It's the economy, stupid! - Part III

While Malaysians obssess over the travails of Anwar Ibrahim and the finer points of statutory declarations and unnatural sex acts, we fail to notice that Vietnam is the Asian economy most likely to crash in 2008.

With suddenness only Asia, as the world's fastest-growing region can deliver, Vietnam's economy has lurched off course. Vietnam's stock exchange has plunged 55 percent this year, inflation topped 25 percent in May, wage protests are erupting at scores of factories and the national budget is cracking under the weight of imported energy.

Morgan Stanley is reported to have warned of a possible "devaluation episode" centered on its embattled currency, the dong, cautioning that such a development "could trigger a contagion throughout the region" similar to the 1997–98 Asian financial crisis.

Economic policymakers around Asia, are now faced with their toughest economic challenge in a decade; surging inflation.

But most Asian governments, Malaysia's included, have yet to embrace the proven macroeconomic-policy response: aggressive monetary tightening.

Instead, most of them favor ad hoc administrative measures like price caps, based on the flawed logic that today's price surge is temporary, so overreacting to it could undermine economic growth that, in fact, is already weakening, thanks to declining consumption in the U.S. and Europe and deteriorating terms of trade.

Some economists argue that the problem is that inflationary momentum is stronger than it's been in nearly two decades in Asia, and likely to rise—not stabilize—well into 2009. They are exasperated that Asia's central bankers, including Malaysia's, are sitting on the fence when they should be reining in inflation.

We are reminded that failure to deal with inflationary pressure was the same fundamental mistake the U.S. made in the 1970s. That historic blunder added the terrifying word stagflation to the modern economic lexicon. It means slow growth coupled with persistent price rises. This phenomenon is already apparent in Malaysia.

Historically, policy flip-flops as inflationary spirals build has magnified the havoc they ultimately wreak. Unless addressed quickly, price hikes in commodities lead to demands for higher wages which push up the general price levels, particularly in fast-growing economies. This is cost-push inflation.

Like many Asian central banks, Bank Negara can head off such a spiral by moving early to tighten money supply through higher interest rates. But there is a sense that many Asian governments are interfering with rational monetary policy by insisting on lower interest rates that favours exporters.

This has adversely affected the value of many Asian currencies and resulted in countries like Malaysia paying more for imported commodities, thus fuelling the inflationary spiral.

This blog continues to maintain that regardless of whether it is BN or Pakatan that leads the federal government of Malaysia, the economic challenges remain the same. It will serve the leaders of either coalition-preferably both- if they take some serious quality time-out to listen to the real economists (not sycophantic economists) and weigh monetary policy options.