World Inflation and the Developing Countries

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

importing food to offset shortages in 1972-73 explain the relatively strong role that food shortages register in statistical tests of inflation in 1972-74. One factor that had no role in initiating the inflation boom was the OPEC oil price increase, though oil was of course one of the influences in the rise of import prices during 1971-75.

Both the developed and the developing countries were emerging from a recession in 1971. This recession was especially severe for the industrialized world. The synchronous expansion in real output, which was of relatively high magnitude in 1973, probably caused some pressure on prices. In the developed world, changes in output have a strong role in explaining inflation. Surprisingly, both individual and cross-country analyses indicate their role is insignificant in the inflation of developing countries. One reason may be the predominantly agricultural basis of most of these economies. Thus, excess demand may have less impact on prices than do weather, technology, and the like.

Expansion of the money supply seems to have preceded the inflation boom. In 1972, when consumer prices were relatively stable, money supply expanded at an unusual rate. Neither wage inflation, budget deficits, nor food bottlenecks were major causes of the liquidity problem, though changes in external reserves were. Some role can be ascribed to trade in causing the reserve increase, but financial borrowing from the capital market (Eurodollars), which was virtually nonexistent in the late 1960s, almost equaled the reserve changes in the early 1970s. And those changes were strongly correlated with money expansion.

The monetarist model of inflation in the thirty developing countries examined in this chapter indicates that the money changes had a strong and systematic effect on the price level. Structural factors--food bottle- necks and particularly changes in import prices--were also significant. The inflation boom seems indeed to have been imported.


Appendix

Table 3-20 reports the results of the monetarist models of inflation (equations 2 and 8) for twenty-nine of the thirty countries investigated in this chapter; Indonesia is not included because complete data are not available. The results of the real activity models are not presented because in most cases they are not significant for either the basic or the hybrid model.

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