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1/13
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On Structural Inflation and Latin-American 'Structuralism'
Author(s): Julio H. G. OliveraSource: Oxford Economic Papers, New Series, Vol. 16, No. 3 (Nov., 1964), pp. 321-332Published by: Oxford University PressStable URL: http://www.jstor.org/stable/2662572Accessed: 17-01-2016 17:21 UTC
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2/13
ON STRUCTURAL
INFLATION
AND
LATIN-AMERICAN
STRUCTURALISM
By JULIO H. G. OLIVERAI
We must
not be led aside
by
a
feeling
hat
monetary
roubles
are
due to
bad economic policy....
In
so doing, we
are
no better than the Thebans who ascribed
the plague
to
blood-guiltiness.
SIR JOHN HICKS
THE process of
inflationwhich, with great severity and persistence,
has
been afflicting
or
years
some
Latin-American
countrieshas given
rise in
them to
a
lively
controversy
bout its
genesis
and
possible
remedial
measures.
There are some who maintain the view, often denoted
as
structuralist ,
that
such
perturbations
should be attributed to non-
monetary
imbalances,
partly
due
to flaws in the economic and
social
organization
of
those
countries;
and
that,
therefore,
he
reliance onmone-
tary restriction o check price rises n them s unjustified.2
The failure
of
successive stabilization plans, not always imputable
to
defects
n their
practical
execution,
has of itself tended to favour the
credibility
of the
non-monetary diagnosis;
but the influence
of the
structuralist
doctrine s still
quite
limited. This may
be
due to some rela-
tive intricacyof
formulation,
oth
from
the
viewpoint of theory
and of
policy,
n
contrast
o the
analytical precision
of the monetarymethod
and
the clearnessof
ts
counterinflationaryrescriptions.
Moreover, he rather
1
The
author is
grateful
o
ProfessorSir John
Hicks
forhis
kind
interest nd comments.
2
The
most
comprehensive
and
rigorous
statement
of structuralism s
Mr.
Dudley
Seers s Theory of Inflation and Growth
in
Underdeveloped Economies Based on the
Experience of Latin America , Oxford conomic Papers, June 1962. In the Appendix, under
the title A Note on the Structuralist
chool ,
Mr. Seers presents n historic ccount of the
development of that doctrine and some of its representative bibliography. The locus
classicus of the structuralist pproach
is
Osvaldo Sunkel s article La inflaci6n hilena: un.
enfoque heterodoxo ,
El
Trimnestrecondmico, M6xico, October-December 1958 (also
in
International conomic Papers,
No.
10).
A
recent nterpretation f the Argentine xperience
with similar echniqueof analysis
s
sustained
n
Aldo
Ferrer sbook
La
Economia Argentina,
Mexico, 1963, ch. xvii. Celso Furtado s study
of the
Brazilian inflation Desenvolvirnento
Subdesenvolvimnento,io de Janeiro, 1961, ch. 6), throughhis emphasis on sectoral im-
balances, can be considered as structuralist
ato
sensu. But there are many differences
among structuralist uthors,both
in
matters
of
theoryand ofpolicy, and the observations
presented n the text regarding structuralism or the structuralist chool do not apply to
all
of them without
distinction.
It
is worth adding
that Dr. Raul
Prebisch,
whose
ideas on
Latin
American economic
development contributedmuch to the formation
nd
characteristicsof the structuralist
doctrine,himself nalyses
the
problem
of
structural nflation
n
his book Hacia una dincmica
del
desarrollo atinoamericano,Mexico-Buenos Aires, 1963.
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3/13
322 ON INFLATION AND
LATIN-AMERICAN STRUCTURALISM
eccentricclaim
by some of ts advocates to have initiated therebya pro-
found ntellectual
revolution, omparable
to the Keynesian revolution
n
economic
theory-a
claim
somewhat
disproportionateto the titles on
which t
is
based-has not
contributed
o a
reduction of the
apathy with
whichthe structuralistdeas werereceived n academic circles.
Abstracting from singularities n
statement, nevertheless, t must
be
recognizedthat the structuralist
doctrinehas focused attentionon some
relevant causal influences. t is, of
course,
a
matterof udgement whether
they
have the
all-important
ole
that
the
structuralists elieve them
to
play:
it is still
questionable whether, s
a
matterof fact,they are the over-
ruling
or
even
the
dominant
causal factors
n
Latin-American nflation.
But
anyonewho has studied closelythe
nflationaryequence in, et us say,
Chile, Brazil, or Argentina,will find t difficult o deny the elements of
truth
which ie
at the
centre
of the structuralist
pproach. They point
to
a
non-negligible, hough oftenneglected,part of the real process.
Even to
explain
a
monetary phenomenon uch as inflation, t is some-
timesnecessary to followthe classical
advice and lift up the monetary
veil . It is
impossible
to
understand
fully
the
chronic nflation
n
some
Latin-Americancountries f one attends only to the monetaryend of the
system:
be
it the
money supply or
outlay, as
in
demand-inflation
ypo-
theses, or the money price of labour (or other supply factors), s in cost-
inflation heories. To
a
significant egree the changes of such magnitudes
have not been truly nitiatingfactors.
They have not been autonomous
in
character,
but induced
by other
economic variations. It is essential
therefore o search beneath
the
monetary surface,
nto
the
underlying
region
of
physical flows,
eal
prices,
and
sectional
disequilibria.
II
The useful core embodied in the
structuralistdoctrine
can
be
easily
translated
into
perfectly
rthodox
and simple economic analysis. Sup-
pose
that
the
existing
set
of
prices
equates
demand with
supply
in all
markets
for
products
and
productive
services. Given
such
circumstances,
let
us further ssume that some
change
of
preferences
nduces the
popu-
lation to
reassign
ts
total
outlay,
so
that
they spend
more on
a
certain
product
or
class
of
products
and less on the
remaining
commodities.
Thereis a changein the directionofdemand withoutaltering he general
level
of ntended
expenditure.
This is
a
kind
of
thing which,
in
principle,
should
concern
only
the
1
The model described
in this
section is
essentially
the
same presented
in
the author s
presidential address to the
ArgentineAssociation
of
Political
Economy
on
8
October
1959,
published
under the
title
of La
Teoria no monetaria de la
inflacion ,
El
Trimestre
cond-
mnico, 6xico,
October-December 1960.
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4/13
J. H.
G. OLIVERA
323
position of relative rices. Except
in
the
rare hypothesis hat the structure
of
supply can adjust
to a demand shift
t
constantmarginalcosts-that is,
the
case of nfinitelyarge supply
elasticities-there will be
some change
n
price ratios. It is also
well known that the smaller
the
relevant elasticities
ofsupply the argerwill be thevariation of relative prices. In thelimiting
case
of a completely
igid supply matrix,the new pattern of
expenditure
will
entirely
eflect
tself
n
a new set
ofrelative values.
But whatever ts
intensitymight
result,
t
is known that any adjust-
ment in
the exchange
ratios among goods can only take
place,
within
a
monetary economy,
by means of variations in their
respective money
prices. What is the
impact of such variations upon the
general price-
level ? Let us imagine,
for moment,
hat
either he
moneysupply
or the
velocityof circulation s passive, so that the market ofmoney keeps on
continually n a situation of indifferent
quilibrium.
Clearly, the
final
outcome
of the
demand shiftwill
depend,
under
such
conditions,
on the
specific
patternsof
response over time of the individual prices. But there
are
two extreme ases
in whichthe effect n the price-level
urnsout to be
partly predictable.
One is what we may describe as perfect
flexibility
f
moneyprices. We
mean by that a price system n whichall
priceshave the
same
speed of response in proportion o the
quantity
of excess demand
in the respective market (uniformflexibility), nd, furthermore, he
absolute velocity of
response depends on
the absolute quantity of excess
demand, not on the
sign of it (symmetric lexibility).
In
such case
the
adjustment process is
entirelyneutral
with regard to the general price-
level, its impact
thereon being
null
both
in
the final situation
and
in
the
intermediate tages of
adjustment.
Upward pricemovements re exactly
balanced
by downwardpricemovements s to the
height
of the
price-level.
The
other clear-cut
case is that
in
whichmoney prices
are
only responsive
to eitherpositive or negative excess demand (unidirectionalflexibility).
Then
every relative price adjustment
gives rise to a variation
of the
price
level, upwards if there exists downward
inflexibility
f
money prices,
downwards f there s
upward inflexibility.
Thus,
in
a medium
of downward inflexible
money prices, any adjust-
ment
of
price-ratios
everberates s
an
increase
of the
money price-level.
There are some
observationswhich must be
added on this
point. First,
t
should
be noted that
complete
downward
price-inflexibility
s a
sufficient,
1
The
set
of relative prices
necessary
to
equate
demand
and
supply
will
hence be consis-
tent
with an infinite
umber of
money price-levels.
But
starting
from
given
initial
money
prices,
the
indeterminateness
f the new
price-level
may
be
simply (so
to
speak)
a static
mirage.
If
the rates of
change
of
the
individual
prices-or,
at
least,
of
any
one
of them-
with
respect
to
time
are
established, then,
of
course,
the behaviour of the
money price-level
becomes
completely unambiguous.
Even the new
equilibrium point (provided
that the
dynamic
system has
a
stationary solution) can be
identified
n
that
way.
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5/13
324 ON INFLATION AND LATIN-AMERICAN STRUCTURALISM
but not a strictly ecessary, onditionforthe kind of effect nder study.
If the facility f pricesto move downwards s weak, at least in comparison
with theirresponsiveness o upward pressures, ven if
t
is different rom
zero, there s
a
strong hance
that
the money-price
ises consequent upon
a
shift f demand will outweigh he price falls,
thus spelling n increase of
the price-level. Second, under the enunciated
conditions, very change in
the value relations mong goods will effecttself hrough n increase of the
price-level,whateverthe cause of the change
considered.
The second point invites some further omment.
Although, for pur-
poses
of
illustration,
we
initially assumed
a change
in
the
direction of
demand,
t
is clear
that
any movementof relative
prices determinedby
a
change
n
the conditionsof supply will similarly
roduce, f money prices
arerigiddownwards, n increase of the generalprice-level. Any change n
the
marginal rates of substitution mong products
or factors,or among
products
nd
factors,whether
t
originate
n
varying
onsumer references,
productionfunctions, r factor-endowment atios, s bound to have some
such
effect pon
the
level
of
prices. Structural
nflation an
thus be either
demand-shift
inflationor
cost-shiftinflation;
ts sourcemay be
situated
either
n
the structure
f
demand or
in
that of supply.1
But
it is
worth
recalling, n
passant,
that the degree of price-flexibility
ay differ ccord-
ingto the origin nd nature of the change.
III
In
the price responsesevoked by any change
n the equilibriumposition
ofrelativeprices,however, here s a dual aspect
of particular mportance:
(a)
the
flexibility
f nominal or
absolute prices
and
(b)
that
of real
or rela-
tive prices themselves. We have just seen that a downward nflexibility
of absolute
prices
is
sufficient
o
entail
that
any adjustment
of relative
prices to
a
new position implies an inflationary hange
of the
money
price-level.
But
the amount of nflation roughtabout by any given
dis-
placement
of
equilibrium depends upon
the way
in
which relative prices
respond o the shift f equilibriumvalues. This is a most mportantpoint.
If the
process set
about
by
the
initiating
change is divergent,
a
single
1
For instance, as ProfessorMachlup points out a fall of productioncost in one industry
will call forth reduction of the price of its product relative to the prices of all other pro-
ducts; this adjustment of relative prices will, n a money economy,proceed either hrough
a fall n the money price of the product that now requires ess labour per unit than beforeor
through n increase in all other money prices (or through
a combination of both);
hence,
stabilization of the money price of the more economically
produced product implies that
equilibriumwill be restored through a general increase in money prices (Fritz
Machlup:
Another View of Cost-Push and Demand-Pull Inflation , The Review
of
Economnics nd
Statistics,May 1960).
A well-knownmodel of demand-shift nflation was presented by Charles Schultze,
in
Study Paper No. 1, Joint Economic Committee,Recent Inflation in the United States,
Washington 1959.
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6/13
J. H. G. OLIVERA
325
variation
in
the data
may give rise to
an
unlimited amount
of
inflation.
Even if the
movement
s
convergent owardsequilibrium, here s
a
differ-
ence according to whether
he
process
is monotonic or
oscillating,forthe
occurrence
of fluctuations
means
that
a
largerrise
n
money prices
will be
necessaryto performhe same adjustment.1
It should
be noted,
in
fact, that the
consequences
of
a
relative price
variation upon
the money price-level
re not
reversible.
A
returnof
the
price ratios
to the
position they
had before
ny given change would
not,
under conditionsof downward
price-inflexibility, ipe
off
he
increase
in
the price-levelbrought bout by their
previous alteration.
Moreover, he
movement
of
relative prices
back to their former
alues would
cause
an
additional increase of
money prices.
It
is
evident, therefore,
hat
the
total increase of themoneyprice-level eneratedby any given adjustment
of relative
prices
will be
greater,
ven
to
a
very arge rate,
f
they approach
their new equilibrium
through
oscillations
rather than
directly. The size
of the total effectwill
vary
with
the
amplitude
and
frequency
f
the
inter-
vening
fluctuations.
The
dynamics
of
stability
nd
instability
have
an
immediatebearing on
all
this.
From
a
purely quantitative viewpoint,
we
may compare
the
total
inducedincreaseof the
price-level
with
the
underlying hange
in
the
equi-
libriumvalue ofrelativeprices and obtain thus a synthetic xpression-
which
may
be denominated the
structural nflation
multiplier -of
the
inflationary otential
nherent
n
a
change
of
that sort. But the
distribu-
tion over
time
s
at least as relevant.
In
this
connexion,
nd
from
quali-
tative
point
of
view,
we
may
note
that
any
shift
of
the
equilibriumvalue
of
relative
prices,
whatever the
magnitude
of the
change,
can
push
the
money price level
into one of
the
following ypes
of
sequence: (a)
a
price
rise of limited
duration,
at a
decreasing
or
finallydecreasing pace,
(b)
a
price rise of unlimitedduration,at a constant or an irregularpace, (c)
a
price
rise of unlimited
duration,
at an
increasing
pace.
The
latter,
of
course,
s the
honmologue
o
hyperinflation
ithin
he domain
of
structural
inflation.
But
both
(b)
and
(c) imply
dynamically
unstable
systems.
IV
We
must
reconsider
now the
monetary setting
in
which the
process
develops.
In
order
to abstract
from
ny
limiting
or
reinforcing
nfluence
1
The principalforms f friction n the adjustmentofrelativeprices including, fcourse,
factor prices) are (a) the tendency to increase
nominal
wage-rates,
with a
longer
or shorter
time-lag, o compensate forrises n the cost of iving, b) the tendency
o
maintain
customary
wage differentialsetweendifferentccupations, c) the tendency o maintain proportionality
between the prices of manufactured oods
and
theirvariable
unit
costs,
and
(d)
thetendency
to keep a more or less constant ratio between farmprices and the prices
the
farmer
ays for
industrial products. (See J. Marcus Fleming, The Bearing of Non-Competitive
Market
Conditions on the Problem of Inflation
Oxford
conomic
Papers, February 1959.)
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7/13
326 ON INFLATION
AND LATIN-AMERICAN
STRUCTURALISM
of
the monetary
conditions
we assumed at the beginning
hat either
the
velocity
of circulation
or
the
money supply
is purely
passive, thus ensur-
ing
that the
flow of money exchanged
for
products
and servicesaccom-
modates
itself
to
price-level
variations
rather than the other way
round.
This
notional
economyallowed
us
to describe the elements
which should
be
considered
s
constituting
he analytic prototype f
structural
nflation.
In
reality,however,
monetary
circumstances
ftenplay
a
more
indepen-
dent role.
The velocity of
circulation
of
money only
behaves passively
(if
it does at all)
within
fairly
narrow imits,beyond
which any
furtherrans-
ference f funds
between active and
idle
money
holdings
s bound to
react
on the market
situation. As
to the money
supply, although
the full-
employment
oal
can be construed
s
requiring
part passu
adaptation
of
the financial
base to the rise
of the price-level,
therconcurrent
bjectives
of monetarypolicy
will
probably
cause
the
money supply
to be more
of
an
autonomous
factor
regarding
price
and income determination.
This is
in
fact the general
rule nowadays.
Yet, even
if
neither
the money
supply
nor its
velocity
behave in a
passive
form,we
should not exclude
the
possibility
of monetary adjust-
ment.
The case
is not so clear as
under cost-push
inflation1
but has a
numberof common
points with t.
There
is,
firstly, possible
adjustment
through
he rise of the interestrate. The additional needs of financewill
provoke
an expansion
in
the demand
for
iquid
resources
and, througha
higher
nterestrate,
dle balances
will be attracted
nto active circulation.
If the demand
for money happens
to
be interest-elastic
while
that for
commodities
s
not,
then that mechanism
will be
capable
of
supporting
new equilibrium
t
the
higher
rice-level.
Secondly,
there
s
also
the
possi-
bility
of a
contraction
n
the demand
for
money
via
expectations.
The
price
ncrease may
cause anticipations
of new
price
rises (an elasticity
of
expectations greaterthan one), intertemporal hiftsof expenditurewill
ensue
and
the
velocity
of circulation
will
increase
as
a result of them.
Thirdly,
he income distribution
ffects
f the relative pricechanges
may
be of such character
as to reduce
the over-all demand
for
money:
for
1
The
reader will
surelyperceivethat
we are
speaking of cost-push
inflation n
its
usual
sense, that is, of
a type of inflationary
rocess
caused by autonomous
increases
in the
nominal
price of
labour or other productive
elements.
Nevertheless,
he definition
may be
broadened
so as
to
include
also
the case of structuralprice-rises.
Thus
ProfessorJohn
R.
Hicks, in his lecture on Inflationand Growth deliveredat the Universityof Buenos Aires,
discernedbetween
demand-pull
nd cost-push
nflation
s follows: According
to the former,
inflation s due to
excess spending;
businesses spending
more
on new plants than the
public
is willing
o save,
or governments pending
more
than they raise in taxes
or
than
the public
will
lend
to them from ts
savings.
According to the latter
(the cost-push
view), inflation
comes
about
through rises
in
particular
prices
(due, initially, to causes
that
may
as well
belong
on
the
supply side
as on the
demand side); such
particular
price-rises
need
not
generalizethemselves,
but
in fact theyoften do
so. (The Review of the
River Plate,
Buenos
Aires,
22 May 1962).
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8/13
J. H. G. OLIVERA 327
instance, if price-ratios
move in favour of urban against rural output or
in favour of wages against
profits. But it will be noted that none of such
mechanisms guarantees
complete adjustment. Either
their operation or
their efficacy trongly epends on adventitious facts.
Therefore, n a case of structural nflation, f the monetaryauthorities
abstain from
nlarging he
money supply
n
the required
measure, so as to
permit the sale of current
output at the higher prices,
there will follow
some compressionof the levels of production nd
employment. Clearly,
with
downward-inflexible
rices, there s no automatic corrective o
such
a state of things; from he analytical viewpoint the
system s over-deter-
mined. The
contraction
of real output, moreover, hrough
o-called
in-
come effects f income variations,1 as well as forpossible
accompanying
changes in income distribution,will of itself cause new shiftsofrelative
prices, thus adding a secondary wave of upward pressures
on the price-
level.
But there s a side issue
that must be mentioned.
If downward price-
rigidity s not absolute, the
influence f excess supply
will tend to reverse
somewhat the
previous price
ncreases. The magnitude
of
such
reduction
will
depend on various
circumstances. Indeed, given a non-complaisant
monetarypolicy, as soon
as the premise of total downward nflexibilitys
dropped the model of structural nflation has to be qualified further.
We
can talk
of
partial
downward
nflexibility
n differentontexts:
either
when the
possible reduction
s
more
or
less straitly
bounded, so
that it
may
not
exceed a certain
fraction f the previous evel;
or when
the rate
of reduction over time is comparatively ow. Under
the firsthypothesis,
the viability of structural
nflation depends on the
magnitude of the
structural
pressureupon
the
price evel. Under
the
second
assumption,
t
depends
on the
length
of time:
if the
period allowed
for
adjustment,
after
each changein price-ratios,were nfinitelyong, structuralpriceincreases
could only be transitory ffects. Thus, within the second
type of inflexi-
bility, he succession ofrelative-pricemovements either
hrough hanges
in equilibriumor by the
multiplier process mentioned
bove) is essential
for
upholding
their nflationary epercussions.2
V
We are now in sightofwhat may be consideredthe essentialsof this
type
of
inflation.
An
interesting spect
is
the relation
it
may
bear to
1
A. Lindeck,
A Study n Monetary
Analysis, Uppsala, 1963, passim.
2
If structural
nflation s of the demand-shift
ype t may occur,under partial
downward-
inflexibility, hat
the pace of shiftingdemand should be
increasing n order to guarantee
a continually upward
price-level pressure (Martin Bronfenbrenner
nd F. D.
Holzman,
Survey
of
InflationTheory ,
in American Economic Review, September 1963,
p. 613).
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9/13
328 ON INFLATION AND
LATIN-AMERICAN
STRUCTURALISM
economic
rowth.
he
structuralist
chool
seems
clearly
o be in
two minds
about this
problem. Sometimes
t
appears to regard structural
nflation
a
by-product
of
growth,
which could
not be
avoided without
stopping
growth tself. This is an interpretation
which the
structuralist conomists
often
pply,
for
nstance,
o
the
Brazilian
inflation. But
quite
as frequently
spokesmen
of that school denounce
stagnation
as a
cause
of
structural
pressures
n the price-level, nd
recommend policy ofgrowthpromotion
as the best line of
attack against
that
sort of
inflationary isturbances.
This
recipe has been extended,
most typically,to the Argentine ase.
Now, it
must
be
recognized that
the
relationship between structural
inflation nd
economic growth s neither simple nor
unequivocal. From
the
foregoing nalysis, however,
wo extreme cases may be discerned, n
optimum
nd
a pessimum. The
optimum
case is balanced growth,under-
stood in
the sense of an elastic
continuous adaptation
of
the expanding
output to the
pattern
of
demand;
a
case
in
which,
therefore,
he
various
product
markets keep constantly
cleared without relative-price hanges.
This situation s optimum n that the
objective of growth s
achieved with-
out any
concomitant structural nflation. The opposite
pole,
the
pessi-
mum, presentsrelative-price
nstability
and lack of economic
growth:
what
may
be
referred o, by contrast
o the other
case,
as unbalanced
stag-
nationordecline. In such contextthe frustration fthe growthobjective
will be
accompanied by
structural
price-rises.
There are two other
possibilities which,
considered
through
the
dual
objective
of
price stability
and economic
growth,
hould
be ranked
be-
tween
optimum
and
pessimum. One is unbalanced
growth,
where the
increaseof
production, ailing
o
adjust completely
o the market
demand,
is
accompanied
by persistent hiftsof relative
prices.
The
other
may
be
described as balanced stagnation or
(if output falls)
balanced
decline,
where here s neither rowthnorchange nprice-ratios nd, consequently,
no
structural-inflation
roblem.
By means of
these primary
distinctionswe
can
now
examine the
con-
sequences
of
passing
from
stagnation
(or decline)
to economic
growth.
There are
several possible cases, with distinct
implications concerning
structural
price-rises.
A
change
from balanced
stagnation
(or decline)
to
balanced
growth, eing positive
as
regards
he
rate of
output,
s neutral
in
its effect n the
price level.
A
change
from
balanced
stagnation (or
decline)to unbalanced growth,which means an improvement n the side
of
output,
s
nevertheless
isturbing
n
regard
to
price-stability.
A
transit
from
unbalanced
stagnation (or decline)
to balanced
growth,
n the con-
trary, nvolves
progress
n both the
output
and
the
price-level bjectives.
Finally,
a
change
fromunbalanced
stagnation (or decline)
to unbalanced
growth, lso
positive
with
respect
to
output, may
have
either
neutral,
or
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10/13
J. H. G.
OLIVJERA
329
accelerating, or
decelerating effectsupon
the
structural price-rises-
which
will, anyhow,
persist
under the new set
ofconditions.
We
findhere
two
opposing
forces t work.
On the
one hand, given the
other
circumstances, rowth
snormally
ccompanied by
a greater
mount
of
change than
stagnation
or decline.
Therefore,
growingeconomy is
likely to
be subject
to wider
variations in
inter-sectoral erms
of trade
than it would
experience f
t did not grow.
But, on
the otherhand, the
facility f
relative-price
djustments
will also be greater.
In a
stagnant or
declining
environment, he
adaptation of relative
prices to new equili-
brium
data
is
certain to
encountersubstantial
resistance, nasmuch as it
implies
not only a
relativebut also an
absolute
decrease f real
income for
the
affected roups.
If the
latter hold any
degree of
controllingnfluence
over
prices, the movement
of value
relations will
probably
assume a
fluctuatingform,
with
alternative marches
towards
equilibrium and
away from
t. In a
growing ystem,
on the
contrary,
articularly f the
rate of
growth s
high, he shift f
relativeprices may be
compatible with
real
income
ncreases even
forthosesectors
against
whomprice-ratios re
varying.
Therefore,lthough
he
multiplicand of
structural
nflation
will
probablybe larger
n the
growth ase, the
multiplier
can be expected to
be
smaller
than
understagnation or
decline.
VI
The
relationship
fstructural
nflation o
the
stages of
economic
evolu-
tion-as distinctfrom
urely
quantitativeoutput
growth-is
also difficult
to
establish
in
general. This partlyreflects
he
large
halo of
uncertainty
around
economic
evolution,
ts
course
and
nature,
as
well as its
signifi-
cance
from the
standpoint
of
alternative
degrees
of economic
develop-
ment. But whatever model of economic evolution s adopted or assumed,
it
is difficulto find
n
unquestionable
correspondence
etweenthe various
stages
and the
existence
or
intensity
f structural
price-rises.
In our
opinion,
the
most
fruitful
pproach
is
from the
angle
of
the
price mechanism.
It
is
well
known that economic
evolution
has a
bearing
on the
qualities
of the
price
system.
It
brings
bout
some
typical
changes
in
the
main characteristics
y
which
t
operates
as an
allocator of
resources;
namely,
n the
mobility
of
factors,
which denotes
their
responsiveness
o
price differencesmong occupations; and in price flexibility.According
to
generallyaccepted
ideas,
economic
progress
s
likely
to exhibit
an
in-
crease of
the relative
importance
of manufactures
nd
organized
services
1
As
Dr. Paul Streetenpoints
out,
for countriesembarking
on development,
unbalance
is inevitable
....
All investment reatesunbalances
because of ndivisibilities, luggishness
of responses,
and miscalculations
( Unbalanced
Growth:
A
Reply ,
Oxford
Economic
Papers,
March
1963).
4520.3
Z
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11/13
330
ON
INFLATION AND LATIN-AMERICAN STRUCTURALISM
in total production; so that,
given the high degree of downward price-
rigidity prevalent in such sectors, the overall downward
flexibilityof
money prices
s
bound to
diminish.
There
may
be also a
tendency, ased
on
the operationof
the
so-called principle
of
countervailing ower,
by
which
the growth of the market share that appertains to less
competitive
industries,
such
as
those
just
mentioned, will probably
give origin to
minimum-price ixing n
behalf of other activities where, s is the rule in
agriculturalmarkets,
full
competition xists among
the
producers.
Contrariwise,
he
mobility
of resources can
be expected
to show a
broadly rising trend. The mobility of land will be favoured
by the im-
provement of
land
markets
and the parallel division of
property,while
the development
of
the
financial system will gradually
facilitate the
mobilityof capital. On the whole, the mobilityof abour is also likely to
increase over time. This
will
be due to a decreasing
influenceof non-
pecuniary
elementson the
election
of employment;
to better
and cheaper
transportation nd,
in
general,
to lesser transfercosts
associated with
mobility;
and also to the improving ducational level of
the population.
It is true that,
at
a certain stage,
the
growth of the labour
unions may
result
n
restrictions
o occupational mobility; but, anyhow,
the degree of
responsiveness
f the
labour
forceto wage rate differencess likely to be,
on balance, considerablygreater n the more than in the less advanced
phases of economic
evolution.
Combining
the
long-run
endencies
of
price-flexibility
nd
mobility
of
factors, t is quite clear
that the risk of structural nflation must be
minimum
oth
for
rimitive,
re-industrialocieties, nd for
ully eveloped
industrial
ystems. This
is so,
in
the former ase, because
the fluctuation
of
absolute prices impedes any sizeable
effect f
relative-price
ariations
upon
the
price-level;
whereas,
in
the
latter type
of
economy,
the com-
paratively high mobility of factors maintains relative-pricevariations
within
moderate imits.
If structural nflation
ppears therein,
t
must
be
rather
under
the
formof creeping nflation .
However,
there
may
be some intermediate
tage
in
the course of
eco-
nomic advancement-a halfwayperiod
which
may
well nclude some large
part
of the conversion
nto
a
fully
ndustrial
economy-where
downward
price-inflexibility
xists side
by
side
with low
mobility
of
factors.
The
occurrence f
such
a
stage
is
not
inevitable,
for a sustained rise
in
factor-
mobilitymay precede the emergenceof any significantack of flexibility
in
prices; and, as
a matterof
fact,
this s
really
what
happened
during
he
historical volution of the now developed economies. Nevertheless,
nder
contemporary onditions,
he
order
of
events in
the
lapse
of time
is
fre-
quently
the
opposite,
so that one
stage appears (as
may
be observed
at
1
So
far
as we
know,
this seems
to
be in
part
the Brazilian
case.
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12/13
J. H.
G. OLIVERA 331
present in certain developing nations) where a scant measure of factor
mobility
occurs with an
almost complete downward nflexibility f money
prices.
In
such
a
context, the degree
of
exposure
to
the peril
of
structural
inflation s evidently great. Any change of price-ratioswill reflect tself
on the
price-level,while the rigidity
of
the structure
of
supply, derived
from sluggishness n factor movements, will magnify the amplitude of
relative-pricevariations. If there comes about any important shift n
the
basic data of equilibrium, process
of
structural nflation s certain to
ensue.
It
seems
logical, therefore,
hat the existence
of ntense structural
inflation
has
been
noticed
with
respect
to some
middle-class countries,
and
not
to
those
in
more
extreme tages
of economic
development.
VII
Perhaps
the
main
weakness
of
the structuralist
chool
lies
in
its policy
prescriptions.
ts advice
on how to
combat inflation s little
better
than
overt
conformism.
ometimes
structural
changes
such
as
(principally)
land
reform,
ntended to increase
the
mobility
of
factors,
are
offered
s
means
to a basic
and
lasting
cure . But
there
is a
notorious
lack
of
proportionbetweentheefficacy fsuch long-runmeasures,howeverbene-
ficialwe
may suppose
them to
prove,
and
the
necessity
o
counteractpro-
cesses of
nflationwith a
speed
that
ranges
from20
to more
than
100
per
cent
yearly.
It is as if believers in the
Pigou effect , being persuaded
that
price
and
wage
reductions
can
prevent nvoluntaryunemployment,
recommended
ong-term
tructural
hanges
favourable to
price
and
wage
flexibility
s
a
practical way
of
correcting slump.
Is it possible
to
develop
a
more
operational
attitude?
It
must be
recognized,of course,that structural nflation s by much the most un-
manageable species
of the
inflation
genus.
It
is
far
less
susceptible
to
instruments
f economic
policy
than
demand-pull nflation ,
nd
even less
than
cost-push
inflation .
But
we
may
doubt whether t
is
completely
intractableas most structuralists
elieve
it
to
be.
In
order o
perceive
the
problem
in
its true
magnitude
it
is
necessary
to
take some mental
pre-
cautions.
The
term structural
is a
slippery word,
that carries the
risk
of
letting
the
analysis glide
into
a
harmful
mbiguity.
Many countries, n fact, by force of their structural features,have a
strong proclivity
to
demand-pull
inflation.
Underdeveloped economies,
specially,
show
a chronic
tendency
to
invest
more than
the
amount of
voluntary savings
for
any given
level
of income.
Yet,
however
deep-
rooted
in
their
economic structure uch
propensitymight be,
the corre-
sponding inflationary
disturbances cannot be
envisaged
as
structural
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13/13
332 ON INFLATION AND LATIN-AMERICAN STRUCTURALISM
inflation. This is quite clear from the above analysis, but the
struc-
turalist chool has not been very particular about the point. One thing
s
structural nflation
nd
another structuralproneness to inflation.
Some-
times the structuralist chool sound as if they were ncluding every
case
in which an underdeveloped ountry riesto grow at a rate higher han
the
(ex ante) equilibriumof saving and investmentwould permit. This
has a
far-reaching mplication from the standpoint of economic policy.
Even
if
genuine structural nflation s also at work in such cases, the element
that it contributeswill be therein ssociated with a wave of sheer demand-
pull inflation.
There is another widespread characteristic among the structuralist
school
which
tends
to
make the policy problem
more
formidable
han
it
needs
to
be.
It
is theirunderrating
ffinancial
policy
as a
possible
means
against
structural nflation. The
representative
structuralist
believes
that, since the cause of structural
nflation s
non-financial,
ts remedy so
far
as
a
remedy
be
conceivable)
should be
procuredthrough
non-financial
policies:
a
sort of
economic
analogue
to similia similibuscurantur.Never-
theless, such
a
correspondence
between causes
and
therapies
is
not
a
matter
of
ogical necessity.
If it were found
that
business fluctuations
re
due to
sun-spot changes,
as some
authors have
held,
it
would
not
follow,
of course,that the only chance for stabilizationpolicy would be to dis-
cover
the
way
of
paralysing
sun
spots.
It
would
be
useful,
we
think,
to examine
the
possibilities
of
financial
policy
with
respect
to structural
nflation.
Although
such
a
study
would
exceed
the limits
of this
paper,
let
us note
that it
is
a
subject-matter
rom
which
interesting ractical
conclusions
could be
derived.
The
degree
of
price flexibility,
n so
far
as
it
depends
on the
price policies
of
business
enterprises,
s not
entirely oreign
o
the
liquidity
situation
n which
they
are accustomed to operate. Furthermore, he mobilityof liquid capital
can
largely compensate
for the lack of
mobility
of other factors
n
the
adjustment
of
supply.
This
is
a
most
importantpoint,
since
the
mobility
of
capital
is
quite
amenable
to the
influenceof skilfulfinancial
policies,
all
the
more
if
they
are
backed
by adequate
tax
regulations.
Even in
the shortrun,
this
opens
a
considerable
pace
of
manoeuvre
gainst
struc-
tural
price-rises.
The
University,
uenos
Aires