© Zenebe Uraguchi

This is How the Current Stubbornly Entrenched Inflation Worsens Inequalities

FROM: Zenebe B. Uraguchi – 19. August 2022
© Zenebe Uraguchi

One of the finest methods to know about the political landscape or local opinion on a topic is to strike up a conversation with a cab driver. Every time I visit a country, whether it be for business or a holiday, I frequently do this.

I was conversing with Zoran, a cab driver in Belgrade, a few months ago. When I asked Zoran how he was, as I often do, he immediately said, "life has been uncertain and frustrating." He quickly added, "I have to work two jobs to pay my bills”. He listed basic items that he needs for his work and livelihood, and how prices have dramatically spiked.

Zoran is not alone. Those riding taxis and ordering deliveries have to cover the increased costs. The current inflation is global, and no country is spared. Economists say low inflation is good for the economy. However, compared to what most economists and central banks previously believed, the present inflation is happening faster and has escalated more dramatically.

In simple terms, inflation is a measure of the rate of rising prices of goods and services in an economy. As prices for goods rise, a currency buys less than it did when prices were lower, essentially making that currency less valuable. It is calculated by comparing the price of certain goods and commodities like food, energy, and fuel each year.

A quick visit to a market provides an excellent illustration of how the rising cost of food and other necessities is eroding household incomes and savings. Additionally, it prevents businesses from making investments and opening up new markets. These are indicators of worsening inequality.

Bust-and-recovery patterns

The COVID-19 pandemic has had an extraordinary worldwide impact on the global economy. The invasion of Ukraine by Russia has only made things worse. These two together create the ideal storm of inflationary causes for the entire world.

COVID-19, the "invisible war," and Ukraine, the "visible and destructive war," have slowed down the world’s supply chains, driven up food and energy costs, depreciated currencies, and caused unfavorable climatic shocks.

With the easing of lockdowns, pandemic-related production disruptions have improved a little bit, leading to the soaring demands for goods and services. The Russian invasion of Ukraine has disrupted trade in natural gas, oil, and grains. As shown in the figure below, for the first quarter of 2022, different countries have experienced varying degrees of inflation rates.

                                        

Also, consumer prices rose as a result of the massive quantitative easing programs that were implemented over the latter two years of the COVID-19 epidemic.

Inflation: from income poverty to increased vulnerability

Gas and oil companies are posting record profits, charging historically high prices. Yet, millions are forced to choose between heating and eating. Poverty during the time of inflation is about the inability to afford basic needs. Those who were able to save a little bit have been digging into their savings to cover the rising costs of everything. Others have to decide on what meal they are going to cook based on the prices. This poses a high risk for nourishment and consequently leads to higher levels of both infant and child mortality.

The limited purchasing power of the poor shrinks when prices of essential commodities increase. However, a distinct problem of inflations for the past years has been incomes or wages did not increase at the same pace. According to the June 2022 report of the United Nations Development Program (UNDP), a staggering 71 million people in developing economies have fallen into poverty as a direct consequence of global food and energy price surges, as a greater proportion of their household income is spent on food and energy.

Across the board, those with a fixed income and those who are in debt are disproportionately affected. These may be those who live in rural areas, belong to minority groups, women working in low-paying and risky informal jobs, young people not in Education, employment, or training, and others.

In most countries, there has been a decade of little to no pay growth despite increasing costs of living. For example, Georgians whose nominal income has not increased over the past year, or only by 10-12%, are now in a very difficult situation – they have become poorer due to inflation. In Kosovo as well, compensation and working hours were reduced.

Just as a comparison, rising oil prices, in addition to droughts in grain-producing countries, caused the 2007-2008 food price crisis. My research on the impact of that crisis in Bangladesh and Ethiopia showed that gender inequality made women more vulnerable to the food price hikes, yet they were resourcefully devising ways to cope with scarcity in availability, access, and consumption of food and other necessities. The current inflation appears to have worsened gender inequality (e.g., wage gap).

The challenge is that most emerging and developing economies and low-income countries have less fiscal room to combat the crises and cushion the impact on their citizens. This means that the current inflation is pushing people deeper into poverty. Those that have been trapped in poverty are becoming more vulnerable.

We need to pay attention to issues that go beyond the lack of the means to preserve purchasing power by those who are most affected. Inflation at a time of high uncertainty can also lead to deterioration in the well-being of those who are disadvantaged and excluded (e.g., mental and physical well-being).

For instance, the high rate of unemployed/underemployed women and youth in the 12 Eastern Partnership and the Western Balkan countries points to difficulties in economic development. Stagflation, or economies with high unemployment and little to no growth while prices are rising faster than usual, is thus a serious possibility. Another indication that having a job does not ensure adequate living conditions is the growing population of working poor.

What can we do as development practitioners

Inflation has to be seen as part of the broader challenges of inclusive and green economic development – for example, due to underinvestment, weak institutions, and a difficult business environment. 

The war in Ukraine and the COVID-19 pandemic have a significant impact on the work we do in the Helvetas’ East and Southeast Europe Program. The context is dynamic and challenging. There are no easy fixes in complex and dynamic situations. But the context also provides us with opportunities.

As a case in point, the war in Ukraine offers opportunities to revitalize and integrate the economies (enhancement of export-oriented sectors and trade standardization), acceleration of green economic transition, and tap into areas of migration and development (e.g. the integration of refugees into the labor markets of their host countries, as well as the support of new business opportunities for displaced people and private sector enterprises).

Helvetas and its strategic partner, the Swedish International Development Cooperation Agency (Sida), are developing a coherent response and shared vision towards the context through programs like RECONOMY that are founded on solid data, context and vulnerability analysis that is informed by risk. Through systemic integration of crises, fragility, and complexity into program design and facilitation, Helvetas and Sida hope to move away from "issue-based" assessments and response formulation.

We constantly evaluate individual efforts, with a focus on the enabling environment and climate vulnerability, in order to specifically address the macro-economic weakness that inhibits private sector expansion and investment. We expect that doing so will help us adapt to opportunities for change, including inflation. This also entails reevaluating the sectors chosen for their adaptability to shifting conditions and creating backup plans to assist companies in recovering from the COVID-19 outbreak and the war in Ukraine.

 

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Programme Manager, East Europe, South Caucuses & Western Balkans; Senior Advisor, Sustainable & Inclusive Economies