Canary Wharf. Photo: Bex Walton on Flickr Canary Wharf. Photo: Bex Walton on Flickr

In this critical assessment of an important new World Bank Report that attempts to make sense of the crisis and save capitalism from a global slump, John Clarke argues the real solutions will have to be won in struggle

In June, the World Bank issued a report that warned of the major recessionary dangers facing global capitalism and that offered some approaches that might limit the risks. Now, a new work, strikingly entitled ‘Is a Global Recession Imminent?,’ explores the dangers of the present situation by examining key points of comparison with previous recessions and downturns. Coming as it does from such an influential institution, the latest study is of considerable interest. It offers some valuable insights but the things it gets wrong or fails to appreciate are also of considerable importance.

The report identifies a rather understandable common feature of all of the five global recessions that have occurred since 1970. Each of these was ‘preceded by a significant weakening of global growth in the previous year.’ At the same time, ‘all previous global recessions coincided with sharp slowdowns or outright recessions in several major economies.’ In this regard, it is noted that ‘recent forecast downgrades are partly a reflection of data showing weaker global growth’ and that, in particular, ‘forecasts for the United States, euro area, and China have recently been lowered significantly.’

Supply shocks and inflation

While all of the post 1970 recessions are considered, the report justifiably focuses on those that took place in 1975 and 1982. The first of these ‘followed a shock to oil prices from the Arab oil embargo initiated in October 1973. The embargo ended a year later, but the supply shock and associated sharp rise in oil prices triggered a substantial increase in inflation, which occurred after a period of rapid global growth and hikes in other commodity prices, and a significant weakening of growth in many countries.’ The points of comparison with the present crisis situation, with major supply shocks following the pandemic and the invasion of Ukraine, are very obvious.

The 1982 recession, on the other hand, ‘was triggered by a sharp tightening of monetary policies in the United States and some other advanced economies to reduce inflation.’ The similarities with the present state of affairs are even more striking in this regard. The report goes on to suggest that ‘Policy responses to the 1975 and 1982 global recessions are informative in the current context of globally synchronous tightening policies.’ It wants to see a more vigorous assault on inflation than in ‘75, without overdoing things, as in ‘82.

The report expresses confidence that it is possible to find a course between these two reefs. It suggests that, ‘making necessary policy adjustments in a timely fashion is essential to containing inflationary pressures and reducing the output costs associated with delayed policy interventions.’ The authors tell us that ‘Over the past three decades, many central banks have set their monetary policy instruments to achieve low inflation targets and have established credible track records of achieving them.’ They are sure that such containment can be accomplished without devastating economic consequences, comparable to the recession of the 80s.

The report sets out ‘three plausible scenarios for the global economy over 2022-24.’ In the first and most hopeful of these, ‘we assume that headwinds from commodity markets and supply-chain disruptions subside.’ Under these conditions, relatively mild corrective medicine suffices and, after a period of moderate downturn, economic activity picks up.

The next step down is the ‘sharp downturn scenario’ that would result from more stubborn inflationary pressure. This would see ‘a steeper-than-anticipated policy tightening’ and result in ‘a global downturn (in per capita terms) on par with the one in 2001 and worse than those in 1998 and 2012.’ Not surprisingly, beyond this lies the ‘global recession scenario’ under which inflation doesn’t come down as hoped and policymakers engage in ‘larger-than-expected, synchronous, policy tightening.’ Under this, ‘the global economy would experience a recession similar in magnitude to the one in 1982.’ As I have already stressed, however, the report is written in the spirit of ensuring that conditions of global slump are prevented.

There are a number of considerations that emerge from these World Bank deliberations on the state of the global economy. The first of these is that, even under the assumptions the report relies upon, the inflationary problem remains a very tough nut to crack indeed. Even under their second scenario, with more aggressive measures employed, there is ‘the possibility that a further increase in policy rates globally may not be sufficient to bring inflation rates back to target in a timely fashion.’

Flowing from this, as with the previous report coming from the World Bank, we may note a distinctly exaggerated sense of the capacity of the ‘policymakers’ to manage their way through the contradictions of the economic system they oversee. In practice, the assumption of a prudent and sensible cooperative effort to find a viable path between shattered price stability and catastrophic economic downturn is quite illusory. There simply isn’t a consensus among those who set and influence policy decisions and, indeed, there are sharp divisions at play.

‘Creative destruction’

Even as low interest rates were put in place, in a largely unsuccessful effort to stimulate productive activity during the period following the Great Recession, some hawkish elements questioned the viability of this approach. Since the inflationary crisis has emerged, the call for very aggressive measures has intensified and the hawks have been gaining ground. A clear majority of a group of mainstream Canadian economists that the Reuters news agency recently polled ‘see signs fast rising prices are becoming entrenched and warn a recession may be needed to avoid a spiral.’

Views such as this are on the ascendancy among the enablers of capitalism and the hawkish perspective is becoming dominant. This approach wouldn’t settle for a limited form of induced downturn, but would deliberately generate a full-blown round of ‘creative destruction’ that would see ‘a significant destruction of capital values,’ at the cost of huge levels of unemployment and a disastrous assault on working class living standards, in order to ensure profitability. This, in turn, points to contradictions and factors that drive crises within capitalism that go far deeper than the present supply chain disruptions and inflationary effects that are unfolding at present.

When it comes to the prospect of weathering the supply shocks and restoring stability to the global economy, it is clear that the report underestimates the implications of what lies ahead. The pandemic may even yet produce further economic disruptions. The impacts of global rivalry on display in Ukraine will continue to pose a threat to economic well-being and stability. As to the effects of climate change on production and trade, they can only intensify. The supply shock is emerging as another ongoing element of the multi-layered crisis of capitalism.

Finally, though we couldn’t expect it from a World Bank report, the writers have nothing whatever to offer when it comes to the societal context and implications of the economic malaise they seek to cure. For billions of people, the inflationary problems they muse over are playing out as a devastating cost of living crisis that is creating conditions of literal starvation in the poorest countries. All three of the report’s ‘scenarios’ are about restoring stability to capitalism and calming its inflationary upset by attacking workers and hard-hit communities.

The high placed deliberations and policy debates that this report reflects are of interest only in the sense that we need to understand the thinking and plans of our class enemies. The real solutions we need, however, won’t be found in studies that are issued by the institutions of global capitalism. They will have to be won in struggle.

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John Clarke

John Clarke became an organiser with the Ontario Coalition Against Poverty when it was formed in 1990 and has been involved in mobilising poor communities under attack ever since.

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