Inflation In Developing Economies
Inflation is a situation in which there is a sustained increase in the general price level in an economy. Inflation means an increase in the cost of living because the price of goods and services rises.
One of the most apparent and prominent drivers behind inflation is an imbalance between supply and demand, which is omnipresent, not just in developing economies. Consumers will demand an unlimited amount of goods and services, however, the supply of this is finite, due to limited resources i.e., the economic problem. This gap between demand and supply, and the extent of it, can truly soar prices.
In comparison to more developed countries, inflation can depend on local, social and economic factors. In locations where food represents a proportionate part of the inflation basket, inflation can leave low-income consumers with no choice but to tighten their disposable incomes.
In areas such as these, one of the most prominent effects ends up being dampened economic growth, as consumer spending power weakens as a result of rising food prices.
Many developing countries, such as Russia and Brazil, have aimed to keep rising prices under control by increasing the interest rate. However, it can be argued that this further, adversely, pressures consumers and investors as it raises credit costs.
Higher interest rates make major purchases, such as corporate investments and mortgages, appear more expensive, therefore they end up being a great hindrance to economic growth.
A specific developing region that is especially interesting to focus on is South Africa, where inflation has been vigorously higher than in other economies. This is somewhat alarming, as South Africa can be viewed as having a reputable financial system and central bank, making it plausible to assume that the inflation rate of the region would mirror worldwide benchmarks.
The South African government has placed significant barriers on the private sector, this has resulted in it becoming more difficult for stakeholders to seek the profit motive as well as an increased cost of doing business. This has ultimately decayed economic efficiency. Secondly, poorly managed public monopolies have advocated extensive costs to the rest of the economy. This has led to a large amount of outsourcing to cheaper countries, such as China and India. This is detrimental to the South African economy, where the labour force already requires strengthening. Some economists argue, however, that although the situation is not as bad as it is in East and West Africa, South Africa still needs to escape the primary sector trap to truly allow its economy to flourish.
As aforementioned, each consumer is impacted by inflation differently, depending on their respective inflation basket. In South Africa, the under-privileged and poverty-stricken consumers are hit significantly harder than the middle-income group. The inflation basket of the lower-income band in South Africa is heavily skewed towards food, education and transport. Any major price increases in these goods and services will always affect poorer households much more intensely. This essentially keeps them stuck in a low-income trap; as the price tag of these essential goods soars, the money in the pockets of consumers drops. Economists argue that this keeps the poor trapped in a vicious cycle of poverty and they will continually lack the ability to move up the economic ladder.
As wages and education standards rise in more prosperous developing countries, such as Eastern Asia, as opposed to less successful ones, such as South Africa, patterns of comparative advantage will transform. Rapidly growing developing countries, such as India and China, will find that their existing comparative advantage in labour intensity will decline as their wages rise, which then allows countries where wages are low, such as Africa, to thrive. The extent of this success will depend on Africa’s ability to take advantage of this opportunity and reassess its private sector and monopolies, accordingly. If South Africa can make itself an attractive place to do business, remove barriers to entry and import protection, whilst also reducing standard business costs, then it can improve its economic climate and consumers will be able to bear the rippling effects of inflation much better.
Economists argue that in developing economies, it is usually a structural reform that needs to occur, whereas, in developed countries, a reassessment of monetary policy can tackle inflation, although the true effects of this can be lagged.
In locations like Venezuela, where corruption is rife, inflation will also follow. Governments will often increase the money supply, by borrowing from the central bank, and hyperinflation ensues. This then ends up diminishing the value of money left in the consumers’ pockets, and negatively impacts those who rely on fixed incomes, such as pensioners or students.
According to the International Monetary Fund (IMF), inflationary pressures should ease over the coming year, which sees rates cooling to below 5% for most emerging economies. However, they did warn in January, that it could persist longer than originally expected, as supply chain disruptions continue into 2022 which is also equally a detriment to developed countries.
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References/Wider Reading
EXPLAINER: Why is inflation in South Africa so high? | Fin24 (news24.com) Inflation (www.africa.com)
How corruption and inflation affect economies - The Nation Online (mwnation.com)