Debt crisis in the majority world under the shadow of global stagflation: Echoes of the early 1980s?

Panelists

• Professor Daniela Gabor, University of West England, Bristol
• Dr Richard Itaman, Jesus College, Cambridge
• Professor Jan Kregel, Tallinn University of Technology
• Daniel Munevar, UNCTAD, Geneva

The Roundtable will be moderated by Professor Andrew Fischer (ISS) and Dr Servaas Storm (Delft University of Technology)

The global South is amid a debt crisis of a breadth and depth not seen since the early 1980s. While the crisis had been on slow burn for several years preceding the more proximate shocks of COVID and the war in Ukraine, the latter shocks have exacerbated the crisis in often sudden and dramatic ways. Severe austerities have re-emerged as the conventional response, often at first self-imposed by countries in failed attempts to avoid turning to the IMF. Moreover, despite assurances from the IMF over the last two decades that it had turned a page on structural adjustment programmes, these appear to have returned with a vengeance. Punitive programmes are now active in an increasingly large number of countries, with severe consequences for development.

Yet most of the focus in the global North has been on stagflation. Supply-side disruptions in global commodity chains, wars in key commodity-producing regions, slowing economic growth, fears of tightening monetary policy and turbulence in stock markets and above-target (and rising) inflation are the dominant features of the world economy today. To many observers, these features eerily resemble the ‘stagflation’ of the 1970s, which, as is well known, did not end well. The ruthless monetary tightening in the US by Paul Volcker’s Federal Reserve, combined with brutal labour market deregulation, brought down U.S. inflation, but at the cost of two successive American recessions, a global recession, and a wave of debt crises in developing countries, especially in Latin America and Africa, which morphed into two decades lost to economic development. Ever since, ‘stagflation’ has become synonymous with crisis, doom and macroeconomic policy failure—an outcome that macroeconomists now want to avoid at all costs.

In response to the global inflation and decline in economic growth, central banks in the OECD economies and in the Global South are raising interest rates. Many observers, for whom low and stable inflation is the cornerstone of stable economic growth, argue that central banks are not yet acting aggressively enough and by being soft healers will be making stinking wounds. According to the World Bank (2022) and the Bank for International Settlements (2022), a key lesson from the 1970s is that central banks need to act in a pre-emptive manner to avoid a loss of confidence in their commitment to maintaining low inflation, and that delaying the necessary monetary tightening heightens the likelihood that even larger and more costly future policy rate increases will be required, particularly if inflation becomes entrenched in household and firm behaviour and inflation expectations.

This roundtable discussion confronts these established views, as promulgated by the World Bank, the IMF, and the Bank for International Settlements, especially regarding the impact of Northern monetary policies on the rapidly cascading Southern debt crisis. Cutting through the hype and hubris, our panellists will challenge the persistence of economic orthodoxies that have reigned for more than four decades, with the conviction that monetary policy is too important to be left to central bankers.