Impact of Global Inflation on Developing Countries – The World Peace Organization

Due to the combined effects of the pandemic, the Ukrainian-Russian crisis and supply chain challenges, the overall rise in global inflation has hurt Third World countries. Rising commodity, food and fuel prices have wider implications for some of the world’s most vulnerable populations. Specifically, rising costs push low-income communities into poverty and increase pressure on refugees. Humanitarian efforts for displaced populations already struggling with food shortages and access to health services face a greater risk of instability in economic activity. In addition to the inaccessibility of resources, the timing of this occurs when aid funding has been drastically reduced.

In a report on shrinking UN humanitarian aid, two-thirds of major UN programs have been reduced or closed, with major cuts in food aid, water, health care and rescue services for people fleeing violence. The United Nations Emergency Relief Coordinator, Martin Griffiths, announced: “If we have a message for the world today, it is this: do not stop now”, he underlined the importance recognition by Member States that ‘out of the headlines does not mean left behind’.

In a World Bank report, global food and energy price shocks account for about 13% of the change in core inflation in low-income countries (LICs), more than half that of advanced economies. With shocks in commodity markets, disruptions in international trade, production and consumption, a statistical analysis by the International Labor Organization predicted that prices will remain high in the years to come. This implies that these higher prices can erode the value of wages and savings, ultimately decreasing the personal wealth of households.

As global economic growth slows, it is important to consider how national governments and international organizations are responding to inflation and what measures are being taken to support vulnerable populations during these times of instability. The book Inflation in emerging and developing economies discussed how, in the face of sharp swings in world food prices, governments are faced with difficult policy choices. One option is to allow domestic prices to adjust to changes in world food prices, thereby exposing domestic consumers and producers to changes in their real incomes. However, it can increase inflation in the short term and, in countries where inflation expectations are poorly anchored, in the medium to long term. In times of crisis or economic decline, governments turn to subsidies in the form of payments, tax breaks and economic support, to help sectors integral to the national economy and infrastructure. While this may serve as a temporary fix, subsidies can quickly hurt spending in other areas.

The case of Sudan is an example of the impact of global inflation on developing economies. Currently in the midst of a deep economic crisis and a shortage of vital resources like fuel, bread and medicine, Sudan is facing additional financial pressures caused by the war in Ukraine and the military coup. According to Reuters, inflation in Sudan declined from the July rate of 422.78% to the August rate of 387.56% during the two years of the transitional government. Following the November 2021 military coup, the economy shrank further. In order to attract and qualify for foreign investment and assistance, the Sudanese government has initiated economic reforms through the International Monetary Fund (IMF). These standards include the removal of fuel subsidies and the devaluation of the national currency. Citizens’ responses include ongoing strikes demanding higher wages, while protesting the undemocratic and ineffective management of the military government under army chief General Abdel Fattah al-Burhan.

Emerging economies risk domestic currency devaluation during periods of high inflation. When a currency is worth less, its exchange rate weakens against other currencies and thus harms national industries and local businesses. In Zimbabwe, President Emmerson Mnangagwa ordered a temporary freeze on bank lending in a bid to limit inflation and stabilize the national economy. President Mnangagwa commented on the decision saying the move was aimed at stopping speculation on the rapid devaluation of the Zimbabwean dollar. BancABC analysts from sub-Saharan financial group AtlasMara criticized the effort, saying that “banning lending activities will threaten banks’ survival as it will wipe out 20-50% of their revenue.”

One of the most common strategies for dealing with inflation and financial crises in developing countries is to adopt IMF-based economic reforms. By undergoing a series of political changes such as the Structural Adjustment Programs (SAP), which facilitate the reduction of public expenditure and open the national economy to free trade. These economic policies are pursued with the intention of obtaining a loan from the IMF and/or the World Bank, but come at the cost of reduced spending on health, education and development. By limiting a nation’s access to essential services, these economic programs negatively affect a population by lowering the overall standard of living.

During periods of global inflation, many steps can be taken to mitigate the effects of financial instability in developing countries and emerging economies. Governments, policy makers and humanitarian organizations must consider the most vulnerable communities and take steps to use social protection programs and policies to provide support to these populations. Widespread change requires multilateral efforts to respond to humanitarian crises exacerbated by economic failures.

From a financial perspective, the policymaker should strive to prevent further economic fragmentation, while managing over-indebtedness. When addressing economic policies and ethical subsidies, it is essential to consider environmentally sustainable and socially responsible solutions. To deal with inflation, governments should reduce the transmission of international food price shocks to domestic markets while supporting the recovery of agricultural production. In the IMF’s April 2022 World Economic Outlook on the Global Recovery, analysts discussed which policy interventions would be most effective in supporting the world’s most vulnerable people. Government efforts to insulate and shield domestic markets from volatility only perpetuate instability. Alternative solutions include reformed storage policies for food and agricultural systems and increased insurance against weather or crop failure.

In times of inflation or in times of financial stability, LICs can benefit from investments from national and international promoters in order to create jobs and stimulate economic growth. However, as with any national economic policy, it is imperative to keep in mind how to address and mitigate growing inequalities, environmental protection, ethical labor standards and appropriate regulations.

Ultimately, how long this period of inflation lasts depends on the labor market, supply chain bottlenecks, and how central banks deal with these issues. Moreover, as the war in Ukraine continues to affect energy and food markets, emerging economies will also suffer the consequences. Regardless of the policies adopted or the aid programs provided, the main lessons of this report include the importance of curbing inflation, aid programs for vulnerable populations and investment in local businesses. Supranational organizations should prioritize support for countries and people most affected by global inflation, the pandemic and the far-reaching effects of the Ukraine crisis.

Aubrey L. Morgan