Asia needs to put lid on inflation, ADB warns

by Shinichi Terada

Asia’s economies are under threat of inflation stemming from high fuel and food costs, and containing it is an immediate challenge for the region if sustainable growth is to be maintained, an Asian Development Bank executive said earlier this month.

“We believe that inflation is the cruelest tax for the poor,” Rajat M. Nag, ADB’s managing director general, said in a recent interview in Tokyo. “The important thing is if we do not control inflation, the gains of growth will be interrupted by the increases of prices. So I think the immediate challenge of Asia is to contain inflation.”

Nag was in Japan earlier this month to discuss the ADB’s long-term vision for poverty reduction with government officials.

In a report released Tuesday, the ADB said inflation in emerging Asian countries is likely to increase to 7.8 percent this year, more than double the average rate of the past 10 years, hurting households in Asia, where more than 50 percent of monthly household expenditures go to food and fuel.

The Manila-based lender also said high food and energy prices, weakening demand from the United States and Europe, and volatility in financial markets are expected to reduce growth in Asia this year to 7.5 percent from 9 percent last year.

On Monday, U.S. investment bank Lehman Brothers Holdings Inc. filed for bankruptcy protection as crisis talks over the weekend faltered, and its failure is widely expected to further weaken U.S. demand and slow the worldwide economy.

“The worldwide economic picture is certainly uncertain. . . . Asia is very export-oriented continent. Therefore, economic growth in other parts of the world is very important,” he said.

Ifzal Ali, ADB’s chief economist, said in the latest report that if the global slowdown continues beyond 2009, the repercussions for the region could be severe.

High food and fuel prices have increased production and transport costs as well as the cost of importing goods from outside Asia. The situation has stirred protests in agricultural and industrial sectors around the world and raised fears that inflation could cause more people to plunge into poverty.

The price hikes have been driven by strong demand for fuel in emerging economies, increased biofuel production raising the price of crops, unfavorable weather, and massive inflows of speculative money from hedge funds and other powerful investors.

Nag said some 600 million people in Asia survive on $1 a day, while more than 700 million people lack access to clean water and 1.7 billion access to sanitation.

He said Asian governments have to look at “a mix of strong macroeconomic management and a tighter monetary policy” to combat inflation and avoid choking growth.

Among measures to control inflation, he suggested the governments ensure “targeted cash income support” for the poor to protect them from price hikes, rather than instituting price controls or trade restrictions that could warp the market mechanism.

“I don’t think the prices will go back to the earlier price level. . . . So we’ll have to start focusing on how to increase production by increasing productivity,” he said, adding that the region should look at ways to increase food production, particularly rice, the most prevalent grain in Asia.

Nag that agricultural research, such as the development of seeds for weather-resistant crops and better water management, should be accelerated.

To combat some of the challenges that face emerging Asian economies as they try to achieve sustainable growth in the long term, Nag suggests they invest in such infrastructure as roads, railways and power projects. He estimated the demand for building such infrastructure would be worth about $400 billion a year.

He also warned that Asia should take steps toward greater energy efficiency.

“By 2015, Asia could be producing as much as about one-third, or 36 percent, of global greenhouse gas emissions. Asian growth will not be sustainable” if this problem isn’t solved, he said.

To achieve sustainable development, Nag said the Asian economies need to create jobs for young people and keep them employed.

ADB’s estimate shows that Asia will have to produce roughly about 400 million jobs in the next 10 years, Nag said. Asia has to look at ways to improve employment opportunities, higher education and vocational training so young people can qualify for employment in emerging Asian countries, he said.