World Inflation and the Developing Countries

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

CHAPTER THREE
The Transmission of Inflation into Developing Economies

SURJIT S. BHALLA

IN 1973 and 1974 inflation spread worldwide, affecting small and large countries, developed and developing. Most developing countries had gone through periods of high inflation in the past; the extraordinary feature of the 1973-74 inflation was its simultaneous spread across countries. This chapter examines the role of internal and external factors in the inflation experiences of thirty developing countries.

The simultaneous occurrence of inflation in the developing countries seems to have arisen from worldwide inflation. The principal forces in the transmission of this external inflation were the steep rise in international reserves flowing into developing countries in 1972, a sharp increase in prices of imported commodities in 1973 and 1974, and the pressure that generally poor harvests in 1972 put on food prices. The examination of the impact of the Great Inflation on twelve Latin American, eleven Asian, and seven African countries covers oil exporters, producers of primary goods, and semi-industrialized countries. Conclusions are drawn principally from the ways that individual countries are affected by outside impulses. Aggregate averages, weighted when appropriate, are used sparingly to supplement the analysis.1.

I THANK William R. Cline for his help and guidance in the preparation of this chapter and Robert Z. Lawrence for extensive discussions on the subject matter. I also thank Babi Gupta and Linda Likar for their very able research assistance.

____________________
1.
The appropriateness of weighting depends on the variable being analyzed. For inflation, when a major country avoids high inflation a weighted index will understate the phenomenon of universal inflation, whereas the inclusion of a country suffering from hyperinflation will make unweighted averages meaningless. Therefore, both weighted and unweighted averages must be taken into account. For variables such as an index of industrial production, weighting is clearly preferable.

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