Sources of inflationary pressures in developing countries

Prof. Dr Moustafa El-Abdallah Al Kafry

Sources of inflationary pressures in developing countries

How Inflation and Interest Rates Vary Around the World - The New York Times

Prof. Dr Moustafa El-Abdallah Al Kafry

The theory of inflation in academic economic thought is studied within the theory of money and banking, and economists in developing countries have been addressing the problems of inflation within the problems that economically developed countries have been exposed to during their periods of economic instability to which they have long been exposed. The economic analysis of inflation was focused on avoiding it and its negative effects that hinder the conduct of economic activity by drawing up the monetary and economic policies of these countries.

Inflation is an economic phenomenon illustrated by rising prices caused by an imbalance between the available supply of goods and services and the effective demand for them. This means that there is a gap between the available and limited supply of goods and services and the efficient demand, that is, with the ability to buy, which exceeds the available supply. Economic laws make it clear that more demand for goods and services than supply leads to higher prices, which is the traditional indicator of inflation in any economy.

The following are the main sources of inflationary pressures in developing countries:

The population problem of high population growth rates more than economic resources and economic growth rate, which has pushed prices to continuous increases with increasing demand and decreasing supply of goods, which in turn encourages it to be a source of inflation that contributes to its economic backwardness.

2 – The small elasticity of supply of products in the short term, especially consumer goods, which leads to higher prices. Thus, the increase in monetary spending helps to find inflationary trends.

3 – The structural nature of specialization in the production of raw materials and raw materials by virtue of the policies of the capitalist industrial countries and their control over 75% of international trade, which contributes to increasing the exports of underdeveloped countries of these materials, whose prices have long been low, which leads to monetary instability in them and even with the rise in these prices (as happened in the rise in oil prices in the seventies of the twentieth century).This is accompanied by inflationary waves that are difficult to stop, even when they are exposed to a decline again due to the inability of these economies to increase their production capacities of these materials in the short term, on the one hand, and the demand of trade unions to increase wages and the consequent creation of an increase in demand for local products, which pushes to increase their prices due to lack of production.

4 – The high marginal tendency to consume, which leads to a lack of national savings due to the decline in the incomes of individuals or the misuse of these incomes among some classes through the resort to ostentatious consumption, which is reflected in the price levels of goods and services whose supply is not suitable for cash spending on their demand.

5 – The rigidity of the financial and banking system and its backwardness in these countries, especially those related to tax systems that cannot achieve an appropriate outcome with the conditions of their development, which prompts their governments to borrow from the Central Bank to address their financial crises.

The nature of the capital accumulation to which these countries resort in the early stages of their development by virtue of their urgent need to establish infrastructure and infrastructure, which are not directly produced. This is an inflationary pressure. And because the imbalance is focused on the balance between the forces of supply and demand, which is reflected in the rise in prices, and these pressures intensify with the prolongation of this stage. [1]

The debate between economists on financing development has been limited to two main sources: national savings and foreign capital, and once the obstacles to economic development appeared in developing countries, especially the subject of financing, the theory of inflation took a new form in economic analysis, some economists believe that inflation can be an important means of capital accumulation in developing countries that depend on it to finance economic development, and so economists began to look at inflation with an optimistic view  They call on Governments to create it to finance economic development. With attention to the negative aspects that accompany each. [2]

The financing of economic development through inflationary policy, or what is sometimes called the policy of cheap money or the policy of budget deficit, although there are many economic opinions on it between supporters and opponents because each of them has its own justifications and arguments supported, but it has become a phenomenon that accompanies all advanced and underdeveloped economies, and each has its nature and forms, benefit and harm.

Prof. Dr Moustafa El-Abdallah Al Kafry

Faculty of Economics – Damascus University

[1]  – Refer to the book: Bronislaw Ogrzanowski, Problem of Inflation Under Socialism, Macmillan & Co. London 1962 p332.

[2]  – Saif Al-Din Muhammad Al-Hadithi, Models of Inflation in Comparative Economic Systems, um Al-Ma’arak, Third Year, Tenth Issue, Spring 1997, p. 145.

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