The global shipping industry is experiencing of its worst crisis in history largely on the back of the post-pandemic recovery which disrupted global supply chains in the onset. The recovery of major importing and exporting countries is unarguably uneven thus compounding the situation of rising shipping cost to the extent where shipping costs have quadruple.
According to a Drip Capital report, small and medium sized businesses around the world account for about 25% of the US$18 trillion maritime trade and this sector has been experiencing a more profound and widespread crisis since the onset of the COVID-19 pandemic and the resulting economic contraction.
In the case of Guyana, freight cost has increased exponentially from shipping cost originated from Asia by over 200% post COVID-19. While freight has increased by more than 20% for North America and Europe.
Further to note, with the flood crisis experienced in Guyana due to heavy rainfall recently, basic food items–for example, agriculture produce skyrocketed to over 200%-400%. This is due to the losses incurred by farmers owing to the floods.
As a result of these unprecedented eventualities, policymakers are concerned about the adverse impact and/or the inflationary effect these would have on the business sector and in turn consumers.
What the rate of inflation does not tell you about rising cost of living
The problem that is unique to Guyana is that there is a lack of data compilation on a Cost of Living Index in particular–which should be an important data and/or indicator in order to guide or inform economic policymaking.
The Consumer Price Index (CPI) – the measure of Inflation
Inflation can be defined as a sustained or continuous rise in the general price level; or, alternatively, as a sustained or continuous fall in the value of money. Given this definition, several things should be noted. Firstly, inflation refers to the movement in the general level of prices. It does not refer to changes in one price relative to other prices. Such changes are common, even when the overall level of prices is stable. Secondly, the prices are those of goods and services, not assets. And thirdly, the rise in the price level must be somewhat substantial and continue over a period longer than a day, week or month (Labonte, 2011).
The CPI is used for three basic purposes:
1. It is a measure of inflation experienced by consumers, and an important indicator of the condition of the economy.
2. It can be used to adjust other economic data for changes in price levels, and to convert into inflation – free dollars. For example, retail sales and income data are “deflated” to assess their “real” movements over time. Another example is to estimate changes in the purchasing power of a dollar.
3. Various government income programmes, such as Social Security, use the CPI to adjust payments or income eligibility levels.
While the CPI is used to calculate cost-of-living adjustments (COLA), the CPI in and of itself is not a cost-of-living index. It does not consider changes in buying patterns that consumers make to adjust to relative price changes. Consumers usually react to relative price changes—for example, beef prices rising more than the price for chicken—by substituting less expensive alternatives for the more expensive commodities; that is, substituting chicken for beef. The CPI does not reflect short-run adjustments made in response to price changes as a cost-of-living index would.
Though the CPI can be used to “deflate” government revenue data, it should not be used to adjust government expenditure data for the effects of inflation.
The key difference between the two is that cost of living is the cost of maintaining a certain standard of living, whereas inflation is the general increase in price levels in the economy. However, both are strong economic conditions that showcase the economic status of a country or region. Generally, if there is high inflation, it is backed by high cost of living. It should be noted, however, that cost of living cannot be controlled easily by Government intervention, since cost of living is mainly driven by demand and supply of resources in a geographical area (Jacobs et.al) and (Pak, 2011).
Conclusion
In order to address the issue of rising cost of living, the policy approach must be multi-dimensional, and must include measures to address urbanisation, such as housing, and connectivity, improving financial awareness, and enhancing productivity and income. Importantly, greater efforts should be directed at increasing productivity levels; inter alia, the adoption of modern technology and increasing the skills of workers through access to better education and training. This would enable the average lower-income earners and mid-income class to move up the value chain towards higher value-added jobs to achieve higher incomes, and hence afford a higher standard of living.
In the case of Guyana, however, in the context of pursuing policies to address rising cost of living, much more needs to be done by perhaps the National Bureau of Statistics, to address the lack of data compilation of cost of living indicators and to develop a cost of living index. This, in turn, can greatly aid policy makers to pursue the right mixture of policies to ensure that cost of living is kept at the lowest levels possible.
Proposals
The issues raised herein are not unique to Guyana, but rather, rising shipping costs is a global post pandemic issue which is resulting in exponential increases in international trade.
As such, policymakers can consider the following measures which this author is of the view that these measures will aid in cushioning some of these effects and prevent a situation of hyper-inflation to occur:
• Temporarily reducing the duty on goods where 100– 150% duty is applied by 50%;
• Subsidize fuel cost to shipping companies and/or reduce corporate taxes applied to shipping companies;
• Explore special financing instrument from international financial institutions such as the World Bank and the Inter-American Development Bank to provide financing so that can be used to subsidize shipping cost in Guyana. This facility can be considered for two years (in anticipation of full post-COVID recovery in the global economy).
About the Author: JC. Bhagwandin is an Economic and Financial Analyst, and an Adjunct Instructor at Texila American University, Business College. The views expressed are exclusively his own and do not necessarily represent those of this newspaper and the institutions he represents. For comments, send to [email protected].
