Asian Region Faces Political Pressures from Rising InflationBy Naomi Martig
Hong Kong
19 June 2008

Rising inflation is putting pressure on governments all over Asia, as angry citizens protest spiraling food and fuel costs and politicians bicker over how to handle new fiscal constraints. Naomi Martig reports from Hong Kong.

Malaysian protesters hold placards reading "Revise The Fuel Price Now" during protest in downtown Kuala Lumpur, 06 Jun 2008India, Indonesia, Malaysia, Thailand, South Korea - just a few countries in Asia where residents angry at surging fuel and food costs say they have had enough. Protests have gained steam in the past month, with demonstrators blocking traffic and in some cases disrupting the flow of fuel and food supplies.

Politicians in many of these countries also are struggling with inflation. Rising costs have forced governments throughout the region to reduce the subsidies they have long given on fuel.

Mark Thirlwell, program director for international economy at the Lowy Institute for International Policy in Australia, says subsidy cuts were bound to happen with oil prices holding over $130 dollars a barrel.

"Their initial reaction in many cases is to use subsidies to defray the impact of higher fuel prices, higher food prices," Thirlwell explained. "As that situation has been sustained for longer and longer and as you've actually seen prices bid up higher and higher, the budgetary burden has gotten greater in each case."

The problem for many governments is that most of the inflation problem is global, not local. High worldwide demand, supply bottlenecks and international monetary policy all help push up oil prices. And food prices are soaring because of tight supplies and rising demand.

That leaves governments with little room to maneuver, and in countries that have long subsidized fuel or food for their citizens, budgets are being overburdened, forcing leaders to do such things as cut subsidies, raise taxes or accept growing deficits.

In Malaysia, for example, government leaders recently raised fuel prices by 41 percent after being faced with $17 billion-bill to underwrite fuel subsidies. In a country used to cheap subsidized gasoline, protests erupted quickly.

In India, politicians are desperate to tame inflation - now at a seven-year high. If they fail, a voter backlash in next year's national elections is likely. Thirlwell says government leaders there are caught in a very difficult situation.

Thirlwell says governments that cut subsidies, or are not fiscally strong enough to handle the burden of rising inflation, face the strongest protests, and the strongest risks of political upheaval.

"On the one hand, it's fiscal pressures which say well our ability to sort of defray or provide subsidies or ameliorate these price increases is limited, on the other hand we know there is real political cost involved here if we let inflation get out of control because the voters will punish us for this," Thirlwell said.

Robert Broadfoot of the Political and Economic Risk Consultancy in Hong Kong says several governments are making a number of mistakes in handling inflation, and public concerns.

"In India, you have elections coming up and members of the ruling coalition don't want anything that is going to cost them votes, which means don't get rid of the subsidies," he said. "So the politicians are making mistakes and this is a time when the countries really can't afford it."

Broadfoot says the Indian government's bill for fuel subsidies is expected to be almost $60 billion this year, because the retail price remains far below the cost of oil. He says considering that citizens already have taken to the streets to protest recent price increases, the Indian government can expect more strife if it is forced to slash subsidies again.

Soaring fuel and food costs also are taking a toll on developed economies such as Hong Kong, where groups are demanding that the government freeze prices or reduce taxes. In South Korea, truck drivers blocked roads to air their frustration over rising fuel prices and lower incomes.

Some countries are handling the problems better than others. Broadfoot says Indonesia should be applauded, despite recent protests over cuts to fuel subsidies.

"The current president is taking some hard decisions, like they've really reduced their subsidies on fuel and yet he's done it in a way that's made it digestible for the population," Broadfoot noted. "He's giving poor Indonesian cash handouts, which make it a lot easier. So there have been protests but not of a scale that can bring the government down."

Indonesia raised retail fuel prices by 30 percent last month.

Many people, including government leaders, hope that relief will soon be in sight. But Thirlwell, like many analysts, warns not to expect inflation to slow.

"Over time, high prices will produce a supply response, and we'll see some of the sting out of current prices come out," Thirlwell said. "But, there are all these question marks of well if there is any disruption to supply, any questions on supply, then rather than a sort of a slight retreat in prices we actually have the potential for another big spike."

A number of Asian countries, including India and Indonesia, face elections in the coming year. How each government handles inflation will likely affect the next campaigns. Being popular with the public is usually a top priority for elected leaders. But many economists and political analysts warn such popularity can come at a higher price than some countries can afford.

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