By Ingo Plöger *
Supply inflation is much worse than demand inflation. In the 1970s, we had the difficult experience with the oil shock, and it took years for various countries to adjust to this situation. After the Pandemic and War in Ukraine, the world experienced the same consequences of supply inflation caused by energy prices and the disruption of global production chains.
Raising interest rates to adjust demand to supply is not the way to combat this type of inflation, but, instead, adding a series of fiscal measures and public policies to counter inflationary pressures. On the one hand, it is possible to increase imports by reducing tariffs, and by promoting domestic and foreign commodity alternatives to mitigate price increases. To reduce social impacts, many economies set subsidies for socially sensitive products.
Developed economies such as the US and the EU, abandoned the “monetary easing mode”, by slowly increasing interest rates. They also searched for alternatives in supply.
Monetary tightening also exported inflation, forcing developing countries to slowly increase their basic interest rates. In the search for policy alternatives, the EU granted more subsidies to its food production chain, kept import markets closed, and explored new energy options. It also added to its climate change agenda, and successively increased energy and food costs for its citizens.
Like Europe, the US has no memory of combating inflation; it has great difficulty operating social and economic issues, giving sequence to a cycle of greater impoverishment of its most fragile economic classes. In the US, which has energy options, the impacts are smaller, and as they are large producers of agro-industrial commodities. Social impacts are noticeable, but smaller than in Europe. In Asia, Japan, Korea, Singapore and neighboring countries suffer from higher-priced imports that have a direct impact on the consumer. They pass-through most but not all the increases in import prices and of the variation in exchange rates. Due to the pandemic shut down, China, whose exchange rate policy we know, had significant impacts on the less favored strata and it is slowly returning to prevoius consumption levels.
In Latin America, the impact has been material on both the economy and society. Latin America is perhaps the region that best knows high inflation and how to combat it quickly and flexibly. However, its current economic fragility forced low-income population to endure great sacrifices. Compared to developed countries, market economies in Latin America have had relatively low debt for years and a reasonable backing of international reserves. But the fragility of the population to price increases, induced a large part of it to cut consumption drastically, to the point of touching their very survival. Countries that do not always have robust economic power resorted to non-market practices: distortionary state interventions that compromise economic sustainability. It is not surprising that voters in Latin America opted for more socialist or social democratic governments, which apparently take better care of the vulnerable population. It so happens that in many LAC economies, increased their commodity and food exports due to the conjuncture, but windfalls are not channeled to capillary improvements, but return to large state or private corporations. The cycle is reinforced with larger social demands and with a greater need of state-supplied aid. We must be careful not to fall into the trap of defining poverty, with the metric of people’s earnings per day or month. Poverty due to the lack of supply can lead to states in which, with incomes above the poverty line, people are unable to purchase necessary goods (for example, water, electricity, etc.). In this dynamic, the state needs to know what is happening with vulnerable populations in a timely manner, to provide focused and efficient solutions. In the vast majority of our States and LAC Governments, we feel that they do not have the slightest idea where to start. Statistics suggest that past solutions of direct State interventions to guarantee consumption minimums, have not been enough to avoid the demonstrations of dissatisfaction, public insecurity and an increase in organized crime. Demagogy and populism lead to narratives of institutional culprits or external agents, to justify the ineffectiveness of their policies.
On the other hand, there is an increase in the use of social technologies, both by organizations and by low-income population, to cope with the harmful social impacts. In some cases, these technologies, deployed outside the mainstream economic and social systems, escape the “radar” and manage to achieve relevant objectives that proliferate positively and exponentially.
Now is the moment when states need social innovation to structure solutions that will make the difference. Insisting on the already-proven insufficient and economically-inefficient solutions will lead to social failure. A great task for business leaders who have a less corporatist views and more of a focus on the well-being of their societies, is to engage in innovations and models of citizen empowerment that will avoid the creation of more privileges than opportunities. When the economy is led by privileges rather than by the competences created by opportunities, societies become increasingly unequal and unfair, distorting the principles of good policy for common welfare.
With less solidary global conditions, where each nation and region is looking for its own solution, it is essential for the business leadership to seek, even for its own survival, and to value social innovations that lift people out of poverty through initiative and competition, scaling them on each country and internationally.
*Brazilian Entrepreneur, President CEAL Brazilian Chapter