INFLATION IN DEVELOPED AND DEVELOPING

COUNTRIES
Why is the rate of inflation consistently higher for emerging market and
developing economies contrasted with advanced countries? A number of demand
and supply-side reasons can be given to help explain the difference.

One reason why inflation in emerging countries tends to be higher is that many of
these countries are experiencing rapid economic growth contrasted with slower
growth in advanced economies.

Fast growth can lead to excess demand and a positive output gap thereby causing
demand-pull inflation. It also brings about cost-push inflation for example
because of rising global demand for raw materials.

A second reason why inflation in developing countries is higher is because many

of these countries have volatile exchange rates and do not necessarily have a
well-established central bank to operate monetary policy.     

Therefore, if a fast-growing country has a large current account deficit, this can
lead to a large depreciation in their exchange rate. One effect of this is a big jump
in the prices of essential imports such as foodstuffs and energy.

In addition, developing economies can be particularly susceptible to inflation

because

 Higher food prices can lead to a significant rise in poverty for the low paid.
 Higher global inflation, will push up interest rates and increase the cost of
debt repayments for low-income countries
 Inflation in developing economies can lead to depreciation in the exchange
rate and capital outflows which can be hard to stabilize.

For example, since the COVID pandemic, Sri Lanka has faced a rise in inflation and
a significant increase in the number of people below the poverty line. In 2022,
Inflation in Sri Lanka was 14% in Dec 2021, and food inflation hit a record of
21.5%. This has caused widespread absolute poverty. Also, combined with low
wage growth and falling tourism revenues, the country is struggling to pay for
imports and consumers struggling to buy food.
EXAMPLE OF INFLATION IN ZIMBABWE
Zimbabwe has been facing different levels of economic turbulence for the past 30
years with its most difficult time being in 2008 and 2020. In these years Zimbabwe
has faced a crisis of hyperinflation. Hyperinflation is a situation where the prices
of goods and services rise uncontrollably over a defined time period that is
inflation happens rapidly.
The inflation in 2008 was caused by the significant rise in money supply that was
not supported by economic growth. The government was printing and injecting
billions of Zimbabwean dollars into the market which led to this scenario. More
money was in circulation which led to the rise of prices.
Another reason was that the national government increased the money supply in
response to rising national debt, there were significant declines in economic
output and exports. This resulted in the country being unable to generate some
income to pay of its national debts.
The year 2008 was also the year of elections leading to political tumults. The
ruling party was infested with corruption coupled with a weak economy which
prevented any resultant change to the economic issue.
Hyperinflation in Zimbabwe spiraled out of control, causing a foreign currency
(such as the South African rand, Botswana pula, United States dollar, etc.) to be
used as a medium of exchange instead of the Zimbabwean dollar.
 Return of inflation in 2019
In 2019, the new Finance Minister, Mthuli Ncube, presided over the conversion
from foreign currency to a new Zimbabwean currency, and the resultant return of
hyperinflation was experienced. The annual inflation rate had risen to 676% in
March 2020, and there was a bleak economic outlook due to the effects of a
drought in 2019 and the Covid-19 pandemic. Covid-19 played the most pivotal
role in upturning the already shaken economy of Zimbabwe. The following years
after the pandemic Zimbabwe is still facing the issue of hyperinflation up to this
day.
ADVANTAGES AND DISADVANTAGES OF DEFLATION

Positive Impacts, Benefits or Advantages of Deflation

The main advantages of deflation can be expressed as follows:

1. Increase in Purchasing Power

Negative inflation or deflation increases the value of money. So, purchasing power
increases and price of goods and services decreases.

2. Lower Monthly Budget

As we know that deflation causes fall in the price of commodities, so people can
satisfy their needs by spending less amount of money. So, it reduces the monthly
budget which benefits middle and low-level consumers.

3. Increase In Saving

Due to fall in price of goods and less spending of money, people's saving will be
increased at the period of deflation.

4. Higher Living Standard

Deflation helps to maintain better living standard because of lower expenditure

and increase in saving.
5. Beneficial For Creditors

Deflation increases the real value of existing debt. So, creditors are benefited in
this situation.

6. Lower Business Costs

Deflation lowers the cost of business because of decrease in the price of raw
materials, machinery, technology and fixed assets. So, this period is appropriate
for long-term investment.

Negative Impacts, Drawbacks or Disadvantages of Deflation

The major disadvantages of deflation can be described as follows:

1. Lower Consumer Spending

People may stop spending on luxurious and expensive products with the
expectation of more decrease in price in the future. So deflation may encourage
lower consumer spending which is not good for the economy.

2. Loss for Investors

At the time of deflation, investors and producers who hold large quantity of
inventory suffer because of the decrease in the value of stock.
3. Increase Value of Debt

As we know that deflation increases the value of debt, it makes difficult for the
existing debtors to repay their loan.

4. Possibility of Unemployment

Business profit decreases because of decrease in the price which force the
producers to stop production or reduce their production capacity. It may create
unemployment problem.

5. Lower Economic Growth

Limited production, less consumer spending, increased value of debt and

unemployment lead to lower economic growth and instability in the country.
POLICIES TO REDUCE DEFLATION
There are several policies that governments and central banks can use to avoid
deflation:
1. Monetary policy: Central banks can use monetary policy tools such as
lowering interest rates or increasing the money supply to stimulate
economic activity and raise prices.
2. Fiscal policy: Governments can use fiscal policy tools such as increasing
government spending or decreasing taxes to stimulate economic activity
and raise prices.
3. Quantitative easing: Central banks can purchase assets such as government
bonds to increase the money supply and lower interest rates.
4. Structural reform: Governments can implement supply-side structural
reforms to improve the efficiency of the economy and increase productivity,
which can help to raise prices.
Real-world examples of these policies:
1. The Federal Reserve in the United States used monetary policy tools such
as quantitative easing and low interest rates to avoid deflation and
stimulate economic growth following the 2008 financial crisis.
2. Japan's central bank, the Bank of Japan, implemented a policy of
quantitative easing in the early 2000s to stimulate economic activity and
combat deflation. It has also kept interest rates at very low levels for the
best part of twenty years or more.
3. The European Central Bank implemented a policy of quantitative easing in
2015 to stimulate economic activity and combat deflation in the Eurozone.
4. In India, the government has implemented structural reform policies such
as the Goods and Services Tax (GST) and the Insolvency and Bankruptcy
Code (IBC) to improve the efficiency of the economy and increase
productivity.