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Economy explainer: Why do some make a fuss of US inflation?

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In the last week many TV figureheads and politicians in the US have been speaking of rising inflation. Many economic commentators in Europe and Asia have also begun addressing this issue shortly after. Some  see in recent data from Germany a hint of spill-over effectsto the EU and other developed countries. Others consider prices in the US a cautionary taleon the combined inflationary effects of re-opening, recovery and fiscal stimuli.

Yet, all these conversations may sound rather abstract for those who are not familiar with the meaning of inflation. Even more so for younger people who were not born yet at the time of the stagflation, in the 1970s. As a matter of fact, the term ‘inflation’ was trending on Google search as people tried to learn more. Thus, to understand why US inflation data are globally relevant one needs to lay down a few basic definitions.

What is inflation? An example

The term inflation describes one of the key phenomena of macroeconomics, which numerous scholars have studied attentively. Put it simply, inflation quantifies the increase (positive change) in the prices of a good or service over time.

In fact, it is intuitive that there are two basic factors on which prices almost always depend, to some extent. First, there is the use value of goods and services for the people who buy them. This is an ‘intrinsic’ valuedependent on “the physical properties of the commodity” or the welfare gain of the service. Second, the exchange value putting the good’s/service’s value in relation to that of all other goods and services. At the most basic level, the exchange value implies the possibility of a barter: an apple is worth two bananas.

However, and this is where inflation enters the scene, one can express a good’s exchange value also in monetary terms. Serving as a conventionally accepted unit of measurement, monetary prices express exchange value in an easily understandable and agreeable way.

Value use and exchange value

Clearly, these two forms of value are usually quite closely related, which makes it harder to grasp inflation.

Abstractly, the price (exchange value) of some foods is higher than of that of the same quantity of others. Concretely, let’s assume that a supermarket sells chicken breast meat at $7.00 per kilo and apples for $2.00 per kilo. The chicken-to-apple exchange value is $7/$2=3.5, which suggests that chicken’s use value is 3.5 times larger than for apples. Nutritionally, chicken is richer than apples as it contains 2.5 times more calories. Moreover, it is packed with proteins, which help keeping hunger at bay for longer. Thus, one of the reasons for the inequalities in prices lies in the differences in use value. In this example, in the fact that a chicken is more nutritious and filling than apples are.

Money’s value

Generally, the barter exchange value (for exchanges between goods) is what tends to remain more or less constant. The value use of meat may decrease in a world where more and more people are turning vegan or vegetarian. Yet, these tend to be marginal fluctuations. However, there is no intrinsic law that imposes a good to cost exactly that amount of dollars per kilo. On the contrary, the monetary exchange value (money-price or monetary price) of good for money is more unstable. The barter may remain stable even if the money-prices of several goods increase in the same proportion — say, 20%.

For instance, if the price of chicken and apples increased by 20% next year, they would cost $8.40 and $2.40. With a calculator one can easily find out that their barter exchange value would not change $8.40/$2.40=3.5. Yet, in 2021 one could buy five kilos of apples with $10. While the same note will only buy a little more than four kilos in 2022.

What has changed is the value of money itself.

Hence all the problems

The reasons why the value of money may change are various. Schematically, one can distinguish three types of inflation according to their source: (scarce) supply, (excess) demand or (expensive) inputs.

For start, if the goods and services that money buys become scarcer their use valueis going to increase. Even if there is not more money in circulation, prices of rare goods will rise — so-called supply inflation.

Similarly, like any other good or service, it is less worthy when it abundant. That is to say, as the central bank prints more money and the government signs more checks money devaluates. In fact, the more money people have, the more they will be able to spend. Usually, supply cannot adapt fast enough – you cannot raise chicken or grow apples overnight – there will be excess demand. In this situation prices also rise — termed demand inflation.

Finally, prices may increase because the price of one of more raw materials’ price is soaring (input inflation). An example of this mechanism is at play whenever the price of oil rises. In the previous example, transporting chickens and apples may become more expensive due to heightened gasoline and diesel prices.

Why to worry? Inflation and policy-making

Recently, inflation has not posed any problem in developed economies. If anything, the issue was actually the opposite: deflation or a reduction in prices due to enduring economic crises. Actually, inflation usually resembles a phenomenon as innocuous for an economy as the growth of men’s beard. In effect, a moderate inflation can be as beneficial as a beard is for some men’s appearance. If there was no inflation, people could just keep all their saving under the mattress, suffocating the baking system. As a consequence, small and medium enterprises without access to capital markets would be unable to borrow money to invest.

Thus, policymakers endeavour to strike a sustainable balance of positive but stably low inflation. Usually, the Central Bank’s mandate expresses this aim by pursuing an inflation somewhere close to 2%, but slightly lower. In other words, the same five kilos of apples that $10 would buy in 2021 should cost $10.20 in 2022. Hence the issue of how to measure inflation.

The Consumer Price Index

The standard approach employs the Consumer Price Index (CPI) and involves a representative basket of goods and services.Every year statistical agencies make inquiries about consumers’ habits to determine how much the ‘typical’ buyer spends on what. The higher the expenditure for a given good or service (e.g., apples as opposed to papayas), the ‘heavier’ its weight. And heavier weights mean that the same proportional change in monetary price generates more inflation all other factors being equal.

Here is a short example using US data. Let’s suppose that all the expenses related to housing increase by 10%, while medical care and apparel fall by 5%. All other expenses increase by 2% as per the Central Bank’s target. At the end of the year, total inflation will be 3.84% — without those decreases it would be over 5%.

The use of CPI inflation usually gives rather volatile results due to the relevant weight assigned to utilities and fuels. However, in normal times it is a rather trustworthy measure of how most people perceive the changes in prices. Yet, CPI figures are only as good as their reference basket. If the assortment hitherto analysed is representative of consumers’ real habits, CPI will provide powerful descriptions. But updating the basket takes time, and usually overhauls take place only every few years. Thus, when habits are changing fast due to an unpredictable exogenous shock, as with the lockdowns, the basket lags behind. True, the FED and other central banks to do not use CPI, but alternative measures that circumvent this problem. However, data collection remains an issue when policymakers have to take split-second decisions.

Paying attention to the data

According to established views, excessive inflation can turn into a pathology and bring a State on the brink of ruin. This is what happened in interwar Germany, when the State printed more money to face enormous expenses. Extremely high inflation (hyperinflation) rapidly devaluates saving and salaries, reducing people’s purchasing power — especially for the poorest earners and retirees. Yet, despite talks of unusually high inflation, no major economy is anywhere near alarming levels of inflation.

If anything, the current rise in prices is an optical illusion. Comparing today’s prices with those recorded last year, at the peak of the pandemic is misleading. As everyone knows, even an average-height person may look like a giant in comparison to a midget. Equally, current prices compared to those of last year’s look impressively higher. Yet, if the comparison is drawn with two years ago, the situation appears less alarming. The 24-month change in prices for selected goods is the easiest way to materialise the distortion in data for 2021. Figure 3 shows clearly that prices in the US are more volatile today than they were two years ago. But it also signals the presence of both inflationary and deflationary drives.

Conclusion: A temporary surge in inflation

In conclusion, the current soar in inflation in the US does not show the basic traits of a looming crisis. At least for now. A rise in prices is physiological after a recession. This time it may appear more intense because demand had not disappeared due to a generalised economic collapse. Rather, governments suppressed consumers’ desire to spend by imposing lockdowns while fiscal stimuli have been supporting income and demand.

Moreover, if China’s experience in forerunning post-pandemic recovery is of any help, inflation in the US will be temporary. In fact, all three sources of inflation are here at work, but they primordial causes are not systemic. First, there is a supply inflation because many factories shut down and ship floated in the harbours for several months. Thus, as demand returns there are several supply bottlenecks — which events such as the blockage of the Suez Canal worsen. Second, there is demand inflation since the end of lockdowns allows people to spend money in ways they could not. The rise in aggregated demand would have driven prices up in the short term even without supply slowdowns. Finally, there is input inflation because oil prices have picked up in comparison to their historical lows in 2020. This affects goods and services through higher transportation costs and prices for plastics, electricity, et cetera.

Thus, the initial rebound may be inebriating, but the hangover will not last. Even China has seen its recovery slowdown after the immediate post-lockdown boom — and inflation drop. And, assuming that this inflationary pressure will be temporary there can be some positive sides to it.  A 3–4% rise in the CPI index for two–three months will not make central banks discontinue their stimuli. Moreover, some inflation may help some borrowers – especially small enterprises – and pave the way for a healthier recovery.

Fabio A. Telarico was born in Naples, Southern Italy. Since 2018 he has been publishing on websites and magazines about the culture, society and politics of South Eastern Europe and the former USSR in Italian, English, Bulgarian and French. As of 2021, he has edited two volumes and is the author of contributions in collective works. He combines his activity as author and researcher with that of regular participant to international conferences on Europe’s periphery, Russia and everything in between. For more information, visit the Author’s website (in English and Bulgarian).

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COVID-19: New Dynamics to the World’s Politico-Economic Structure

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How ironic it is that a virus invisible from a naked human eye can manage to topple down the world and its dynamics. Breaking out of CoronaVirus, its spread across the globe and the diversity of consequences faced by the individual states all make it evident how the dynamics of the world could be reversed in months. Starting from the blame games regarding coronavirus to its geostrategic implications and the entire enigma between COVID-19 and politics, COVID-19 and economies have shaken the world. Whether it is the acclaimed super power, struggling powers or third world states or even individuals, the pandemic has unveiled the capability and credibility of all, especially in political and economic domains. Wearing masks in public, avoiding hand shake and maintaining distance from one another have emerged as ‘new normal’ in the social world of interaction.

Since the pandemic has locked its eyes upon the globe, world politics has taken an unfortunate drift. From the opportunities for leaders to abuse power during state of emergency (which is imposed in different states to limit the spread of novel Coronavirus) to the likelihood of rise of far-right nationalists to the emergence of ‘travel bubbles’ between states (such as New Zealand and Australia) and the increased chances of regionalism in post-pandemic world to the new terrorist strategies to gain support and many others, all are result of the pandemic’s impact on the political world, one way or the other. Since the end of WWII, the United States has taken the role of global leadership and after the Cold War, it became more prominent as it was the sole superpower of the world. Talking ideally, pandemics are perceived to bring up global cooperation but in the COVID-19 scenario it has started a whole new set of debates, sparkled nativism versus globalization and the sharp divide in global politics has drifted the focus from overcoming the global pandemic through global response to inward looking policies of leaders.

Covid-19 has impacted every sphere of life, be it social, political, health or economic. The pandemic itself being the result of a globalized world has affected globalization badly. It is the best illustration of the interrelation of politics and economics and how the steps in one sector impact the other in this interdependent, globalized world. Political actions such as restricting travel had drastic economic impacts especially to the countries whose economy is largely dependent on tourism, foreign investment etc. Similarly, economic actions such as limiting foreign products’ access had political implications in the form of sudden unemployment and downturn in living standards of people.

For the first time in history, oil prices became negative when its demand suddenly dropped when industries were shut down almost everywhere. Russia and Saudi Arabia’s oil clash which led to increased oil production by Saudi Arabia further complicated the situation. This unprecedented drop in oil demand and consequently its price would only help in the economic recovery of countries. Covid-19 has impacted three sectors badly. First of all, it affected production as global manufacturing has declined due to decrease in demand. Secondly, it has created supply chain and market disruption. Finally, lockdowns affected local businesses everywhere. Bad impact aside, pandemic has led to the change in demand of products. Instead of investment and foreign trade, states having strong medical and textiles industries have got the opportunity of increasing exports. This is because there are requirements of face masks everywhere to avoid contagion. Need for medical instruments have also increased such as ventilators in developing countries specially. 

The only positive impact of Coronavirus is that it fostered environmental cleanliness. It is said that it can avert a climate emergency but the fact is that, as soon as the lockdown will be eased and businesses will begin returning into functioning, economic growth and prosperity will be prioritized over sustainability and we might even witness, more than ever, carbon emissions into the atmosphere.

Novel coronavirus has brought new dynamics to the world’s politico-economic structure. While the world has the opportunity to come close for cooperation and consensus to fight it, we might witness increased regionalism in the post-pandemic world as a cautious measure and alternative where crisis management would be more cooperative and quick. There is a likelihood of the emergence of an international treaty or regime to ban bio-weapons. While the prevalence of political optimism is not assured in the post-pandemic world, we are likely to see the interdependent economic world, as before, to overcome the economic slump and revive the global economy. 

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The free trade vision and its fallacies: The case of the African Continental Free Trade Area

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The notion of free trade consists of the idea of a trade policy where no restrictions will be implemented on imports or exports in the respected countries that have signed such an agreement. Some economists argue that free trade is understood through the idea of the free market being forced through international trade. The African Continental Free Trade Area (AfCFTA) is a trade area that was founded in 2018, and it is the most ambiguous project in the history of the continent. This project has plenty of potential successes, as well as fallacies. Particular African nations are either in favor or against this project, and it is a matter of time before the world understands if this project will reflect the true notion behind the idea of a free trade policy.

The African Continental Free Trade Area: The European Union Vision in Africa?

The African Continental Free Trade Area was founded in 2018 in Kigali, Rwanda. It is believed to be the most prestigious project ever created on the continent. It was created by the African Continental Free Trade Agreement and it was signed by 44 countries. Some of the general objectives of this agreement include: The creation of a single economic market, the establishment of a liberalized market, the allowance of free movement of capital and people, diversification of the industrial development in the continent, e.t.c. In some ways, this project can be compared with the European Union and the vision that it represents for a single market and free movement of goods and people. However, due to the size and the geopolitical tensions of the African continent, there are a few obstacles to the achievement of this project. The European Union itself was a project that took more than half a century to be established in its current form, and still, we can see some problems that remain. With that being said, among the 27 member states, there seems to be more or less a coherent economic and political stability. In the case of the African Union, there are far more obstacles, ranging from huge economic differences, political and religious turmoils, and in general a neglected infrastructure; that might not be able to support a mammoth project like this. Any sort of optimism should be also approached with a realistic perspective when it comes to its implementation, which might not be happening anytime soon, certainly not before 2030.

The Relevance of the Free Trade Notion in Africa

It is important to remember that this project deals with the concept of free trade, and free trade itself is something that economists still argue about. Generally speaking, most economists seem to be in favor of free trade. There is an argument that supports the idea of free trade and any kind of reduction in government-induced restrictions on free trade which will be beneficial to economic growth and stability. On the other hand, some economists suggest that the policy of protectionism could be a more lucrative alternative for an economic policy. There is a suggestion that the liberalization of trade will result in an unequal distribution of losses and profit gains while economically dislocating a large number of workers in import-competing sectors.

In the case of the AfCFTA however, the opinion of Ha-Joon Chang, a South Korean economist, might be more relevant. He suggested that if there is going to be any kind of free trade liberalization in the African continent, some prior steps should be taken. For example, the improvement of the institutions in those developing African nations must be achieved to have sustainable economic growth and development. In addition, the idea of demanding from the developing nations to achieve institutional standards that we see in the developed nations such as the U.S or Great Britain, but have never before been achieved in those countries, will only hurt these nations since they might not need or even afford the implementation of these institutions that we see in the West. There is a valid point in the argument because the concept of the AfCFTA might indeed benefit some nations in Africa, but still, it will not develop to its full potential to benefit all 44 countries that have signed the agreement. This is because this project involves countries with different views and needs. Some of them see the AfCFTA as a blessing for the liberalization of the African economy, while other nations are more skeptical about it, thinking that this project will result in African states “biting off, more than they can chew”. This dichotomy is visually striking when we compare some African nations and examine the true reasons why they are in favor or against the AfCFTA.

The African Dichotomy

Rwanda is a small nation in East Africa, having at least 12.5 million people, with a total estimate of its GDP being close to $33.45 billion. A very impressive number, if someone considers the fact that in 1980 its GDP was barely $2.1 billion. It is also the nation that is strongly in favor of the ambitious free trade project in the continent. It is estimated that from 1994 until 2010, Rwanda’s economy grew an average of 6.6%. This is mostly based on the fact that the president of the country, Paul Kagame, led a strong campaign towards the liberalization of the country’s agricultural sector. His reforms allowed the producers to benefit from this liberalization boom while boosting productivity through capital investments. It is clear by now that any sort of project that aims to liberalize the economies of other African nations will be beneficial to Rwanda that aims, as President Paul Kagame mentioned before, to make Rwanda the “Singapore of Africa”.

However, some countries pose some key arguments that need to be addressed for the AfCFTA. There are concerns regarding the massive difference between populations in many African states, as well as the potential of the markets to sustain such a project. With that being said, there is still optimism from some experts that view this project as a win-win situation for Africa since it will allow a trade-led diversification away from Africa’s commodity dependence and focus towards industrial development. On the other hand, this optimism is being taken with a “pinch of salt” from certain African nations, like Nigeria. Nigeria is a nation of at least 205 million people with a total GDP of $1.087 trillion. Nigeria was one of the last nations to sign the agreement, but not before firmly opposing the deal. The strongest argument that Nigeria had against the deal, was the fact that Nigeria could do nothing to undermine the local Nigerian manufactures and entrepreneurs of the country. There was strong domestic opposition to regional trade liberalization and concerns about the government’s ability to implement it effectively. In the same line of thought, Togo’s Foreign Minister Robert Dussey did not hide his concerns. In an interview with Deutsche Welle, Mr. Dussey stressed the fact that many African countries will need to be firstly well-equipped with the right technical tools to meet the challenges of such an enormous project. He shared his views that some rich nations in the West are not so keen to see the potential industrialization of the African continent: “African development is foremost the responsibility of Africans. We have a problem with work for our youth. It is important that we have strong industries to have work for the young”, said Mr. Dussey for Deutsche Welle.

Can we safely say that the AfCFTA project complies with the economic policy of free trade? Theoretically, it does. The project has the potential to change the socio-economic status of all the countries involved. Even if some nations are more industrialized than others, and can take full advantage of the opportunities for manufactured goods, other nations that might not be so privileged can benefit by linking their economies into regional value chains. This can happen again theoretically if there is a reduction in trade costs and facilitating investments. However, one should not overlook the growing challenges of this project. It is not feasible to suggest a 90% tariff cut, a unified digital payments system, and an African trade observatory dashboard that the AU Commission promises in the next five years. For the simple reason that you cannot have this liberalized economic system when most of the African countries are suffering from socio-political instability. How can a system which in some ways is based on the European Union, work when there is such a striking inequality among African nations? There is a lack of industrial infrastructure to support such a project, and it will be more beneficial to address these regional problems before expanding in a global vision. One day Africa will reach its full potential, but not in the next five years and not in the next ten years. Such an agreement is a blessing, but it needs careful examination before being implemented; otherwise, we will talk about a disaster in the African continent that could potentially bring more inequality and regional tensions.

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Turning to sustainable global business: 5 things to know about the circular economy

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Due to the ever-increasing demands of the global economy, the resources of the planet are being used up at an alarming rate and waste and pollution are growing fast. The idea of a more sustainable “circular economy” is gaining traction, but what does this concept mean, and can it help save the planet?

1) Business as usual, the path to catastrophe

Unless we make some major adjustments to the way the planet is run, many observers believe that business as usual puts us on a path to catastrophe.

Around 90 per cent of global biodiversity loss and water stress (when the demand for water is greater than the available amount), and a significant proportion of the harmful emissions that are driving climate change, is caused by the way we use and process natural resources.

Over the past three decades, the amount of raw materials extracted from the earth, worldwide, has more than doubled. At the current rate of extraction, we’re on course to double the amount again, by 2060.

According to the International Resource Panel, a group of independent expert scientists brought together by the UN to examine the issue, this puts us in line for a three to six degree temperature increase, which would be deadly for much life on Earth. 

2) A circular economy means a fundamental change of direction

Whilst there is no universally agreed definition of a circular economy, the 2019 United Nations Environment Assembly, the UN’s flagship environment conference, described it as a model in which products and materials are “designed in such a way that they can be reused, remanufactured, recycled or recovered and thus maintained in the economy for as long as possible”.

In this scenario, fewer resources would be needed, less waste would be produced and, perhaps most importantly, the greenhouse gas emissions which are driving the climate crisis, would be prevented or reduced.

This goes much further than simply recycling: for the circular economy to happen,  the dominant economic model of “planned obsolescence” (buying, discarding and replacing products on a frequent basis) would have to be upended, businesses and consumers would need to value raw materials, from glass to metal to plastics and fibres, as resources to be valued, and products as things to be maintained and repaired, before they are replaced.

3) Turn trash into cash

Increasingly, in both the developed and the developing world, consumers are embracing the ideas behind the circular economy, and companies are realising that they can make money from it. “Making our economies circular offers a lifeline to decarbonise our economies”, says Olga Algayerova, the head of the UN Economic Commission for Europe, (UNECE), “and could lead to the creation of 1.8 million net jobs by 2040”.

In the US, for example, a demand for affordable, high-quality furniture, in a country where some 15 million tonnes of discarded furniture ends up in landfill every year, was the spur for the creation of Kaiyo, an online marketplace that makes it easier for furniture to be repaired and reused. The company is growing fast, and is part of a trend in the country towards a more effective use of resources, such as the car-sharing app Zipcar, and Rent the Runway, a rental service for designer clothing.

In Africa, there are many projects, large and small, which incorporate the principles of the circular economy by using existing resources in the most efficient way possible. One standout initiative is Gjenge Makers in Kenya. The company sells bricks for the construction industry, made entirely from waste. The young founder, Nzambi Matee, who has been awarded a UN Champion of the Earth award, says that she is literally turning trash into cash. The biggest problem she faces is how to keep up with demand: every day Gjenge Makers recycles some 500 kilos of waste, and can produces up to 1,500 plastic bricks every day.

4) Governments are beginning to step up

But, for the transition to take hold, governments need to be involved. Recently, major commitments have been made in some of the countries and regions responsible for significant resources use and waste. 
The US Government’s American Jobs Plan, for example, includes measures to retrofit energy-efficient homes, electrify the federal fleet of vehicles, including postal vans, and ending carbon pollution from power generation by 2035.

In the European Union, the EU’s new circular economy action plan, adopted in 2020, is one of the building blocks of the ambitious European Green Deal, which aims at making Europe the first climate-neutral continent.

And, in Africa, Rwanda, Nigeria and South Africa founded the African Circular Economy Alliance, which calls for the widespread adoption of the circular economy on the continent. The Alliance supports African leaders who champion the idea, and creates coalitions to implement pilot projects.

5) Squaring the circle?

However, there is still a long way to and there is even evidence that the world is going backwards: the 2021 Circularity Gap Report, produced annually by the Circle Economy thinktank, estimates that the global circularity rate (the proportion of recovered materials, as a percentage of overall materials used) stands at only 8.6 per cent, down from 9.1 per cent in 2018

So how can the world be made “rounder”? There are no easy answers, and no silver bullet, but Ms. Algayerova points to strong regulation as a big piece of the puzzle.

“I am proud that for the automotive sector, a UN regulation adopted at UNECE in 2013 requires 85 per cent of new vehicles’ mass to be reusable or recyclable. This binding regulation influences the design of around one quarter of all vehicles sold globally, some 23 million in 2019.”

“It’s a step in the right direction, but these kind of approaches need to be massively scaled up across all sectors”, she adds. “Shifting to the circular economy is good for business, citizens and nature, and must be at the heart of a sustainable recovery from the COVID-19 pandemic.”

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