Macroeconomic Policy in East Asia

Inflation Stabilized at a Low Level

High inflation hurts economic growth. Economies that suffer from high inflation usually suffer from relative price distortions as different prices adjust at different speeds and in different time patterns. Real interest rates are often negative and real exchange rates tend to appreciate. Moreover, high inflation economies tend to have high volatility of real interest rates and real exchange rates. The noise and distortions in these key prices impedes the efficient allocation of resources. In addition, real tax collections tend to fall when inflation increases, thus exacerbating fiscal pressures.

The high-performance East Asian economies have maintained low inflation rates for extended periods of time. Average annual inflation was under 10% in Japan, Hong Kong, Singapore, Thailand, and Malaysia during the entire period 1965-1993. While in 1965-1980 Indonesia and Korea had moderate inflation, they both brought inflation down to a low level in 1980-1993. This is a remarkable achievement, given that 1980 to 1993 was a difficult period for other developing economies.

The commitments to low inflation in the high-performance East Asian economies have different roots in their recent economic history. In Indonesia and Taiwan/China (and to a lesser extent Korea), aversion to inflation grew out of tramatic inflationary spirals that accompanied economic and political crises. In Malaysia and Singapore, the success of colonial-era fiscal conservatism seems to have helped shape post-colonial policies. In Thailand, the tradition of responsible fiscal policies dates from the nineteenth century when a strong currency helped the kingdom to retain its independence. In Hong Kong, colonial rule has insulated the government from demands for increased government spending.

Topic Economic Growth in East Asia