I had written this article for my blog in December 2019 stating that according to the newspaper Mint dated 19^th Nov 2019, former Prime Minister and economist Dr. Manmohan Singh has cautioned that while India is not yet in stagflation territory, it would be prudent to watch out for increased risks of such an event occurring.

Last year, Moody’s Analytics, research arm of ratings agency Moody’s, said that India had entered into a stagflation phase with notably weaker growth but inflation still stubbornly high. Fitch ratings had also said that that the combination of high inflation and slow GDP growth implies that India may have entered into stagflation. Technically, it was not right to say India is faced with stagflation then in Dec 2019. But, today it looks that Moody Analytics might prove to be true….

A sharp decline in consumer spending in the European Union and the United States will reduce imports of consumer goods from developing countries. Developing countries, particularly those dependent on tourism and commodity exports, face heightened economic risks. Global manufacturing production could contract significantly, and the plunging number of travellers is likely to hurt the tourism sector in small island developing States, which employs millions of low-skilled workers.

Before the outbreak of the COVID-19, world output was expected to expand at a modest pace of 2.5 per cent in 2020, as reported in the World Economic Situation and Prospects 2020.

On 12th March 2020 Beijing News.Net has carried a news article that a range of financial institutions around the world have admitted that the corona virus pandemic would have a hard impact on the world economy. Countries around the world are facing the upcoming slowdown. US Federal Reserve has already slashed interest rates by a half-point, CNN reported. Though the likelihood of inflation is low, the threat of stagflation is for real. The global uptick in the Gross Domestic Product (GDP) could be as low as 1 percent this year, reports the Institute for International Finance (IIF) in last week of March 2020.

Stagflation is an economic cycle in which there is a high rate of inflation and also stagnation. Inflation occurs when the general level of prices in an economy increases, which means value of money falls. Stagnation occurs when the production of goods and services in an economy slows down or even starts to decline.

Stagflation, in this view, is caused by cost-push inflation. Cost-push inflation occurs when some force or condition increases the costs of production. This could be caused by government policies (such as taxes) or from purely external factors such as a shortage of natural resources or in a situation like war. Stagflation slows economic growth and creates rather high unemployment. It can also be defined as inflation and a decline in gross domestic product (GDP). But, a fact of stagflation is that real estate and commodities like gold, silver and platinum do well. Investment in these assets is a good decision.

Stagflation is costly and difficult to eliminate, both in social and fiscal terms. There are only a few examples in history and the most notable one occurred in the 1970s in the United States. The onset of stagflation In the 1970s was blamed on the US Federal Reserve’s unsustainable economic policy during the boom years of the late 1950s and 1960s. The Fed moved to keep unemployment low and boosted overall demand for products and services in the 1960s. However, the unnaturally low unemployment during the decade triggered something called a wage-price spiral. The wage-price spiral is a macroeconomic theory used to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. The wage-price spiral suggests that rising wages increase disposable income raising the demand for goods and causing prices to rise.

The OPEC oil prohibition in 1973 also contributed to the unwanted economic event in the US. Industries across the country suffered from excessively high oil prices and shortages. Demand fell to new lows and industrial output suffered.

Theories on the Causes of Stagflation

One theory states that this economic phenomenon is caused when there is a sudden rise in the cost of oil. It reduces an economy’s productive capacity. In October 1973, the OPEC (Organization of Petroleum Exporting Countries) issued a restriction against Western countries. This caused the global price of oil to rise dramatically, thereby increasing the costs of goods and contributing to a rise in unemployment. Because transportation costs rose, producing products and getting them to shelves became more expensive and prices rose even as people got laid off. Critics of this theory point out that sudden oil price shocks like those of the 1970’s did not occur in connection with any of the simultaneous periods of inflation and recession that have occurred since then.

Another theory is that the convergence of stagnation and inflation are results of poorly made economic policy. Harsh regulation of markets, goods and labour in an otherwise inflationary environment are cited as the possible cause of stagflation. Confluence of stagnation and inflation are results of poorly made economic policy. Harsh regulation of markets, goods and labour in an otherwise inflationary environment are cited as the possible cause of stagflation. Some point fingers to the policies set by former US President Richard Nixon, which may have led to the recession of 1970; he is blamed for the period of stagflation. Nixon put tariffs on imports and froze wages and prices for 90 days, in an effort to prevent prices from rising. Once the controls were relaxed, the sudden economic shock of oil shortages and rapid acceleration of prices led to economic chaos in US. While appealing to the former theory of OPEC’s ban of few nations, Nixon’s policies are basically an ad-hoc explanation of the stagflation of the 1970’s, which does not explain the simultaneous rise in prices and unemployment that has accompanied subsequent recessions up to the present.

Why are so many nations and organizations failing in the world? The reason is simple – wrong people are at the helm of affairs and they are the ones calling the shots. When incompetent people get promoted and start taking deadly decisions nations and organizations doom. Dr. Laurence J Peter and Raymond Hull in their 1969 book The Peter Principle, describe that in a hierarchy every person/employee tends to rise to their level of incompetence. And, their incompetence can cause anarchy. They get promoted mainly due to their seniority (number of years in service) or sometimes earlier because of favoritism/ nepotism. When people are promoted as far as they deserve their outputs are the best but sooner or later when they are promoted to a position at which they are not suitable, the problem begins. Managing upward is the concept of a subordinate finding ways to subtly “manage” superiors in order to limit the damage that they end up doing. Some of the damages are irreparable and hence organizations collapse.

I have great regards for our ex Prime Minister Dr. Manmohan Singh’s capability in economic reforms of this country.  He’s a great academician and thinker. In 1991, as India faced a severe economic crisis, newly elected Prime Minister P.V.Narsimha Rao surprisingly inducted the apolitical Manmohan Singh into his cabinet as Finance Minister. Over the next few years, despite strong opposition, he as a Finance Minister carried out several structural reforms that liberalized India’s Economy. But, sadly he represented the paradox as Prime Minister of India – possibly because he is so honest and is not a keen politician. He could not play dirty games. Dr.Singh failed presiding over gross dishonesty. The answer to the paradox is, however, simple: it lies in The Peter Principle. Dr. Singh is the ultimate exemplar of the Peter Principle at work.

In an organizational structure, the Peter Principle’s practical application allows evaluation of the potential of an employee for a promotion based on performance in the current job. He might be doing a good job because of various reasons and elements. He must be sharing great rapport with his boss and peers, he must be enjoying the functionality of the job, but no sooner he is promoted in the upward hierarchical position, he might turn out to be a misfit. That level is the employee’s “level of incompetence” where the employee has no chance of further promotion, thus reaching their career’s ceiling in an organization.

The employee’s ineffectiveness is not necessarily exposed as a result of the higher-ranking position being more difficult. It can simply be because of that job is different from the job in which the employee previously excelled, and thus requires different work skills, which the employee may not possess. Let me give you an example: when a good surgeon skilled, very competent both in diagnosis and prognosis gets promoted in a hospital in the administrative position as “Dean” or “Director” he might fumble or fail because of lack of administrative skills. This is not a unique example. In reality, it has been observed that technically qualified people turn out to be poor administrators.

Taking decisions of putting people back in their previous comfort level requires lot of guts. But perhaps the best way to address the Peter Principle in an organization would be to introduce a policy of relegating employees to their fitting level of competence without the stigma of failure.  If an employee isn’t working out in a higher position, allowing him to go back to whatever position he excelled in would avoid the bad effects. This would, however, require the supervisor who made the poor promotion decision to admit he made a mistake, an act not often found in the higher levels of a hierarchy.

Another reason of promoting people without checking their competence is nepotism and favoritism. Many nations and organizations suffer because of nepotism. Nepotism is the practice among those with power to influence or to favor relatives or friends. It has a considerable negative effect on Human Resources practice. It creates bad taste besides job satisfaction, quitting intention, and feeling of negativity. It creates lot of tensions and fights among people. Nepotism is indeed an unprofessional phenomenon that provides benefits merely to the family members or close friends. It paralyzes human resource practices and affects the level of satisfaction among employees. We have witnessed in history, and even today, nepotism has created Peter Principle situations in good organization which have only led them to downfall. In a recent article on Forbes.com it is admitted to promoting a culture of nepotism within its own executive stratum. While B.C.Forbes in early 19^th century remained heavily involved with the publications for rest of life, he gave top positions to his oldest sons, Malcolm and Bruce. Though Forbes did very well and grew; perhaps the publications would have done much better than they have done till date, if the right persons would handle the affairs at top.

Another solution to the Peter Principle would be paying higher pay without promotions. Employees often accept a promotion not for the power or prestige but the increased pay attached to it. If companies offer higher pay increases for excellent work within the same position, the Peter Principle can be averted to a great extent. While the employee makes more money and he’s comfortable in his competent position.

Peter suggests that a manager who finds himself encumbered with an incompetent employee has the option to get rid of that employee without firing him. Peter suggests giving employees with seniority a longer title with less responsibility. This way the employee still feels important, but is kept away from the important, burning matters, so to speak. Peter also recommends percussive sublimation as a way to get an incompetent employee out of a manager’s hair. In this method, the incompetent employee is simply promoted to another position in another division.

Perhaps the most important factor in avoiding the Peter Principle is an alert employee, one who is aware of the extent of his capabilities. The offer of a promotion is tempting, but the employee must consider the extra responsibilities and jobs that come with it. Of course, the employee can simply turn down a promotion if he feels its afar his capability, an action Peter referred to as Peter’s Parry.

The Peter Principle advises managements not to gamble with talent management and promotions. Instead take the time to ensure that the right people are in the right roles in an organization. It’s better to ensure that the person has the desire and inclination to be a leader before promoting him/her. If they don’t have inclination, don’t force it on them, but rather create career paths to maximize their contribution and receive the recognition they crave for. There are good numbers of people out there who refuse promotions because they feel burdened and are not keen on making a mess in their career. I think such people are genuine and sincere humans.

Another thing organizations need to realize is that everyone does not know how to lead. Leading requires lot of maturity, capability and an aptitude; especially the first-time managers fumble when they need to lead seniors and capable people.  Before promoting people to higher levels organizations must provide them with objective feedback and coaching early and often. If they easily shift into the role, only then should they be promoted. I think skill broadening and enhancing techniques in regular intervals through training and development is need of the hour to avoid Peter Principle.