Because Ukraine's trade deficits are large, Ukraine depends on large flows of capital from other countries, and thus has high and unsustainable levels of debt service to pay. A potential answer here is to devalue the currency, and there was a 40% devaluation back in 2008. But when so much of what a country buys and sells is in world markets, a large devaluation of your currency is wildly unpopular--in effect it makes the costs of all exports rise and the costs of all imports rise.Admittedly I want to contrast some aspects of this scenario in what are relative terms, and what follows is somewhat random. Even though Ukraine's economy is only partially developed, its citizens are as resistant to inflation as anyone: such as the disgruntled shopper I highlighted in a recent post. Many nations now rely heavily on what is bought and sold in world markets. However that is more beneficial for any nation, when economic interdependence is more a matter of choice than one of necessity. When the dependence is perceived as necessity, that just adds to supply shocks - especially when political ramifications are involved. Another consideration is that supply shocks can have more complex monetary implications, when a nation does not have a fully developed service sector.
Indeed, monetary expansion can be somewhat risky for any country whose "natural" rate of unemployment appears to be increasing: something which has been on my mind since Taylor's post. Again, this goes back to aggregate participation in the economy or lack thereof. Any nation which seeks to replace human labor with technology has to consider potential negative monetary effects. Plus, economic participation on the part of all citizens, means fewer problems for nations which seek a higher growth trajectory. That should hold true for a number of reasons.
Even developed countries may not benefit from imports to the degree it would seem. For one thing, those with fixed incomes are more exposed to inflation in general. That means they often resist the optimal and efficient prices of discretionary goods, because of the degree to which their income is already captured by local and not so efficient non discretionary product. Part of the problem is that much of what is clearly efficient production (capable of good deflation), often falls into imports and exports categories. Whereas local economies with "captured" consumers may not have the same pricing incentives to reach global consumers. Some medical complexes in the U.S. approach this differently, however, with appeals to consumers worldwide which are not necessarily offered to local consumers.
What's more, policy makers don't always have the appreciation for good deflation values which some imports represent. Instead, imports may be seen (still) as competitors for local production which - again, often has the ability to produce for a higher cost than what the import would represent. This can have repercussions in other areas of production as well, such as the effects of higher sugar costs for U.S. food production.
These are just some of the elements which reduce the benefits of good deflation where it does occur. Therefore the consumer is left with a consumption basket more heavily weighted with less productive elements from government and special interests. If that were not enough, central bankers still try to skim inflation away by further reducing nominal income potential. All of which leaves the consumer more aggravated at headline inflation, which takes much of the blame for what could be better and more efficient adjustments all around.
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