Asia must tighten monetary, fiscal policy to tame inflation: ADB

Asian Economic News, June 23, 2008

KUALA LUMPUR, June 15 Kyodo

Governments in Asia need to tighten both monetary and fiscal policies to tame runaway inflation sparked by the rise in fuel and food prices, the Asian Development Bank warned Sunday.

''If they have not tamed it by a combination of tightening monetary and fiscal policy while reducing subsidies, you will have inflation expectations which will lead to demand for higher wages and prices will spiral, which will actually affect the growth story of Asia,'' Rajat Nag, managing director of the Manila-based bank, said at the World Economic Forum on East Asia.

He listed inflation, inequality and the ''infrastructure deficit'' as the most pertinent problems facing Asia now.

''Inflation is the worst form of taxation for the poor,'' he said, adding that this is made worse by the widening income gap between the rich and poor which could sow the seeds of dissent and lead to social upheaval.

The ADB forecasted in April that inflation in Asia will hit 5.1 percent this year, the highest in a decade. This comes after economic growth rose to 8.7 percent last year, the highest in two decades.

While Asian governments need to act to tackle inflation, international institutions like the World Trade Organization and the International Monetary Fund have come under criticism for their response to the food and fuel crises and the subprime mortgage fiasco in the United States.

''I believe that the international institutions we have at the moment, including the World Trade Organization, are woefully inadequate in dealing with the global challenges,'' former Indian Finance Minister Yashwant Sinha said at the forum.

He said that if the subprime mortgage crisis had occurred anywhere in Asia or Latin America, a ''whole team'' from the IMF would have descended there to tell governments what to do just as it did during the 1997 Asian financial crisis.

''There is a major regulatory failing in the U.S. What is the IMF doing about the U.S.? Nothing,'' Sinha said.

Japanese Financial Services Minister Yoshimi Watanabe said Asian countries should collaborate and cooperate to deal with the crises as Washington can no longer be expected to be the ''locomotive of the global economy.''

''The Asian countries are in the same boat, we share the same destiny,'' he said.

But while challenges remain with Asia, it is still the region with the fastest growth pace, and the high demand for consumer goods and services, especially from India and China, could help alleviate global slowdown.

''The world looks to the region to get out of the crisis,'' said Peter Brabeck-Letmathe, chairman of Swiss food and beverage giant Nestle Plc.

Azman Mokhtar, managing director of Malaysia's sovereign fund Khazanah Nasional, said he believed Asia could weather the current crises much better having learned from the 1997 Asian monetary crisis.

''It has not been a lost decade,'' he said. ''We feel we are in pretty good shape.