The dobule whammy of inflation and unemployment is pushing the world into Economic Doldrums. it is going to require some nifty footwork to get us out of this. I write for the FPJ

The word is in a precarious position. Between the impact of COVID on the economies of the world, and the impact of war, the economies of the world have been squeezed, and the impact is beginning to hit. Many believe the worst is yet to come.

The impact of COVID on the world economies will still be counted a decade from now. We really do not now how all it has impacted us, except to know that the most marginalised sections of the world are even more vulnerable. Women in the labour force, as well as daily wage workers – both skilled and unskilled – have been impacted, as have been workers of the gig economy. Schools and healthcare have been hit, worldwide. As in person education came to a screeching halt, many children lagged behind as they could not afford either smart devices, or fast connections. It was hoped that 2022 would begin the recovery process with a focus on the must vulnerable sections of society. But that has taken a backseat to Russia’s imperial ambitions.

No sooner than the world began catching its breath in the aftermath of COVID, looking at how to build recovery in their economies, Putin invaded Ukraine, and threw all calculations off kilter. While COVID impacted global supply chains, and manufacturing; the war in Ukraine has impacted the supply of two of the key resources that fuels the world – food, and energy.

In 2020, Russia and Ukraine accounted for almost 30% of the world’s wheat production. The supply of wheat is in peril, as war lays waste to farmlands. There is a food crisis brewing, and countries are scrambling to find ways of feeding their populations in a cost-effective manner. But it is not just wheat production that is impacted. Since the start of the invasion and the war, the price of sunflower oil has gone up by over 40%. Ukraine supplies about 50% of the word’s demand, and Russia about 25%. For India, 15% of our edible oil importsare sunflower oil. And this price hike is hitting. Combine this with a steady increase in fuel prices, and cooking oil prices – you have the start of an economic crisis on your hands.

Add to this is the double whammy of rising inflation and rising unemployment in most nations. Any of us who has gone food shopping would know the overall increase in our food bills. According to the Government’s own figures inflation is up, with rural inflation higher than higher inflation.

Employment is still nebulous – with a tremendous shortage of high skilled talent, and a massive glut of ordinary graduates. If you look the data, the states with the most social disturbances – Bihar (21%), Rajasthan (29%) and Haryana (34%) – also have the most unemployment.

Traditional economic wisdom tells you that policy makers will have to make a trade-off between combatting inflation and combatting unemployment. The problem is that the measures to solve the issues of unemployment and inflation have polar opposite solutions, and the solving of one, may lead to the increase of the other.

As governments go into combat unemployment by undertaking infrastructure projects or social welfare schemes, disposable income in the household will rise. And, that extra money in the system will chase goods and services making them more expensive in the short run. As, production ramps up to meet the demand, more people will be employed, there will be more money in the system, and inflation will go up. Or so goes the theory.

On the other hand, to cut inflation, you have to make money more expensive. And, to do that, you increase interest rates. This would dampen demand for money – especially loans that help drive business. And you can combat inflation. But the flipside of controlling inflation has an impact on the appetite of businesses to borrow, kick start enterprise, and therefore on jobs. It puts a question mark on demand for homes, as homebuyers defer purchase; as it does demand for vehicles, or machinery.

While in the post second world war era, the major priority was the rebuilding of nations, and the creation of jobs and the welfare state; in the last 30 years the pendulum has swung towards the combat of inflation. Right now, central banks across the world are trying to control price rise by hiking interest rates. This is driving small businesses, households to brink of despair and poverty. The RBI’s recent interest rate hike is expected to dampen demand in the housing market, which was just coming out of a deep slump. That is many projects stalled. And many jobs crushed.

Central bankers across the world, including India, seem to be chained by the dogma of a world which was more stable. A world in which governments dominated economic policy and trade. And a world in which the potential of conflict seemed non-existent. The world has changed. And the need of economics to change with the times has never been greater than now.

What is needed now is bold thinking. The need is not just to rekindle the economies, but societies facing chaos because of rising unemployment. The dignity of labour and the labourer has never been lower in the world. Graduates have never faced a bleaker future in the last 70+ years. What the economy needs right now, is not the throttling of demand but the creation of jobs, which will soak up the demand – and policies that enable this. Not more interest rate hikes.