A global response to global inflation
Russia’s invasion of Ukraine has united many democracies to defend not only Ukraine, but also their own liberal order as well as each other. Yet now another challenge is putting democracies to the test: inflation.
As with the Ukraine war, the global rise in prices has started to renew cooperation among wealthier democracies. Many leaders want to ensure this economic crisis is not a setback for low-income nations where democracy is most in jeopardy.
Their concern was on display this week at the annual spring meetings of the International Monetary Fund (IMF) and World Bank. The big creditor countries, mainly in Europe and North America, were focused on more than how to respond to inflation in their own countries. They also worried about the effects of higher interest rates on other countries that are less well-off, about relieving supply chain bottlenecks everywhere, and about possibly easing the debt burden in high-debt, low-income countries.
“We must work together to resolve global challenges. The quality of our world, not just the quality of our economy, is at stake,” said IMF Managing Director Kristalina Georgieva.
The current inflation crisis has its roots in the trillions of dollars pumped into economies during the pandemic to keep individuals and business afloat. The pandemic also disrupted global supply chains, and then, as economies revived, high demand led to supply shortages of both labor and goods. In addition, the sudden decrease in Russian fuels and Ukrainian wheat added to inflation.
The African country of Ghana illustrates the difficulty many countries face. Although it is a politically stable nation, it is heavily dependent on imports of grain, oil, and steel from Ukraine and Russia. According to the African Development Bank, the price of wheat is up by 62% and fertilizer by 300%. The government now faces concerted strikes by industrial unions demanding that salaries be indexed to inflation.
With foreign debt obligations equal to 78% of its gross domestic product, Ghana has little economic flexibility. That problem could be made worse as Europe and the United States raise interest rates to tame prices at home.
Central bankers and economists this week have discussed a range of ways to help insulate developing countries from economic shocks. Solutions include greater clarity from richer economies about the remedies they are implementing to address inflation at home. They also include new requirements for debt transparency to enforce better governance in recipient countries and enable better lending practices.
“Prosperity, like peace, is indivisible,” said Henry Morgenthau, a former U.S. treasury secretary at the 1944 Bretton Woods Conference where the World Bank and IMF were created. If countries today work together on global inflation, they might again show that a global economy requires indivisible cooperation.
