War, inflation and stagnation

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By PLINIO DE ARRUDA SAMPAIO JR.*

In the central economies, for the second consecutive year, the rate of increase in the general price level is moving towards the double-digit level

The war in Ukraine provoked a quality change in the international economic situation. The growing involvement of the United States in the conflict has irremediably shaken the foundations of the multilateral global order, accelerating the disintegration of the world economy and boosting the configuration of antagonistic geopolitical blocs that oppose the West, led by the United States, to Asia, led by China. The economic consequences of the confrontation compromised the recovery of world GDP. The specter of growth stagnation and high inflation looms large.

The negative impact of the war on the rate of profit and on international trade resulted in a substantial reversal of expectations of expansion in the world economy. The recessive trend was reinforced by the health policy of lockdown of the Chinese government and the reversal of the expansionist monetary policy of the central economies. As a consequence, estimates for the expansion of world production and international trade were substantially downgraded.[I]

Among developed economies, the European Union will be the hardest hit region. Among underdeveloped countries, the poorest countries dependent on food imports will be the most penalized.[ii] The perspective for 2023 is that the developed economies will enter into recession and that a low growth regime will be installed.[iii]

By accentuating imbalances between supply and demand in a series of strategic goods for the functioning of the global economy – such as energy products, essential industrial components, particularly semiconductors, as well as basic inputs and food –, the war in Ukraine gave new impetus to the inflationary surge that accompanied the rebound in growth, after the sharp drop in production caused by the quarantine measures in the first months of the pandemic.

In the central economies, for the second consecutive year, the rate of increase in the general price level is heading towards the double-digit level, calling into question the continuity of a cycle of low inflation that has lasted for almost four decades.[iv] The trend towards a significant devaluation of currencies against the dollar, caused by the flight to safety in the face of uncertainties in the international scenario, should put even more pressure on the destabilization of inflationary expectations.

The decision by the economic authorities of the United States and the European Union to tighten monetary policy, reversing years of injection of liquidity into the economy, will not be able to restore the price stability regime of the golden age of the Great Moderation. The ongoing inflation cannot be reduced to a problem of excess demand that would be solved with a tidying brake that, by depressing the labor market, would break the impetus for rising prices. In fact, wages have not even been able to chase prices.[v]

In addition to transitory imbalances between demand and supply, the inflation that erodes workers' purchasing power has a structural character, conditioned by large-scale changes in the dynamics of expansion of the world market, in the composition of household expenditures, in the organization of value chains on a global scale, in the behavior of the labor market and in the costs of strategic energy inputs.

The main factor responsible for the acceleration of inflation has been the total freedom of large corporations to indiscriminately increase profit margins as a way of compensating for the reduction in the rate of profit caused by the contraction of markets and by increases in production, logistics and transport costs.[vi] The unbridled commercial and financial speculation with commodities agricultural prices – a side effect of the indiscriminate deregulation of markets – exacerbates inflationary pressures.

There is no possibility of a return to the past. The segmentation of the world market into antagonistic economic blocs makes it impossible to reconstitute the pattern of production, distribution and circulation of the glory years of neoliberalism. The appeal for an orthodox shock, based on wage tightening and fiscal austerity as a means of taming inflation, only interests large corporations and the global plutocracy, which seek, by all means, to boost their rate of labor exploitation and protect their wealth. the corrosive effects of inflation.

The crisis of the global order deepens. Stagflation is a symptom of the birth pangs of a new international economic order. If the large economies of scale generated by the movement towards integration into the world market and intercapitalist competition based on wage arbitrage on a global scale led to a long downward price cycle, a process that reached its climax in the integration of China and Russia into the World Trade Organization (WTO), it is reasonable to assume that the process of fragmentation of the global order will trigger a reverse trend. The world capitalist system is in transition to a new phase, whose duration and characteristics will ultimately be defined by the development of the capitalist crisis, by changes in the international geopolitical balance, by the severity of the escalation of the environmental crisis and, ultimately, by the character of the class struggle.

In the absence of a solution based on the struggle of the working class, the policy of managing the capitalist crisis along the line of least resistance, materialized in the deepening of neoliberal reforms, should exacerbate the recessive tendency that undermines the functioning of the world capitalist system, intensify financial instability , intensify national rivalries, aggravate the environmental crisis and deepen social inequality and poverty, all contributing to the intensification of xenophobic and reactionary tendencies that progressively undermine the very foundations of the notion of res publica as one of the fundamental organizing principles of the bourgeois State.

* Plinio de Arruda Sampaio Jr. He is a retired professor at Unicamp's Institute of Economics and editor of the website Contrapoder. Author, among other books, of Between nation and barbarism – dilemmas of dependent capitalism (Vozes).

 

Notes


[I]. OECD, IMF, World Bank and UNCTAD revisions on world economic growth expectations are systematized in the infographic War in Ukraine is Setting Back the Global Economy, Statistically – https://www.statista.com/chart/27699/global-gdp-growth-projections-for-2022-pre-and-post-war-outbreak/. The World Trade Organization, in the most negative scenario, for which the conjuncture seems to evolve, predicts that international trade will grow only 2,5% in 2022 – almost half of the previous forecast. WTO, Russia-Ukraine conflict puts fragile global trade recovery at risk, in: https://www.wto.org/english/news_e/pres22_e/pr902_e.htm

[ii]. IMF, World Economic Outlook: War Sets Back the Global Recovery, April 2022, in: https://www.imf.org/en/Publications/WEO/Issues/2022/04/19/world-economic-outlook-april-2022.

[iii]. The perspective of the world economy is analyzed by Michel Roberts in Energy: the recession trigger? In: https://thenextrecession.wordpress.com/2022/07/13/energy-the-recession-trigger/; and The scissors of slump, in: https://thenextrecession.wordpress.com/2022/06/10/the-scissors-of-slump/

[iv]. In the United States, the consumer price index jumped from 1,4% at the end of 2020, to 7,0% in 2021, and to an annualized rate of more than 8% in mid-2022. inflation was even higher, climbing from -0,3% to 7,0% and 7,4%, respectively. ECLAC, Repercussions in Latin America and the Caribbean of the war in Ukraine: how to face this new crisis?, June 6, 2022 – https://www.cepal.org/es/publicaciones/47912-repercusiones-america-latina-caribe-la-guerra-ucrania-como-enfrentar-esta-nueva. On the ongoing inflationary trend see also, BIS, Annual Economic Report, June 2022.

[v]. On the relationship between inflation, wages and profit, see the article by Michael Roberts, Inflation: wages versus profits, https://thenextrecession.wordpress.com/2022/05/09/inflation-wages-versus-profits/

[vi]. The relationship between inflation, wages and profit is examined in the article by Joseph Stiglitz and Dean Baker, Inflation Dos and Don'ts, July 8, 2022, in: https://www.project-syndicate.org/onpoint/us-inflation-supply-side-causes-and-solutions-by-joseph-e-stiglitz-and-dean-baker- 2022-07.

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