The real record — inflation

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In the previous post in this series comparing various governments’ economic and development records, we saw that when it comes to growth in average income, there hasn’t been much difference between the three latest governments. The increase in average income in that post is real, that is, after allowing for inflation. However, inflation is an important economic indicator in its own right.

In fact, as far as average person is concerned, real GDP per capita is an abstract construct, whereas prices of everyday commodities is, for the lack of a better word, much more real! Arguably, more than the war crimes trial or Digital Bangladesh, it was the promise in the video below that brought Awami League its 2008 landslide. And arguably, more than India or Islam factors, it’s the failure to meet this promise that’s behind AL’s sagging popularity.

Politics in Bangladesh, as the saying goes, is price of rice.

This post looks at the recent governments’ record when it comes to inflation.  However, we need to begin with a bit of wonkery because when evaluating different governments on inflation, we need to keep some basic economics in mind, some of which may be counter intuitive

Once we go beyond the wonkery, three charts will show that the current government performs poorly compared with the last BNP government as far as inflation is concerned.

First, there is a strong empirical relationship between price level and the standard of living — things are more expensive in the rich, developed countries. Of course, people in rich, developed countries are richer, and thus can afford the more expensive stuff. But if you are looking at the level of price of anything, you will likely find that it costs more in Bangalore than Barisal, and more in Beijing than Bangalore, and more in Boston than Beijing.

The reasons for this are well outside the scope of this post — the interested reader can start here. The relevance for us is that in any economy where the standard of living is rising over time, prices will rise too.  That means, you should never take a politician seriously if they promise cheap stuff —promises are cheap, stuff, not always so.  While prices of some goods —electronics for example —may fall over time, in a growing economy, overall price level usually rises over time.

Recall, our economy has been growing over time —per capita income has risen by about 4½ per cent a year(after adjusting for inflation) over the past decade, under successive governments.  Therefore, we should expect some inflation under recent governments.

No economics lesson is needed to know that inflation is undesirable to most people.  However, given that some inflation is to be expected in a growing economy, how should we judge the performance of different governments?

Or, conversely, since under all three latest governments, inflation-adjusted income has risen at around 4½ per cent a year, should we care if these governments’ inflation records are different?

We should care about inflation, and we should use two criteria to judge governments’ performance.  First, low inflation is preferable over high ones.  And second, steady inflation is preferred over variable rates of inflation.

The first criteria is self-explanatory —if prices are to rise, it’s better that they rise at a modest pace than at fast pace.  The second one takes a bit of explaining.  If inflation has been, and expected to remain, steady at, say, 5 per cent a year —that is, prices of everything is on average 5 per cent higher this year than last year, and this has been the case for a while and you expect this will be so into future—then you can plan your savings, investment and other economic activities accordingly.  But if inflation is 2 per cent one year, 10 per cent the next, and then 5 per cent the year after, it is hard to plan economic activities.  And that causes inefficiencies and frictions, which are bad for long term economic prospects.

Also, variable inflation rates mean that the government is not managing the macroeconomy very well, indicating one or a combination of chronic budget deficits, fluctuations in the exchange rate, and an incompetent central bank.  An economy can grow despite poor governance, but if inflation is high and volatile, it’s very likely the government’s fault.

Before going into the evidence, the final piece of wonkery —inflation is a macroeconomic issue, not a microeconomic one.  All the stories you heard about corrupt syndicates and so on?  Forget them.  That stuff has little, if anything to do with inflation —see here for detail.

Okay, that’s enough free economics lesson.  What does the record show?  Let’s go to the videotape, by which I mean the charts.

The first one shows growth in GDP deflator, which is a measure of prices of everything produced in an economy.  Just as GDP, BBS has new series for inflation (both GDP deflator and CPI —see below).  However, these series don’t go back far enough to make comparisons between different governments.  So, like GDP per capita, we are using data estimated on the 1995-96 basis.

In Chart 1, the columns are annual growth in GDP deflator, while the lines are annual average growth under various governments going back to the 1980s.  Pretty clearly, 1980s was more inflationary than the subsequent decades.  Also clear that both the 1990s governments maintained low and steady inflation.  Inflation started rising under the BNP government in the 2000s.  But at less than 5 per cent a year, BNP’s record was better than the nearly 7½ per cent a year seen under the two latest governments.  More worryingly, inflation has tended to become more volatile under the current and immediate past government.

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While GDP deflator measures prices of everything that is produced, people actually care more about prices of what they consume.  Consumer Price Index, CPI, measures this.  We also have monthly data for CPI going back to 2000.  The squiggly blue line in Chart 2 shows the yearly CPI inflation (how much CPI has grown since the same month a year earlier).  The flat lines represent annual average inflation under the three latest governments.

The pattern appears to be pretty similar to GDP deflator series above.  Under the BNP government of early 200os, CPI inflation averaged at less than 6% a year, compared with around 8½ per cent a year under the two more recent governments.  And again, worryingly, under the latest government, inflation has been quite volatile, reaching as high as 12 per cent in the year to September 2011.

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We have seen trends in inflation —that is, growth in prices —in the two charts above.  But the PM’s promise in the video above was about the level of a price of a specific commodity —that of rice.  Chart 3 shows the retail price of a kg of coarse rice in Dhaka.  The squiggly red line is the average retail price over the preceding three months.  The flat lines are the average under the past four governments.

Remarkably, the AL government of the late 1990s actually did manage to keep a lid on rice prices.  In the first half of 1996, price of a kg of coarse rice averaged around 14.50 taka, compared with 13.50 taka in the first half of 2001.  The price shot up to over 17 taka per kg in early 1999, in the aftermath of the devastating flood of 1998.  But then it came down.  By contrast, the price rose steadily under the BNP government, to average 19 taka in the second half of 2006.

Recall, prices are expected to rise over time in a growing economy.  So the mere fact that prices are higher than was the case under a previous government, by itself, is not indicative of poor performance.  Regardless, comparing the two governments, public perception in 2006-07 was rightly that AL performed better in terms of keeping rice prices low.

The recent years have put paid to that notion.  After BNP left office, under the 1/11 regime, rice prices shot up to 35 taka per kg in mid-2008.  Then, over the following year, the price came down steadily, to be around 24 taka in the late summer of 2009.  Both the spike and the fall in the price was primarily caused by global factor —but the 1/11 regime paid a political price and the AL government benefited politically from it (as noted here, AL’s popularity was very high in 2009).

Then look at what happened.  Rice price shot up again in 2010, reaching 40 taka a kg in February 2011.  And unlike in 2008, there was no global spike in prices.  This was homegrown, and it was caused by the macroeconomic mismanagement of the current government (see here for details).

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To sum up then, whereas the first Hasina Wajed government performed very well as far as inflation was concerned, the current government has been quite a failure.  The BNP government of the early 2000s, in contrast,  did significantly better than the  more recent governments.

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