Open-Source Stability: How Some Emerging Markets Have Thrived as Others Inflate
While monetary independence is a highly appealing concept, maintaining it has been an endless struggle for many emerging markets. While a great improvement from 50 years ago, the 8.3% inflation of emerging markets and developing economies in 2023 still dwarfs the 2.6% of advanced economies. All countries, no matter their stage of development, have experienced less volatile inflation rates over the last 50 years, but inflation has remained a serious issue particularly for the countries who could benefit from some added stability the most.
This phenomenon arises first from the inflationary incentives faced by bureaucrats and central banks of these rapidly growing countries. The desire to build infrastructure and pour resources into one’s own country is healthy and even necessary, but this desire coupled with sparse resources can create unsustainable spending. Some inflation arises from greed and lack of monetary expertise, but much of it arises from the desire to please the people twice at one time. Citizens fundamentally want two things: to keep their money and to live in a constantly improving country. Governments who heed their people’s calls seem to have found a perfect solution. Through increasing the money supply they can simultaneously spend as they wish and reduce taxation. This adrenaline rush has never failed to create some severe volatility in the long run. It certainly isn’t helpful that they often do this with encouragement and assistance from aid organizations who claim that if they just get over the developmental hump they will be able to recoup their investment manyfold.
The second basis of this inflationary phenomenon are the very real shocks that developing and emerging markets face as they grow unpredictably with far fewer guardrails than developed countries have. With many less years of industrial experience, these growing nations are still discovering their aptitudes. The potential for natural resource discovery is much higher than in a thoroughly industrialized country such as England. A year can allow market shifts that would be unheard of in a developed country. The entrance of new technology or organizational strategies can radically change incentives and make old industries nearly obsolete in months. Through all of this uncertainty, consistent economic growth and increasing consumption make inflation a necessary reality and positive indicator.
While much of this inflation comes from growth and desire to induce growth, it often causes long run potential growth to decrease, as their inflated currency becomes an increasingly less appealing store of value. Investors are incentivized to store their money in other currencies and invest in foreign business, creating a deadly cycle of inflation building upon itself. These institutional causes are exacerbated by the instability of agricultural infrastructure. An inability to consistently have access to food creates hoarding and price spikes that make inflation even stronger. Its relatively high market share in developing countries gives food a much stronger ability to sway prices. While price increases in other goods can lead to decreased spending, increases in food prices lead to inflation and civil unrest, posing a whole range of existential problems for emerging nations. Monetary instability damages a country’s potential from the inside out, by stunting both investment and consumer security.
Some developing economies have found safety from inflation by buying gold. Gold provides them an effective counterbalance to the inherent volatility of their national developmental process. As both national and international uncertainty increases, gold has a tendency to increase in value. The same problems that destabilize the currency of an emerging market also grow the attractiveness of gold. Times of instability that would have led to a powerful inflationary increase in the past can now be overcome through a dependence on gold’s increase in value. Possessing a large amount of gold can also increase the faith of the people in their own currency and government. Gold can shift the source of governmental authority away from military force. While buying gold pulls resources away from short-term developmental spending, it provides a basis for much more sustainable growth over a long period of time.
Gold provides much-needed access to the international financial world. Local currency is often the greatest barrier to international trade, especially if that currency is always fluctuating and devaluing. If even calculating exchange rates is difficult, then goods which would have otherwise been extremely marketable lose much of their value. Gold provides support to international trade in two major ways. The first is how it helps a currency stabilize, which makes that country more appealing to trade with. The second way it helps international trade is by letting the government of the emerging market trade with whoever they wish. Their currency’s appeal does not limit them, and they are able to secure their country whatever they desire, from wherever they desire it. In the volatile world of emerging market development, gold provides a lovely opportunity for strength and stability.
