Inflation as political burden

It is not surprising that deep concern about rising prices has become a serious political issue in Pakistan. The opposition is threatening that it would take to the streets and bring down the government by focusing on the issue of inflation. But Pakistan is not alone where rise in prices has become a political issue. However, in politically weak countries such as Pakistan it can prove to be distracting. It is important for the people in Pakistan to understand what is behind the rapid rise in prices and focus on the real causes. Bringing politics into the discussion is the right thing to do: it focuses the attention of those who manage the economy. But policymakers must not be distracted from the task at hand.

Prices have risen and are rising in the country for two reasons: Pakistan is following a global trend that has sent up prices all around the world. What are the trends and how they can be addressed? Second, the government that currently holds the reins of power has taken several steps that have aggravated the problem but these were adopted to help the poorer segments of the population.

Talk about inflation is not only happening in Pakistan; it is a subject that is drawing a great deal of attention all over the world. A recent issue of The Washington Post (January 24, 2022) has a long story that begins on the first page of the newspaper and then takes up most of the back page. The story has an interesting headline: ‘As prices rise worldwide, leaders see no quick fix’. That is not the approach most of the political discussion in Pakistan is taking at this moment.

The newspaper begins the analysis by saying, “It probably isn’t much consolation for Americans struggling with highest inflation in 40 years that they are not alone.” The paper’s writeup on the subject does not give enough attention to what economists have been calling the process of ‘globalisation’ that has changed the structure of the world economy over the last two decades. It was in the early 1980s that economists working in international organisations such as the World Bank and the International Monetary Fund began to notice that a number of constraints, under which world had begun to carry out its business, had begun to ease. That was happening because of the speed with which information technology was developing. IT had made the flow of information instant: what was occurring in one part of the world was communicated almost instantly all over the world. One example of how the speed with which information flows is pertinent for the situation in Pakistan is related to the rise in price of urea. Suddenly the price of urea has rocketed and is affecting the price of agricultural produce. Urea is the most commonly used chemical fertiliser by low-income farming community. The price of urea has gone up because China, the chemical’s largest producer and exporter, placed constraints on the sale of the substance. Urea is an important input in the making of computer chips.

What is happening in other parts of the world. Prices are rising unusually fast in the United States. “Part of what we are seeing in the U.S. is very similar to, and echoed in the rest of the world,” said Nathan Sheets, global chief economist for CitiGroup. “And part of it is unique to our circumstances and particularly the strength of U.S. aggregate demand.” This is also the case in Europe where prices are rising faster than at any time since the eurocurrency was introduced a couple of decades ago. The annual inflation rate in Britain hit 5.4 per cent in December 2021, the highest figure there in nearly 30 years. Japan was struggling with the opposite development — deflation — but it has begun to experience price rise. Among major economies it is only China that has a lower inflation rate than in early 2020 when the global economy was hit by the Covid-19 pandemic.

Globalisation has linked the world economy in ways that were never seen before. No major product is produced in one place by one manufacturer. Apple products — IPads and IPhones — are examples of the new manufacturing processes. They are designed by the company in its laboratory on the United States West Coast but assembled in a large Taiwan-owned plant in south of China from parts and components made in a dozen countries mostly in East Asia. The same is the case with automobiles. The other day I went to an automobile dealer to look at new cars. American law requires that carmakers must display the place of manufacture of all major components that go into the final product — the automobile. I noticed that most European carmakers were making parts of the final product in places such as Mexico. Theses supply chains now dominate the system of production with manufacturing being done whichever place has the comparative advantages for producing the products being made. This system of production has heavy reliance on transport since parts and components have to be shipped or trucked from the place of manufacture to that of assembly and then to the shop floor. The Covid-19 pandemic disturbed the transport sector creating serious bottlenecks that affected the availability of goods in demand. Over the past year, prices of imports such as food, fuel and industrial parts have risen by more than 10 per cent, according to the United States Bureau of Statistics. Worldwide, over the past year, durable good’s prices rose by 16.8 per cent, more than four times the increase for services such as restaurant and teashop meals, haircuts and medical care.

Pakistan is experimenting with programs that aim to pump money into hands of the poor. The government of Imran Khan built upon the Benazir Income Support Program by launching the Ehsaas Emergency Cash Program on April 1, 2020. Under the program, a total of Rs203 billion would be dispersed to 15 million families, with each family getting Rs12,000. The program would provide relief to one-third of the country’s total population. It has been designed to keep bureaucratic controls to the minimum. The people who believe they are eligible to receive funds can register directly with the program. Since both the BISP the Ehsaas program provide cash to the poor, it is inevitable that they will have a price impact on the items on which the poor spend. Another initiative by the prime minister — the tree tsunami program — would directly benefit the poor since they would be involved in growing, planting, and maintaining the saplings the program would put in the ground. The ongoing but still not fully developed China-Pakistan Economic Corridor program by providing employment to the poor would also have an impact on prices.

To understand why prices are rising in Pakistan we must give attention to its many causes before hitting the streets to protest. Most of what the current government has done is to help the poor rather than enrich the rich.

 

Published in The Express Tribune, February 14^th, 2022.

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