Inflation exacerbated by Russian-Ukrainian conflict will affect food insecurity

Gazi Hassan is a Senior Lecturer in Economics at the University of Waikato. He is also a Research Associate in the Centre for Applied Macroeconomic Analysis (CAMA) at the Crawford School of Public Policy, Australian National University, and a Visiting Academic at the Centre on Migration, Policy, and Society, Oxford University. His research field is broadly development macroeconomics, specifically looking into overseas migration of manpower from developing countries and the consequences of international remittances. He is currently working on research projects investigating how inflowing remittances at the household level could be a source of finance for sustainable development goals, in particular, climate adaptation costs and clean energy expenditures in poor coastal countries.

With the war in Ukraine, food and fuel prices have spiked, as Russia and Ukraine are big exporters of many commodities. Several economies in Europe and Central Asia, the Middle East, and Africa are almost entirely dependent on Russia and Ukraine for wheat imports. For lower-income countries, disruption to supplies as well as higher prices could cause increased hunger and food insecurity. And disruption to supply chains could broadly intensify inflation pressures. In this context, the Center conducted an exclusive interview with Gazi Hassan, hoping to understand his views on monetary security and food security in the context of the Russian-Ukrainian conflict.

Gazi M Hassan: Inflation exacerbated by Russian-Ukrainian conflict will affect food insecurity

Inflation exacerbated by Ukraine war will affect food insecurity and trigger social insecurity. But it will affect different countries differently, given their internal and external conditions. The vulnerability of households can be lessened through policy measures. But not all countries have the full capacities to do, so some risks remain.

The global economy had enjoyed decades of low inflation since the 80s. Whether or not explicitly targeting inflation officially, achieving stable and moderate inflation was the objective of monetary policy. Globally we enjoyed low and stable inflation due to the globalization of the world. Some pundits even predicted the end of inflation until the Covid19 pandemic hit and disrupted the world order. Because we inherited globally low inflation at the beginning of the pandemic, the central banks worldwide felt confident with aggressive and ultra-loose monetary policy supported by the expansionary fiscal stimulus. Perhaps the idea was that even if the inflation goes up in the short term, it can hopefully be brought back to the target in a couple of years. However, it now seems that inflation expectations are not anchored, and the high inflation is likely to stay for longer.

Notably, inflation in emerging markets and developing economies reached its highest level since 2011. In most cases, inflationary episodes dismissed as temporary earlier are now looking permanent. The war in Ukraine has made the jobs of world central bankers harder. Not only that the war a significant shock for global commodity markets, but it has disrupted the factors that also affect inflation structurally. In that case, traditional monetary policy tools will be inadequate to bring inflation within the target soon in emerging and developing economies. The effect of inflation across countries is not uniform. Rising food prices significantly affect people in low- and middle-income countries since they spend a larger share of their income on food than people in high-income countries. The added pressure the war places on an already high inflationary episode poses many risks for the lower-income countries, including food insecurity for vulnerable households and social and political unrest due to widespread shortages and competition for resources. However, prudent government policies at the household level and macro level can reduce the risk of exposure to high inflation and enhance income growth to minimise the social insecurity arising from conditions of high inflation.

Food insecurity in low-income countries became an issue even before the Ukraine war. Studies by World Bank, FAO, and other international agencies have found a sizable number of people running out of food or skipping meals in the first two years of the COVID-19 pandemic. Recently the Global Network Against Food Crises, also confirmed large increases in the number of people facing acute food insecurity in 2020-2021. Ukraine war has exacerbated the situation, although not all low-income countries are affected equally. The Pacific Island Countries most affected by climate change are more vulnerable to inflationary exposure because their growth prospect is still forecasted negative compared to other developing countries.

The capacity of governments to help alleviate the vulnerability of the households is subject to many conditions, including abilities to raise funds internally and externally and the extent of the foreign exchange reserve. The degree of vulnerability of the households is dependent on the exposure to the high food, energy and fertiliser prices at the retail level and how the prices are affected by the country’s exposure to the external economic conditions. Governments can provide subsidies on wheat and oil or withdraw import duties to lessen the bite of inflation for the households at the retail level. But not all low-income countries can successfully implement such policies because giving subsidies or withdrawing import duties can put pressure on the budget. It depends on the government’s fiscal condition and the ability to borrow from the domestic market without constraining the private sector.

Because energy, food and fertiliser are imported into most low-income countries, the development of external economic conditions is another source of vulnerability. The Ukraine war has affected the external conditions of countries through commodities disruption, availability of foreign finance, and overall global confidence. For example, given current conditions, suppose a country can finance a high import volume of wheat or oil through foreign borrowing or from its international reserve in the short term. In that case, it is financially resilient to a negative disruption. Countries that can’t secure financing through reserve or borrowing are more vulnerable. The problem would intensify for the countries already running a large current account deficit, with a weak currency and a substantial sovereign debt. Households in these countries have greater risk exposure to higher import prices of essentials because of large devaluation. Governments can make policies to defend their currencies with capital control measures, revaluating domestic investments and selectively intervening in the foreign exchange market.

Governments can also initiate blunt price control policies on food or energy prices at the retail level by effectively determining a ceiling. While it may be effective in the short term, historically, price controls have created more distortions and haven’t worked properly without strong governance and regulatory support. The most robust policies to alleviate food and social insecurity target small and medium farms by focusing on the supply side. These policies aim to increase productivity and generate income growth to raise short-term food production at the grassroots level. With support from the private sector, the government can help make available cheap financing for investment in farm equipment, seeds, and fertiliser.

2022.05.22

Contacter: Li Yuhan

Question: Chen Liyuan

Translator: Li Yuhan

Corrector: Xu houkun