World Inflation and the Developing Countries

By Surjit S. Bhalla; Gabriel Siri et al. | Go to book overview

CHAPTER TWO
Real Economic Effects of World Inflation and Recession

WILLIAM R. CLINE

THE SHOCKS of worldwide inflation and recession in 1973-75 brought a number of real economic losses and gains to the developing countries. This chapter examines these effects in four major areas: terms of trade, capital needs and availabilities, external debt, and the distribution of income among nations. The nominal effects of world inflation transmitted into developing economies through externally induced monetary expansion and price rises are examined in chapter 3.

Commodity prices are of fundamental importance to developing countries, given their reliance on commodity exports. The ratio of their export prices to import prices, or terms of trade, has major implications for their economic well-being. Moreover, increased fluctuation in commodity prices can mean disruption of their development. This chapter examines changes in the terms of trade of fifty-two developing countries from 1971- 72, the two years preceding world inflation, to 1975. To determine how oil price increases influenced these countries' terms of trade in this period, it compares the total changes to changes in terms of trade excluding oil. It also examines commodity prices to determine whether fluctuations were greater under the unsettled worldwide economic conditions of the 1970s than in the 1960s.

In the 1970s, development assistance from the Organization of Petroleum Exporting Countries rose sharply but aid to developing countries from traditional donors stagnated. With the trade gap serving as a measure of requirements, the changes in export and import values caused by rising prices of traded goods during the inflationary years and the deviation from export trends in the 1975 recession are calculated for fifty-two developing

I AM grateful to Stephen Harvey and Marion Layton for their fine research assistance.

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