Inflation and Democracy

The evidence continues to mount of not merely a continuing rise in inflation, but a rise that will go on till the cows come home. And this, probably more than anything else, will roil the politics of the developing countries, including the emerging economies.

We’ve already seen how inflation has helped convert small-time elite demonstrations into mass protests and regime-toppling in the Arab world. Prime Minister Manmohan Singh had to recently deny that India was hardly in the same category, despite double digit inflation in pretty much everything.

He’s almost certainly right. Crippling inflation is bad for any regime. But people in democracies are normally willing to wait until the next election to show their anger. There is always an increase in social unrest, but not the kind that gets governmental systems overturned. Just ballot choices.

There are at least two other factors that can exacerbate the impact of inflation on a democracy. One is if the inflation is simply big enough– in other words, hyperinflation. A 1996 study of cases of democratic failure showed that if inflation goes above 30 per cent a year, the life expectancy of a democratic polity fell to 16 years.

Two, I would argue, is a lack of growth. The same study showed that democracies that experienced inflation between 6 and 30 per cent had a life expectancy of 71 years. But curiously if inflation fell below 6 per cent, a democracy’s chances of premature death increased. Life expectancy fell to 44 years.

Why, one wonders, should rock-bottom inflation figures have such a poor effect on a democratic polity? The answer, I suspect, is that inflation at such low levels often means an economy that is growing at equally low levels. And the constrainment of opportunity and aspiration that this represents is almost as damaging to public morale as Weimar Republic-style price rises.

Nonetheless, inflation is going to be around for a while. If you believe price rises are caused by simple supply and demand mismatches, then you can see such mismatches proliferating across the world. In India alone, agricultural productivity is growing at a fraction of the growth in incomes and population. In other words, people are increasing their food consumption far faster than others are increasing their food production.

If you believe prices are rising because of monetary policies, consider these figures. Non-gold international reserves, one measure of global liquidity, combined with the US central bank’s holdings of US securities, totaled $11.6 trillion last November. That is an increase in the global liquidity supply by over 50 per cent in two years. Friedmanites will turn in their graves: this bloat is beyond reason.

One comfort is that though everyone likes to denounce India as a den of superrich and ultrapoor, the truth is that if one were to map the world by Gini coefficients (a measure of inequality) India would fare pretty well. It is more equitable or on par with all parts of the world except, broadly, Europe, Canada and Australia.

Why does this matter? Democracies are sensitive to inflation but the truth is that they are also inflation-generating because of populist, throw money around, tendencies. Research looking at the data in 100 countries from 1960 to 1999 shows that this tendency is strongest among countries with a high degree of income inequality. And India, as I have mentioned, fares pretty well compared to other countries.



Copyright © 2011 Hindustan Times.

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