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Opinion

Stagflation

FIRST PERSON - Alex Magno - The Philippine Star

A dreadful word has been resurrected from the mid-seventies in the present economics conversation: stagflation.

Stagflation happens where inflation spikes even when there is no growth. Normally, inflation is induced by rising demand due to economic expansion. This is the reason why the newfangled term had to be coined.

The abnormality occurred in the mid-seventies after oil exporting countries banded together to form the OPEC cartel. The oil exporting countries felt they were being screwed by an international system where cheap prices were paid for a finite commodity. Through the workings of a cartel, exporting countries jacked up prices several-fold.

The sudden increase in oil prices forced the global economy into a deep recession. Both demand and spending were redirected to pay for higher oil prices. At the same time, higher fuel costs were pushing up prices across the board.

Pushed into a recession, the major economies began shedding jobs. In turn, jobs losses further cut into consumer demand. That was a vicious cycle.

On the other side of the balance sheets, the oil exporting countries were flush with cash they were not ready to spend (the ostentatious consumption of the sheiks notwithstanding). A name had to be found as well for this sudden cash surge: petrodollars.

Petrodollars were channeled into the international banking system. With most economies in recession and major industries rapidly downsizing, the banks found few borrowers for the overflow deposits of petrodollars. Without borrowers, the cash could kill the banks. They were paying interest on deposits they could not lend out.

To help out the banks, multilateral institutions convinced governments to borrow and invest in “development.” This set the stage of the debt-driven “development state” that provided fertile conditions for unaccountable authoritarian leaders.

The “development state” model itself found its own crisis in the eighties. Many countries that heavily borrowed, the Philippines included, found they had not grown their economies enough to pay back their debts.

The Philippines was one among many countries that began defaulting on their debt. This produced a new crisis for the international banking system. Again, the multilateral agencies stepped in and “convinced” developing countries to restructure their debt and undertake austerity measures (“structural adjustment” they called it) to support their debt repayments.

For many years, the heavily indebted countries had to cut back on economic investments to plow money to debt repayment. This led to underinvestment in needed infrastructure and reduced social services, including upgrading the educational and health systems.

There were other aberrant events that accompanied this process. In the US, for instance, unruly gangs began attacking Japanese cars. The American car industry was then producing gas guzzlers unfit for the new fuel price regime. Consumers shifted to the more economical Japanese cars. American “patriots” saw this instead as a foreign industrial invasion.

Everywhere, governments came under strong domestic pressure to adopt protectionist policies. Trade protectionism served to further deepen the global recession. The developing countries suffered the most from this turn of events.

Replay

Most countries, the Philippines included, will likely miss their growth targets this year. The biggest reason for this is the spread of the more contagious Delta variant of the coronavirus.

Spiking infection rates forced new rounds of restrictions, strangling economic activity.  Travel and health restrictions have caused congestion along the major trade routes. Supply chains have been cut in many places. Consumer confidence is simply not there.

Earlier this week, the Philippine Statistics Authority reported last month’s inflation rate at 4.9 percent. The elevated inflation rate is due largely to costlier food items.

Meanwhile, the latest independent projections of our economic growth this year brings down the forecast to 3.5 percent. Even that might be a fighting target. The MECQ imposed on the NCR last month was due to be lifted yesterday and replaced with a complex scheme of “granular lockdowns.”

At the last minute, however, the return to GCQ was postponed another week. This left many small businesses expecting to resume commercial activity in a lurch. Meanwhile, the daily count of new Covid-19 cases remains alarmingly high.

The wild card remains to be the emerging variants of the deadly virus. In the midst of battling the Delta variant, we really do not know what other variants might develop after it.

The nightmare scenario remains to be the emergence of a variant that is resistant to the protective effects of available vaccines. Such a new variant could negate the vaccination program we hope will be key to unlocking the economy.

We now have an unseemly situation where the inflation rate is much higher than the expected growth rate. This is not a good sign, obviously.

The economic dynamics we are experiencing are not unique. Across the globe, economies are battling high inflation and low growth. In turn, this pushes up unemployment and discourages investments in new productive capacity.

The classic Keynesian solution to this situation is to pump up government spending to raise demand growth. But to stimulate the economy in this way requires more borrowing to stimulate domestic market activity. The peril here, as it was in the mid-seventies, is to push up the national debt to unsustainable levels.

With the channels of trade partially blocked by restrictions on movement among our trading partners, we cannot rely on external commerce to stimulate the domestic economy. At any rate, if health restrictions prevent workers from making it to our factories, we cannot take advantage of trade opportunities even if they were there.

The politicians we will be hearing from more frequently will promise recovery from our economic slump. But the real policy options are complex.

STAGFLATION
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