
While Yodhoyono?s remarks were made in a Southeast Asian context, they apply to the larger Asian region, since the Asean represents much of the contrasts and vulnerabilities that Asia nurses. Asean is a strikingly heterogeneous group. It includes the small, prosperous and technologically-advanced, high-productivity economy of Singapore, middle-income economies such as Malaysia, Indonesia, Thailand and the Philippines, a labour-abundant and potential manufacturing powerhouse like Vietnam, and economically backward countries like Cambodia and Laos. There are untapped energy-rich countries in the region like Brunei and Myanmar. Product specialisation and comparative advantages vary sharply within the region, as they do elsewhere in Asia, which is evident from the co-existence of rice exporters like Thailand and Vietnam and rice importers like the Philippines and Singapore. The region is a strategic economic hub for facilitating maritime trade traffic through the busy Strait of Malacca?the main shipping channel connecting the Pacific Ocean to the Indian Ocean. It is also a key node for air traffic in East, South and Southeast Asia through active airports at Singapore, Kuala Lampur and Bangkok. Geographically and structurally, the region typifies Asia in a variety of ways: co-existence of contrasting endowments in natural resources, skilled manpower, and scientific and technological abilities; demand-supply imbalances; high growth scenarios and extensive marginal populations.
How strong are the inflationary concerns across Southeast Asia? Headline consumer price inflation across the region varies quite sharply; from being as high as 13.9% in Vietnam to 6.7% in Indonesia, 5.5% in Singapore, 4.3% in the Philippines, 3.2% in Thailand and 2.4% in Malaysia. While these were the consumer price inflation rates in 2010, President Yudhoyono, while expressing his concerns, would have been influenced by the fact that inflation is expected to increase in most of these countries in 2011. While in Vietnam inflation is expected to remain roughly the same, it is expected to cross 7% in Indonesia, and reach almost 5% in the Philippines, 4% in Thailand and 3% in Malaysia, respectively.
The numbers?projected by the IMF in its latest assessment of the regional outlook?indicate that inflationary expectations vary considerably across the region. But what is significant is the uniform hardening of such expectations among the countries of the region. What is also worrying is that large parts of these increases are going to come from escalations in food and energy prices. According to the IMF?s estimates, a 10% increase in food prices are expected to result in a 1.3 percentage point increase in core inflation in the Philippines, 0.9 percentage points in Thailand, 0.8 percentage points in Malaysia and 0.6 percentage points in Vietnam and Indonesia, respectively. Food prices, in fact, are the bigger determinants of headline inflation compared with energy prices; similar forecasts on the correlation between energy prices and headline inflation show a 10% increase in energy prices, resulting in 0.3-0.1 percentage point increase in headline inflation in the mentioned countries. What is worrying though is the combined effect of the increase in food and energy prices. These can easily add up to 1.5 percentage points in headline inflation. And there is very little that interest rate hikes can do for curbing the prices.
Much of the eventual increase in inflation will depend upon how much of the global increases in food and energy prices are ?passed through? on to domestic prices. Southeast Asian countries tend to be cautious in this respect. Like India, only parts of global increases in food and energy prices are passed on to domestic prices. But even with limited pass-through, the incremental price effects might be disturbing for economies that are already struggling with high headline inflations. President Yudhoyono has proposed new initiatives such as creating a food reserves system for addressing price volatility. These, however, are long-term measures. The immediate future remains grim, as is clearly evident from the President?s statement. It looks grimmer if what is reflected in Southeast Asia is taken as a reflection (and correctly so) of the impending state of affairs in most of the rest of Asia.
The author is a visiting senior research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views
