Syndicate content

Does South Asia Run the Risk of Rising Inflation?

Eliana Cardoso's picture

I am old enough to remember the days when Latin America was the land of inflation. Hyperinflation in Bolivia, Brazil and Argentina made the news in the 1980s and early 1990s. At that time, Asia was seen as immune to the Latin disease. Since then, much water has gone under the bridge. Inflation came under control in the majority of Latin American countries. Today the median inflation rate in South Asia is more than twice the size of the median inflation rate in Latin America and the Caribbean. (See chart below)

Should South Asia’s policymakers look at this information and wonder whether they are doing something wrong?

In general, the recipe for hyperinflation is the monetization of budget deficits in countries afflicted by political instability or conflict. Even if the threat of mega inflation is far removed from the South Asia scenarios, the combination of big budget deficits and loose monetary policy seems to be present in some countries of the region.

From the price stability perspective the most worrying situation is that of the Maldives. There, the budget deficit is projected to reach 33% by the end of the year and a black market for foreign currency has emerged. The government has promised fiscal adjustment.

From the same perspective, the good news is that despite raging violent conflicts, Afghanistan has been able to keep its macroeconomic policy under control. But in Nepal, fiscal slippage could undermine macroeconomic stability and some tightening of monetary policy would be a good idea since real interest rates are negative. In India, widening budget deficits are the most visible obstacle to stable and sustainable growth.

Paying for increased current expenditures at the expense of instability in the future is a Faustian pact. Do you remember Dr. Faust, the respectable German academic who, unhappy with the limits of traditional knowledge, hired Mephistopheles’ services? The idea of selling one’s soul in exchange for knowledge inspired Marlowe’s play, Goethe’s book, and at least two important operas: Berlioz’s “The damnation of Faust” and John Adams’ "Dr. Atomic" (about Oppenheimer, the American Faust). You can listen to both at the Metropolitan Opera House Website and forget about inflation.

After all, it is possible that the higher inflation in South Asia is just a passing cloud blown by the spike in food prices. Is current accommodation by the monetary policy soon to give way to restraint as the global crisis subsides? Should we just forget about inflation and listen to Berlioz in harmony?

Comments

Submitted by Helga Hoffmann on
Dear Eliana, thank you for the info. and interesting observations. By the way, that Faustian pact in the way you present it a propos fiscal deficits in Asia is being made by Pres. Lula. At least it is how it looks to me, seeing it from São Paulo. What does the snobbery at the end, about going to the Metropolitan, listen to Berlioz, and forgetting inflation, intend? To suggest that the rich do not have to worry about inflation? Well, as you know, I never managed to fully understand your literary analogies applied to economic issues... I hope you are enjoying the US and the IFIs. We are at the moment in a funny world, where against all expectations Minister Guido Mantega is defending floating exchange rates for Brazil while the IMF is defending capital controls. Love and all the best. Helga

To Helga: Thank you for your insightful comments and for the news from policy making in Brazil. I can understand the IMF's apology of controls of capital inflows through price mechanisms. A pity this defense comes a bit too late...

Submitted by Ram Bansal, the... on
I won't say for the whole of south Asia but certainly can say the hyper-inflation in India is a product of political and administrative corruption, which provides huge purchasing power to about 15 percent population of the country. This population makes a huge market for local and foreign producers of luxury goods, and they buy things at whatever price. 85 percent of population is suffering in the culprit hands of these 15 percent.

To: Ram Bansal Inflation has to reach 50% per month before we can talk of hyperinflation. Inflation in India is below 10% per year: not a hyperinflation at all. I understand you disapprove of inequality and corruption. But inflation is not a product of corruption. It is a product of loose monetary policy.

Submitted by denis khan on
At the Pittsburgh G-20 Summit, PM reportedly stated that there is no economic crisis in India. At the grassroots level,however, the common man is facing huge price rises in essentials, eroding his consumer power. On 22-5-08, the Times of India published a report that about 70 lakhs crores rupees of India are lying in Switzerland banks. In 2008-09, the Centre’s total expenses increased by over Rs 1.5 lakh crore (from Rs 7, 50,883.53 crore in 2007-08) to more than Rs 9 lakh crore. At the micro level, the chronic small change shortage is fuelling the parallel black market economy. The 50 paisa is the lowest coin in circulation. The Govt. should accelerate return of this money to India. This will mitigate the approximate Rs. 4 lakh crore expenditure, and trim taxation.

To Denis Khan: The PM is right in the sense that India is going through a remarkable recovery from the global financial crisis that hit emerging markets in mid-2008. You are right that India still faces big development challenges. But there are no easy answers to these challenges. Good allocation of government revenues to priorities, such as infrastructure investment, will be part of the solution.

Submitted by kumaran on
Indian Govt should not only look at the growth but also sustainability. Growth and inflation are invesely proprtional if the growth is a temprary growth but when you have a inclusive growth then inflation will be become better as you grow. Only when you allow a certain part of the society to grow then you are calling to trouble for getting into inflation. Just bu investing in infrastructure will not be a major solution, a inclusive growth will be the solution for inflation

Submitted by Gaggan Qureshi on
Great effort to point out this stylized fact. But inflation was more a monetary phenomenon in 1980s than today. Today's inflation is more a global phenomenon as compared to 1980s. So I disagree the level of warning by saying inflation is double in South Asian countries (currently) than was in Latin American Countries (in 1980s). Furthermore, the important thing is the exchange rate regime and willingness to keep exchange rate closer to desired level. Today's south is more close to that willingness. Looking inflation alone is not the right thing.

Submitted by NEVILLE KISHORE... on
The linkage between Marlowe's play & inflation today is most appropriate.Apart from the technicalities of the subject of Inflation, the gravity of inertia on the part of Governments can at best be highlighted by such links. It is heartening to note his legacy lives on.

Add new comment