Retail fuel is heavily subsidised and controlled in most Asian states. Some, for instance China, not only subsidise but also impose price controls in an effort to shield the poor from inflation, even though the controls often lead to shortages and disrupt the finances of refiners. Other countries, such as Indonesia, try to compensate refiners fully for the gap between their import costs and the official retail price.

Despite the oil shock, China has not signalled a change in approach. It has frozen not only fuel prices but the prices of basic food items and utilities, either by decree or through informal pressure from Beijing. Yet this has failed to suppress inflation. The consumer price index rose 8.5% in April and is likely to be higher in May. The government raised interest rates six times in 2007, but it has failed to tighten monetary policy this year. On 4 June the Organisation for Economic Co-operation and Development (OECD) warned that China must tackle inflation now or risk a disorderly slowdown in growth.

Beijing’s massive interference in the market, coupled with the distraction of the Sichuan earthquake, has kept a lid on the social pressures arising from oil-led inflation. This is not so in Vietnam, another booming ex-command economy. On 2 June the country was gripped by strikes as unions demanded higher pay for their workers to keep pace with inflation, which surged 25.2% in May after seven months of double-digit inflation.

The strikes hit foreign enterprises such as Panasonic’s factory in Hanoi. With the value of the Vietnamese dong depreciating rapidly as Vietnam’s trade deficit has soared on oil costs, many workers are desperately converting their money into dollars on the black market. The government’s sluggish response to the inflation crisis, and the possible flight of foreign capital faced with labour activism, has prompted ratings agencies to slash their outlooks for Vietnam.

I am sure Asian Infrastructure speaks for all its readers in expressing sympathy to those in Myanmar and China who have suffered from the recent natural disasters. Cyclone Nargis and an accompanying tidal wave raced through Myanmar causing untold destruction to families, housing, ports, roads and agriculture on 4 May. Just a few days later China’s province of Sichuan reeled from a massive earthquake that flattened buildings leading tens of thousands dead.

Myanmar’s repressive and authoritarian regime responded in a way typical of its leadership and which greatly affected the outcome of the disaster. The final death toll of the cyclone and earthquake looks likely to reach around 150,000. Despite the Chinese event seeming to be of greater scale, Myanmar is likely to have lost two thirds of the fatalities.

Multiple challenges, few remedies

The economy is not doing poorly, but it certainly could be doing better. Several painful external shocks have combined with durable inflation have created a number of significant challenges for policy-makers. Unfortunately, unwillingness to free prices and all too much willingness to free lending and liquidity leaves the State Council with little means to improve the situation.