World Inflation and the Developing Countries

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

CHAPTER SIX
Central American Accommodation to External Disruptions

GABRIEL SIRIand LUIS RAÚL DOMÍNGUEZ

GUATEMALA and El Salvador are small, developing countries with very open economies, fixed exchange rates, and a tradition of conservative monetary and fiscal policy. Their economic structure and policies are representative of the Central American economies.1. The countries of this region, lying along a narrow isthmus with easy access to the sea, have been heavily oriented toward external trade, and economic policies have reinforced the natural tendency. Tariff barriers have remained relatively low and exchange-rate manipulation has simply been nonexistent. Parity rates with respect to the U.S. dollar have been constant for Guatemala and El Salvador since the early 1920s. Moreover, in Guatemala the purchase of foreign currency has been practically unrestricted. In both economies, expansions in the money supply can be readily diverted to imports with little effect on domestic prices or production.2.

During the international economic disruptions of the early 1970s, inflation surged from rates traditionally near zero to rates on the order of 13 percent to 19 percent in Guatemala and El Salvador. There is little

____________________
WE ACKNOWLEDGE the competent assistance of Ana Rosa Batres de Osorio in the preparation of this paper and the helpful comments of Armando Gonzales Campo, Manuel A. Chavarria, Federico Sanz y Sanz, and Juan Rafael Vargas.
1.
Except for Costa Rica, whose more ambitious full-employment policies and resulting balance-of-payments difficulties make it atypical of the region. Nicaragua and Honduras are not included in this analysis because the repercussions of the December 1972 earthquake in Nicaragua and the October 1974 hurricane in Honduras distort the economic profiles of these two countries in the 1970s.
2.
This marginal definition of openness, which is sometimes at odds with the more familiar one that relates the size of the external sector to the total product of the economy, is based on Robert Triffin's scheme for the integration of monetary and income analysis in The World Money Maze: National Currencies in International Payments ( Yale University Press, 1966), app. 1.

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