The prevailing theories of inflation in developing countries, as well as developed ones, consist essentially of two major types: (a) the demand-pull type, and (b) the cost-push type.
Developing countries in general lack strong organizations on the side of the labor force, and, hence, it is extremely unlikely that wages in those countries can provide the continuous upward push for a long period of inflation. Nor are any other items on the cost side likely to provide something more than an occasional and discontinuous disturbance.
The chronic process of inflation, found to a greater or a lesser extent in almost every developing country, must, therefore, be the result of the excessive creation of money supply by the responsible monetary authority in each nation. The creation of money supply is any country with even a rudimentary, modern monetary and banking system is usually induced by three major common causes: (1) the government’s reliance on money creation to finance its budget deficits; (2) the banking system’s reliance on money creation to finance credits extended to industries; and (3) the banking system’s reliance upon money creation to purchase and accumulate foreign exchange assets.
We have selected twenty-seven developing countries, chiefly on the basis of the availability of comparable monetary statistical data, and have compared their inflationary experiences during the two decades 1961–70 and 1971–80. This examination illustrates that inflation is not likely to taper off just because developing countries gradually build up more efficient machinery for the collection of tax revenues, which would mean that budget deficits might be more under control. We also see that there is a tendency towards the excess expansion of credit to industries, which supercedes government borrowing from banks and becomes the primary cause of inflation in developing countries. Therefore, apart from the provision of some increase in the money supply (M1) by the properly authorized monetary authorities to allow for genuine growth in the transaction demand for cash balances, any arbitrary creation of money supply by excess credit expansion must be soundly condemned as an “art of burglary.” Unless such acts of burglary are stridently denounced in most universities, and unless they are subjected to legal sanctions, it is unlikely that inflation will even cease to plague human societies.
