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Asian Government Subsidies Ease Inflation Pain

  • Heda Bayron

A vegetable seller, Vijay Kumar, waits for customers in his shop in an upscale INA market, in New Delhi, India (File Photo)

A vegetable seller, Vijay Kumar, waits for customers in his shop in an upscale INA market, in New Delhi, India (File Photo)

Consumer prices are rapidly rising in Asia, and many people are trying to stretch their budgets. As governments are giving out cash and increasing subsidies on fuel and staple goods to soften the blow on consumers.

In Thailand, food vendors say inflation is biting into their daily profit.

One man says he raised the price of noodles by 16 cents or 5 baht because fuel, cooking oil, chicken and pork prices have all gone up.

A banana fritter vendor says he reduced the number of bananas he sells for 32 cents from 20 pieces to 15 pieces.

"What we see is because the economy is doing well, people feel like they should be able to pass along some of those increases but you’ll never be able to pass a 100 percent," noted Frederico Gil Sander, an economist at the World Bank in Thailand.

Bad harvests, political tensions and higher demand have wreaked havoc on many families’ budgets. Many are getting less for their money.

Oil prices

As world oil prices surged in recent months because of tensions in the Middle East, the Thai government capped the price of diesel - the fuel used by truckers to transport goods from the provinces to the cities - to not more than 96 cents per liter. Indonesia decided to delay a planned cut in fuel subsidies. And in the Philippines, the government approved $11.5 million in fuel subsidies to public transport drivers.

In Hong Kong, a city which imports nearly all its food supply, inflation surged to a 30-month high in February. Shortages and higher demand in mainland China, the source of much of Hong Kong’s food, have spilled over here. One eggplant can now cost more than a dollar in supermarkets.

The government promised to use its budget surplus this year to help citizens by offering electricity subsidies, increasing welfare payments and handing out $770 to every resident.

"Well, I think those subsidies help to provide certain relief especially to the grassroots and the lower middle class," said Connie Bolland, the chief economist of Economic Research Analysis in Hong Kong. "But the amount I think is probably too small to make a difference."

Not sustainable

But economic analysts say that while price controls and subsidies help some people, they are not sustainable because they could cost governments a lot of money in the long run, worsening budget deficits. Sander says subsidies should be targeted to benefit everybody.

"If these subsidies were very targeted to people in the bottom, we think that there will be a lot more to benefit than this overall subsidy which basically ends up reaching everyone," said Sander.

Authorities in China, the Philippines, South Korea, India, Thailand and Indonesia have also raised interest rates in the last two months to reduce the amount of money in the financial system - another means of reining in inflation. They say rates could still go up as long as prices keep on climbing.

Credit costs

Higher credit costs could add to many businesses' woes as they would have to pay more on their loans. Some analysts also worry that it could stifle economic growth, leading to unemployment.

In Hong Kong, authorities have little room to tackle inflation. Bolland says Hong Kong’s fixed exchange rate to the dollar makes Hong Kong assets cheaper to mainland Chinese buyers who hold an appreciating yuan. And that drives up the stock and property market. In some pockets of the property market, prices have surpassed their former peaks in 1997.

"Of course with the liquidity in the system in the mainland, even though they are trying to tighten credit and bank lending and all that, there’s a lot of cash that somehow manages to find its way to Hong Kong," said Bolland.

Positive effect

With every country in Asia struggling to contain rising prices, Sander at the World Bank says inflation has propelled energy efficiency and agricultural productivity higher on Asian governments' agenda.

"In the long term basically you tie this to increases in the productivity of agriculture where there are more people demanding more food," said Sander. "You need to have the supply response and have agriculture produce more food and we think that there is a lot of potential for that. And number two, on the fuel situation. If you need less oil, increases in the price of oil will hurt you less."

The United Nations estimates that between 10 and 42 million people in Asia will be pushed into poverty or prevented from getting out of poverty this year because of higher prices.