Oil, food prices will adversely affect South Asia - WB

Shanta Devarajan, World Bank Chief Economist for the South Asia Region says South Asian countries will serious problems associated with global external shocks such as increasing oil and food prices, as well as country-specific shocks such as escalating conflicts or political turmoil.

While the countries in the region may be only slightly affected by the subprime crisis, Devarajan warned, “These critical issues should be addressed if South Asia is to protect the gains in growth and poverty reduction of the last decade. Otherwise, they could potentially threaten the goal of ending poverty in a generation.”

Reflecting on the usual reaction of governments in the region to an increase in oil prices, Devarajan said, “the temptation is to insulate poor people from this shock essentially by subsidizing prices to domestic consumers.” Drawing attention to historical records, Devarajan said, “This actually hurts poor people more than it helps them.

That subsidy has to be paid by the government which means the government has to cut back on other expenditures that might benefit poor people like health, education, and water.”

Sometimes governments are forced to print money to finance the subsidy which leads to inflation which can be a huge tax on poor people.

Devarajan advised that while it might seem cruel at first, “Passing on the increase in oil prices to domestic consumers is actually in their best interest because it allows the economy to be better managed and better able to continue growing which is critical to ending poverty in a generation.”

“The current subprime mortgage crisis in the United States will not seriously impact South Asian countries”, Devarajan said.

World Bank