In early January 2003, Robert Lucas, President of the American Economic Association in his Presidential address on the occasion of the one hundred fifteenth meeting held in Washington D.C. said " The central problem of depression prevention has been solved, for all practical purposes, and has been solved for many decades.". Roger Bootle one of the foremost economist of the City of London and a former Specialist Adviser to the House of Commons Treasury Committee for two decades (1998-2017) also wrote a book titled "Death of Inflation" (1996) which became a best seller at the time.
Despite such optimistic predictions, it now appears that the global economy is facing slowing growth and rising inflation, raising the concerns of a 1970s style stagflation. The global economic and financial outlook for years ahead has rather deteriorated due to the fear of the US and other advanced economies descending into recession and financial turmoil. In fact, several prominent Wall Street institutions have now decided that a recession is their baseline scenario as well as the Bank of England. Even Roger Bootle is now seeing signs of inflation returning.
The global economy is faced with worrisome effects of the pandemic and rates of inflation at levels not seen since the 1970s. As such, the major central banks like the US Federal Reserve, European Central Bank, Bank of England and others have started to tighten their monetary policy, reversing the easy-money policy that was in place over the last two decades. Now there is a growing fear that stagflation which is viewed as a relic of the 1970s could make a comeback. The global economy is now faced with extraordinary economic challenges.
In fact, the World Bank in its latest "World Economic Prospects" report issued on June 7, 2022 warned that the global economy was falling into a prolonged period of stagflation - lower growth and even outright contraction lasting into the foreseeable future. But it is evidently clear from the report that stagflationary trends were well underway even before the outbreak the Russia-Ukraine armed conflict in February this year.
Stagflation is an economic phenomenon reflected in a combination of stagnating growth, rising inflation and high unemployment. Stagflation is worrying for every one but for a developing country like Bangladesh it is even worse because the country is reliant on exports to wealthy countries and regions like the US, the UK and the EU. Economic slowdown in these countries will hit Bangladesh hard. It is also to be noted that all developing countries including Bangladesh are always at the receiving end of the advanced economies macroeconomic policy consequences.
Many developing countries like Bangladesh with significant proportion of population living under the poverty line are increasingly becoming unable to afford nutritional diet and can not meet basic health care expenses due to rising price levels. FAO Director General Qu Dongyu said, "We are deeply concerned about the combined impact of overlapping crises jeopardizing people's ability to produce and access food, pushing millions more into extreme levels of poverty".
It is not only food price hikes but also rising fuel prices that are the principal drivers of the current inflationary surges around the world, including Bangladesh. Rapidly rising food prices are not only causing widespread human sufferings but also could lead to destabilising the political, economic and social order as in Sri Lanka.
A cost-of-living crisis is brewing in Bangladesh now. It is marked by the rising cost of everyday essentials like food and fuel. Prices of these products are rising much faster than average income. Millions of households across Bangladesh now continue to grapple with rising prices of everyday essentials as the cost of living crisis showing no sign of slowing.
Prices, especially food prices have been steadily rising since the second quarter of this year. Bangladesh is now facing one of the most difficult cost of living crisis and many are wondering why prices are rising. In fact, rising price or what is generally termed as inflation has emerged as one of the most serious problems now facing the country.
According to the 2016 Household Income and Expenditure Survey of Bangladesh, households at the bottom 5 per cent of the income distribution spend 62.5 per cent of their income on food while food consumption constitutes only about 33.7 per cent of total expenditure for those belonging to the top 5 per cent. Inflation in general and food inflation in particular hits much harder the poorest segment of the population.
Many supposed causes of inflation are often advanced. They include excess demand, excess growth of the money supply, excess government spending, government regulation, falling productivity, excess wage demands, high cost of energy imports to name a few. Now, of course, this list also includes the Covid-19 pandemic-caused shocks to the global economy, disrupting supply chains and contributing to major shipping delays.
However, the most important of all now is the US led NATO proxy war against Russia in Ukraine and the US and EU sanctions on Russia which have negatively impacted on both food and fuel supply thus further pushing up prices. Overall, the argument is that the current inflationary pressure around the world, including Bangladesh is being primarily driven by the supply-side shocks.
Inflation is an economic phenomenon whose nuances, however, remain a mystery even to economists. Also, forecasting inflation is especially a very tricky business, and economists are in particular very bad at it. Charles Goodhart, a Professor at the LSE and a former member of the Bank of England's monetary policy committee made a remarkable statement in a ECB get-together that "the world at the moment is in a really a rather extraordinary state because we have no general theory of inflation". The statement encapsulates the core of the problem for central banks including Bangladesh Bank to deal with inflation effectively.
Goodhart argues that the two competing theories-- the Friedmanite monetary theory and the Philips Curve theory that dominated the debate on inflation in the 1950s through the 1970s have broken down empirically over the last three decades.
The replacement as adopted by central banks in the developed world, Goodhart describes it as a "bootstrap theory of inflation": that is if people expect high inflation, they will behave in ways that reinforce inflation and vice versa. In other words, as long as inflation expectation remain anchored, inflation itself will remain anchored. He considers inflation expectations as very backward looking and people tend to extrapolate their recent experience into the future.
Meanwhile, some academics following the Marxist tradition also argue that the monetarist and Keynesian explanations of inflation, especially inflation under conditions of stagnation as happened in the 1970s are inadequate. They put forward an extended critique of the two most influential mainstream theories of inflation by providing their alternative theoretical position on inflation - the mark-up pricing theory of inflation and the conflict theory of inflation within the ambit of a monopoly capitalist economy.
As monopoly capital pursues the highest rate of profit that can be sustained over the long run, the monopoly pricing mechanism, therefore, in a period of prolonged stagnation, as happened in the 1970s, can set off an inflationary process which will be perpetuated through the interaction of monopoly capital and the working class. Therefore, the model incorporates both mark-up pricing and class conflict to explain inflation that is consistent with profit maximisation by capital.
It is generally agreed that the role of monopoly power as a cause of inflation within the capitalist market system has not received much attention, let alone the neo-liberal version of the same. In fact, linking monopoly power to inflation would be labelled as "blasphemy" by neo-liberal economists.
However, economists at the Federal Reserve Bank of Boston recently published a report which concludes "the increase in industry concentration over the past two decades could be amplifying the inflationary pressure from current supply chain disruptions and tight labour market". The authors, it is be noted, are not arguing that monopoly power causes inflation, but it is "an amplifying factor" that allows companies to pass on more of the costs of supply shortages, energy shocks, and labour market tightness.
But the Washing Post, the Washington establishment mouthpiece, in an editorial dismissed the idea that monopoly has anything to do with inflation. Former US Treasury Secretary Larry Summers also argues that inflation has more to do with supply chains, record pandemic-driven demand and increasing wages for workers. There is a general recognition that in the US inflation is running at a much faster rate than wage gains average Americans are achieving. Also, some studies in the US found that 60 per cent of the increase in inflation was going to corporate profit indicating there is a profit inflation spiral. In fact, Labour share of national income (GDP) has been declining in advanced economies since the1980s.
Pure monopoly power is seldom found in the real world, just as the theoretical idea of pure competition and that applies to Bangladesh also. The way the monopoly power causes inflation in Bangladesh is through what can be described as cartelised monopoly. The cartelised monopolists, via jointly beneficial mutual action, have a great deal of freedom and independence over either setting selling price and the buying price of the product in question e.g., rice, chicken, egg or cooking oil.
It has long been recognised that the non-competitive market structure known as the "business syndicate" comprising numerous middle-men, wholesalers and importers is a major factor in contributing to price hikes in Bangladesh. They do so by creating cartels and hoarding essential food items like rice and cooking oil. Such cartels are quite powerful in Bangladesh and are capable of controlling supply in the market or fixing prices.
They also take advantage of the weak consumer protection laws in the country. Either way, they are capable of earning substantial excess profit what is termed as economic rent in economic textbooks. In recent times the authorities in Bangladesh also found such business syndicates (cartelised monopolies) responsible for rapid prices rises for many daily consumer goods like poultry, eggs, cooking oil etc.
Cartelised monopoly selling power as it exists in Bangladesh results in higher consumer prices since buyers have no viable alternatives in terms lower priced substitutes. The cartelised monopolists in Bangladesh avoid price competition and supply at a level which is less than would be the case in the workably competitive market. In fact, lower output and higher prices is also textbook monopoly pricing behaviour.
Covid-19 induced supply shortages have provided the perfect time for these cartelised monopolies in Bangladesh to exploit their pricing power. Such opportunistic behaviour leads to inflation. In essence, the cartelised monopolist pursues predatory pricing that is significantly contributing to driving inflation up in Bangladesh.
Such a behaviour enables the cartelised monopolist in Bangladesh to charge a consumer price which exceeds cost plus normal profit which means they can amass huge economic rent which leads to price escalation, more precisely rising inflation. In fact, there were demonstrations in Dhaka asking the government to break up the "business syndicates" to stop market manipulation of essential goods and to introduce ration cards for the poor.
More alarmingly these cartelised monopolists in Bangladesh can effectively frustrate the government's anti-inflationary policies. When the government uses fiscal and monetary policy tools to curb inflation, the cartelised monopolists by using their market power still can raise prices even when they face declining demand.
At a time when the Bangladesh economy is faced with rising inflation, high unemployment, lagging productivity and lack of competitiveness as reflected in rising imports, rising food inflation is of major concern for the government. According to the ADB, 20.5 per cent of population in Bangladesh live under the national poverty line as estimated in 2019. This figure now stands much higher due to the impact of the pandemic. According to a survey published at the end of the last year, it was estimated that the pandemic had pushed 32 million people into poverty in the country. Inflation in urban areas rose even faster than the national average. That definitely tells us that the cartelised monopoly power must be dealt with decisively.