World Inflation and the Developing Countries

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

Conclusion

For most developing countries the worldwide inflation and recession of 1973-75 did reduce the terms of trade, but only because of oil price increases. Excluding oil, terms of trade improved for most developing countries from 1971-72 to 1975. The 1970s were a period of heightened fluctuation in the real terms of trade for raw materials exports.

Price inflation did not cause non-oil-exporting developing countries' capital needs to rise until 1975 (when export prices had backed off for some commodities and yet import prices of manufactured goods were continuing to rise). Even then, the magnitude of increased capital requirements was more than offset by the increased availability of capital, even of concessional aid alone for low-income countries. Indeed, the massive borrowing by developing countries to cover sharply higher trade deficits in 1974 and 1975 appears to have resulted primarily from their import and growth policies rather than from inflationary increases in the prices of traded goods per se.

World inflation conferred a major windfall gain on the developing countries by eroding the real value of their external debt (when measured by the erosion of the present discounted value of future repayments as well as by the more common measure of erosion of outstanding nominal debt). Inflation also eroded the real value of developing countries' holdings of dollars as foreign reserves, however. The net effect was still a large windfall gain, on the order of $13 billion in 1972 prices.

The Great Inflation had very little impact on the distribution of world income. From 1972 to 1975, changes in prices of traded goods had an almost imperceptible equalizing effect on income distribution. Even hypothetical radical price increases for the whole gamut of commodities exported by developing countries appear to have such an extremely small impact on income distribution that a concerted scheme to raise prices cannot be justified as a means of improving the world distribution of income.

Lerner conditions are not met), devaluation will not improve the trade balance while import quotas will. But even in this case (presumably rare), the imposition of quotas will have a domestic inflationary effect (by reducing supply).

____________________
will aggravate external inflationary impulses by less than will increased protection.

-47-

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