Decoupling, Recession, Hunger and the Ukraine War

High inflation in shrinking economies, social tensions, famine and waves of refugees: the negative scenarios have seldom been as gloomy as they are now. Multilateral cooperation and open markets are now needed to ensure that they do not occur.

All was right with the world back then: Ukrainian wheat is loaded onto a ship in the port of Nikolayev on the Black Sea in 2013. Today Russia’s navy is blocking the export.

Vincent Mundy/Reuters

Have the “Davos People” had their day? Will the world-improving dialogue between internationally active companies and politicians from all over the world, as cultivated by the World Economic Forum (WEF) with its annual meeting in Davos, which has just ended, soon become an anachronism, because the world is falling apart into warring underworlds?

It could happen like this. The pandemic has created the conditions for this. Few words are as popular among politicians and business leaders these days as resilience. Logistics problems and disruptions in supply chains caused by the pandemic have suddenly brought security of supply to the fore. Many companies are considering only working with suppliers in their area or at least diversifying their supply chains in Asia beyond China. That makes their products more expensive.

A dangerous cocktail

While the expectation of a return to normality prevailed during the pandemic, Russia’s invasion of Ukraine brutally dashed that hope. Suddenly there is a regime in Europe that opposes the free world with the ruthless use of force. The fact that the Chinese autocrat Xi Jinping promised Vladimir Putin a friendship without borders shortly before the outbreak of war increases the fear of a hard conflict between dictatorships and democracies all the more. Companies need to analyze their geopolitical risks and realign themselves.

In many companies, a lack of preliminary products is slowing down production. Transport options are scarce, from containers to truck drivers, there is a shortage. One end is not foreseen. At the same time, governments around the world have replaced lost wages and income with generous aid payments during the pandemic. Accelerated digitization and more climate-friendly electric cars ensure that the demand for electricity continues to rise.

People are getting poorer

Increasing demand when supply is tightening is a sure recipe for inflation. In Germany, commercial producer prices rose by a record 33.5 percent in April compared to the same month last year. The spot price for natural gas has increased more than sixfold within a year, the price for crude oil has risen by a third. In Switzerland, a liter of unleaded petrol costs a quarter more than a year ago. Consumer prices increased by 7.5 percent in the euro area and by as much as 8.3 percent in the USA. Only because the franc has strengthened is inflation in Switzerland still within limits at 2.5 percent.

Inflation will not go away on its own any time soon. It makes people poorer and hits the less fortunate particularly hard. The willingness to accept higher costs for the sake of climate policy is dwindling – more coal is being burned again and calls for populist measures such as fuel subsidies are getting louder. Political polarization is increasing.

famine and refugee pressure

With a little delay, the war will also severely affect many poor developing countries. Ukraine and Russia are among the largest exporters of wheat, corn and sunflower oil. They are also important fertilizer producers.

According to the World Trade Organization (WTO) Countries in Africa and the Middle East get more than half of their wheat imports from these two countries. Lebanon imported 64 percent of Ukraine’s wheat, Nepal 94 percent and India 85 percent of sunflower oil.

A farmer brings Ukrainian fertilizer to the field.  His village was recently bombed by the Russians.

A farmer brings Ukrainian fertilizer to the field. His village was recently bombed by the Russians.

Thomas Peter / Reuters

Also the one from World Food Program of the United Nations Half of the wheat distributed in countries affected by hunger has so far come from Ukraine. According to the organization, over 800 million people worldwide are undernourished. 276 million people are at risk of starvation – twice the number before the pandemic.

The war in Ukraine affects the local harvest. Fertilizers produced using natural gas are becoming scarce. Although the wheat warehouses were still full due to a good harvest last year, Russia is blocking the exit from the Black Sea with its warships. If the blockade is not lifted soon, there is a risk of famine in numerous countries. Should the conflict continue beyond June, expects the WTO that an additional 47 million people will no longer have enough to eat – this war is by no means just an intra-European problem.

Hunger in Africa and the Middle East would further increase the refugee pressure, which is probably Putin’s calculation. Europe is already required to grant refuge to over 6 million Ukrainians.

Tariff reduction creates prosperity

High inflation with declining growth, worsening debt problems as a result, conflict-prone systemic competition between autocracies and the free world: With so many problems, it is tempting to point to others.

Famine is followed by waves of refugees: a displaced person in Yemen receives food aid.

Famine is followed by waves of refugees: a displaced person in Yemen receives food aid.

Yahya Arhab/EPO

China-facing countries in Asia, Latin America, or Africa may be tempted to blame the West and the United States, not Russia, for rising prices and food shortages. Russia and states sympathizing with it are already weakening the efficiency of multilateral organizations such as the Monetary Fund, the World Bank and the group of the twenty largest industrialized and emerging countries (G-20). Nationalist defensive reflexes are increasing.

Around 30 countries – including India – have imposed food export bans. The trade dispute between the USA and China and the search for more resilience could lead to the creeping decoupling of different regions of the world.

The terrible war in Ukraine can, but does not have to, plunge half the world into a prolonged, severe recession. Turning away from open markets, new tariffs and subsidies may seem like the obvious answer to many. But they only exacerbate the problem and lead straight to disaster.

Agricultural markets open to world trade, in which producers are free to react to price signals, can prevent further famines. Countries around the world should be united and unequivocal in pressuring Russia to end its blockade of Ukrainian ports around Odessa.

In addition to rising interest rates, one of the good ways to combat rampant inflation is to lower high import tariffs and other anti-business hurdles. In Davos, US Secretary of Commerce Gina Raimondo stated that she would at least consider reducing the punitive tariffs imposed on China.

Open markets create wealth and help prevent poverty and political uprisings. The fight against such global problems as climate change can only be won in global cooperation.

Multilateralism without Russia

This year’s WEF in Davos was a little less international and well attended than before the pandemic. One could take this as a sign that globalization has reached a dead end. In fact, there has been much talk of the world crumbling into aggressively warring, blocking blocs.

Fortunately, there was also widespread agreement in Davos that this scenario would be catastrophic. It would make the world significantly more expensive and dangerous; for millions of people it could even mean death.

Competition is important and good, but it requires agreement on a minimum of cooperation and common rules – also to ensure that new technologies are used for the benefit of mankind and are not misused. Cooperation, not isolation, is the right answer to the current problems. International cooperation and a strengthening of multilateralism are needed – now more than ever.

If the G-20 is blocked by Russia, the G-7 of the industrialized countries could try to form a G-19 without Russia with emerging countries willing to cooperate. China should be included and committed to multilateral rules, at least as long as it does not carry out any military attacks on third parties. Germany could contribute more actively to a united, stronger Europe, and Switzerland should also do more to save peace, freedom and a multilateral world order in the future. It is up to the free world to prevent the looming catastrophe. Hopefully, the “Davos People” who rely on global cooperation will not be obsolete for a long time.

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