World Inflation and the Developing Countries

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

CHAPTER EIGHT
Policy Response to External Fluctuations

WILLIAM R. CLINE

IN THE GREAT INFLATION of 1973-74 and worldwide recession of 1974- 75, developing countries fared relatively well, although the external shocks complicated their economic planning. Their growth rates were high during the worldwide boom of 1973 and did not fall far in the subsequent recession; they obtained substantial windfall gains from the inflationary erosion of their external debt; capital flows to these countries, including concessional assistance (especially from OPEC countries and Europe), more than kept pace with externally provoked changes in their needs; and despite large changes in relative prices, the world distribution of income stayed practically unchanged (or became slightly more equitable).

The developing countries that do not export oil did experience a decline in terms of trade from 1971-72 to 1975. However, when oil is excluded from the calculation of trade values, the great majority of developing countries experienced an improvement in their terms of trade in this period. The source of the overall decline was not inflation in industrial countries but the actions of the Organization of Petroleum Exporting Countries. Terms of trade also became more unstable in the 1970s as commodity prices gyrated more wildly, making planning more difficult.

Inflation was almost universally transmitted into the domestic economies of developing countries; those with traditional price stability faced socially disruptive inflation for the first time, while those with their own inflation found it aggravated by external shocks. Higher prices for imported commodities and expanded reserves and money supply were the principal transmission channels of world inflation. The first of three distinct phases in the international cyclical shocks was the flood of foreign capital into many developing countries in 1971-73, in some cases coupled

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