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Inflation and Growth: The Statistical Evidence

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1966
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IT IS FREQUENTLY asserted that inflation, particularly a rapid inflation, discourages economic development. It is unnecessary to repeat the arguments in support of this view which have been presented elsewhere.1 Rather, it is important to examine the available data to determine if experience conforms to expectations.

Previous examinations of the data have tended to be inconclusive. Bhatia could find “no systematic relationship between price changes and rate of growth.”2 In part, this conclusion resulted from some inadequacies in his data.3 Tun Wai found that “For the less developed countries in general, the findings did indeed prove to be inconclusive; but for most of the small number of individual countries for which the available statistics cover periods in which the rates of price increase differ significantly, the evidence suggests that the rate of growth was higher when the rate of inflation was lower.”4 However, it is possible to come to somewhat more positive conclusions suggesting that rapid price increases retard development, on a closer examination of Tun Wai’s data.5

The major difficulty in interpreting the effects of inflation on growth arises because the rate of price increase is only one of the influences at work at any time. Many other forces influence the rate of development and, in many cases, their effects overwhelm any effects arising from inflation. Consequently, any statistical examination of the relation between inflation and economic development must be inconclusive in the technical sense. Sociological considerations, such as the effect of population changes, are likely to produce “exceptional cases” which, given the statistically small number of nations in the world, are likely to make any classifications insensitive to mathematical tests. The best that can be done is to collect the available data, classify them by reasonable criteria, observe the evident relations, and comment on the conclusions which may be made. Above all, it must be recognized that the rate of price increase in any economy is not the only, or, necessarily, the most important force determining its rate of development. Rather, it is one of several very important influences at work.

The Effect of Wealth

One of the most important determinants of progress is the existing level of income already achieved. (To a certain degree, “unto everyone that hath shall be given, and he shall have abundance; but from him that hath not shall be taken away even that which he hath.”) Very poor countries, with incomes approximating subsistence levels, find it difficult to set surpluses aside for investment, so that capital accumulation is difficult; as a consequence, the raising of output and living standards is difficult in these countries. As economies manage to achieve progress, saving becomes easier and capital accumulation leading to further progress is facilitated.6 After certain levels of output and consumption are achieved, the effect on output of rising savings ratios tends to be offset by certain impediments to progress. The urge to reach even higher living standards may weaken as this standard itself rises. Advanced societies are at a disadvantage compared with less advanced societies, in that the less advanced may frequently absorb technological advances taken from wealthier economies, while the very advanced, even already affluent, must be technologically inventive and speculative if they are to advance further. The technological problems of organizing production become more complex as the level of output expands; in particular, the problems of organizing production to satisfy socialized demands, which are likely to increase relatively faster than other demands as consumption rises and social organization becomes more complex,7 may raise political problems in libertarian societies. The tendency for marginal returns on investment to decline as capital becomes more plentiful may encourage investment in less prosperous foreign countries, with little social (as distinct from private) benefit to the economy, rather than domestic investment. These problems frequently make it difficult for an economy to move from high to higher levels of output, just as it becomes progressively more difficult to advance as one climbs toward the summit of a mountain.

These considerations suggest that it might be reasonable to expect the existence of a “profile of progress” similar in shape to Chart 1. Poor countries should be expected, unfortunately, to experience slow progress; less poor countries might be expected to advance more rapidly; very wealthy countries should be expected to progress less rapidly than the less wealthy. Given the limited statistical examination of this thesis, little significance should be attached to the values, or even to the particular configuration, of Chart 1.8 Rather, the pattern of expectations regarding the relation between income and growth, in the absence of other influences, may be expected to be generally convex upward, as in Chart 1.9

Chart 1.Expected Relation Between Wealth and Growth

The Importance of Flexibility

Progress involves more than the enlargement of national production. Abstracting from such questions as the maintenance of traditional values,10 or the development of new social values,11 or some of the high correlations between aesthetic and material satisfaction,12 and limiting attention solely to material development, progress involves a change in the structure of output as well as an increase in output. With development, many types of output increase only slightly so that they decline in relative importance, if not necessarily in absolute amount,13 while other types of output increase much more rapidly. One of the first aims of an appropriate development policy must be to encourage the more rapid expansion of certain forms of output and employment and the less rapid expansion, or even contraction of other types (Luddites of all types are the featherbedding enemies of happiness). These adjustments can be greatly facilitated by official economic policy such as appropriate fiscal measures. However, within the framework of such official guidance, if those types of output, including services, which are most in demand with rising living standards become relatively high priced and produce higher incomes in the economy, their production will be encouraged. If the traditional types of output, the demand for which is not rising rapidly, are relatively low priced, any increase in their production will be discouraged. One of the aims of economic policy should be the maintenance of price flexibility, so that social advance may be stimulated. It is extremely difficult to achieve the appropriate changes in individual relative prices by administrative fiat. The price mechanism is the most delicate and beautiful instrument yet evolved for this purpose.

This stimulation of social progress may lead to the willing acceptance of a certain rate of inflation. An economy will be more flexible if adjustments can be brought about by means which make the owners of factors of production, moving in the desired directions, feel better off in money terms. Gently rising levels of prices, wages, and other incomes may contribute to the flexibility of an economy. If the economic units14 producing those goods and services, the demand for which increases most rapidly with advancing welfare, are able to obtain credit relatively easily, they may bid resources away from other units, or attract previously unemployed resources into employment. In this process, the bidding-up activity of expanding units will raise the general level of prices and costs in the economy, including the prices and costs of the nonexpanding activities. On the assumption that the credit made available to the expanding sectors is limited to an amount which is sufficient to attract unemployed or transferable resources to the expanding industries, but not excessive in the sense that it will merely lead to a rise in costs and prices without any associated movement of resources, a limited inflation may facilitate progress. But, there are specified limits within which inflation must be contained to ensure that the desire for progress is not frustrated.15

It follows from this argument that a declining level of average prices may be expected to diminish the flexibility of an economy. That is, deflation may be expected to discourage economic development.

On the other hand, the depressive effects of strong inflation must be recognized. It might be suggested that, while deflation discourages development and mild inflation encourages it, after a certain point the depressive effects of inflation offset the stimulating effects of monetary expansion. In other words, these considerations suggest that there is a “profile of inflation” similar in shape to Chart 2. Deflation discourages development, slowly rising prices encourage it, and, after a point, further price increases discourage progress. Given the limited statistical examination of this thesis, little significance should be attached to the values, or even the particular configuration, of Chart 2.16 Rather, the pattern of forces relating relative levels of average price change to rates of growth may be expected to be of the general bell shape outlined in Chart 2.

Chart 2.Very Wealthy Countries: Expected Deviation of Rates of Growth with Inflation

Arguments suggesting that a moderate rise in the general level of prices may encourage development may be based on the desirability of encouraging flexibility in an economy. It follows that there is an inverse relation between the relative price flexibility and the appropriateness of an inflationary policy as part of a development program. If all prices are equally flexible up and down, arguments based on the desirability of flexibility of relative prices provide no foundation for the acceptance of a rising level of prices. If all prices (including wages and other factor costs) are inflexible downward, but not necessarily subject to upward movement when some of them rise, relative price flexibility may be achieved through increases in the prices of those resources most in demand and stability of other prices, with a relatively small increase in the level of prices on the average. If traditions regarding “normal” price relations exert a strong force on the structure of prices, so that increases in the prices of resources in high demand drag up the prices of resources in less high demand, the increase in the average level of prices commensurate with the attainment of the changes in relative prices necessary for the achievement of progress will be greater.

It may be suggested that there is a relation between the level of development already achieved by a country and the traditionality of its price structure. Poor countries whose economies are frequently based on the production of one or a few primary products for export and other agricultural products, without (or with weakly organized) trade unions, and with relatively few, very secretive entrepreneurs, are likely to be economies where prices tend to be flexible upward and downward. However, it must be recognized that traditional prices may be important in the relatively static countries in this group. In such cases, it is likely that these traditional prices will be inflexible in money terms. That is, these economies will be subject to flexibility upward but not downward, and thus the upward movement of some prices will not drag other prices up. However, the traditionality of prices in these economies may reduce the flexibility of all prices and hence the adaptability and, consequently, the inherent progressiveness of these societies. Wealthy economies, primarily dependent on domestic production of manufactured goods, with strong and widely embracing trade unions committed to the principle of “not a penny off the wage: not a minute on the day,” and with well-organized (often cartelized) all-embracing trade associations, are likely to be subject to downward inflexibility of all prices. In such economies, traditions of “fair shares” are likely to result in conditions such that any changes in price relations lead to upward movements in the general level of prices.

That is, there is not one “profile of inflation” similar to that of Chart 2, but a “family” of profiles dependent on the social conditions of each country. If, as an abstraction, wealth alone be accepted as the indicator of social conditions, this family may be based on wealth considerations alone. Very poor countries may be considered to possess the necessary flexibility to enable desirable changes in relative prices to be achieved with little effect on the average level of prices. Very wealthy countries may be assumed to have such highly developed traditional social relations that the attainment of price flexibility requires an increase in the average level of prices.17 It follows that price stability will approximate the optimum “level of inflation” in very poor countries, with rising “optimum” levels as progress is achieved. A “family” of profiles is presented in Chart 3, where the profile of Chart 2 is accepted as that for very wealthy countries and this profile is moved to the left to represent price stability as the “optimum” level for very poor countries, with profiles for countries at intermediate stages of development lying between these extremes.18

Chart 3.Various Types of Country: Expected Deviations of Rates of Growth with Inflation

Charts 1 and 3 may be combined in a three-dimensional Chart 4. If countries are ordered on the horizontal scale by their average per capita income, it might be expected that they would also tend to show a fairly regular pattern of annual rates of growth of income. Countries at both extremes might be expected to have the lowest growth rates, and countries with average income levels the highest growth rates. That is, if rates of growth are measured outward in the third dimension, something like a ridge in the shape of the curve in Chart 1 might be expected to appear on the surface of Chart 4. If the same countries are ordered on the vertical scale by their recent average annual rates of inflation, it might also be expected that they would tend to show a fairly regular pattern of annual rates of growth of income. Countries at both extremes might be expected to have the lowest growth rates, and countries with “optimum” rates of inflation the highest growth rates, that is, the surface of Chart 4 derivable from Chart 1 would be depressed or raised in a pattern derivable from the family profiles in Chart 3. The resulting surface could be expressed as an opportunity contour map, as indicated in Chart 4.19 Countries with average income levels that maintain appropriate monetary policies may be expected to achieve the highest level of economic progress. The problems facing both poorer and more wealthy countries will make it less likely that they will be able to achieve the rates of progress attained by the “Average” countries. However, the progress actually achieved by any country will be strongly influenced by its financial policies. Both monetary stagnation and undue inflation will lead to lower levels of achievement: relatively stable prices will be consistent with the highest levels of progress.

Chart 4.Wealth, Inflation, and Rates of Growth: Hypothetical Contours1

1 Figures within the chart represent rates of growth per cent, per capita, per annum.

In sum, countries that are relatively stable on these criteria may be expected to have rates of growth of gross domestic product (GDP) greater than the average either of other countries in the same wealth group, or of all other countries in the world, while countries whose prices are rising faster or more slowly than is compatible with “relative stability” may be expected to grow more slowly than other countries.

The Statistical Evidence

The Appendix records all the data on these relations available in International Monetary Fund, International Financial Statistics, and the United Nations, Yearbook of National Accounts Statistics, 1963.20 These data are summarized in Tables 1 and 2. In these tables the countries are classified, on the criteria described in the Appendix as: Very Wealthy, Wealthy, Average, Poor, or Very Poor.21 The experiences of these countries over the period for which the United Nations provides data on the growth of GDP at constant prices (i.e., usually 1953-61)22 are classified as demonstrating: Little Price Change, Relative Stability, Mild Inflation, or Strong Inflation.

Table 1.Wealth, Inflation, and Growth
Average Increases inRepresentativeness1 Related to
Class of CountryPricesPer capita gross domestic productWorld average growth of GDPGroup average growth of GDP
Very wealthy1.91.93/43/4
Little price change1.21.12/22/2
Relatively stable2.52.71/21/2
Wealthy2.42.42/42/4
Little price change1.22.3-/l1/1
Relatively stable2.72.42/31/3
Average2.74.36/74/7
Little price change1.02.7-/l1/1
Relatively stable3.04.66/63/6
Poor93.48/129/12
Relatively stable2.14.56/74/7
Mild inflation72.5-/22/2
Strong inflation251.32/33/3
Very poor41.410/218/21
Little price change—0.20.81/11/1
Relatively stable1.61.36/156/15
Mild inflation92.61/2-/2
Strong inflation120.92/31/3
Over-all average4.52.029/4826/48
Source: Table 3.

The second of each pair of numbers is the number of countries in the subgroup in Table 3. The first of each pair is the number of countries in that subgroup whose rates of growth are consistent with the hypothesis presented in this paper, in that (a) if the countries are classified as “relatively stable” their rates of increase of GDP are greater than the average, and (b) if the countries are not classified as “relatively stable” their rates of increase of GDP are less than the average. The correctness of the hypothesis is checked for each country by comparing its rate of growth of GDP firstly with the average rate of growth of GDP for all the countries listed (“over-all average”), which gives its “representativeness related to world average growth of GDP,” and secondly with the average rate of growth of GDP of the group of countries to which it belongs according to its degree of “wealthiness,” which gives its “representativeness related to the group average of GDP.” As there are so few countries in each subgroup, it would not be appropriate to measure representativeness by any more sophisticated statistical techniques than the simple counting done here.

Source: Table 3.

The second of each pair of numbers is the number of countries in the subgroup in Table 3. The first of each pair is the number of countries in that subgroup whose rates of growth are consistent with the hypothesis presented in this paper, in that (a) if the countries are classified as “relatively stable” their rates of increase of GDP are greater than the average, and (b) if the countries are not classified as “relatively stable” their rates of increase of GDP are less than the average. The correctness of the hypothesis is checked for each country by comparing its rate of growth of GDP firstly with the average rate of growth of GDP for all the countries listed (“over-all average”), which gives its “representativeness related to world average growth of GDP,” and secondly with the average rate of growth of GDP of the group of countries to which it belongs according to its degree of “wealthiness,” which gives its “representativeness related to the group average of GDP.” As there are so few countries in each subgroup, it would not be appropriate to measure representativeness by any more sophisticated statistical techniques than the simple counting done here.

Table 2.Inflation, Wealth, and Growth
Average Increases inRepresentativeness1 Related to
Class of CountryPricesPer capita gross domestic productWorld average GDPGroup average GDP
Little price change0.91.63/55/5
Very wealthy1.21.12/22/2
Wealthy1.22.3-/l1/1
Average1.02.7-/l1/1
Very poor—0.20.81/11/1
Relatively stable2.12.221/3315/33
Very wealthy2.52.71/21/2
Wealthy2.72.42/31/3
Average3.04.66/63/6
Poor2.14.56/74/7
Very poor1.61.36/156/15
Mild inflation82.61/42/4
Poor72.5-/22/2
Very poor92.61/2-/2
Strong inflation181.14/64/6
Poor251.32/33/3
Very poor120.92/31/3
Source: Table 3.

See footnote to Table 1.

Source: Table 3.

See footnote to Table 1.

Table 1 suggests, first, that the available evidence is consistent with the view that there is a “profile of progress,” the rates of progress being lowest in very poor countries, more rapid in poor countries, most rapid in average countries, lower in wealthy, and still lower in very wealthy countries. Second, for each of these wealth groups, except the very poor where the results are rather inconclusive,23 the data are consistent with the view that there is a profile of inflation. (However, the data are less conclusive if the rates of inflation taken as separating experiences of low price change from price stability are the same for all countries.)

Table 2 provides an alternative summary of the data, indicating that deflation or unduly small price increases and strong inflation both appear to be inconsistent with relatively rapid growth. For each relative inflation group, the data are consistent with the view that there is a “profile of progress.”

It is possible to array the national data in matrix form on the criteria outlined in the description of Chart 4. This is done in the Appendix, Table 4, where the countries covered in Table 3 are ordered horizontally by income levels and vertically by average rates of price increase. The rates of growth in per capita GDP for each country are entered at the intersections of the coordinates for each country. It is possible to convert Table 4 into Chart 5 by drawing lines joining the intercepts for those members of each group of countries showing similar rates of growth which appear to fall on reasonable contours. The resulting contour lines in Chart 5 are quite similar to the hypothetical lines presented in Chart 4. The assessment of the representativeness of these data given in Tables 1, 2, and 5 suggests that the generalizations made here approximate the facts reasonably closely.

Chart 5.Wealth, Inflation, and Rates of Growth: Actual Contours1

1 Figures within the chart represent rates of growth per cent, per capita, per annum.

While these data suggest that there is a relation between inflation and progress, they must be regarded with skepticism. They comprehend only two of the important variables affecting growth. Population pressures, education, available natural resources, social traditions, and the other important determinants of the rate of development are not included. It is possible to conclude from these data that the rate of inflation may influence progress. Declining prices or unduly low price increases appear to be associated with low rates of growth. Relatively slowly rising prices—particularly in the wealthier countries—may have a stimulating effect. However, if the rate of inflation exceeds a certain (unspecified) rate, rising prices discourage economic development, and rapid inflation seriously inhibits growth. On the basis of these data, it is not possible to conclude that the rate of price change will determine the rate of economic growth.

APPENDIX

Table 3 presents all the available comparable data on average increases in per capita GDP from the UN Yearbook and on average changes in prices from IFS. Countries are classified by two criteria:

  • (1) Increase in prices

  • (2) Per capita GDP

Table 3.Individual Countries: Inflation, Wealth, and Growth
Increase in
Per Capita Gross Domestic ProductPricesPer capita gross domestic product
CountryPeriod(In U.S. dollars)(In per cent)
Very wealthy1,6501.91.9
Little price change2,0501.21.1
United States1953-612,3241.11.2
Canada1,7671.31.0
Relatively stable1,3002.52.7
Sweden1953-611,3132.73.4
New Zealand1955-611,2812.41.9
Wealthy1,1002.42.4
Little price change1,0291.22.3
Belgium1954-611,0291.22.3
Relatively stable1,1332.72.4
Australia1954-601,2112.51.4
France1953-611,1133.63.7
United Kingdom1,0782.12.0
Average8002.74.3
Little price change9751.02.7
Venezuela1953-619751.02.7
Relatively stable7753.04.6
Iceland1953-619373.82.5
Germany, Fed. Rep.9311.55.7
Netherlands7672.23.4
Finland7503.64.0
Austria6561.95.7
Israel5794.96.3
Poor3759.03.4
Relatively stable3752.14.5
Italy1953-614901.95.4
Denmark4752.33.4
Ireland4742.02.4
Jamaica1954-593612.07.2
Greece1953-613103.75.2
Nicaragua2881.50.3
Japan1954-612841.68.8
Mild inflation30072.5
Colombia1953-6130172.1
Mexico28863.0
Strong inflation375251.3
Argentina1953-61474240.4
Chile409330.6
Brazil1953-60250182.8
Very poor1254.01.4
Little price change216—0.20.8
Malaysia1956-60216—0.20.8
Relatively stable1251.61.3
Portugal1953-612181.34.3
Honduras1921.30.7
Philippines1911.22.1
Ecuador1790.91.1
Guatemala1640.32.3
Morocco1592.7—2.2
Peru1953-571482.60.3
Syrian Arab Rep.1954-611382.3—0.7
Ceylon1953-611220.31.1
United Arab Rep.1953-571160.42.1
Nigeria1953-56792.42.7
Thailand1953-61782.81.2
India1953-60672.01.4
Pakistan1953-61631.60.6
Burma511.22.8
Mild inflation10092.6
China, Republic of1953-6111583.4
Turkey78101.9
Strong inflation100120.9
Paraguay1953-6011112-1.0
Korea1954-60105132.0
Indonesia1953-5869111.7
Source: International Monetary Fund, International Financial Statistics.
Source: International Monetary Fund, International Financial Statistics.

The averages from this table are the summaries presented in Tables 1 and 2.

The choice of appropriate measures for average changes in prices is not easy. In some respects, wholesale or similar price indices are better measures of prices than cost of living indices, which frequently have a high wage element (e.g., in the services component) and relatively inflexible and essentially unmeasurable elements (e.g., rents and the cost of owner-occupied housing), and tend to be influenced by subsidies and other inflation-repressing measures. On the other hand, wholesale price indices are frequently heavily weighted with the prices of imports and exports and tend to be measures of the domestic equivalents of international prices rather than measures of domestic prices. Hence, cost of living indices are used here as the least unsatisfactory measures of domestic prices, i.e., of the degree of price inflation. This choice also maintains consistency between this and previous Fund studies.24

Each group of countries is divided into those with experience of little price change, relative stability, mild inflation, and strong inflation. For reasons outlined on page 88, the criteria separating little price change from relative stability are different for each wealth group. These experiences are defined as:

  • Little Price Change

    • All cases of declining prices and for:

      • Very Wealthy Countries

        • Average price increases of less than 2.0 per cent a year.

      • Wealthy Countries

        • Price increases of less than 1.5 per cent.

      • Average Countries

        • Price increases of 1.0 per cent, or less.

      • Poor Countries

        • Price increases of less than 0.5 per cent.

      • Very Poor Countries

        • Price increases of less than 0.1 per cent.

  • Relative Stability

    • Price increases above the ceiling for Little Price Change but less than 5 per cent.

  • Mild Inflation

    • Price increases of not less than 5 and not more than 10 per cent.

  • Strong Inflation

    • Price increases of more than 10 per cent.

Countries are also classified in wealth groups on the basis of their average per capita incomes in 1958. These groups are:

  • Very Wealthy

    • (With per capita GDP at factor cost estimated to be in excess of the equivalent of US$1,250 in 1958)

  • Wealthy

    • (With per capita GDP equivalent to US$1,000-1,250)

  • Average

    • (With per capita GDP equivalent to US$500-1,000)

  • Poor

    • (With per capita GDP equivalent to US$250-500)

  • Very Poor

    • (With per capita GDP equivalent to less than US$250)

There are serious conceptual as well as statistical difficulties not only in measuring per capita GDP in terms of national currency but also in determining the appropriate conversion factors for the estimation of dollar equivalents, the welfare implications of different patterns of income distribution in individual countries, and the conversion factors for different income levels. Hence, little significance should be given to the numerical relations of these measures. Rather, they provide a generally useful way of ordering countries by income level without providing a meaningful measure of the relative levels of real income in different countries. That is, they provide an ordinal rather than a cardinal ordering.

The entries for each group or subgroup of countries are unweighted averages of the individual observations for the countries forming the group or subgroup.

Table 4 is described in the text (p. 94). Table 5 provides an assessment of the representativeness of the contours in Chart 5, by comparing the number of countries in each group with similar rates of growth considered to be representative of the group, in the sense that their intercepts are used in plotting the group contours, with the total number of countries in each group.

Table 4.Wealth,1 Inflation,2and Rates of Growth3
Source: Table 3.

Represented by average per capita gross domestic product income measured in dollars in 1958.

Average percentage increase in prices as given in Table 3.

Average percentage increases in per capita gross domestic product, given in Table 3, are entered in the body of this table.

Source: Table 3.

Represented by average per capita gross domestic product income measured in dollars in 1958.

Average percentage increase in prices as given in Table 3.

Average percentage increases in per capita gross domestic product, given in Table 3, are entered in the body of this table.

Table 5.Assessment of Representativeness of Estimates of Relation Between Inflation, Wealth, and Rates of Growth
Countries Experiencing Annual Percentage Rates of Growth of GDP of1Representativeness of Growth Contours2
Less than 0-/3
0-0.51/3
0.6-1.59/11
1.6-2.511/12
2.6-3.58/9
3.6-4.51/3
4.6-5.52/2
5.6-6.52/3
6.6-7.51/1
7.6-8.5-/-
8.6-9.51/1
Total36/48
Source: Table 3.

The groups of countries with the rates of growth shown in the body of Table 4.

The second of each pair of numbers is the number of countries in Table 4 showing the average per capita rates of growth in GDP in that group. The first of each pair of numbers is the number of these observations which seem to fall on the appropriate contour line in Chart 5.

Source: Table 3.

The groups of countries with the rates of growth shown in the body of Table 4.

The second of each pair of numbers is the number of countries in Table 4 showing the average per capita rates of growth in GDP in that group. The first of each pair of numbers is the number of these observations which seem to fall on the appropriate contour line in Chart 5.

Inflation et croissance: la preuve statistique

Résumé

La plupart des études statistiques du rapport entre l’inflation et la croissance économique ont en général été peu concluantes, en partie parce que le taux d’inflation ne constitue que Tun des facteurs influen-cant le taux de croissance dans un pays. La présente étude renferme une analyse des données disponibles, stratifiées de façon à déterminer les effets de la richesse sur les taux de croissance. Elle constate que revolution récente n’est pas incompatible avec une hypothèse posée comme postulat. Selon cette hypothèse, la baisse des prix entrave la croissance économique, et la hausse relativement lente des prix—en particulier dans les pays les plus industrialisés—peut avoir un effet stimulant; cependant, si le rythme d’inflation dépasse un certain taux (non spécifié), la montée des prix fait obstacle au développement economique, et l’inflation rapide entrave sérieusement la croissance.

Inflación y crecimiento: la comprobación estadística

Resumen

La mayoría de los análisis estadísticos sobre la relación entre la inflación y el crecimiento han tenido a ser poco concluyentes, en parte debido a que el ritmo de la inflación es sólo uno de los factores que influyen en la tasa del crecimiento de cualquier país. Este estudio examina los datos disponibles, estratificándolos de modo de acusar los efectos que la riqueza surte sobre el ritmo de progreso. Encuentra que la experiencia reciente no es incompatible con una hipótesis que ha sido planteada como postulado. Esta hipótesis es que la declinación de los precios inhibe el crecimiento, en tanto que el aumento de los mismos a un ritmo relativamente lento—especialmente en los países más prósperos—puede producir un efecto estimulante; sin embargo, si el ritmo de la inflación pasa de determinada tasa (no especificada), el alza de los precios obstaculiza el desarrollo económico y la inflación acelerada inhibe seriamente el crecimiento.

Mr. Dorrance, Chief of the Financial Studies Division, has been a lecturer at the London School of Economics and a member of the staff of the Bank of Canada.

See, for example, International Monetary Fund, Annual Report, 1962, pp. 42-43; Pieter Lieftinck, “Monetary Policy and Economic Development,” Finance and Development, Vol. I (1964), pp. 152-57; and Graeme S. Dorrance, “Inflation and Growth,” Finance and Development, Vol. I (1964), pp. 32-38, and “The Effect of Inflation on Economic Development,” Staff Papers, Vol. X (1963), pp. 1-47.

“Inflation, Deflation, and Economic Development,” Staff Papers, Vol. VIII (1960-61), p. 102.

Dorrance, “The Effect of Inflation on Economic Development,” loc. cit., p. 3, footnote 4.

The Relation Between Inflation and Economic Development: A Statistical Inductive Study,” Staff Papers, Vol. VII (1959-60), p. 302.

Dorrance, “The Effect of Inflation on Economic Development,” loc. cit., p. 2.

This argument is closely related to, but somewhat different from, the concept of the “take-off” outlined in such works as W. W. Rostow, The Process of Economic Growth (New York, 2nd ed., 1960).

See, for example, J. K. Galbraith, The Affluent Society (Boston, 1958), especially Chapter 19, for a discussion of this aspect of growth in a very wealthy economy.

The shape and values of Chart 1 are, in fact, based on the averages contained in Table 3 in the Appendix, adjusted to account for the influence of inflationary conditions on these rates.

The greater difficulties faced by poorer countries in fostering growth from their own resources provide the basis for one argument in favor of aid from the wealthier to the poorer countries in order to maximize international welfare.

It should not be suggested that if residents of Mediterranean countries were to forego their siestas, even if they thereby managed to achieve an increase in material output, they would be enhancing their welfare.

As countries progress, some of the arguments for the maintenance of authoritarian regimes become less persuasive, and material progress may make it possible to achieve noneconomic benefits of liberty.

The social welfare associated with the substitution of decent housing for slums cannot be separated into its material and aesthetic components.

This may be regarded as a generalized statement of Engels’ law, although the actual shifts in the structure of production envisaged here are likely to involve absolute declines in the output of certain goods and services rather than merely slower growth in some lines than in others (it should be remembered that, in 1945, the per capita consumption of carbohydrates from potatoes and bread was absolutely higher in Poland than in the United States).

The term “economic unit” is used to mean any complete decision-making entity whose activities may be identified conceptually (e.g., a bachelor living alone, a family living together, a partnership, a company, a charity, a government).

An incident where monetary policy was used to facilitate the transfer of resources by encouraging a slight rise in prices (in 1939-40) and then later used to limit price increases in order to prevent undesirable distortion (in 1941) is described in “The Bank of Canada,” by Graeme S. Dorrance, in Banking in the British Commonwealth, ed. by R. S. Sayers (Oxford, 1952), pp. 138-40.

The shape and values of Chart 2 are, in fact, based on the data for the very wealthy countries contained in Table 3 in the Appendix.

It is possible that this inflexibility of relative prices in very wealthy countries, as well as the factors already mentioned, is one of the forces leading to the downward slope of the “profile of progress” at its wealthy end, as suggested above.

It should be noted that, if these structural differences, in fact, exist between poor and wealthy countries, the inherent inflationary bias of the wealthy countries will facilitate the economic diversification of the poorer countries. As prices rise in the wealthy countries and remain stable in the poorer countries, the range of activities in which the wealthy countries become submarginal will grow and, consequently, the range of activities in which the poorer countries become competitive will widen.

Given the limited statistical examination’ of this thesis, little significance should be attached to the values or even to the shape of the contours in Chart 4. However, they are based on the observations presented in Table 3 in the Appendix and are, in fact, not inconsistent with the interpretation of these data given in Chart 5, which on the basis of the assessment of its reliability given in Table 5 appears to be reasonably representative.

The latest issue available when this paper was drafted.

The Yearbook presents data for both 1958 and 1962, but the 1958 data are much more comprehensive than those for 1962. Hence, they have been used. There would be some significant differences between a 1958 and a 1962 classification (e.g., Germany would be transferred from the “Average” to the “Wealthy” category, ranking after Australia).

For the dates actually covered, see Appendix, Table 3.

But suggest that strong inflation definitely discourages progress.

In addition to Bhatia, Tun Wai, and Dorrance, op. cit., see Gertrud Lovasy, “Inflation and Exports in Primary Producing Countries,” Staff Papers, Vol. IX (1962), pp. 37-69, and A. S. Shaalan, “The Impact of Inflation on the Composition of Private Domestic Investment,” Staff Papers, Vol. IX (1962), pp. 243-63.

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