African central banks have the ability to help protect their countries from the global shock to prices triggered by Russia’s invasion of Ukraine, Steve Hanke, professor of applied economics at the Johns Hopkins University in the US, tells The Africa Report.
Refusing to emit excess money in response to the shock would limit the impact of higher prices for energy and food, Hanke says. He sees few signs that African central banks are ready to follow that path.
Inflation is not a global problem, but “always and everywhere” a monetary one, Hanke says. “It isn’t caused globally, it’s caused locally. Central banks should not be emitting excess amounts of money as they have been during Covid-19.”
Countries that are following the right policies are China, Japan and Switzerland, all of which have been able to contain inflation, Hanke argues. In Africa, by contrast, central banks have followed the lead of Western central banks by increasing the money supply, he says.
“Each country is following the policies of the Fed and the ECB.” The result is that inflation is increasing across the board in Africa, he says.
- The outlook for inflation and growth is worsening in most of the continent’s major economies and prime candidates for stagflation include Angola, Ethiopia and Algeria, he adds.
Key to Hanke’s argument is the distinction between overall inflation in an economy and the relative prices of the elements in the basket of goods used to measure inflation. An external shock, such as Putin’s invasion, raises the price of petrol relative to the rest of the goods in the basket, Hanke says. However, it cannot – by itself – increase the overall rate of inflation in the basket: for that, an increase in the money supply is needed.
1970s oil shock lessons
Hanke’s view is far from uncontested. Jens Nordvig, a former senior global markets economist at Goldman Sachs, has argued that while monetary expansion can have an important influence on inflation, especially when combined with fiscal expansion, there is no direct and mechanical relationship.
Many argue that non-monetary events do have an impact on inflation, with supply-chain disruptions during Covid-19 and the Russia-Ukraine war as obvious examples. The effects of the Russia-Ukraine war will weigh on the post-Covid-19 recovery in sub-Saharan Africa, with higher energy and food prices lifting inflation and dampening growth for commodity importers, according to an April 7 note from Moody’s vice president David Rogovic.
- Food and non-alcoholic drinks account for about 50% of the consumer price inflation (CPI) basket in Nigeria, Zambia and Senegal, Rogovic’s research shows.
- The risk of African social unrest is worsened by the fatigue created by pandemic-induced restrictions on movement, he adds.
Central banks, Hanke says, are often misled by claiming that incidental factors are driving inflation when the culprit is in fact their money supply policies. He gives the responses of Japan to the two oil shocks of the 1970s as a historical lesson.
- Japan relied on fuel imports, and increased its money supply in response to the first oil shock of 1973-74, leading to a bout of inflation.
- However, there was no increase in money supply in response to the second oil shock of 1979, and inflation was contained despite higher oil prices, Hanke says.
Inflation is only half of “stagflation”: slow growth can lead to stagnation even as prices rise. Most countries in Africa are hampered in their response to a global shock, such as Putin’s invasion, by their lack of free markets, Hanke says.
- The only partial exception, he says, is South Africa, which, according to the Cato Institute, has the continent’s best ranking for economic freedom.
- But even that is only enough for South Africa to rank 68th in the world, and most African countries are in the bottom quartile of the ranking.
Hanke says there is no quick solution for African economies, but structural reforms to increase market freedom will improve the ability to adapt to future shocks.
- The Africa Report