Inflation in the Time of Corona and War: The plight of the developing economies

Abstract

Reliance on established macroeconomic thinking is not of much use in trying to understand what to do in response to the constellation of forces driving up inflation and slowing down growth in these times of COVID-19 and war. This paper attempts to reduce the heat and turn up the light in the debate on the return of high inflation and looming stagflation—by providing evidence-based answers to key (policy) questions concerning the return of high inflation: How close are the parallels between the current conjuncture and the 1970s? What are the differences? Does what is currently happening already amount to stagflation? Can central bankers engineer a ‘soft landing’ of their economies or are we already poised for a deep (global) recession? What are the likely spillover effects of monetary tightening in the US on the emerging economies? What, if anything, can we learn from the monetary and fiscal policy experiences and policy mistakes of the 1970s? And, finally, are there alternative, less socially costly, ways to bring inflation down?

Myth and Reality in the Great Inflation Debate: Supply Shocks and Wealth Effects in a Multipolar World Economy

“…But with a few exceptions, it has not happened. The steep fall in stock markets in recent months has tempered the enthusiasm for higher interest rates of more than a few bankers, as have fears of a developing crisis in emerging markets (Storm, 2022). But central banks around the world have thus far continued raising rates, while Summers and like-minded colleagues in economics and financial markets trumpet the need for more.…”

The Return of Debt Crisis in Developing Countries: Shifting or Maintaining Dominant Development Paradigms?

“…In another statement, Lagarde doubles down on her claim, pointing out that 'sectors have taken advantage to push costs through OECD (2023). In contrast to the 1970s, when real wages in core OECD countries such as the US or the UK were rising and profit shares were being squeezed, real wages have now been falling, as the bargaining power of labour is at an all-time low (Ferguson and Storm, 2023;Stansbury and Summers, 2020;Storm, 2021). Empirical evidence provided by Storm (2022) shows that nominal wage growth in many developing countries, including Argentina, Brazil, Mexico, South Africa and Turkey, has not been keeping up with consumer price inflation during 2019-22 and, hence, real wages are stagnating or declining.…”

“…Even though the IMF and World Bank have been warning about the build-up of (public and private) debt, as noted above, they have simultaneously contributed towards it through policies of financial liberalization, and by pro-2. For some recollections, see Bortz et al (2020), Chowdhury and Jomo (this issue), Storm (2022) and UNCTAD (2022).…”

“…The situation over the last decade is best described as a slow burn, contained by regular and persistent applications of austerity and adjustment programmes. Many have been under the direct tutelage of the IMF, with an overriding aim of placating (global) financial markets, while cutting critical public investment and social spending (Kentikelenis and Stubbs, 2023; Storm, 2022; UNCTAD, 2022).…”

“…According to the World Bank (2022) and the BIS (2022), the key lesson from the 1970s and 1980s is that central banks need to act in a pre‐emptive manner to avoid a loss of confidence in their commitment to maintaining low inflation, and that delaying the necessary monetary tightening heightens the likelihood that even larger and more costly future policy rate increases will be required, particularly if inflation becomes entrenched in household and firm behaviour and inflation expectations. This belief has been bolstered in policy making by the shift towards ‘independent’ inflation‐targeting central banks in both ‘advanced economies’ as well as ‘emerging market and developing economies’ (World Bank, 2022; for a critical view, see Chowdhury and Jomo, this issue; Storm, 2022).…”