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The ‘Developed’ Dilemma

There has been a lot of concern about the slowdown in economic growth and the rise in inflation across the globe. Oil prices had risen in the 1970s, so did inflation. However, economic stagnation and inflation did not prevail simultaneously at that period of time.

John Maynard Keynes (June 5, 1883 – April 21, 1946) and Michał Kalecki (June 22, 1899 – April 18, 1970) had come out with their respective economic theories to rescue the world from the Great Depression in the 1930s. Their main point here was that it would not be possible to sell goods at lower prices during a recession, as the level of demand, the purchasing power of the people, and investments by traders tend to fall during this period. Hence, the Government needs to increase spending in order to overcome recession. This theory has been proven to be effective over the past 100 years or so. Unfortunately, there is not much discussion about inflation in Keynes and Kalecki’s works.

Later, Alban William Housego Phillips (popularly known as A W Phillips; November 18, 1914 – March 4, 1975) claimed that the policy of boosting demand among the wealthy section of people triggered price rise. He showed whenever a Government made an attempt to achieve growth, or to generate employment opportunities quickly (or forcibly), there was a rise in the rate of inflation. In other words, when the unemployment rate was high, wages tended to be stable, or possibly fall. Conversely, when the rate of unemployment was low, wages rose rapidly. In simple terms, it can be said that the increase in supply cannot keep pace with the increase in demand. As a result, the rate of inflation increases. Then, economic depression does not exist in a country, as all surplus stock sells out quickly.

Neo-classical Economics and new Keynesian Economics had successfully analysed all these issues. However, both the theories were associated with economic growth… if there is an increase in economic growth, the price will increase or remain the same. In this context, the narrative of Japan’s economic situation is rather more relevant. The Asian nation has experienced both income growth and inflation for a long time.

There is still no universally-accepted socio-economic theory that explains how inflation can rise in the wake of a recession on the basis of other existing theories. Since it did not happen in Western economic systems, not much has been written about this. When the West is on the verge of facing such a crisis, no one is there to say something about the relation between inflation and recession. It is such a phenomenon that the economy needs new technologies to cope with it.

As it is a bit difficult for a Government to reduce direct spending, the Central Bank tends to raise interest rates in an attempt to discourage consumption (especially by borrowing loans), in case the inflation suddenly spikes or slows down. This policy often decreases the rate of unwanted growth, slightly. If there is still an increase in price, then it becomes really difficult to control the situation. At the moment, the US Federal Reserve is wondering if the economy will move in which direction, if it restricts the money supply. This can happen, if reduced demand somehow puts the supply under pressure. No one can deny the fact that lower supply triggers an increase in price. Interestingly, popular economic theories have so far said nothing about the crisis in supply. Shortages of labour and workers have been particularly observed in the Developed World for several days, despite no major change in oil prices. Surprisingly, this shortage has increased since the COVID-19 Pandemic. There are not more than one or two employees in big stores in different European countries. One has to wait a month to get a shoe sole in Germany. The acute shortage of young workforce is a harsh reality, now.

If the supply remains constant, then a decrease in demand certainly triggers a fall in price. However, there shall be an increase in price, irrespective of any change in demand, in case the supply continues to shrink. Only a few have a fair idea about this relation between demand and supply. Hence, no one explains this relation in a proper manner by referring to any particular economic theory even in the age of publicity. While some wonder whether the recession will deepen again, others believe that a decrease in economic growth could be disastrous. At one time, the International Monetary Fund (IMF) used to ask Governments to cut spending, instead of borrowing loans, in order to safeguard the ailing economies. However, this policy backfired in various Developing Nations, as the inflation rate increased with the recession. Today, the Developed World is facing this problem.

In the post-COVID-19 world, the economies of Developing Nations are turning around faster than those of Developed Nations. Stagflation is unlikely in India at the moment, as there is no shortage of labour in this South Asian country. The Indian Economy is highly dependent on the unorganised sector. Hence, salary increment is not a big issue here. Although there is hardly any possibility of an increase in food prices in near future, hike in prices of petroleum products may slightly increase the rate of inflation in India.

On the contrary, Europe and the US are experiencing a shortage in the supply of labour. It has become difficult for them to manage the situation by controlling demand. If the US and the European countries reduce demand to prevent inflation, then it would have a negative impact on supply. In that case, the rate of inflation would increase, although a steady economic growth could be maintained. Currently, the Developed World is facing two major problems: the rising oil prices and the shrinking labour supply.

Since Brexit, the movement of goods, as well as human beings, through Europe has been disrupted. Essential commodities are not available in many stores in the UK. At a time when the National Income is constantly increasing, the Rishi Sunak Government in London is trying hard to deal with price hikes. If Britain plans to increase the demand in order to boost employment opportunities, then the price, too, will jump. And if it reduces the demand, then also the price will increase. In other words, Britain and other Developed Nations are in a state of dilemma.

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