Tackling inflation through economic development
Economic Intelligence Branch
The sharp rise in inflation just about everywhere in the world is the result of a combination of economic shocks. Supply problems caused by COVID-19, climate change, natural disasters, a shortage of labour, and geopolitical tensions, have all contributed to a drop in the global supply of certain products and services.
At the same time, global population growth, rising wealth in Asia, pandemic-related economic assistance plans, and easy access to credit—especially in North America, have boosted global demand. And we’re not out of the woods yet. By 2030, nearly 3 billion people will have a level of consumption comparable to the 750 million people who consumed the most during the 2000s, i.e., Westerners.
Playing a key role
While monetary tightening puts downward pressure on demand, economic development could play a key role in tackling inflation by productively increasing supply. Economic development can also impact other factors that drive up prices, such as climate change and global supply chain disruptions.
Increasing food production
Well before the pandemic, experts questioned whether global supply could keep up with growing demand, particularly in the food sector. Boosting local food supply around the world would increase global supply and supply resiliency.
In Quebec, urban agriculture could be further developed, e.g., Lufa Farms in Montréal; as could controlled-environment (greenhouse) agriculture, e.g., the Winter Farm project.
Increasing production and productivity
Improving productivity is another solution. Automation and the 4.0 digital transformation help reduce labour requirements and production costs. European exporters in the food processing sector are ahead of the curve in this regard. They export, to Canada, products that are of comparable quality to local products at a better price. In doing so, they are taking full advantage of the Comprehensive Economic and Trade Agreement (CETA).
Once the effects of monetary tightening are felt, upward pressure on prices may remain because of the labour shortage. Again, economic development can facilitate the attraction and retention of workers.
Reorganization of supply chains
Economic development can also allow businesses to make their supply chains more resilient. This is a long and costly process. In some cases, new business models need to be adopted: integrating local SMEs into regional supply loops; bringing production activities closer to consumer markets; abandoning just-in-time supply chains; etc.
Despite monetary tightening, inflation will continue to rise until global supply is able to keep up with growing demand. To this end, supply chains need to be strengthened and production and productivity increased. In this context, well-targeted economic development support measures are a complementary solution to controlling inflation.