Saturday, April 1, 2023

Why a 1970s-style ‘stagflation’ crisis would hit world’s poor hard


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When it comes to the global economy, the near future looks increasingly bleak. But while rich countries like the United States and Britain fret about slowing growth and rising prices, if stagflation makes its long-dreaded return, it will be poorer nations that get the worst of it.

This week, the World Bank and the Organization for Economic Cooperation and Development (OECD) both slashed their estimates for economic growth, citing the ongoing disruption caused by the pandemic and Russia’s war in Ukraine.

Annual growth would be 2.9 percent this year, the World Bank said in a report released Tuesday, down from its forecast in January of 4.1 percent. The OECD, a club of mostly wealthy nations, made a similar prediction Wednesday that growth would hit 3 percent, down from a 4.5 percent projection from December 2021.

The two bodies are only the latest to issue grim economic warnings. The United Nations and the International Monetary Fund dropped their own forecasts earlier in the year, albeit by smaller amounts — a sign of how quickly the ground has moved.

The economic turnaround has been abrupt. Just a few months ago, many expected that there could be a post-pandemic boom. The OECD report argued that “the world economy was on track for a strong, albeit uneven, recovery from COVID-19” in the early months of 2022.

But that has changed. “The conflict in Ukraine and the supply-chain disruptions exacerbated by shutdowns in China due to the zero-COVID policy are dealing a serious blow to the recovery,” the OECD wrote, adding that inflation would likely hit 9 percent across its 38 member states.

It has already hit 40-year highs in Britain, Germany and the United States.

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If everyone agrees that the global outlook looks bad, they differ on quite how bad. One area where the World Bank and the OECD disagreed was in the risks of stagflation, a combination of stagnating growth, inflating prices and high unemployment last seen a half-century ago after twin oil shocks.

Stagflation occurs when consumers and businesses think that inflation is a long-term problem that won’t change and adjust their behavior in the light of it — a vicious cycle that in turn creates more inflation and slows growth.

When it last occurred in the 1970s, stagflation flummoxed economists and policymakers. You could fix inflation by raising interest rates, but that risks causing a recession. And if you increase spending to stimulate the economy, you risk raising prices.

While the OECD downplayed its risk Wednesday, World Bank President David Malpass said this week that “the danger of stagflation is considerable” and compared the current situation to the period between 1973 and the early 1980s, though noting a number of key differences.

Stagflation is worrying for everyone, but for poor countries, it’s worse. Many developing nations are reliant on exports to wealthy countries to prop up their economy, meaning a global slowdown would hit them hard.

Many of these same countries also owe enormous sovereign debts. As interest rates rise and their economic growth remains low, repaying this debt becomes impossible.

The last time stagflation hit, 16 Latin American countries stopped paying their debt payments — sparking a “Lost Decade” in the 1970s that saw living standards decline. This time around, Sri Lanka has already defaulted on its debts, sparking street protests and government collapse. Without intervention, the World Bank thinks others will default, too.

“This is the Ukraine effect: a credit line for fuel you thought could last two months now lasts one. Even if you get a bailout, you’re buying less food, less fuel, less medicine,” Alan Keenan, an analyst at the International Crisis Group consultancy, told my colleague Gerry Shih as he reported on the crisis in the South Asian country in April.

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Can a global stagflation crisis be avoided? The OECD believes so, arguing that a variety of changing global circumstances — including that wealthy nations are less reliant on low energy prices and most central banks are now independent — make this very different than in the last crisis in the 1970s.

That time around, the spark for the crisis was the 1973 Yom Kippur war and the subsequent oil embargo. As The Post’s David Lynch wrote this week, what we are seeing now “pales alongside what happened almost five decades ago. Oil prices quadrupled in 1973-1974 before doubling again in 1979-1980 amid the overthrow of the shah of Iran.”

But while this is a different situation, it isn’t all better.

Russia’s invasion of Ukraine and blockade of its Black Sea ports have locked up one of the world’s top grain-producing regions. Many poorer countries rely on these imports for food. Climate change has also hit supplies in new and unpredictable ways, with India banning wheat exports amid a heat wave and Brazil suffering a devastating drought.

In a recent interview with the New York Times, World Food Programme Executive Director David Beasley said that before the war, he was telling people the next two years would be the worst in the humanitarian world since World War II. And now? “I’m like, you know, wipe that clean — it’s worse than what I was saying,” Beasley said.

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In ordinary times, governments would step in. But after the pandemic, many developing nations already have record levels of debt. The World Bank said foreign debt in low- and middle-income countries climbed to $8.7 trillion by the end of 2020, with some nations seeing a double-digit percentage increase.

Making matters worse is another problem that they didn’t have in the 1970s: The historically high level of the dollar makes repaying debt or buying commodities even more expensive.

For these poorer nations, the benefits of globalization are weighed down by the risks of events like stagflation. As Jayati Ghosh, a professor of economics at the University of Massachusetts Amherst, wrote for Foreign Policy last year, developing nations have long been at the mercy of “the spillovers from the advanced economies’ macroeconomic policies.”

“But it is possible that they have never felt as cruelly used by this interdependence as today,” Ghosh added.

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