August 2009

When the capacity of the economy to supply goods and services (given by its factories, workers, etc.) exceeds demand, as happens in a crisis, there is pressure for prices to fall. A continued decline in prices (deflation) can in turn aggravate the economic crisis, because consumers expect prices will be lower in the future and so have an incentive to postpone purchases. They also fear that their wages (the price of labor) may decline along with other prices, and tend to save more. These factors further reduce demand and may create a vicious cycle, such as the one that happened in Japan in the 1990s.

But not all changes in prices are related to the underlying domestic economy. If price changes are expected to be "one-off" then the expectations of consumers about future prices do not change, and the logic above does not apply.

After five years in Indonesia, my family and I have left this wonderful country and moved to Kenya. The last five years have been excellent years for Indonesia. The economy stabilized, growth resumed and services started to improve, although modestly and not in all areas. Indonesia still remains an underrated country, but this may change. Indonesia has only mildly been affected by the global crisis. After holding its second direct presidential election, where more than 100 million Indonesians cast their votes, the country can expect another five years of political and economic stability, and possibly some improvements in the business climate.

In my last blog on Indonesia, I’d like to focus on Indonesia’s decentralization experiment, which was put in place ten years ago and made effective on January 1, 2001. Indonesia’s decentralization was a by-product of its democratization after the dismantling of Suharto’s “new order” regime.  Indonesia then implemented one of the most ambitious decentralization programs of modern times, radically transferring responsibility and financial resources to lower levels of government. My colleagues Bert Hofman and Kai Kaiser coined the phrase “big bang decentralization” (pdf). Even though decentralization makes sense in a country covering three time zones and more than 17,000 islands, many were skeptical about this experiment, particularly in the central government.

The Xe Bang Fai river in Laos started to break its banks over the last two weeks in some areas, causing testing to stop for the Nam Theun 2 project.

The rainy season in Laos is well advanced now, and the Province of Khammouane, where most of the Nam Theun 2 Hydroelectric Project (NT2) is located, has been hard hit over the last two weeks. Just over a week ago there was 225mm of rain over central Khammouane in one night, leading to floods in several places around the province – including the provincial capital of Thakek. Apparently there were places in Thakek up to a meter deep in water for a while: a combination of heavy rain and blocked drains, according to a local official. Those of us who were in Lao’s capital Vientiane during last year’s floods will vividly remember this.

As a result of this heavy rain, the Xe Bang Fai River, which drains a significant part of Khammouane, started to break its banks over the last week in some areas. The Xe Bang Fai is very significant to the NT2 as it is the river that will receive the water discharged from the hydropower facility when it is operating. The incremental impacts of NT2 water on the regular flood cycle of the Xe Bang Fai river has always been a concern for the project, and was studied extensively.

Impacts of climate change could cause heat stress in many plants and cause problems for grazing animals in Mongolia. (Photo courtesy of PnP! under a Creative Commons license)

Ban Ki-moon, UN Secretary General, was recently in Mongolia in part to observe the ways in which climate change is affecting this country of climatic extremes and how it needs to adapt. Of course one could be forgiven for thinking that a country with -40 degree winters, +40 degree summers, dust storms and flash floods might welcome a bit of climate change.

Unfortunately we can’t produce ‘designer climates’ just yet, and the impacts of the ways in which the Mongolian climate is changing are worrying. Already the combination of precipitation decreases and temperature increases have caused rivers and lakes to dry and herders and local government officials to complain about the lowering productivity of the steppe.