Opinion Sur
Inflation is presented as indomitable and it is not. Dismantling it or reducing it to a low level is possible as long as measures are taken that also address causes that remain covert. It is worth explaining the nature of these causes and the identity of those who keep them hidden.
Many of us argue that inflation is a multicausal phenomenon, that is, that several causes converge to generate inflation. Some causes generate and others drive inflation. There are political, economic, and social causes that condition each other, but the critical thing is that there are causes that are openly recognized and others that remain hidden. If the covert causes are not addressed, it will be very difficult to dismantle inflation. This is what the following lines are about.
Without abandoning the notion that inflation is a complex multidimensional process, it can help to differentiate explanatory from consequently intervention levels. One of these levels is that of macroeconomic variables, another level refers to how markets are structured and work (the meso economy), a third level that we do not address in this short text refers to the forces that reproduce inflation, including the expectations that are inseminated into the actors for spurious reasons.
It is worth remembering that actors act defending material interests together with a mixture of identity, evaluative, and ideological reactions, a changing diversity of motivations when making decisions.
Causes at the macroeconomic level
Some of the most significant causes at this level refer to the organization of public accounts, the amounts of monetary issuance and exchange stability that ensures the availability of foreign currency to avoid serious bottlenecks in the external sector. To these causes we add another critical cause that conditions the others and, not by chance, certain sectors try to cover it up, the criminal drain of a very significant part of national savings.
The organization of public accounts
It often happens that public expenditures exceed tax revenues, generating situations of fiscal deficit. The pressure for the state to provide social and productive infrastructure contrasts with resources that are not infinite. That tension is compounded when we look at where the revenue comes from and how they are allocated through public spending.
The main revenues come from taxes and contributions from improvements the State collects, from contributions from public enterprises with large surpluses, and from sovereign indebtedness contracted in local or foreign currency. Let’s see what usually happens in that chain of variables and in the type of solutions that are usually imposed.
At the level of public revenues, the prevailing structure is highly regressive, that is, the burden of revenue falls on the middle and popular sectors. Something unheard of but real, the rich pay proportionally less than others. This does not happen by chance but by the political design of dominators to block any attempts at establishing a progressive tax structure. In this way, they ensure that the concentration of wealth is not affected even if the inequity of harsh inequalities increases. Resolving this situation is essentially a political challenge.
In turn, public spending often presents unacceptable injustices in favor of high-income sectors. If it is necessary for the State to provide productive infrastructure that favors those who have more, in those cases it must collect the contribution for improvements established by law. Similarly, if subsidies are granted to large service providers, it is critical to verify that there are no covert networks that falsify the amounts and necessity of the claims. If these items disappear in or are reduced accordingly, public spending could cover more extensively the needs of middle and popular sectors, always ensuring effectiveness and transparency in its execution. This is a challenge of a political nature with technical support from those who help structure the national budget.
As the powerful prevent improving the structure of public revenues and expenditures, the type of solutions they impose to solve a fiscal deficit ends up being ruinous for the country. They concentrate religiously on reducing public spending that caters to the middle and popular sectors (education, health, social security, environmental care, among others) and, as this is usually insufficient, they force the indebtedness of the State, a solution that if it is occasional can help, but if it is repeated by paying interest and refinancing the amount of the debt, it produces a very dangerous ravine, precipitating sovereign over-indebtedness. Far from being a solution, it severely conditions national sovereignty, asphyxiating it, since instead of adopting decisions in favor of the country, creditors impose measures that ensure them to collect their debts by reproducing financial submission. Another result concocted by perverse political decisions.
Monetary issuance
Within these tensions and conflicts, monetary issuance operates to close the gaps that are not addressed with better revenues and expenditures, the most genuine way to address a fiscal deficit. The creation of local currency is necessary at a certain level to accompany and induce sustained growth, however, after that level, excessive issuance tends to increase inflationary tensions. Not surprisingly, neoliberalism religiously prioritizes monetary issuance as the main inflationary cause, although historical experience shows many cases where issuance was reduced to almost zero and inflation persisted or even increased.
As noted, inflation is generated by multiple causes, particularly those that remain concealed by the design of powerful minorities aimed at favoring their interests at the expense of others. They hide in ideological arguments, reasons that are indefensible in the open.
Exchange rate stability to avoid external sector bottlenecks
Another critical factor is to ensure some exchange rate stability. Strong devaluations of the exchange rate have an inflationary effect because they increase the cost of imported goods and services and produce various adjustments in many other prices, although rarely in wages and other remunerations of middle and popular sectors. In the following lines, we will see how this occurs in the context of an enormous criminal drainage of surpluses and in the highly oligopolistic structures of the markets.
Without addressing substantive solutions, the margins of action are significantly reduced by forcing devaluations of the currency itself in order to favor exporters and, to some extent, to contain imports. These measures are part of adjustment policies that punish middle and popular sectors causing recession or a sharp retreat in the pace of growth with the closure of companies and job losses.
There are also other unexpected causes such as the Covid pandemic and the wars in Ukraine and elsewhere that disrupt the supply channels of goods, inputs, and energy with serious effects on prices and commercial availability. Countries with few foreign exchange reserves suffer more severely from the negative impacts on their exchange rate stability.
The criminal drainage of much of the national savings
The first thing to note is that the criminal drain of resources is enormous and permanent. Drainage that is carried out using various mechanisms, almost all illegal. Among the most significant, tax evasion or elusion, and the criminal manipulation of foreign trade that result in the flight abroad of these ill-gotten resources.
Tax evasion and elusion is carried out with the assistance of experts and the complicity of officials responsible for tax control and regulating foreign trade, along with a certain part of the financial system.
In terms of foreign trade, the greatest drain materializes between corporations and their subsidiaries or associated companies. Corporations under-invoice exports and over-invoice imports by selling or buying from their associates in order to reduce taxable profits. These are actions sanctioned by the laws in force, but they are carried out with almost total impunity. The crimes that are discovered are very few and the fines applied negligible in relation to the tremendous drain of resources that they carry out and continue to do. Other modalities used for the purpose of tax evasion refer to making unregistered departures or entries of products, and to effecting payment of fees for services not performed or falsely increased.
Excellent researchers have estimated the magnitude of these crimes and identified those who carry them out. However, the enormous drainage continues to bleed peoples who are suffering the disastrous effects of the enormous “white collar” robberies that sterilize a large proportion of national savings. If this drain were closed, this flow of resources could be dedicated as a genuine solution to ordering the public accounts by reducing or eliminating the fiscal deficit, to contain an uncontrolled monetary issue since another important source of resources would be available and to strengthen exchange rate stability. By avoiding leaks that are always made in foreign currency and never in local currency. In short, cutting this drain would help dismantle a good part of the inflationary causes without punishing middle and popular sectors.
If so, we might well ask, why this is ruinous covert causes of inflation are not being addressed. Again, the same answer: there is a political collusion that prevents the adoption of a firm intervention that ensures justice, equity, and sustainability to development.
Causes at the level of the structure and functioning of markets
The structure and functioning of markets can be addressed on two main fronts: that of a country’s productive matrix and that of its main value chains.
In non-central countries, formally or informally colonized, the productive matrix was shaped by multiple investment decisions that adapted to policies imposed by the centers of power. This game of geopolitical forces led us to be mainly suppliers of primary products and importers of the rest (what was produced by those who colonized the world). As the domestic market grew, industries were born to serve the consumption of emerging middle sectors and broad popular sectors. These industries imported their capital goods and main inputs at prices relatively higher than those of exported products and, to a large extent, continue to do so, but with a significant change. While at first, they were small local companies, over time they were displaced by other subsidiary companies or associated with large international corporations that conditioned the purchases of capital goods, inputs, and remittances of profits to the needs and strategies of their headquarters.
This rationality of the large conglomerates is not in line with the possibilities of the local economy and the needs of the majority population. There is a productive matrix that is intensive in imports and dependent on decisions taken in other latitudes. The state has little capacity to influence what is invested, much less when, how much, and where it is invested. The productive matrix is reproduced at the pace and in the direction of private decisions that ignore or neglect the impacts that their investments have on the economy as a whole. This leads to recurrent situations of systemic instability, such as when available foreign exchange currency fails to meet demand for importing goods, services, and remitting profits to parent companies, the fearsome external sector bottlenecks. The economic system enters into a crisis and is at the mercy of solutions that do not defend the interests of the whole but of large economic conglomerates that in any case accumulate profits. It would be very different if the government were supported by a firm political coalition aimed at transforming the structure of the productive matrix with firm and cautious steps. The political is again decisive.
The other front of intervention refers to the structure and functioning of the main value chains. These production chains are made up of leading companies, medium, and small suppliers, who consume or use their products and the State that provides them with various productive infrastructures. The structure of these chains ends up being highly heterogeneous, the leading companies concentrate the profits, and the rest accompanies losing part of the value that belongs to them.
Certain value chains control the markets in which they operate, they are oligopolies with the power to set prices and commercial conditions. In inflationary phases, they ensure their profits with permanent remarks, often beyond the rate of inflation. This adds pressure for other actors to adjust their prices as best they can and inflation does not stop or decrease. It is a ruinous distributive struggle where the strongest are successful.
This can be controlled with interventions that regulate the distribution of results within each value chain and the final prices to their consumers. A complementary option is to strengthen other value chains. Thus, in terms of food, cooperatives can be promoted that potentiate local family farming or, in textiles, associations of small producers and marketers.
In any case, in this meso-economic space the political is also decisive.
In conclusion, we see that there are very important covert causes that explain the genesis of inflationary processes. It is far from being originated in monetary issuance, although it may be a factor that adds additional pressures. It is no coincidence that the covert causes are related to political decisions that tend to sustain the process of concentrating wealth and decision-making power that prevails in countries and throughout the world. Addressing these causes now hidden is a critical challenge that cannot be addressed by economic techniques. The transformative decision is essentially political in nature, let’s not fool ourselves, economic technicalities come later to implement the strategies adopted.
If you like this text, by filling up the form that appears in this page you can subscribe to receive once a month a brief summary of Opinion Sur English edition
