Inflation and the Financing of Economic Development

Abstract

The central topic of this book being the financial aspects of the development problem in Latin America, it might appear that in the chapter on inflation we should turn immediately to the analysis of the direct effects of inflation on the sources and uses of development funds, public and private, domestic and foreign. However, to narrow the question in this way would be to run the risk of severely distorting the problem. A central argument of one school of thought on inflation in Latin America is not so much that inflation provides a desirable means of financing development — quite the contrary — but rather that an ongoing inflation has to be tolerated in the short run in the pursuit of development. Given this line of argument, it would be misleading to discuss the direct effects of inflation on savings and investment without exploring the broader direct and indirect relationships between inflation and growth. Further, it will be clear that underlying such a discussion are highly controversial issues. A person’s view of the relation between inflation and growth, and his interpretation of the empirical evidence differ greatly according to his view not just of the origins of the typical inflationary process, but even of the whole framework of development in Latin America. Thus to approach the question of the relation between inflation and growth we must first begin with some understanding of the major schools of thought on the origin of inflation in Latin America.

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