The international scene is moving fast and the proper reading of options has become quite unpredictable. The pandemic resulted in a disruption of global production chains, disrupting strategic supplies and changing global consumer habits.
Disruption meant that component shortages and increased logistical bottlenecks caused a supply shortage. Supply inflation began to surface in several countries. Developing countries were still trying to manage the return of the pandemic, with structural unemployment in services as its side effect, and therefore, they gave up their subsidized interests so as not to interfere causing higher unemployment. However, inflation set in and was not, as many Central Banks expected, a fleeting thing. Supply inflation is much more difficult to fight only with a monetary interest rate policy. The last time economies had this effect was in the 1972 oil crisis, which lasted a few years. One-off investments, tax policies, tax reductions, and the replacement of inflated products are what remain.
Developing countries, such as Brazil and others, with even more recent memories of high inflation, reacted quickly with high-interest rates and unilateral market opening and tax policies. Along with this came the countries’ national humanitarian aid efforts to support population sectors that are socially sensitive due to the pandemic, with minimum income resources in the fight against hunger and misery. This monetary expansion goes against the conventional policy of increasing the monetary base. While Brazil and several other Latin American countries raised their interest rates to double digits, for months, Europe and the US still remained in monetary easing. For suppliers of raw materials, food, feed, and energy in developing countries, like Brazil, the world was not so bad because they benefited from price increases. The contradiction becomes greater because of the price hikes in food, energy, and raw material-sensitive areas in Brazil and Latin American countries, increasing local inflation. The contradiction becomes evident in politics with the question, how can a food exporting, energy-producing country have such a high rate of hunger and misery? Social economy policies (Soziale Marktwirtschaft – Ludwig Erhard) are difficult for conservative and liberal governments and, in the name of the market economy, the flank is opened in the fight against hunger and misery.
But, as if this were not enough, the war in Ukraine added an even more difficult vector in this international dynamic, that of security, which goes beyond other economic and political reasons. What comes into play is not the economic rationale, but the value politics, of perceptions, and of decisions of friends, adversaries, or enemies. When this component is added to the decisions equation, the field becomes even more insecure and unpredictable.
Suddenly, geopolitics becomes part of the medium- and long-term decisions, trying to fit the short-term ones as best as possible. Europe, already very close to the Ukrainian War, is looking for solutions no longer to encourage Putin’s audacity while not taking the escalation to uncontrollable dimensions. What looked like a quick war now looks like a long-running trench war. Meanwhile, in the US, the slow decisions in the fight against inflation are leading the economy, which exerts a very large monetary power in the world, to have advantages and disadvantages due to such slowness. On the one hand, inflation soared, on the other, appreciation of the dollar is taking place, in the opposite direction of the search for a “safe harbor.” Unlike Europe, which is becoming more competitive due to the devaluation of its currency, even though domestic inflation is at dimensions that have not been seen for a long time. Europe, particularly the European Parliament, is “greener” and more environmentalist and they precisely have to make decisions about extending the lifetime of the energy plants that they have always fought, such as nuclear and coal-fired plants. Joining this effort is a dogmatic position of the Green Deal, in which, because of their commitments to voters, they are closing the market until 2050 in the name of climate change, to cause internal environmental changes.
The problem with these policies that have a regional rather than a global, and more dogmatic than a rational view, is that they will raise the price of food and energy for Europeans far beyond what is necessary. In other words, in addition to being closed, they will make Europe less competitive than the rest of the world. The day European voters discover this, will they have the perception to vote correctly or will they lean towards one of the extremes, as we experience in Latin America?
However, this is not yet the last dimension of this dynamic. China, the Middle East, and India will also tend to re-establish their domestic policies and their international alliances. China will seek to strengthen its market position and maintain its influence where it already has it. Chinese companies operating abroad will certainly have stricter guidelines. International companies in China will be watched more closely for their investment and divestment movements and third markets will be more coveted.
In this last aspect, Latin America will be the focus of Chinese, Asian, American, and European investments.
Although a part of Latin American countries has social democratic or socialist governments in democracies, the political regime of democracies is of high intrinsic value these days. It may seem paradoxical, but the more pragmatic policies will prevail over the dogmatic ones. The dogmatic ones will require their people to make an economic sacrifice far above the necessary and will have great tensions to resolve since supply inflation is not solved overnight only by high-interest rates. But the pragmatics will also have to serve the less favored population at risk of hunger and misery with social market policies. Here, restriction to the market is only justified when the minimum supply that gives dignity to life cannot be solved and requires complementary solutions.
Brazil, particularly, has the “Bolsa Família” model, which has been improved for more than 25 years in more than 5 different governments, in which minimum income plays the role of trying not to leave anyone behind.
We are in difficult and exceptional times and making difficult decisions is necessary, not only for governments, but also for leaders in companies, institutions, and families in general. In this setting, entrepreneurs needs to review their plans several times, know how to listen to different opinions, and have the courage to change his goals if necessary.
But this is what distinguishes good leaders who do not shy away from making difficult decisions in the face of enormous resistance and misunderstandings…
…as long as they are the right decisions, made in the right way from the start.
Ingo Plöger is a Brazilian Entrepreneur, President of CEAL Brazilian Chapter