Supply cuts have led to a wave of government intervention to control the prices of basic commodities, but the inflationary crisis is unlikely to last.
A fruit vendor weighs oranges at a morning market in Ubud, Bali, Indonesia.
All over the world, inflationary pressures are pushing up the prices of basic necessities such as energy and food. I think this is mainly because as the pandemic fades, the wave of pent-up demand has been uncovered and supply chains are taking time to catch up. I am also of the opinion that this is a temporary, albeit painful, adaptation, which means that many of the unusual reactions we have seen to it are unlikely to have much persistence.
Let us remember that we came from a world where, in essence, zero demand for oil in 2020, to a world where there is huge demand as people start to leave their homes, get behind the wheel and fly again. And this happened within a few months. If you add Russia’s invasion of Ukraine – both countries are important global sources of fertilizer, wheat, oil and gas – it’s no surprise that food and energy prices have skyrocketed.
The more important question is what are states going to do about it? In the Asia-Pacific region, we are seeing some moves towards old-fashioned protectionism, mostly in the form of export bans. Just this year, Indonesia banned exports coal as well as Palm oilMalaysia has recently discontinued chicken exportand India suppresses wheat export. Is this just the tip of the iceberg, and are we facing a wave of retaliatory measures that could spark a trade war in Southeast Asia?
The good news is that this seems unlikely to me. India, Indonesia and Malaysia have banned exports not because they want to harm their trading partners or to gain a strategic position in the global economy. The reason is much simpler. They fear that some basic commodities will run out and want enough to meet the needs of the domestic market. They only need to look at their neighbor in Laos see what happens when a country runs out of fuel.
Most ASEAN countries are deeply integrated into global trade networks and, other things being equal, prefer to have economic growth dependent on exports and surpluses. For example, Vietnam and Thailand would probably only ban exports if the domestic situation was really dire. For Singapore as a regional hub for trade, transportation and global financial flows, maintaining a free and open trade system is critical to economic security.
Indonesia and Malaysia have also banned certain exports only as a last resort and are in a slightly safer position to do so simply because the sky-high prices of their export commodities such as palm oil give them some cushion over the current account. time. The fact that Indonesia has lifted its bans on coal and palm oil exports within weeks suggests that they are not going to starve global markets for long. They are simply trying to send a signal that the domestic market needs to be supplied first. And all this fuss reflects a global economy in which market prices are fundamentally out of whack.
A simple way to think about prices is that they send a signal about the balance between supply and demand in a particular market. Right now, high prices are telling us that demand for things like energy and food is outstripping supply. Typical market solutions to this problem include increasing production by increasing investment, or reducing demand by raising interest rates. But this may take some time to show up in lower prices or have adverse effects such as slower economic growth or rising unemployment. And in Southeast Asia, the state usually shows less deference to the market, especially when national interests are at stake.
A more direct and less market-friendly intervention is simply to increase the supply of locally produced goods by blocking exports. And that’s what we’re seeing, on a limited scale, in countries that have the domestic resources to do so. If supply contraction eases and prices stabilize, we should see fewer such interventions and return to more normalized trade flows. All this makes me think that the protectionist tendencies seething in the region will be limited in scope and short-term.