Undoubtedly, the war between Ukraine and Russia brought with it devastating effects on the world economy: prolonged rises in the prices of oil and its derivatives, as well as the rise in the cost of raw materials and metals; in addition, threats to food security, since both are agricultural countries, among other consequences.
Each one of them is being lived in the country and one more could be added. The World Bank recently reported that, as a result of this conflict between the two European countries, there is a “stagflation” risk alert.
This phenomenon, whose original term comes from English and is “stagflation”, occurs when an economy has very low decrease or growth of economic activity, accompanied by a prolonged increase in the prices of goods and services.
“In general, it can be said that it refers to an economy that is stagnant, but the increase in the prices of goods and services persists,” explains Arturo Martínez Moya, a member of the Monetary Board of the Central Bank, about this term originated in 1965, when the British Finance Minister assured that the United Kingdom was experiencing this phenomenon.
If it happens today in the country, this would affect the recovery of the economy after the Covid-19 pandemic that began in early 2020, according to economist Miguel Collado Di Franco.
“If you have stagflation in the United States, which is our main trading partner, where remittances and most tourists come from, it could obviously affect us since they would not have the same purchasing power and if the income of the inhabitants of this particular country decreases. Well, that would have its effect”, exemplifies Collado Di Franco, making the caveat that his illustration can be extended to other nations.
As a result of this stagnation of economic development, the Dominican Republic could also suffer a steady rise in unemploymentsince companies stop selling due to the decrease in purchases by citizens who prefer not to purchase certain products due to high prices.
Both interviewees agree that the country’s greatest risk is the imported inflationwhich does not depend on the Dominican authorities.
How to counter it?
This phenomenon is caused by various factors, among which Martínez Moya mentions the increase in the price of a barrel of oil, the very high prices of raw materials, the pause in grain production, the stagnation of exports and the increase in the cost of food, the permanent incidence of Covid-19 in China, among others.
“That is causing an imported inflation that does not depend on the Dominican government, that does not depend on the Central Bank and to that is added the inflation generated here; for that reason, the role of the Central Bank is to minimize local inflation”, says the economist.
Martínez Moya applauds the government’s adoption of measures such as the elimination for six months of the tariff on certain products in the basic family basket and the subsidies they are allocating to fuel.
Likewise, he believes that the Central Bank should continue to limit the excess liquidity that may be in the street and in commercial banks, and take it out of circulation as it has been doing since it “eliminates the possibility of creating additional inflation internally.”
However, Miguel Collado Di Franco, who is also executive vice president of the Regional Center for Sustainable Economic Strategies (CREES RD), considers that other measures can be applieddespite the fact that there has been no evidence in recent months that the country is experiencing stagflation or is close to doing so, as seen from the main indicators of the economy.
Among the ideas that CREES proposes to counteract this phenomenon, it mentions “breaking the complacency of the status quo and make structural reforms that reduce the costs of living and doing business in the Dominican Republic”.
With this, Collado Di Franco refers to making changes in transportation, for example, since the country has one of the most expensive transport systems of the region due to the existence of monopolistic structures. Likewise, he considers that the energy system should be reformed, so that there are less costs of self-generation.
In addition, he points out that one of the reasons why fuels are expensive in the Dominican Republic is because they are highly taxed. For this reason, he also suggests reducing taxes on hydrocarbons and opening the market to competition.
Labor reforms that make the labor market more flexible, as well as the simplification of the tax system, are other CREES proposals that would even position the Dominican Republic in more competitive places, especially for investors.
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As a result of the damage caused by the pandemic and the war, this year, the level of per capita income in developing economies will be almost 5% below its pre-pandemic trend, according to the report published by the Bank World.
The June World Economic Prospects report presents the first systematic assessment of how current global economic circumstances compare with the stagflation of the 1970s, with a particular focus on how stagflation might affect emerging markets and developing economies.
The recovery from stagflation in the 1970s required sharp increases in interest rates in major advanced economies, which played a major role in triggering a series of financial crises in emerging markets and developing economies.