Unexpectedly high inflation, wars in key commodity-producing regions, declining real wages, slowing economic growth, fears of tightening monetary policy and turbulence in stock markets — we see all of these things in today’s world economy. These were also the dominant features of the world economy in the 1970s. That period ended in the early 1980s, with a brutal monetary tightening in the US, a sharp reduction in inflation and a wave of debt crises in developing countries, especially in those of Latin America. It was also followed by huge changes in economic policy: conventional Keynesian economics was buried, labour markets were liberalised, state-owned enterprises were privatised and economies were opened up to trade.
How close are the parallels, especially to the 1970s? What are the differences? And what can we learn from those mistakes? The World Bank’s Global Economic Prospects report, out last week, addresses these questions. The parallels are clear, as are differences. Not least, there are mistakes to be avoided: do not be over-optimistic; do not take high inflation lightly; and do not leave vulnerable people and economies unprotected against the shocks themselves and their painful legacies.
Does what we are seeing already amount to stagflation — defined as a prolonged period of higher than expected inflation and lower than initially expected growth? The answer is “not yet”, but it is a risk.