In most transition models, the economic downturn is organically linked to inflation, generating stagflation as a stable characteristic of the transition economy. In transition economies, the same causes give rise to both recession and inflation, causing a stagflationary "trap" phenomenon. In the transition economy, there is not only the principle of mutual suppression of inflation and recession, as in the "normal" market economy but also the principle of their mutual complementarity.
This is not just a question of stagflation (recession + inflation), but of the state of the economy, in which both of these factors mutually condition and strengthen each other. The increase in demand does not lead to an adequate increase in supply, i.e. does not provide for overcoming the recession, only increasing the inflation rate. Deflationary policies, while reducing demand, do not provide adequate reduction of inflation, but entail a significant deepening of the recession, making it impossible to continue the deflationary policy. Stagflationary "trap" arises in the transition economy in cases when: 1. The role of corporate and monopolistic regulation in the economy is more important than the regulatory power of the state and self-regulation of the market; 2. The institutional structure of the state and the market is weakened or has not yet developed; 3. Significant "imprints" of the command and control and bureaucratic system remain in the economy: significant depth of disproportions, non-market stereotypes of behavior of economic entities, strong positions of the bureaucracy in the economy, etc. The depth of the stagflationary "trap" and the speed of exit from it depend on: - the intensity of the factors listed above; - from non-economic factors, among which is the presence of a well thought-out strategy of transformational reforms and consistency in the implementation of selected economic policy. In theory, there are 2 exits from the stagflation trap. Moving forward is an attempt to overcome difficulties by eliminating loss-making industries and focusing on private sector development, creating new high-performing jobs, restructuring and increasing export revenues. Proponents of moving forward can also be divided into two groups. The former belief in the effectiveness of market mechanisms and private initiative, believing that all they have to do is wait for domestic economic forces to pull it out of the crisis. This option to emerge from the stagflationary "trap" is to strengthen, first and foremost, market self-regulation mechanisms while reducing the role of corporate and monopolistic regulation accordingly. This can be achieved through a rigorous course of deep economic liberalization ("shock therapy"), in some cases complemented and mitigated by some social policies.
The latter, fearing social instability and an excessive drop in output, allow for active participation by the State in economic life, with steady progress. This option is primarily through the strengthening of government instruments to regulate the market economy, but also through a reduction in the scope for corporate monopolistic regulation.
Both options for moving forward imply the effective functioning of institutional and legal structures of society, as well as political stability. They differ not only in the weight of different methods of market regulation but also in the social price that is paid to get out of the stagflationary "trap".
The first option is inevitably associated with a spike in unemployment and a fall in real wages, with high unemployment and low wages even after leaving the trap. The second option has the same consequences, but in a mitigated form, through the increased use of elements of public paternalism in social policy. Without these prerequisites, a focus on shock therapy could lead to deep economic degradation without accelerating the exit from the trap. Of course, an indispensable condition for a quick exit from the stagflationary "trap" under these prerequisites is an effective policy of promoting the formation of mechanisms of modern market self-regulation (which ensures the "inclusion" of the mechanism of the traditional capitalist cycle) and ensuring institutional and political stability. It should be noted that all this becomes possible with a timely change of attitude to the liberalization shock of a more active and socially responsible policy of state regulation (which politically corresponds to the transition of power from right-wing radical parties to the left-wing opposition).
Accordingly, the slower the exit from the stagflationary "trap" is, the weaker the prerequisites for transition to a market economy have been developed, the more fragmented and inconsistent the formation of mechanisms of market self-regulation, the stronger the institutional and political instability, etc.6