"Inflation" is a word, relevant not only in the recent news headlines but also evident in the post-pandemic Consumer Price Index graphs of numerous countries around the globe. From great economic powerhouses like the UK and the US to low and middle-income countries like Bangladesh and Pakistan, they all have been struggling to keep a tab on the soaring prices of commodities. Switzerland, a small mountainous nation in Western Europe, has avoided rampant inflation because of its unique economic landscape, which has been decades in the making.
Taking the recent scenario of one of the strongest developed economies, the United Kingdom, into consideration, we observe end-user electricity prices to have shot up in the UK, surpassing twice the European average of 23.325 per kilowatt due to its "dual system"- where renewable energy resources like wind and solar power generated about a third of the electricity used in Britain in the first quarter of 2023, thus giving us an illusion of a potential reduction in energy costs, when in reality, these supposed cheaper alternatives are pushing energy prices up due to its heavy dependence on not only state empowered subsidies but also on a large fleet of gas power stations on standby. These are then used as an alternative on a large number of days when the wind isn't blowing at the required mph or when the sun isn't shining as brightly, given the country's maritime, moist, and temperate climate.
When trying to figure out why emerging economies fail to implement renewable energy-oriented infrastructure, which indirectly makes them prone to inflation due to supply chain disruptions, it is important to look at the linear relationship between Income and REC%, i.e., the share of renewable energy sources in the total energy consumption. In the case of countries like Brazil, Turkey, and India, we observe a U-shaped curve which means, at lower levels of income, as GDP per capita increases, REC% decreases. Only when the income reaches a certain threshold level of financial development does the relationship between the two become positive. This is reflected in the investment patterns of developing economies, where investment in renewable energy takes a back seat, as new income capabilities are more likely to be channeled towards the betterment of healthcare, education, and housing infrastructures. This phenomenon is obvious because nations going through transitions witness economic boom which far exceeds the scale of energy that can be provided by existing renewable energy sources. Thus, opting to turn towards readily available and far more accessible fossil fuels to fuel their economic prosperity.
On the other hand, although Switzerland too has recorded an all-time high inflation rate of 3.5% in 2022, it is still well below the double-digit inflation rates in other advanced economies. The reason why Switzerland is riding out "the global inflation storm so well can primarily be attributed to its international trade scenario. Currently, as other countries are facing supply chain obstructions, Switzerland remains majorly unaffected. Home to a mountainous topography and more than 1,500 lakes, the country boasts a widespread adaption of hydroelectric power for the majority of its energy requirements, making Switzerland less reliant on oil and gas imports. Thus, making it much less susceptible to oil and gas price volatility, currently being fuelled by the ongoing Russia-Ukraine war. This can be attributed to the country's relatively high-income levels and the fact that the weight of energy stands only at 5% in the Swiss CPI basket compared to Italy's 8% and Germany's 10%, according to OECD data, which means that the general public spends a lesser proportion of their income on electricity bills in Switzerland. Switzerland also maintains a highly regulated monopoly market for electricity following the nationalization of the Swiss energy provision. It has proved to be more resilient in the long term when compared to particularly those nations in Europe that underwent a broad shift to privatization and, as a result, are currently being haunted by it. This not only reflects Switzerland's self-sufficiency but also ensures lower energy bills than the rest of Europe even during a global trade adversity.
The Swiss government also has been able to successfully curb the rising prices for agricultural products while the UK struggles with soaring food prices, which went up by 18% over the past year, making it the highest rate for food in whole of Europe. This influx occurred due to the UK's long-term standing as the world's 3rd largest importer of food and drinks. This bleak situation has caused the general public immense distress, forcing many small businesses to shut down, and compelling many to migrate due to the lack of sensible pricing and affordability.
Meanwhile, the Swiss were able to dampen this situation by using the perennial mechanism of high import duties levied on agricultural goods, on the basis of whether the crop in question is produced within the Swiss territory or not. The average tariff on imported goods in Switzerland is around 43% which is much higher than the EU's average of 12.6%.
The country, in fact, takes it one step ahead, as it also maintains closely administered prices for almost 1 in 3 products used to calculate the rate of inflation, implying that merchants are permitted to adjust prices only at certain times of the financial year. In Switzerland, 30% of the goods and services in the HCPI Consumption Basket are subjected to intense price regulations, which is extremely high when drawing parallels with its neighboring countries, including France, Austria, and Italy, where the proportions are merely 18%, 9%, and 8% respectively. This ensures the decoupling of Swiss food prices from the global rates.
Switzerland has been able to leverage its strong currency, the Swiss Franc, to import goods and services consistently at a 10% discount from what they were 12 months ago. This is because the Swiss Central Bank, being supported by the government's accommodating taxation policies, has been able to ensure a 91.5% backing of its currency with gold, stocks, and foreign assets, which is indicative of the Central Bank's abundant and ever-growing reserves. Therefore offsetting a large part of any inflation that they were subjected to.
With elevated global financial stability concerns, it is important to look up to Switzerland's economic model and proceed to close loopholes in the affected economies by better monitoring financial sector risks, enhancing and expediting recovery and resolution planning, and implementing other outstanding recommendations of the IMF to enhance resilience. The authorities of the countries being plagued with severe inflation should pursue labor market and pension reforms, and try accelerating and integrating green transition into their country's energy framework. Continuation of dialogue and engagement among countries and partners is essential to come up with policies aimed at countering the threats posed by the grim situation at hand.
Comments