Stagflation and supply-side consolidation

Weak growth is likely to continue this decade due to weak investment in most parts of the world, with inflation now at multi-decade highs in many countries, and supply-side expansion slowly expected, there is a risk that the pace of price growth will remain higher for longer than expected. Currently.

Moreover, external public debt in developing economies today is at record levels, much of it owed to private creditors, and much of this debt has variable interest rates that can suddenly jump. With the tightening of global financial conditions and the depreciation of currencies, critical debt situations began to expand to middle-income countries, having previously been limited to low-income economies.

Ending the accommodative nature of monetary policy in the United States and other advanced economies, coupled with the rising rise in the cost of borrowing worldwide, presents another extremely unfavorable situation for developing countries. In addition, most fiscal support measures introduced in 2020 to combat the pandemic will be phased out over the next two years, although debt levels will remain high. With the accommodative nature of policies removed, it will be important to reduce inequality and seek higher incomes for all through the use of financial and monetary instruments that strengthen supply chains, strengthen small businesses and improve capital allocation.

However, the current situation differs from the seventies of the twentieth century also in several important respects. The dollar, which was very weak at the time, is now strong. As for oil prices, which quadrupled in the period 1973-1974, and doubled in the period 1979-1980, today they do not exceed two thirds of the level they reached in 1980 after the impact of inflation was excluded . The financial position of the large institutions is also generally strong, while it was in jeopardy in the 1970s.

Economies around the world today are more resilient than they were in the 1970s, structural rigidities in wages and labor markets are lower, and policymakers today are in a better position to undo stagflationary headwinds. Monetary policy frameworks are also more reliable and credible: central banks in advanced economies and many developing economies work with clear mandates to achieve price stability. All of this, in turn, combined with the fact that technology and capital now have the power to produce massive increases in the supply side, has helped stabilize long-term inflation expectations.

The World Bank’s latest forecasts show that global growth is expected to slow by about 2.7 percentage points between 2021 and 2024, more than double the slowdown in the 1970s from 1976 to 1979. To prevent a prolonged recession, inflationary inflation must the world’s policymakers focus on five main areas.

Reducing the risks of stagflation will require targeted action by policymakers around the world. In this exceptional era of intertwined global crises, policymakers everywhere will have to focus their efforts on five key areas.

First, they must limit the damage to the war-torn population in Ukraine, which in turn will require coordinated efforts to respond to the crisis, including the provision of emergency food aid, medical aid and financial subsidies to war-torn areas, and share the burden. of housing for refugees and IDPs, and providing the necessary support for them, and perhaps repatriation.

Second, policymakers must brave the sudden jump in oil and food prices. There is a need to strengthen the supply of the most important primary commodities for food and energy, and the markets are functioning with a forward-looking view of the future, and therefore the mere announcement to secure the supply of commodities in the future will help drive prices lowering and inflation expectations. All countries must also support social safety nets and avoid export and import restrictions that inflate price increases.

Third: There is an urgent need to step up efforts to ease the debt burden. Debt-related risks were acute for low-income countries even in the run-up to the pandemic. With the spread of critical levels of debt to middle-income countries, the risks facing the world economy will grow in the absence of rapid, comprehensive and significant debt relief efforts.

Fourth: Officials need to step up health preparations and efforts to contain the Corona virus, as expanding the scope of vaccination efforts in low-income countries, including the provision of Corona virus vaccines, should be a global top priority.

Fifth: Accelerate the transition to low-carbon energy sources. This will require more investment in electricity networks, cleaner energy sources and increased energy efficiency. Policymakers at national level should establish climate-friendly regulatory frameworks, adapt incentive structures and strengthen land use regulations.

Restoring long-term prosperity depends on a resumption of faster growth and a more stable environment for rules-based policies. There is good reason to expect this. As soon as the war in Ukraine ends, efforts to rebuild Ukraine’s economy and revive world growth will be doubled, including by the World Bank Group. Meanwhile, policymakers need to mitigate other threats to global development, including: rising food and energy prices, persistent stagflationary pressures, increasingly dangerous excessive debt burdens, increasing inequality and stability, as well as the many risks posed by climate change.

* Quoted from the newspaper Al-Eqtisadiah.

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All published articles represent only the opinion of its authors.

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