Largest cost-of-living shock of the 21st century
by UN News, Global Crisis Response Group
10:06am 15th Jun, 2022
June 2022 (Extract)
More than three months since the start of the war in Ukraine, people globally are facing a cost-of-living crisis not seen in more than a generation, with escalating price shocks in the global food, energy and fertilizer markets - in a world already grappling with the COVID-19 pandemic and climate change.
An estimated 1.6 billion people in 94 countries are exposed to at least one dimension of the crisis, and about 1.2 billion of them live in ‘perfect-storm’ countries which are severely vulnerable to all three dimensions – food, energy and finance - of the cost-of-living crisis, according to the latest findings of the United Nations Secretary-General’s Global Crisis Response Group (GCRG) on food, energy and finance systems.
“For those on the ground in Ukraine, every day brings new bloodshed and suffering. And for people around the world, the war, together with the other crises, is threatening to unleash an unprecedented wave of hunger and destitution, leaving social and economic chaos in its wake,” warned Secretary-General Antonio Guterres at the launch of the GCRG’s latest brief.
“Vulnerable people and vulnerable countries are already being hit hard, but make no mistake: no country or community will be left untouched by this cost-of-living crisis.”
After two years of fighting COVID-19, the world economy has been left in a fragile state. Today, 60 per cent of workers have lower real incomes than before the pandemic; 60 per cent of the poorest countries are in debt distress or at high risk of it; developing countries miss $1.2 trillion per year to fill the social protection gap.
The ability of countries and people to deal with adversity has therefore also been eroding. As the war erupted, global average growth prospects have been revised downward; many countries’ fiscal balances have deteriorated, and the average household has lost 1.5 per cent in real income due to price increases in corn and wheat alone.
Worldwide, more people have been facing famine-like conditions, and more people have faced severe hunger emergencies. The lingering effects of the pandemic, coupled with the war in Ukraine and the impacts of climate change, are likely to further increase the numbers of people experiencing poverty. And as poverty increases so does vulnerability, particularly for women and girls. Countries and people with limited capacity to cope are the most affected by the ongoing cost-of-living crisis.
Three main transmission channels generate these effects: rising food prices, rising energy prices, and tightening financial conditions. Each of these elements can have important effects on its own, but they can also feed into each other creating vicious cycles - something that unfortunately is already happening.
For instance, high fuel and fertilizer prices increase farmers’ production costs, which may result in higher food prices and lower farm yields. This can squeeze household finances, raise poverty, erode living standards, and fuel social instability. Higher prices then increase pressure to raise interest rates, which increase the cost of borrowing of developing countries while devaluing their currencies, thus making food and energy imports even more expensive, restarting the cycle.
These dynamics have dramatic implications for social cohesion, financial systems and global peace and security. Food should never be a luxury; it is a fundamental human right. And yet, this crisis may rapidly turn into a food catastrophe of global proportions.
Higher energy costs, trade restrictions and a loss of fertilizer supply from the Russian Federation and Belarus have led to fertilizer prices rising even faster than food prices. Many farmers, and especially smallholders, are thus squeezed to reduce production, as the fertilizers they need become more expensive than the grains they sell. Critically, new fertilizer plants take at least two years to become operational, meaning that most of the current supply of fertilizers is limited. Because of this key fertilizer issue, global food production in 2023 may not be able to meet rising demand.
Rice, a major staple which up to now has low prices because of good supplies, and is the most consumed staple in the world, could be significantly affected by this phenomenon of declining fertilizer affordability for the next season.
Time is short to prevent a food crisis in 2023 in which we will have both a problem of food access and food availability. If the war continues and high prices of grain and fertilizers persist into the next planting season, food availability will be reduced at the worst possible time, and the present crisis in corn, wheat and vegetable oil could extend to other staples, affecting billions more people.
In one way or another, everyone is exposed to the shock waves of the war. The level of exposure of a country and its ability to deal with the shock determine a country’s vulnerability. And this is a challenge in the developing world.
The UN Global Crisis Response Group, together with the United Nations Regional Economic Commissions, undertook a global vulnerability assessment on the capacity of countries to cope with each of the channels of transmission and the vicious cycles they can create.
The results confirm a widespread picture of vulnerability: 94 countries, home to around 1.6 billion people, are severely exposed to at least one dimension of the crisis and unable to cope with it. Out of the 1.6 billion, 1.2 billion or three quarters live in ‘perfect-storm’ countries, meaning countries that are severely exposed and vulnerable to all three dimensions of finance, food, and energy, simultaneously.
This vulnerability of Governments and people can take the form of squeezed national and household budgets which force them into difficult and painful trade-offs. If social protection systems and safety nets are not adequately extended, poor families in developing countries facing hunger may reduce health-related spending; children who temporarily left school due to COVID-19 may now be permanently out of the education system; or smallholder or micro-entrepreneurs may close shop due to higher energy bills.
Meanwhile countries, unless a multilateral effort is undertaken to address potential liquidity pressures and increase fiscal space, will struggle to pay their food and energy bills while servicing their debt, and increase spending in social protection as needed.
The clock is ticking, but there is still time to act to contain the cost-of-living crisis and the human suffering it entails. Two broad and simultaneous approaches are needed:
1. Bring stability to global markets, reduce volatility and tackle the uncertainty of commodity prices and the rising cost of debt. There will be no effective solution to the food crisis without reintegrating Ukraine’s food production, as well as the food and fertilizer produced by the Russian Federation into world markets – despite the war.
2. Increase people and countries’ capacity to cope. This means helping the most severely exposed countries help their poor and vulnerable populations, by increasing countries’ fiscal space and liquidity access so that they can strengthen social protection systems and safety nets and hence enhance the ability of people to deal with adversity.
Taken together, this suggests – as the United Nations Secretary-General said recently – that “there is no answer to the cost-of-living crisis without an answer to the finance crisis”.
All available rapid disbursement mechanisms at international finance institutions must be reactivated, and a new emission of Special Drawing Rights must be pursued. To succeed, strong political will across the multilateral community is needed. Piece-meal approaches will not work. What will, is a comprehensive approach that looks at the emergency today without forgetting about the future.
The vicious cycles this crisis creates shows that no one dimension of the crisis can be fixed in isolation. This crisis touches all of us. It is everyone’s problem and a common responsibility. Yet, we must accept that not everyone is affected equally. Some countries, communities and people are more vulnerable than others, and those need to be assisted first. It takes a world to fix a world, what is needed now is to start.
According to the brief, the increase in hunger since the start of the war could be higher and more widespread. World Food Programme estimates show that the number of severely food insecure people doubled from 135 million pre-pandemic to 276 million over just two years. The ripple effects of the war in Ukraine, however, are expected to drive this number up to 323 million in 2022.
The Food and Agriculture Organization’s latest food price index had already reached a record high in February 2022 before the war started, since then it has had some of the largest one-month increases in its history.
Despite the widespread impact of the crisis, not all regions and subregions are exposed in the same way, says the report, stressing the fact that some countries and communities are more vulnerable than others and need assistance urgently.
Countries in Sub-Saharan Africa, for example, remain significantly vulnerable with one out of every two Africans in the region exposed to all three dimensions of the crisis. The Latin America and the Caribbean region is the second largest group facing the cost-of-living crisis with nearly 20 countries deeply affected.
In South Asia, which is currently experiencing crippling levels of heatwaves, 500 million people are severely exposed to the food and finance crisis. Countries in Eastern Europe and Central Asia are severely exposed to the energy and finance dimensions, given the importance of remittances and energy exports from Russia.
The brief makes policy recommendations to address the cost-of-living crisis, highlighting immediate action on two critical fronts - the urgent need for stability in the global food and energy markets to break the vicious cycle of rising prices and the imperative to bring relief to developing countries, calling on resources to be made available immediately to help the poorest countries and communities.
“There is no solution to this global crisis without a solution to the economic crisis in the developing world. The global financial system must rise above its shortcomings and use all the instruments at its disposal, with flexibility and understanding, to provide support to vulnerable countries and vulnerable people,” stressed Guterres.
“The message of today’s report is clear and insistent: we must act now to save lives and livelihoods over the next months and years. It will take global action to fix this global crisis.”
* In a number of African countries basic food costs have risen by up to 30%. Globally, rising inflation driven by increasing fuel and food costs and supply chain disruptions are undermining household budgets, impacting low income and working people significantly.
* Access the report: http://bit.ly/GCRG-Brief-02
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