Why the Cost-of-Living Crisis?

FROM Belgrade to Buenos Aires, from Lagos to Lima, from Manila to Mexico City, and from Washington, D.C., to Wellington, governments struggle against inflation.

Sometimes the governments themselves are in sore financial straits. One report states that “the United States has created more debt in the last five years than in [its] entire prior history.” An African government recently had to withdraw a long-awaited wage increase. It discovered, to its embarrassment, that the Treasury did not have enough money to foot the new wage bill. Similarly, in a large Latin American country, the inflation rate was such that the government feared that by the end of 1988 it would be unable to pay the salaries of over a million civil servants.

Five-year plans, devaluations, wage freezes, price controls, and other economic remedies are heralded. But the problems are complex and the solutions elusive. To illustrate the difficulties, Awake! here outlines just some of the basic causes of the cost-of-living crisis.

The Fragile International Economic System

Global interdependence. As one international financier explained: “The world is one. Our economy is global. . . . The idea that a solution can be unilateral in a global economy is nonsense.” For example, a recession in Western countries is soon transmitted to poorer countries, who find that there is no longer a demand for their products. Likewise, a rise in interest rates in the United States means that Latin American and African nations will have more problems paying the interest charges on their debts. Generally speaking, the poorer the country, the less influence it has on the overall economic climate, but the more vulnerable it is to unfavorable economic winds.

The fluctuations in stock-market prices highlight the shaky nature of the world economy, as well as its interdependence. Investors were so nervous about economic prospects, that dismal U.S. trade figures for August 1987 and possibly an indiscreet remark by a treasury official were said to be enough to trigger a worldwide market crash in October 1987.

The severe debt problem of the United States, together with the inability or unwillingness of the major economic powers to coordinate economic policy, make it unlikely that confidence will be restored promptly. Referring to this situation, economist Stephen Marris warned: “We are in a mess. There is no easy way out.”

Price fluctuations. In recent years there have been dramatic price fluctuations in oil, metals, and other basic commodities. The sudden hike in oil prices in the 1970’s caused widespread inflation and sparked a world economic recession. Third World countries not producing oil were particularly hard hit.

In the 1980’s there has been a slump in the price of most commodities. This has severely hampered the economies of poorer countries whose exports consist mainly of such products. Countries such as Mexico and Nigeria, who rely heavily on oil exports, have also experienced a sharp decline in living standards due to falling oil prices. Such price fluctuations can sink the soundest economic planning.

Shortsighted Government Spending

Military spending. The total global military spending for 1987 is estimated at about a trillion dollars. This is equivalent to about $1.8 million a minute! Not only rich countries squander money on armaments; some of the poorest countries of the world have planned a 10 percent yearly increase in defense spending.

Economist John K. Galbraith, explaining the social and economic effect of Third World military spending, said: “Those who pay for these armaments are the poorest of the poor. They are bought at the expense of non-military investment destined to improve the cost of living, at the expense of bread itself.”

“White-elephant” projects. It is said that a king of Siam used to give a white elephant to courtiers whom he disliked. Since the animal was considered holy, it could not be made to work. Thus its upkeep would bring financial ruin to the unfortunate recipient of the gift. In recent years Western nations have inadvertently played the role of the king of Siam. Their aid programs have financed grandiose technological projects that recipient nations have been unable to keep in repair.

These expensive, impractical “white elephants” litter the economic landscape of poorer countries: luxurious airports from which planes only rarely depart, a state-of-the-art bakery that can’t produce bread for lack of flour, a gigantic cement factory that constantly breaks down for lack of maintenance.

Sometimes governments of the Third World have saddled themselves with enormous debts due to lavish spending on extravagant projects such as hydroelectric schemes, nuclear power plants, or even new capital cities.

Population Growth

In many countries of the world, the rapid population growth contributes to a lower standard of living. Housing, jobs, schools, and even food production just can’t keep pace with the ever-increasing demand. Mexico, for example, because of its burgeoning population, needs to create one million jobs a year just to keep its unemployment rate from rising. In many African countries the rapidly growing population​—made worse by a migration to the cities—​has led to a tripling of food imports and has contributed to the decline in living standards during the last decade. Some despairing fathers, unable to find jobs and provide for their large families, have just deserted them or have even committed suicide.

Inherent Weaknesses in the System

Unpredictable market forces. Economic forecasting is a notoriously inexact science. The problem is that even in advanced economies it is difficult for experts to know exactly what is happening, while in Third World economies​—where specific data is unavailable—​it is practically impossible. And even if economists could agree on the exact nature of the problems, they would doubtless prescribe different solutions, according to their own political or social viewpoints. To complicate matters further, the politicians, who make the final decisions, tend to heed only the economic advice that they find palatable.

Regarding the United States, former U.S. secretary of commerce Peter Peterson explained: “At bottom, our problems are not economic. Rather, we are stymied by our lack of political consensus. We do not even agree on the nature of our economic difficulties.”

Unenlightened selfishness. Each country tends to pursue its own sovereign interests regardless of the effect on others. Economic aid, for example, may be in the form of sophisticated military equipment, sent to a country that cannot even feed all its citizens. Evidently, the donor country’s motives are economic or political rather than humanitarian. Tariff barriers put up by rich industrial countries to protect their own producers hamper the efforts of poorer countries to sell even basic commodities.

Underdeveloped countries criticize international banking institutions for being concerned only about prompt interest repayments. Some projects have to be abandoned for lack of financial backing, simply because they will not produce quick returns for the lender. The high interest rates that these debtor nations now have to pay are mainly due to profligate spending by other nations much wealthier than they are. President Alfonsín of Argentina pointed out that in five years Latin America has sent to the United States and Europe the monetary equivalent of two Marshall Plans.a The region, however, is more deeply in debt than ever.

Corruption and greed. Presidents of some African and Asian countries have been accused of embezzling billions of dollars. Police chiefs and prominent business officials in Latin America have also been implicated in multimillion-dollar frauds. These huge amounts of money are usually siphoned off programs intended to improve the lot of the ordinary people. Endemic corruption at all levels seriously undermines the economies of countless nations, placing an added financial burden on the impoverished majority who have to subsidize it.

Cynical commercial greed also contributes to the cost-of-living crisis. The aggressive marketing techniques of multinational tobacco companies, for example, have succeeded in persuading millions of poverty-stricken people to spend what little cash they have on cigarettes. In some developing lands, health-threatening, high-tar cigarettes are widely distributed, and most customers are unaware of the health hazard. Valuable agricultural land has been turned over to tobacco cultivation due to the lure of vital foreign exchange, which often does not materialize. Meanwhile smoking-related diseases increase at a par with the rising cost of living.

This brief review of the reasons behind the cost-of-living crisis suffices to show the daunting challenge facing governments who strive to better the economic plight of their citizens. President Mitterrand of France, speaking at an economic forum, complained about a “world that constantly moves the carpet under your feet, pulling it out and threatening to trip you up.” Statesmen and economists of the Third World know from bitter experience exactly what he means.

Does that mean that there is no hope for economic recovery? Is the world economy incapable of providing a decent living for all mankind? The following article will answer these questions.

[Footnotes]

[Box on page 8]

The Debt Problem

National Debt

In many lands government expenditure greatly exceeds income. The extensive borrowing that this policy requires leads over the years to the accumulation of an enormous budget deficit, sometimes called the national debt. Repayment of this debt, together with interest, forces the government to keep on borrowing, which pushes up interest rates and fuels inflation. Furthermore, as Time magazine explained, governments are loath to reduce spending because “voters, being human, want more benefits and fewer taxes, and politicians, being politicians, respond to the [voters’ wishes].” Thus, the day of reckoning is postponed, and meanwhile the cost of living goes up.

International Debt

For a variety of reasons, some countries import more goods and services than they export, resulting in a balance of trade deficit. The shortfall has to be paid for in currency that is acceptable to other nations, usually in dollars or other strong currencies. This money must be either drawn from the reserves or borrowed from other countries. If the country’s reserves fall dangerously low and loans are not forthcoming, import restrictions may have to be introduced or the currency devalued. Both these measures cause a sharp rise in the price of imported goods, many of which may well be necessities for industry and consumer alike.

Third World countries particularly have balance of trade problems because, in almost every case, the value of the goods they export has dropped dramatically. For example, in 1960 a ton of coffee could buy 37 tons of fertilizer, whereas in 1982 it could buy only 16 tons. Similar figures could be given for cocoa, tea, cotton, copper, tin, and other primary products that are the main exports of less developed countries. Largely as a result of these adverse terms of trade, over which they have little control, by 1987 developing countries owed a staggering $1,000 billion. This millstone round their necks gravely hinders economic recovery and even threatens the stability of some governments.

The New York Times recently commented: “The single issue that unites Latin America is debt . . . This problem is held responsible by governments for their crumbling popularity and is seen as the key political variable affecting their immediate future.”

[Map on page 7]

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World Inflation Rates 1980-85

(Based on El Mundo en Cifras, published by The Economist)

■ 0 to 15%

■ 15 to 30%

■ 30 to 100%

■ over 100%

■ figures not available