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Wednesday, April 09, 2008

Agflation Attacks!

Intro: Inflation in Ukraine has beaten all forecasts. Since the beginning of the year, it has reached 10 percent, while the Finance Minister had forecasted a rate of 9.6% for the entire year. World Bank experts come up with even grimmer forecasts — 20 percent by year-end. Still, aside from pessimistic forecasts, the world’s economists also issue some useful tips. Tasha Trofimova spoke with the economists.

Narrator: Today, even kids know about inflation. A school cafeteria makes for a better study than any economics class.

High school student: [A slice of] pizza was 1.80/$.36 and now it’s 2.20/$.44.

Narrator: For several weeks, the girls’ pocket money budgets have failed to make both ends meet. A while ago, 5 hryvnias was enough to cover their daily cafeteria joys of life. Now, it’s twice as much.

High school student: My parents give me money based on prices. Food is very expensive.

Narrator: The high school students’ observations are borne out by the State Statistical Committee. Food prices rose the most throughout the year, by almost 40 percent. Transportation, health care and housing are slightly below that rate. But already, everything costs more. Inflation, of course, was predicted but not at such a rampant rate: Officially, the expected rate was 9.6% for the entire year, but it’s already one percentage point above that figure. And that’s hardly the end of it. Officials are not hesitating with their forecasts; independent experts are waxing eloquent.

Mykhailo Kolisnyk, economist: In this case, I’d talk about an inflation rate of 12% and possibly up to 30%.

Narrator: Officials are no longer as optimistic as they were at the beginning of the year. Measures to rein in inflation were today discussed by the President, the Prime Minister, and the Speaker of Parliament.

President Yushchenko: We should take the most robust of measures to bring balance to the situation, because it’s impossible to explain to people why we should have such a high inflation.

Narrator: The President is demanding a budget overhaul to protect the poorest and to raise the minimum living level to 515 hryvnias [$103]. Adding a few more hryvnias worth of welfare to the underprivileged would, according to preliminary estimates, swell the budget by an additional UAH 70 billion [$14 b]. That scares the World Bank economists. They offer different advice: By all means, do not raise spending and do raise utility bills immediately.

Martin Raiser, World Bank representative in Ukraine: Natural gas prices have risen. The country is already paying more, but the domestic consumer — the housewife — is paying less. Raising utility bills would be a lot more efficient. It would harness inflation, and in a year or two would harness gas consumption, resulting in further savings.

Narrator: Energy efficiency is a good thing, our economists are saying, but rising utility rates would make our people panic even more. We should care about production, not elections.

Yaroslav Zhalilo, economist: Starting with 2004, there’s been a craze for outpacing…for handing out money to the populace. That doesn’t mean that the populace has too much money. Living standards remain not high enough, but this results in outpacing, measured against productivity gains and production growth.

Narrator: Here’s the advice for ordinary Ukrainians: Tighten your belts and, with a good political and economic strategy, putting the brakes on inflation will be a matter of three to four months. That said, school cafeteria prices will hardly fall. Tasha Trofimova, Serhiy Haransky, Ilya Hnedash, Novy Kanal.

Tymoshenko’s Keynesian electioneering appears to be stumbling amid the raging agricultural inflation, or agflation, a trend that grips the globe.

Globally, agflation can be traced to an expanding global middle coupled with increased and oft-subsidized biofuel production, which distorts the full cost of biofuel.

While rising incomes ramp up food demand, increased biofuel production creates a host of negative externalities such as cropland diversion, deforestation, and greenhouse emissions. This two-pronged attack robs the poorest nations of much of their daily diets, sparking food protests across the globe.

Locally, many believe that Tymoshenko’s policy of compensating Ukrainians for a fraction of their Soviet savings has added fuel to the agflationary fire.

The idea of giving back some of the value that Ukrainians scrimped and saved while creating value in the now grabitized Soviet economy has met stiff resistance from Regionomists — and quite understandably so.

However, from an economically sound ethical perspective, the idea can only be criticized for bad timing, inflation risky mechanisms, and insufficient indexation.

Ukraine’s economic policies have been prone to extremes. Printing money was one of them. Excessive monetarism was another. The post-hyperinflation era swept a cadre of supply-side consultants from the IMF and the World Bank into the Ukrainian government. These brilliant folks confined the Ukrainian economy to a dollarized monetarist straightjacket, with a 40-percent undervalued hryvnia.

Without transparency policies, the World Bank’s calculus leads us nowhere. The housewife’s main problem is not paying too little for gas; it’s knowing too little about the gas she’s paying for, both as a consumer and as a taxpayer. In a country where huge quantities of gas create huge fortunes overnight, triple-charging the housewife will not solve the problem.

No matter how inefficient the economy and no matter how small the productivity gains, we still have companies that show fifteen-fold leaps in profitability. Talk about inflation.

Far from living in a free-lunch economy, Ukrainians should pay their bills and know what they’re paying for. This simple measure would deflate the bulk of Ukraine's economic problems.

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Anonymous said...

"Since April 1, Ukrainian lawmakers have got another reason to complain about their fate, KP in Ukraine daily reads. The prices have soared in the parliamentary canteen. According to waiters, serving national deputies, on the whole, price of lunches has soared by 20%. They blame the inflation in the country for the growth of prices."


Taras said...

Wow! Compared to those price quotes, McDonald’s sure looks overpriced.

We can’t let our MPs starve like that. Let’s get them some more матеріальна допомога!

Anonymous said...

Well perhaps McDonalds should change over to a traditional ukr kitchen and forget the burgers and stick with salmon roe. Interesting economics going on as regards to the lawmakers cafeteria while schoolchildren struggle to afford school lunches.


Taras said...

Back in the Soviet days, the Lenin cliché was “Лучшее — детям.” (“The best to the children.”)

Some of the children who capitalized on the Soviet system to become today’s powers-that-be can now upgrade that cliché to “The best to our children.”