WHY DOES LOW INFLATION AND HIGH GROWTH IN THE SAME BREATH GOT TO BE AN OXYMORON

Why is it that when there is a high growth the inflation also has to go up. This is a false dichotomy. In my view, over the longer term there is no conflict between lower inflation and higher economic growth. In fact, higher economic growth can be sustained only in an atmosphere of reasonable price stability. So high-inflation- high growth strategies are simply temporary boosts to economies which can’t sustain themselves. They’re not two pals who can bed together.

Governments & central banks across the world find a tough time balancing these. Governments fall and rise when either of the two is not under control. As we all are aware that high growth is because of growing demand and inflation is because of insufficient supplies. In order to curb the demand often governments raise the lending rates, instead of increasing supplies. In short term that may seem a reasonable option but at the cost that of lower growth is not justified.

There is a school of thought that believes that price stability is a luxury for a developing country with a primitive private sector. So, governments have to do everything regarding economic development and inflation is one of the supporting instruments. Developing countries need basic infrastructure for continuous development and the private sector cannot provide it. So, governments can fill the vacuum by funding them. Hence, inflation is the inevitable cost, but is paid back by immediate high economic growth.

Price stability is required for promotion of savings and investment. Sometimes there could be a conflict in the short run. But, that should not be utilized as an excuse for letting inflation go out of hand.

So is high growth and low inflation possible. If we see around we see many a countries which have achieved this. Singapore is the best example. In fact, they openly declared that money cannot produce prosperity. So, they didn’t allow the government to print money and undertake capital expenditure programmes. The result was miraculous. Within a matter of 25 to 30 years, Singapore managed to uplift itself from a poor country to a developed country. Another example is New Zealand in 1990s. Now of course European Union countries and Australia also have joined the bandwagon.

So, what’s the secret of continuous high economic growth?
Low inflation and hard work by people.