East Asian nations must act promptly to ease the burden of mounting food and fuel prices on the region's poor, the World Bank said yesterday. Inflation poses a greater challenge to the region's economies than the current financial turmoil, it said.
In its half-yearly update on the region's outlook, the bank said growth in developing East Asian economies could slip by 1 to 2 percentage points this year to 8.5 percent as the US credit crisis unfolds, damping demand for exports.
But it warned that food and fuel prices that have soared in recent years are a more pressing problem for governments to tackle. Since 2003, oil and many other commodity prices have more than tripled and doubled respectively.
"While the subprime crisis will have its impacts -- possibly on some countries more than others -- the more immediate concern is that in virtually every East Asian country, inflation is climbing to uncomfortable levels," Jim Adams, vice president of the bank's East Asia and the Pacific region, was quoted as saying in a release.
The urban poor and landless rural workers who devote between a third and two thirds of their expenditures on food are seeing their real incomes decline substantially, the report said.
Similarly, "while higher fuel prices hurt everyone, the poor are hurt disproportionately," it said.
The region could suffer an aggregate income loss of about 1 percent of GDP this year from the effect of higher food prices and additional increases in oil and metals prices, the bank said.
The report noted that some economies that are net exporters of commodities are enjoying gains in overall national income and that higher food prices do help some farmers -- although small farmers are usually hurt because they tend to be net consumers of food.
The bank warned that controlling prices to temporarily curb inflation distorts market signals and encourages black markets over the long term.
East Asian governments have dealt with such challenges in the past with a variety of solutions that include targeted subsidies, conditional cash handouts or school lunch programs, the report said.
"These programs now need to be considered again and reintroduced before the problem becomes too acute," it said.
Growth of 8.5 percent would be the lowest for developing East Asia since 2002, and down from 10.2 percent last year.
"East Asian economies will face testing times in 2008," said the bank, which based its forecast on expected US growth of between 0.5 percent and 1.4 percent this year, down from 2.2 percent last year, and to be followed by a recovery in the 1 percent to 2 percent range next year.
China's growth is expected to dip to 8.6 percent after five years at rates of above 10 percent, mainly due to lower export growth.
In Indonesia, Malaysia, Thailand and the Philippines, economic growth is expected to ease more modestly to the 5 percent to 6 percent range.
Growth in the economies of Hong Kong, Singapore, Taiwan and South Korea is forecast to slow slightly to around 4.6 percent, as a group.
Still, despite the US credit crisis, the region's economies are likely to stay buoyant as investments in sound macroeconomic policy and structural reforms over the past decade have brought greater resilience and flexibility, the bank said.
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