Consumers throughout Southeast Asia have begun to show their displeasure at the rising cost of food, but the threat of these protests degenerating into region-wide, destabilising unrest is, for the moment, overstated. The most important political constituencies in these countries are often in the middle class, and they still have the capacity to absorb price increases and general economic pain. Also, governments throughout the region still have a variety of options with which to temporarily temper public discontent. Vietnam is arguably the exception, with inflation at almost 20 per cent possibly threatening labour relations.
The primary concern, however, is that the rise in prices is secular and will stay at elevated levels. In which case, governments throughout the region will not only have to deal with the persistent pressure that inflation will put on politics, but with the need to adjust their long-term policies without resorting to open-ended programmes that drain them fiscally and discredit the credibility of their macroeconomic programmes. In addition, the rise in inflation rates comes at a time when three governments – the Philippines, Thailand and Malaysia – are politically unsettled, and with Indonesia preparing for parliamentary and presidential elections in 2009.
The inflationary spikes being seen in several Southeast Asian countries have been uneven, influenced generally by three factors: increased aggregate demand, currency policies and rising global prices. In some cases, the problem is exacerbated by speculative hoarding. This has led to the jump in prices for food commodities and staples such as rice, wheat, pork, soybean and palm oil. According to the World Bank, grain and edible prices rose 21 per cent and 15 per cent, respectively, in just the first two months of 2008.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Overall inflation is worst in Cambodia and Vietnam, where governments have largely kept their currencies pegged to the dollar during a time of rising investment, thus stoking domestic demand and allowing their economies to import inflation from the weakness of the US currency. This is in addition to the general inflationary pressures from rising commodity prices. However, dealing with inflation in these two countries could threaten growth, as they will likely require government to reduce aggregate economic demand, as well as consider revaluing the currency, both of which could slow their respective economies.
Some countries, such as Thailand and the Philippines, are seeing inflation in specific commodity groups, with the general rise in prices being more recent and less than that of Cambodia and Vietnam. These countries have allowed their currencies to appreciate substantially over the last two years, reducing inflationary pressures. Thus, inflation in these countries has also risen, but remains in the middle single digits. But the baht and peso have largely stabilised since the start of the year, making it likely that more of the imported inflation will feed into the system. This affects the Philippines more, as the country has arguably the worst agricultural profile in the context of today’s rising prices. It is heavily dependent on imports for its top staple, rice, while being bogged down by an inefficient production and distribution system. Shipping produce from the southernmost island of Mindanao to the capital is more expensive than shipping it between the Philippines and Singapore.
Thailand, with its rice surplus and general access to produce from neighbouring countries in the Greater Mekong Area, is substantially better off in terms of access to key commodities. For Indonesia, another rice exporter, it is the higher prices of tofu – a key protein substitute for the poor – and cooking oil that is proving to be politically troublesome. Also, Jakarta has kept the rupiah at essentially the 9,000 per dollar level for the past few years, for which reason the country has imported some inflation from the West, and prices are rising about 9 per cent year-on-year.