Inflation and the Development of Underdeveloped Areas
Whether the relatively underdeveloped areas can accelerate their process of development by recourse to deliberate inflation has, in the recent past, been a subject of widespread contention. It now appears to be settled in the negative, at least by most professional economists and responsible central bankers. Nevertheless, it may still be useful to give some thought to the problem, particularly emphasizing aspects of the economic structure of underdeveloped countries that condition their response to a deliberate attempt to use inflation as a method of stimulating and accelerating economic development.' For the purposes of this paper inflation will be defined as any steady increase in the general level of prices (no matter whether at an increasing, decreasing, or constant rate), reflecting an expansion of money income relative to available goods and services, over a period of time. Once this rise has come to a halt, there is no further inflation.2 This steady increase in the price level is, if the monetary authorities are willing to make credit, available, basically the result of one group (private individuals or the government) in the economy attempting the consumption of a larger share of (given) real output than other groups are willing to acquiesce in.3 If the group is successful, the real income of some sector(s) of the economy must be reduced as the general price level rises through the process of competition for a given quantity of goods.4 If the amount of real output available to some groups (whose money income does not increase in proportion to the price level) is reduced, inflation may encourage economic development if the group gaining command over additional real resources purchases resources, such as machinery, which themselves will produce a stream of income in the future. The reason inflation is needed to secure these results is attributable to a situation where the existing level of voluntary savings is inadequate to sustain a desired rate of increase in real output; inflation, by redistributing income, may increase the amount of savings and therefore the possibility of increased real investment.5 The redistribution of income and wealth, the immediate decline in the standard of living of some segments of the community, a possible allocation of resources to luxury goods, inappropriate construction, investment in inventories or foreign exchange, and a possible deterioration in the country's external position are some of the costs of inflationary financing. If the additional savings go into undesirable investment, this will very likely prevent the inflation from having a significant effect on the rate of development.
- DOI
- 10.2307/1925610
- Volume
- 36 (3)
- Pages
- 334
- Export
- BibTeX
- Sources
- openalex crossref