Combating inflation, food crisis:

Demand side policies may not work

by Gamini WARUSHAMANA

The developing economies of Asia and the Pacific will grow at 7.3 percent in 2011 as recovery from the global economic downturn continues, states the report of the Economic and Social Survey of Asia and Pacific (ESCAP) 2011 of the United Nations.

The new growth forecast for the region is lower than the 8.8 percent in 2010 due to a low base, withdrawal of fiscal stimulus policies, adoption of tight monitory policies and sluggish recovery in the advanced economies, the report said. Economic growth in 2011 is expected to be broad-based. Growth projections of developing and transition economies by subregions are as follows:

East and North East Asia at 7.9 percent, North and Central Asia at 4.8 percent, the Pacific island developing economies at 5.5 percent, South and South West Asia at 6.8 percent and South East Asia at 5.5 percent.

The region's large developing economies continue to power ahead with growth rate in China projected at 9.5 percent, India at 8.7 percent and Indonesia at 6.5 percent. Growth forecast for Sri Lanka in 2011 is 8 percent.The report said that most of the economies in the region may see an increase in inflation. To some extent, inflationary pressures reflect a resumption in growth. Inflation also results from rising food and energy prices, which would have a particularly damaging impact on the poor and vulnerable populations.

There are significant risks associated with the excess liquidity in developed countries, which results in large inflows of speculative capital to Asia and the Pacific. This in turn is creating asset price bubbles as well as causing inflation and the appreciation of regional currencies.

According to ESCAP estimates, rising food and oil prices could lead 42 million people into poverty and in addition 19 million have been affected in 2010. In a worst case scenario with food price inflation doubling in 2011 and average oil price at $130/barrel, the achievements of the MDG for poverty could be postponed by up to half a decade in some developing countries,the report said.

Presenting the report in Colombo, Economic Affairs Officer of ESCAP, Bangkok Dr. Muhammed Hussain Malik said that demand side solutions such as tight monitory policies will not work in combating high inflation. To face high food price and cost push inflation countries in the region will have to look at increasing food supply, improving productivity in the agriculture sector and a second green revolution.

Supply side interventions such as income transfer schemes, maintaining food stocks, regional level food banks and South-South co-operation in agriculture research and development are essential at regional level. To reduce food prices global interventions such as regulating commodity markets and discipline in conversion of grain into bio fuel are needed. To face the volatility in oil prices the Asia Pacific region should agree on benchmarking and also should maintain strategic reserves. The G 20 countries should take the initiative in this regard, Dr. Malik said. The Oil price volatility will reduce the region's growth by 1 percent in 2011. Dr. Malik said that exporting to developed countries and increasing economic growth will not work any more. Countries should find regional markets and increase intra regional trade. Preferential Trade Agreements (PTAs) can serve as building blocks in intra regional trade and there are 170 PTAs within the Asia pacific region, he said.

Reviewing the report from the point of view of the Sri Lankan economy former Deputy Governor of the Central Bank W.A. Wijewardena said that some countries have begun believing in economic policies such as economic nationalism and protectionism that wex proved wrong centuries ago.

Today, Sri Lanka is dependent on foreign savings which is vulnerable and risky. Foreign borrowing dominates the funding of the investment-savings gap.

The composition of foreign borrowings have changed with governments, commercial borrowing increasing and concessionary borrowings declining.

Commercial borrowing is acceptable only if investing in high return investments. For instance Singapore went for commercial borrowing in its economic transition and it achieved results as the country invested in high return ventures.

Wijewardena said that the Central Bank's responsibility is not only price stability. It should pay attention to economic and price stability. Price indices can be manipulated and the CB should fine balance inflation and economic growth.