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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.



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.



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.



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.)



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).



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).



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



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

This content downloaded from 186.23.32.166 on Sun, 17 Jan 2016 17:21:28 UTCAll bj t t JSTOR T d C diti


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.



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



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

olivera oxford

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