Features | Economy | Southeast Asia

Staple Stoush

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.

By Bob Herrera-Lim for

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.

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.

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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.

The problem for many governments is that the recent bout with inflation is not simply the result of money supply excesses in their countries, but is in large part due to the rise in global prices due to higher demand. For this reason, traditional, one-size-fits-all policies that try to curtail domestic demand in individual economies (ie interest-rate shocks) are likely to deliver general macroeconomic pain, but not as much benefit in the form of lowering prices. This makes the problem more secular than temporal.

The inflationary spike comes at a particularly bad time for the region’s top leaders, as many of them are facing uncertain political futures. Indonesian President Susilo Bambang Yudhoyono, long considered the runaway favourite for the 2009 presidential elections, is seeing more political resistance even from his nominal coalition allies, as well as a strengthening of the opposition and potential challengers for the presidency. In 2005, the government was forced to more than double average fuel prices in the wake of deteriorating confidence in the country’s finances. The subsequent slowdown in job creation and inflation led to the largest declines in the president’s approval rating in 2006. Yudhoyono has already frustrated several of his key constituencies due to the slow pace of economic and regulatory reform in the nearly four years that he has been in office. Inflation, if it persists, could undermine Yudhoyono’s support across the population even further, creating the possibility of a more competitive race in 2009, possibly against former President Megawati Sukarnoputri. The appointment of an orthodox economist in Dr Boediono will help maintain the credibility of the country’s monetary policy, which limits the possibility of any decline interest rates anytime soon.

Philippine President Gloria Macapagal-Arroyo will be another leader whose political capabilities could be seriously undermined by rising prices. Unpopular and constantly under attack from corruption allegations, Arroyo could see Filipinos previously unwilling to take to the streets against her administration begin to display their frustrations if shortages actually hit. The repercussions could range from a more distracted government to larger street protests that actually destabilise her government. As of now, consumers have to deal with substantially higher prices but not the absence of products on the shelves; inflation is thus likely to be problematic politically, but still not threatening to her government’s survival.

Malaysia and Thailand are also experiencing higher inflation compared to 2007, but these are also in the single digits. Both countries have governments that are, however, unpopular with substantial portions of the population. A worsening of inflation together with perceptions of political deadlocks or stasis could accelerate the decline in popular support for the incumbents in these two countries. In the case of Malaysia, it could force the hand of the ruling United Malays National Organisation’s (UMNO), and lead to a leadership transition from the current unpopular Prime Minister Abdullah Badawi, who the party blames for its dismal showing during the 8 March general elections. In the case of Thailand, it could also heighten public dissatisfaction with the controversial prime minister, Samak Sundarajev, who is seen as holding the fort for former Prime Minister Thaksin Shinawatra.

Vietnam’s battle with inflation will lead to political concerns separate from the possibility that the government’s efforts to cool demand could slow the economy substantially. There could be some fears that worsening inflation could also divide the Communist Party of Vietnam (CPV) politically, similar to what happened in the aftermath of the 1998 financial crisis. Back then, high inflation followed by a weakening economy led to a schism within the communist party. General Le Ka Phieu, perceived as distracted by his efforts to consolidate power, was replaced midterm by the current general secretary, Nong Duc Manh. For now, the CPV remains cohesive; policy is formulated by the CPV’s Manh, Prime Minister Nguyen Tan Dung and President Nguyen Minh Triet and there is relatively little disagreement within the Party over the general direction of economic reform and liberalisation. Where some disagreement may still exist is regarding the pace of change, and this is where inflation could be a factor, possibly creating a divide within the party that could lead to reforms being implemented more slowly.

Burma is a rice producer, but its limited access to foreign exchange (due in part to the costs of the transfer of the capital from Rangoon to Naypyidaw) has exacerbated the problem with overall inflation. The November 2007 protest by Buddhist monks, which turned into the most serious social confrontation with the regime in almost two decades, was triggered by an unexpected and large increase in fuel prices. There is speculation that Burmese ability to service its short-term debt (likely to China and Japan) is becoming more questionable, which makes it difficult for the country to persist with subsidies. This makes more fuel price hikes likely in the future, and with it, the prospect of more protests.

Governments will therefore try to ride out the storm, by using all possible means to prevent the rise in inflation from morphing into public unrest. These policies will range from simple photo-ops in warehouses stacked with commodities to subsidies on key staples and welfare payments. The danger is that some of these policy measures, meant to be temporary, will turn out to be anything but, pressuring government budgets soon and diverting money from longer-term public investments such as healthcare, infrastructure and education.
An extended version of this article is available on www.policyandmarkets.com