Impact of Inflation on Asian Economies - Dissertation Example

?Impact of Inflation on Asian Economies Table of Contents 0 Introduction 3 2.0 Causes of Inflation in Asian Economies 5 3.0 Effects of Asian Inflation on its Economic Growth 8 4.0 Effectiveness of Inflation Management in Asian Economies 9 5.0 Conclusion 11 6.0 References 13 1.0 Introduction The rate of inflation in the Asian economies had been soaring during the recent past obsessed by rising prices of oil and food. Since the inflation rate had been enormously rising after the global financial crisis during the year 2008, several governments of the Asian countries have initiated various remedial steps. However, the steps cannot, at once, eradicate inflation; rather they are aimed towards minimisation of the adverse impacts of inflation upon the growth of economy to a definite extent. Placing in the most generic term, inflation within an economy diminishes the value of money as a result of which the common people find it difficult to survive. Inflation and growth are such two terms of the economy that are comprehensively incompatible and can never be anticipated to meet (Economy Watch, 2011). The present research paper has been designed to critically evaluate the impact of inflation upon the Asian economies. The reason for selecting the Asian economies for study is the excessively elevating rate of inflation as compared to the rest of the world during the past a few years. The following demonstration of the inflation rate has led to the undertaking of present research. The rates of inflation depicted in the figure are those of the recent period. Source: (Trading Economics, 2011). The figure is a clear representation of the rate of inflation in various countries of the world inclusive of the western countries, European countries, Australia and the major Asian countries in terms of economic growth and also population. It is evident from the figure that rate of inflation in India and China is the highest in the entire world in recent times. This is the basis of the present research that will be concerned with finding the causes of inflation along with its effects and most importantly finding an effective way of managing inflation. 2.0 Causes of Inflation in Asian Economies According to a special report from the Asian Development Bank (2008a), during the period from the year 2007 to 2008, both structural as well as cyclical factors have contributed towards the escalating prices of food products in Asia. Before that period, major cereal stocks in the global market were reducing radically. The harsh rate of failing stock was a clear indication that the world economy had been becoming incapable of meeting up the rate of consumption (ESCAP, 2011). As a result of this, the ratio of stock-to-use had been falling massively, before it reached one of its lowest rates during the same period of 2007-2008 as shown in the figure below: Source: (Asian Development Bank, 2011). The percentage figures in the above figure had been shown with respect to three important cereals: corn, wheat and rice. Various structural factors that have been influencing the increasing rate of food prices during the period 2007-2008 are observed to be continuing their impacts upon the present episode of ever increasing food prices within the Asian economies. The factors relevant on the demand-side of the economies are inclusive of huge rate of growth in population figures, sturdy rate of growth in people’s income within the emerging economies and varying diet habits of the people from staple items of food towards meat and several other processed foods. Increased consumption of processed food items requires huge amount of feedstock and raw materials. The factors in the supply side that contributes towards increased rate of inflation are the enhanced utilisation of food grains, primarily rapeseed oil and corns for the purpose of producing biofuel; alteration of the agricultural lands in order to be utilised for business purposes; enhanced shortage of resources for irrigation; lower production of crops; increasing costs of raw materials; and avoidance of massive investment within several activities related to development process (ESCAP, 2011). In the meantime, the cyclical factors had also contributed towards increasing prices of food to a considerable extent. During the middle of the year 2010, the prices of agricultural products pitched pertaining to a sequence of crop collapses in most of the producing areas within Asia. The adverse phenomenon of the weather (La Nina) had given rise to excessive flooding in many of the Asian countries. Intense disturbances within the weather condition are being held as the primary contributor towards deficits in supply of most of the important commodities such as that of corn, rice, sugar, wheat and coffee (Asian Development Bank, 2011). The following table depicts severe events of weather during the period from June 2010 to December 2010: Source: (Asian Development Bank, 2011). Along with this cyclical factor that contributed towards Asian inflation, strong recovery is also considered as one of the contributing factors. The phase of recovery after the global financial crisis enhanced food demand within the emerging economies such as that of India and China. Weaknesses of US Dollar is also considered as an enhancing factor towards Asian inflation because most of the items of food are valued in US Dollars (Asian Development Bank, 2011). Apart from the above mentioned cyclical and structural factors contributing towards inflation, several protectionist policies also played a strong role in enhancing inflation. The protectionist policies are inclusive of export bans, heavy taxes on exports and various schemes of self-sufficiency with available national resources. For example, huge restrictions on exports by Ukraine and the Russian Federation (topmost producers of wheat) forced large importers such as Middle East to store inventories. This action ultimately resulted in further pinch in supplies, boosting up inflation (Asian Development Bank, 2011). 3.0 Effects of Asian Inflation on its Economic Growth Asia’s developing countries host almost 2/3rd of the poor people of the world. The impact of inflation mostly hampers these poor people who are susceptible to the ever increasing prices of products. It is a caution for the developing countries that if inflation arises due to increasing food prices, then the economic scenario holds strong implication for worsening economic inequality and thus can lead towards societal tensions within the economy. Although the financial crisis within the world economy has, to certain extent, held up the Asian economic growth, it has not halted the growth process. The rate of growth in Asia is expected to reach 7.8% by the end of the present year 2011, if Japan is excluded, which has been adversely hit due to reconstruction process after the massive earthquake. Despite the positive outlook for the future Asian economic growth, inflation remains a great danger for the Asian countries. The staggering rate of inflation within 45 Asian countries has been anticipated to reach an enormous rate of 5.3% by the end of the year 2011 from a rate of 4.4% during the last year 2010 (Asia News, 2011). In the following section of the paper, the threats of inflation, primarily to the national economy and secondarily to the global economy, have been discussed. Firstly, the rate of inflation directly impacts the stock position of the market by enormously pushing down the prices of stock. It is evident from the case of Vietnam during the year 2008 when the central bank of the country took a step towards fighting inflation. The rate of interest was increased by the State Bank of Vietnam during the month of June, 2008 by 2% to 14%. As a result of this increased rate of interest, the stock market at Vietnam which was at its nascent stage, crashed. For example, the VN, which is an index in the country’s stock exchange, fell down by above 60% as a result of the information of raised interest rate. The policy of the government did not work because at that time the rate of inflation of the country was 25% and interest rate of 14% is an indication of the interest rate being highly negative. The consequence of negative rates of interest is an indication for influencing future rate of inflation. This is because negative rates do not provide the stimulus for saving. It is in fact true that this type of situation urges the people to spend their entire money because with the passage of time, the value for the same money will decrease. The situation then urges the people towards borrowing as much as possible because of boosting being provided by the inflation (Jubak, 2008). Considering the facts about the past and present anticipation for rising inflation in the near future, it can be concluded that although the Asian economies are growing along with the rate of inflation, there is still enormous necessity for tightening of policy in the coming few days. The tightening of policy has been felt necessary for avoiding any unpleasant consequences within the social factors of the Asian economies (China Daily, 2011). 4.0 Effectiveness of Inflation Management in Asian Economies The effectiveness of managing inflation within an economy is dependent upon the extent to which the ruling entities of the economies are able to control inflation. Managing effectively the inflation is, perhaps, a challenging task for the economies and the central banks of various economies are responsible for managing inflation. For example, India’s central bank, the Reserve Bank of India, has been following the policy of increasing rates of lending and cash reserve ratio for coping up with the increasing inflation. There had also been revival within the country’s monetary policy for managing inflation (Economy Watch, 2011). According to a report published within the Asia Pacific Real Estate Association (APREA), the real estate in the Asian regions hold strong basis for acting as an effective hedging instrument for inflation. The report was conducted on the basis of eight Asian regions, namely, Shanghai, Beijing, Hong Kong, Guangzhou, Seoul, Bangkok, Tokyo and Singapore. The report ended up with the conclusion that, although the effectiveness of real estate sector of Asian regions in the short term is questionable, in the long-term the instrument will be definitely effective. The conclusion is based on the fact that due to the presence of various features of performances associated with real estate, the investors observe the sector as a distinct species of assets. Precisely, the investors consider the real estate to be separate entity from equities whose return is always at an uncertain position (Asia Asset Management, 2011). However, effectiveness of inflation management within Asian economies cannot be proclaimed on the basis of this presumption because practical effectiveness of the real estate sector has not been measured so far through implementation. On the other side of the coin, the monetary as well as fiscal policies of the Asian countries at the present economic scenario cannot be comprehensively considered to be effective in reducing inflation. Ineffectiveness in monetary policy can be considered to be as a result of incapability of the Asian economists to predict inflation at the right time. Moreover, the uncertain fiscal conditions of the economies have strived towards challenging the monetary policies of the countries. Despite various measures of the Asian governments’ such as that of contractionary monetary policy, the inflation has been anticipated to be remaining high during the coming few years. Also the wages are at an increasing mode that holds the implication for worsening the economic conditions to further extent. Thus, it can be cited that the scenario of inflation management within the Asian economies is not at a satisfactory position and it is in requirement for an immediate consideration of various adverse economic conditions (The Economic Times, 2011). 5.0 Conclusion After diagnosing the root cause that led to the enormous rate of inflation within the Asian economies and impact that the Asian inflation rate can have upon the growth of the economies, it would be no wrong to mention that Asian inflation rate is required to be immediately managed. Performance of Asia with respect to enhanced rate of growth, especially India and China, had been remarkably well during the last year. The enhanced growth had led the economies towards the phase of global recovery. Thus, it can be suggested that the policymakers within the various Asian economies have responded adequately towards the global financial crisis. However, at the same time, the rate of inflation has been on an increasing trend since the crisis hit the global economy. From the analysis of the process of inflation management being followed within the Asian economies, not enough effectiveness could be built up. Henceforth, it is to be recommended that the central banks should concentrate more on making their policies effective. At the same time, various other effective mode of managing inflation can also be followed such as that of generation of service from various inflation management companies. For example, in the USA, the Western Asset Inflation Management Fund Inc is vested with the task for managing assets effectively when the economy is hit with inflation (Economy Watch, 2011). However, monetary policies are the best instruments for coping up with inflation within an economy. Thus, it is highly recommendable for the Asian economies that they should keep on altering their respective monetary policies so as to avoid high inflation in the coming future. 6.0 References Asia Asset Management, 2011. Asian Commercial Real Estate an Effective Inflation Hedge. The Journal of Investments and Pensions. Asia News, 2011. Economic Growth Slowing in Asia as Inflation Fears Rattle China. News-en. [Online] Available at: http://www.asianews.it/news-en/Economic-growth-slowing-in-Asia-as-inflation-fears-rattle-China-21225.html [Accessed August 29, 2011]. Asian Development Bank, 2011. Global Food Price Inflation and Developing Asia. Documents. [Online] Available at: http://www.adb.org/documents/reports/global-food-price-inflation/food-price-inflation.pdf [Accessed August 29, 2011]. China Daily, 2011. Inflation a Threat to Sustained Asian Recovery. Global Biz. [Online] Available at: http://www.chinadaily.com.cn/world/2011-04/06/content_12278352.htm [Accessed August 29, 2011]. Economy Watch, 2011. Inflation and Economic Growth. Inflation. [Online] Available at: http://www.economywatch.com/inflation/economy/economic-growth.html [Accessed August 29, 2011]. Economy Watch, 2011. Inflation Management. Inflation. [Online] Available at: http://www.economywatch.com/inflation/management.html [Accessed August 29, 2011]. ESCAP, 2011. Rising Food Prices and Inflation in the Asia-Pacific Region: Causes, Impact and Policy Response. MPDD Policy Briefs. Jubak, J., 2008. Inflation from Asia: The Next Crisis. Microsoft. [Online] Available at: http://articles.moneycentral.msn.com/Investing/JubaksJournal/InflationFromAsiaTheNextCrisis.aspx [Accessed August 29, 2011]. The Economic Times, 2011. Burden of Inflation Management Solely On Monetary Policy: RBI. News. [Online] Available at: http://articles.economictimes.indiatimes.com/2011-08-18/news/29900818_1_monetary-policy-policy-rates-fiscal-deficit [Accessed August 29, 2011]. Trading Economics, 2011. Inflation Rates, List by Country. Major Economies. [Online] Available at: http://www.tradingeconomics.com/inflation-rates-list-by-country [Accessed August 29, 2011]. Read More