The cost of Asian subsidies

The Asian Development Bank (ADB) says Asian governments ‘are caught in the pincer grips of slowing growth and rising inflation’. Whilst the cost of subsidies is ballooning. India, for example, will spend $42.5bn in oil subsidies this year, ‘six times the entire education budget’. As the ADB notes, `increased food and energy subsidies erode fiscal ability to provide social protection and support for a slowing economy and reduce funds available for development.’

In a perfect world, Asian governments would abandon subsidies and instead spend their money on critical areas for future growth, such as education and infrastructure. But they ‘missed the opportunity in the good times to change the subsidies’ according to former IMF head Rodrigo de Rato. Now they risk riots if they allow fuel and food prices to rise.

Thus the ADB forecasts that inflation will continue to rise, whilst growth slows. It expects just 7.6% growth this year, and 6.3% inflation, compared to 8.4% growth and 3.2% inflation between 2004-7. This will squeeze chemical demand – already Hong Kong companies expect to close 20,000 plants in the Guangdong area this year due to ‘higher wages and fuel prices’.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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