Economic stagnation exists when the total output (or output per capita) in goods and services is constant, falls slightly, or rises only sluggishly. It also exists when unemployment is chronic and increasing. Such conditions may exist in particular industries, in wider sectors of an economy, or in the economy as a whole. It may persist because the economy is dominated by unchanging traditional patterns in which there is no incentive for change. Alternatively, the economy may be held in a state of static equilibrium at low levels of income.
The economic slowdown in the major developed market-economy countries in the 1980s has reflected the impact of macro-economic policies on capacity utilization and expansion. These countries have been operating below their potential trend level, which itself has been declining largely because of the persistent gap between actual and potential output (maximum production capacity consistent with stable inflation).
There are three explanations for the slow growth of output: (a) there has been a longer-term reduction in the efficiency and flexibility of the economic structure of developed market-economy countries, such as changing attitudes to work, the proliferation of government regulations, existing tax structures, accelerated inflation, the size of government sector, insufficient technological innovation and inadequate research and development; (b) various factors favouring growth in the 1950s and 1960s have gradually disappeared, such as the possibility of shifting a substantial proportion of the work force from agriculture to other sectors and the progress in western Europe and Japan towards eliminating the technological gap between those countries and the USA; (c) the recurrent and severe macro-economic disturbances of the 1970s served to depress both the growth of output and the growth of production capabilities. Marked fluctuations in the aggregate demand, unprecedented swings of interest rates, volatility in exchange rates, heightened instability in raw material prices, volatility in economic policy have combined to heighten uncertainty and lower the profitability of investment and the propensity to invest. Uncertainty and high interest rates have inflicted particularly heavy damage on longer-term investment, thereby slowing the pace of structural change.
In the 1950s and 1960s, the global economy grew by about 5% a year, sending living standards soaring in many parts of the world. In the 1970s, growth fell to slightly above 3%, and in the 1980s it has slipped to about 2.3%. Coupled with rising population, this means that the world economy, while growing, is very fragile indeed. A key factor in stagnant economies is the lack of incentives to invest accumulated capital. Since venture capital has become internationally mobile it may have nowhere to go in the cases of regional, hemispheric, or industrialized-nation stagnation. In times of stagnation, therefore, governments may feel that only their intervention in supplying money can stimulate growth. This can be successful in the short run but can exacerbate national debts and ultimately lead to higher taxes and interest rates. Elected officials who feel their tenure depends on their solving stagnation may turn to military spending or trade protectionism or both. Thus times of little or no economic growth may be periods of high international tension.
[Developing countries] Growth has slowed substantially in developing countries. By early 1985, the economic and financial positions of most major debtor developing countries had failed to improve to the extent originally expected, despite a relatively strong cyclical upturn in the USA economy in 1984. In many of these countries the view began to prevail that the strategy in force required them to sacrifice growth indefinitely. Some African and highly indebted countries have suffered significant declines in incomes per capita. Their investments have fallen to levels at which even minimal replacement may no longer occur in important sectors of their economies. Their debts are growing, but they still face negative net resource transfers because debt service obligations exceed the limited amounts of new financing available. In some developing countries the severity of this prolonged economic slump already surpasses that of the Great Depression in the industrial countries, and in many countries poverty is on the rise.
Real output of the non-oil developing countries grew at only about a 2% annual average in the early 1980's, and almost all of any output gains realized were absorbed in reducing current account deficits due to trade losses and high interest payments. Per capita incomes have fallen in these countries, at great social cost.
[Former socialist countries] The growth of net material product fell from over 6% in the early 1970s to 2% in the beginning of 1980s. The earlier high rates were made possible by heavy investment in basic industries, notably engineering, metallurgy, electric power generation and chemicals, as well as by the abundance of labour and raw materials. How ever, as labour reserves became exhausted, investment became increasingly capital-intensive. Moreover, investment requirements in fuel and raw material exploitation rose as new deposits had to be worked. Although the external sector of the former socialist countries of eastern Europe is small, there is no doubt that the slower growth of their trade owing to recession in the developed market-economy countries and the growth of protectionism has affected the overall economic performance. In addition, increased indebtedness as a result of export credits accorded by the developed market-economy countries, together with high interest rates, has exerted pressure on the external accounts of some former socialist countries, which have faced larger annual interest payments and heavy refinancing requirements, as loans come to maturity.