Asian nations on subsidy spree as inflation hits

KUALA LUMPUR:

As prices of food and fuel reach historic highs, Asian nations with a wary eye on Middle East uprisings are doling out subsidies that experts warn are storing up trouble for the future.

Robust Asian economies largely escaped the global downturn, and are now in danger of overheating, stoked by low interest rates, demand from increasingly affluent citizens, and a flood of capital from depressed Western economies.

Supply shocks caused by severe weather are also fuelling inflation that has seen the price of basic commodities spiral - an irritation for Asia’s growing middle class but a matter of life and death for its countless poor.

The UN’s food agency said  that world food prices have now hit record levels, and that oil price spikes triggered by the revolutions in the Middle East and North Africa could push them even higher.

From regional giants China and India to emerging tigers Indonesia and Vietnam, governments are trying to soften the blow with measures including subsidies, cash handouts and price controls.

The factors fuelling the “Jasmine Revolution” that has felled the leaders of Egypt and Tunisia, and threatens a civil war in Libya, are not mirrored across Asia, with its emerging democracies and rapid recent economic growth.

But regional governments are twitchy over the mayhem in the streets of Tripoli and Cairo, and anxious to head off dissent which could see them dumped at the ballot box if not unseated in a revolution.

“Political unrest, social unrest and high food prices have gone hand in hand across the region,” said Glenn Maguire, chief Asia economist at Societe Generale.

In India, where the cost of onions - a staple in most traditional dishes - doubled in just a few days last year, there have already been large rallies over inflation, heaping pressure on the government to act.

In its recent budget, food and fuel subsidies were largely maintained, and social spending was raised by 17 per cent as part of a range of measures to reduce imbalances and retain the support of its core poor supporters.

China’s inflation has remained stubbornly high for months. The UN food agency said that prices for rice and wheat flour are 23 per cent and 16 per cent above their levels a year ago despite government moves to cool the increases.

In November subsidies were ordered for low-income households and last week plans were announced for cash subsidies to be made routine at times of high inflation, at a level “not lower than” the extra living costs.

“Price rises can easily spark people’s discontent and even lead to grave social problems if they are linked to corruption or graft,” said Premier Wen Jiabao.

But the subsidy largesse has caused unease for observers who say that even though Asian governments, with their large budget surpluses, can afford the programmes right now, their actions will worsen the inflation crisis in the long term.

“They’re only postponing the problem, not resolving it. Politicians like to be re-elected but it’s not necessarily good for society,” said Ilian Mihov, economics professor at INSEAD in Singapore.

Subsidies and price controls can distort markets by encouraging even higher levels of consumption, and the latter can remove the incentive for production to increase.

If they are not carefully targeted, governments can also end up underwriting the cost of fuel and basic foods for those who can afford to pay, as well as the poor.

“The best thing would be to have greater production of food and oil, and the thing that helps people produce more is if prices are higher,” said Mihov, pointing to oil shocks in decades past that triggered intensive innovation.

Published in The Express Tribune, March 7^th, 2011.