On Structural Inflation and Latin-American 'Structuralism'

Author(s): Julio H. G. Olivera

Source: Oxford Economic Papers, New Series, Vol. 16, No. 3 (Nov., 1964), pp. 321-332
Published by: Oxford University Press
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ON STRUCTURAL
LATIN-AMERICAN

AND
INFLATION
'STRUCTURALISM'

By JULIO H. G. OLIVERAI
We mustnot be led aside by a feelingthatmonetarytroubles
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 severityand persistence,has

been afflictingforyears some Latin-Americancountrieshas given rise in
them to a lively controversyabout its genesis and possible remedial
measures. There are some who maintain the view, often denoted as
'structuralist', that such perturbations should be attributed to nonmonetary imbalances, partly due to flaws in the economic and social
organizationof those countries; and that, therefore,the reliance on monetary restrictionto check price rises in them is unjustified.2
The failure of successive stabilization plans, not always imputable to
defects in their practical execution, has of itself tended to favour the
credibility of the non-monetary diagnosis; but the influence of the
'structuralist'doctrineis still quite limited. This may be due to some relative intricacy of formulation,both fromthe viewpoint of theory and of
policy,in contrastto the analytical precisionof the monetarymethod and
the clearnessofits counterinflationary
prescriptions.Moreover,the rather
1

The author is gratefulto ProfessorSir John Hicks forhis kind interestand comments.
The most comprehensive and rigorous statement of structuralism is Mr. Dudley
Seers's 'Theory of Inflation and Growth in Underdeveloped Economies Based on the
Experience of Latin America', OxfordEconomicPapers, June 1962. In the Appendix, under
the title 'A Note on the StructuralistSchool', Mr. Seers presentsan historicaccount of the
development of that doctrine and some of its representative bibliography. The locus
classicus of the structuralistapproach is Osvaldo Sunkel's article 'La inflaci6nchilena: un.
enfoque heterodoxo', El Trimnestre
Econdmico, M6xico, October-December 1958 (also in
InternationalEconomicPapers, No. 10). A recentinterpretationof the Argentineexperience
witha similartechniqueofanalysis is sustained inAldo Ferrer'sbook La Economia Argentina,
e
Mexico, 1963, ch. xvii. Celso Furtado's study of the Brazilian inflation(Desenvolvirnento
Rio de Janeiro, 1961, ch. 6), through his emphasis on sectoral imSubdesenvolvimnento,
balances, can be considered as structuralistlato sensu. But there are many differences
among structuralistauthors, both in matters of theoryand of policy, and the observations
presentedin the text regarding'structuralism' or the 'structuralistschool' 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 formationand characteristicsof the 'structuralist'
doctrine,himselfanalyses the problemof structuralinflationin his book Hacia una dincmica
del desarrollolatinoamericano,Mexico-Buenos Aires, 1963.
2

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322

ON INFLATION

AND LATIN-AMERICAN 'STRUCTURALISM'

eccentricclaim by some of its advocates to have initiated therebya profound intellectual revolution,comparable to the Keynesian revolutionin
economic theory-a claim somewhat disproportionateto the titles on
which it is based-has not contributedto a reductionof the apathy with
which the structuralistideas were received in academic circles.
Abstractingfrom singularitiesin statement, nevertheless,it must be
recognizedthat the 'structuralist' doctrinehas focused attentionon some
relevantcausal influences.It is, of course,a matterof judgementwhether
they have the all-importantrole that the structuralistsbelieve them to
play: it is still questionable whether,as a matteroffact,they are the overruling or even the dominant causal factors in Latin-Americaninflation.
But anyonewho has studied closelythe inflationarysequence in,let us say,
Chile, Brazil, or Argentina,will find it difficultto deny the elements of
truthwhich lie at the centreof the structuralistapproach. They point to
a non-negligible,though oftenneglected,part of the real process.
Even to explain a monetaryphenomenonsuch as inflation,it is sometimes necessary to followthe classical advice and lift up the 'monetary
veil'. It is impossible to understand fullythe chronicinflationin some
Latin-Americancountriesif one attends only to the monetaryend of the
system: be it the money supply or outlay, as in demand-inflationhypotheses, or the money price of labour (or other supply factors),as in costinflationtheories. To a significantdegreethe changes of such magnitudes
have not been truly initiatingfactors. They have not been autonomous
in character, but induced by other economic variations. It is essential
thereforeto search beneath the monetary surface, into the underlying
region of physical flows,real prices, and sectional disequilibria.
II
The useful core embodied in the 'structuralistdoctrine' can be easily
translated into perfectlyorthodox and simple economic analysis.' Suppose that the existing set of prices equates demand with supply in all
marketsforproducts and productiveservices. Given such circumstances,
let us furtherassume that some change of preferencesinduces the population to reassign its total outlay, so that they spend more on a certain
product or class of products and less on the remaining commodities.
There is a change in the directionof demand withoutalteringthe general
level of intended 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 TrimestreEcondmnico,
M6xico, October-December 1960.

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J. H. G. OLIVERA

323

position ofrelativeprices. Except in the rare hypothesisthat the structure

of supply can adjust to a demand shiftat constantmarginalcosts-that is,
the case of infinitely
large supply elasticities-there will be some change in
price ratios. It is also well knownthat the smallerthe relevantelasticities
of supply the largerwill be the variation of relativeprices. In the limiting
case of a completelyrigid supply matrix,the new pattern of expenditure
will entirelyreflectitselfin a new set of relative values.
But whatever its intensitymight result, it is known that any adjustment 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 pricelevel ? Let us imagine,fora moment,that eitherthe money supply or the
velocity of circulationis passive, so that the market of money keeps on
continuallyin a situation of indifferentequilibrium.' Clearly, the final
outcome of the demand shiftwill depend, under such conditions,on the
specificpatternsof response over time of the individual prices. But there
are two extremecases in whichthe effecton the price-levelturnsout to be
partly predictable. One is what we may describe as perfectflexibilityof
moneyprices. We mean by that a price systemin whichall priceshave the
same speed of response in proportionto the quantity of excess demand
in the respective market (uniform flexibility),and, furthermore,the
absolute velocity of response depends on the absolute quantity of excess
demand, not on the sign of it (symmetricflexibility). In such case the
adjustment process is entirelyneutral with regard to the general pricelevel, its impact thereonbeing null both in the final situation and in the
intermediatestages of adjustment. Upward price movementsare exactly
balanced by downwardprice movementsas to the heightof the price-level.
The other clear-cutcase is that in which money prices are only responsive
to either positive or negative excess demand (unidirectionalflexibility).
Then every relative price adjustment gives rise to a variation of the price
level, upwards if there exists downward inflexibilityof money prices,
downwardsif thereis upward inflexibility.
Thus, in a medium of downward inflexiblemoney prices, any adjustment of price-ratiosreverberatesas an increase of the money price-level.
There are some observationswhich must be added on this point. First, it
should be noted that complete downwardprice-inflexibility
is a sufficient,
1 The set of relative prices necessary to equate demand and supply will hence be consistent with an infinitenumber of money price-levels. But startingfromgiven initial money
prices, the indeterminatenessof the new price-levelmay be simply (so to speak) a static
mirage. If the rates of change of the individual prices-or, at least, of any one of themwith 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 systemhas a stationarysolution) can be identifiedin that way.

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324

ON INFLATION

AND LATIN-AMERICAN

'STRUCTURALISM'

but not a strictlynecessary,conditionforthe kind of effectunder study.

If the facilityof pricesto move downwardsis weak, at least in comparison
from
with theirresponsivenessto upward pressures,even if it is different
zero, thereis a strongchance that the money-pricerises consequent upon
a shiftof demand will outweighthe price falls,thus spellingan increase of
the price-level. Second, under the enunciated conditions,every change in
the value relationsamong goods will effectitselfthroughan increase of the
price-level,whateverthe cause of the change considered.
The second point invites some furthercomment. Although, for purposes of illustration,we initially assumed a change in the direction of
demand, it is clear that any movementof relative prices determinedby a
change in the conditionsof supply will similarlyproduce, if money prices
are rigiddownwards,an increase of the generalprice-level. Any change in
the marginal rates of substitutionamong products or factors,or among
productsand factors,whetherit originatein varyingconsumerpreferences,
productionfunctions,or factor-endowment
ratios, is bound to have some
such effectupon the level of prices. Structuralinflationcan thus be either
'demand-shift'inflationor 'cost-shift'inflation; its sourcemay be situated
eitherin the structureof demand or in that of supply.1 But it is worth
may differaccordrecalling,en passant, that the degree of price-flexibility
ing to the originand nature of the change.

III
In the price responsesevoked by any change in the equilibriumposition
ofrelativeprices,however,thereis a dual aspect ofparticularimportance:
(a) the flexibilityof nominal or absolute prices and (b) that of real or relative prices themselves. We have just seen that a downward inflexibility
of absolute prices is sufficientto entail that any adjustment of relative
prices to a new position implies an inflationarychange of the money
price-level. But the amount of inflationbroughtabout by any given displacement of equilibriumdepends upon the way in which relative prices
respondto the shiftof equilibriumvalues. This is a most importantpoint.
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 fortha reduction of the price of its product relative to the prices of all other products; this adjustment of relative prices will, in a money economy,proceed eitherthrough
a fallin the money price of the product that now requiresless labour per unit than beforeor
throughan 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 restoredthrough a general increase in money prices' (Fritz Machlup:
'Another View of Cost-Push and Demand-Pull Inflation', The Review of Economnicsand
Statistics,May 1960).
A well-knownmodel of 'demand-shiftinflation' was presented by Charles Schultze, in
Study Paper No. 1, Joint Economic Committee, Recent Inflation in the United States,
Washington 1959.

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J. H. G. OLIVERA

325

variation in the data may give rise to an unlimited amount of inflation.

Even if the movementis convergenttowardsequilibrium,thereis a difference accordingto whetherthe process is monotonicor oscillating,forthe
occurrenceof fluctuationsmeans that a largerrise in money prices will be
necessary to performthe same adjustment.1
It should be noted, in fact, that the consequences of a relative price
variation upon the money price-levelare not reversible. A returnof the
price ratios to the position they had beforeany given change would not,
under conditionsof downwardprice-inflexibility,
wipe offthe increase in
the price-levelbroughtabout by theirprevious alteration. Moreover,the
movement of relative prices back to their formervalues would cause an
additional increase of money prices. It is evident, therefore,that the
total increase of the moneyprice-levelgeneratedby any given adjustment
of relativepriceswill be greater,even to a verylarge rate, ifthey approach
theirnew equilibriumthroughoscillations ratherthan directly. The size
of the total effectwill vary with the amplitude and frequencyof the intervening fluctuations.
The dynamicsof stabilityand instabilityhave an immediatebearingon
all this. From a purelyquantitative viewpoint,we may compare the total
induced increase of the price-levelwith the underlyingchange in the equilibriumvalue of relative prices and obtain thus a syntheticexpressionwhich may be denominated 'the structuralinflationmultiplier'-of the
inflationarypotential inherentin a change of that sort. But the distribution over time is at least as relevant. In this connexion,and froma qualitative point of view, we may note that any shiftof the equilibriumvalue
of relative prices, whatever the magnitude of the change, can push the
money price level into one of the followingtypes of sequence: (a) a price
rise of limited duration, at a decreasing or finallydecreasing pace, (b) a
price rise of unlimited duration, at a constant or an irregularpace, (c)
a price rise of unlimited duration, at an increasingpace. The latter, of
to hyperinflation
withinthe domain of structural
course,is the honmologue
inflation. But both (b) and (c) imply dynamicallyunstable systems.

IV
We must reconsidernow the monetary setting in which the process
develops. In order to abstract fromany limitingor reinforcinginfluence
1 The principalformsof 'friction'in the adjustment ofrelativeprices (including,ofcourse,
factorprices) are (a) the tendencyto increase nominal wage-rates,with a longer or shorter
time-lag,to compensate forrisesin the cost ofliving,(b) the tendencyto maintain customary
wage differentials
betweendifferent
occupations,(c) the tendencyto maintainproportionality
between the prices of manufacturedgoods and theirvariable unit costs, and (d) the tendency
to keep a more or less constant ratio between farmprices and the prices the farmerpays for
industrial products. (See J. Marcus Fleming, 'The Bearing of Non-Competitive Market
Conditions on the Problem of Inflation' OxfordEconomic Papers, February 1959.)

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326

ON INFLATION

AND LATIN-AMERICAN 'STRUCTURALISM'

of the monetaryconditions we assumed at the beginningthat either the

velocity of circulationor the money supply is purely passive, thus ensuring that the flow of money exchanged for products and services accommodates itselfto price-levelvariations rather than the other way round.
This notional economy allowed us to describe the elementswhich should
be consideredas constitutingthe analytic prototypeofstructuralinflation.
In reality,however,monetarycircumstancesoftenplay a more independent role. The velocity of circulationof money only behaves passively (if
it does at all) withinfairlynarrowlimits,beyond which any furthertransferenceof fundsbetween active and idle moneyholdingsis bound to react
on the market situation. As to the money supply, although the fullemploymentgoal can be construedas requiringa part passu adaptation of
the financialbase to the rise of the price-level,otherconcurrentobjectives
of monetarypolicy will probably cause the moneysupply to be more of an
autonomous factorregardingprice 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 possibilityof monetaryadjustment. The case is not so clear as under 'cost-push inflation1 but has a
numberof commonpoints withit. There is, firstly,a possible adjustment
throughthe rise of the interestrate. The additional needs of financewill
provoke an expansion in the demand forliquid resourcesand, througha
higherinterestrate, idle balances will be attracted into active circulation.
If the demand for money happens to be interest-elasticwhile that for
commoditiesis not, then that mechanismwill be capable of supportinga
new equilibriumat the higherprice-level. Secondly,thereis also the possibility of a contractionin the demand for money via expectations. The
price increase may cause anticipationsof new price rises (an 'elasticity of
expectations' greater than one), intertemporalshiftsof expenditurewill
ensue and the velocity of circulation will increase as a result of them.
Thirdly,the income distributioneffectsof the relative price changes may
be of such character as to reduce the over-all demand for money: for
1 The reader will surelyperceive that we are speaking of 'cost-push inflation'in its usual
sense, that is, of a type of inflationaryprocess caused by 'autonomous' increases in the
nominal price of labour or other productive elements. Nevertheless,the definitionmay be
broadened so as to include also the case of structuralprice-rises. Thus ProfessorJohn R.
Hicks, in his lecture on 'Inflation and Growth' delivered at the Universityof Buenos Aires,
discernedbetween demand-pulland cost-pushinflationas follows: 'According to the former,
inflationis due to excess spending; businesses spendingmore on new plants than the public
is willingto save, or governmentsspendingmore than they raise in taxes or than the public
will lend to them fromits savings. According to the latter (the cost-push view), inflation
comes about throughrises in particular prices (due, initially,to causes that may as well
belong on the supply side as on the demand side); such particular price-risesneed not
generalize themselves,but in fact they oftendo so.' (The Reviewof theRiver Plate, Buenos
Aires, 22 May 1962).

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J. H. G. OLIVERA

327

instance, if price-ratiosmove 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 efficacystronglydepends on adventitiousfacts.
Therefore,in a case of structuralinflation,if the monetaryauthorities
abstain fromenlargingthe money supply in the requiredmeasure,so as to
permit the sale of currentoutput at the higherprices, there will follow
some compressionof the levels of productionand employment. Clearly,
with downward-inflexible
prices, thereis no automatic correctiveto such
a state of things; fromthe analytical viewpointthe systemis over-determined. The contractionof real output, moreover,throughso-called 'income effectsof income variations',1 as well as forpossible accompanying
changes in income distribution,will of itself cause new shiftsof relative
prices, thus adding a secondarywave of upward pressures on the pricelevel.
But there is a side issue that must be mentioned. If downward pricerigidityis not absolute, the influenceof excess supply will tend to reverse
somewhat the previous price increases. The magnitude of such reduction
will depend on various circumstances. Indeed, given a non-complaisant
monetarypolicy, as soon as the premiseof total downwardinflexibilityis
dropped the model of structural inflation has to be qualified further.
contexts: either
We can talk of partial downwardinflexibilityin different
when the possible reduction is more or less straitlybounded, so that it
may not exceed a certain fractionof the previous level; or when the rate
of reduction over time is comparativelylow. Under the firsthypothesis,
the viability of structural inflation depends on the magnitude of the
structuralpressureupon the price level. Under the second assumption,it
depends on the lengthof time: if the period allowed foradjustment,after
each change in price-ratios,were infinitelylong, structuralprice increases
could only be transitoryeffects. Thus, withinthe second type of inflexibility,the succession of relative-pricemovements(eitherthroughchanges
in equilibriumor by the 'multiplier' process mentionedabove) is essential
forupholding theirinflationaryrepercussions.2
V
We are now in sight of what may be considered the essentials of this
type of inflation. An interestingaspect is the relation it may bear to
1

A. Lindeck, A Study in MonetaryAnalysis, Uppsala, 1963, passim.

If structuralinflationis of the demand-shifttype it may occur,under partial downwardinflexibility,that the pace of shiftingdemand should be increasing in order to guarantee
a continually upward price-level pressure (Martin Bronfenbrennerand F. D. Holzman,
'Survey of Inflation Theory', in AmericanEconomic Review,September 1963, p. 613).
2

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328

ON INFLATION

AND LATIN-AMERICAN 'STRUCTURALISM'

economicgrowth.The 'structuralistschool' seems clearlyto be in two minds

about this problem. Sometimes it appears to regard structuralinflation
a by-product of growth,which could not be avoided without stopping
growthitself. This is an interpretationwhich the structuralisteconomists
oftenapply,forinstance,to the Brazilian inflation.But quite as frequently
spokesmen of that school denounce stagnation as a cause of structural
pressureson the price-level,and recommenda policy of growthpromotion
as the best line of attack against that sort of inflationarydisturbances.
This recipe has been extended, most typically,to the Argentinecase.
Now, it must be recognized that the relationship between structural
inflationand economic growthis neithersimple nor unequivocal. From
the foregoinganalysis, however,two extreme cases may be discerned,an
optimumand a pessimum. The optimum case is balanced growth,understood in the sense of an elastic continuous adaptation of the expanding
output to the pattern of demand; a case in which,therefore,the various
product marketskeep constantlycleared without relative-pricechanges.
This situationis optimumin that the objective of growthis achieved without any concomitant structuralinflation. The opposite pole, the pessimum, presents relative-priceinstability and lack of economic growth:
what may be referredto, by contrastto the othercase, as unbalanced stagnation or decline. In such context the frustrationof the growthobjective
will be accompanied by structuralprice-rises.
There are two other possibilities which, considered through the dual
objective of price stability and economic growth,should be ranked between optimum and pessimum. One is unbalanced growth,where the
increaseofproduction,failingto adjust completelyto the marketdemand,
is accompanied by persistentshiftsof relative prices. The other may be
described as balanced stagnation or (if output falls) balanced decline,
wherethereis neithergrowthnor change in price-ratiosand, consequently,
no structural-inflation
problem.
By means of these primarydistinctionswe can now examine the consequences of passing from stagnation (or decline) to economic growth.
There are several possible cases, with distinct implications concerning
structuralprice-rises. A change from'balanced' stagnation (or decline)
to balanced growth,being positive as regardsthe rate of output, is neutral
in its effecton the price level. A change frombalanced stagnation (or
decline) to unbalanced growth,which means an improvementon the side
of output,is neverthelessdisturbingin regardto price-stability.A transit
fromunbalanced stagnation (or decline) to balanced growth,on the contrary,involvesa progressin both the output and the price-levelobjectives.
Finally, a change fromunbalanced stagnation (or decline) to unbalanced
growth,also positive with respect to output, may have eitherneutral,or

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329

accelerating, or decelerating effects upon the structural price-riseswhich will, anyhow,persistunder the new set of conditions.
We findhere two opposing forcesat work. On the one hand, given the
othercircumstances,growthis normallyaccompanied by a greateramount
of change than stagnation or decline. Therefore,a growingeconomy is
likely to be subject to wider variations in inter-sectoralterms of trade
than it would experienceif it did not grow.' But, on the other hand, the
facilityof relative-priceadjustmentswill also be greater. In a stagnant or
declining environment,the adaptation of relative prices to new equilibrium data is certainto encounter substantial resistance,inasmuch as it
implies not only a relative but also an absolutedecreaseof real income for
the affectedgroups. If the latter hold any degree of controllinginfluence
over prices, the movement of value relations will probably assume a
fluctuating form, with alternative marches towards equilibrium and
away fromit. In a growingsystem,on the contrary,particularlyif the
rate of growthis high,the shiftof relative prices may be compatible with
real income increases even forthose sectors against whom price-ratiosare
varying. Therefore,althoughthe 'multiplicand' ofstructuralinflationwill
probably be largerin the growthcase, the 'multiplier' can be expected to
be smaller than under stagnation or decline.
VI
The relationshipof structuralinflationto the stages of economic evolution-as distinctfrompurelyquantitative output growth-is also difficult
to establish in general. This partly reflectsthe large halo of uncertainty
around economic evolution, its course and nature, as well as its significance from the standpoint of alternative degrees of economic development. But whatevermodel of economic evolution is adopted or assumed,
it is difficult
to findan unquestionable correspondencebetweenthe various
stages and the existence or intensityof structuralprice-rises.
In our opinion, the most fruitfulapproach 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 bringsabout some typical changes
in the main characteristicsby whichit operatesas an allocator ofresources;
namely, in the mobilityof factors,which denotes theirresponsivenessto
price differencesamong occupations; and in price flexibility.According
to generallyaccepted ideas, economic progressis likely to exhibit an increase of the relative importanceof manufacturesand organized services
1 As Dr. Paul Streetenpoints out, 'for countriesembarkingon development,unbalance
is inevitable .... All investmentcreates unbalances because of indivisibilities,sluggishness
of responses, and miscalculations' ('Unbalanced Growth: A Reply', Oxford Economic
Papers, March 1963).
4520.3

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in total production; so that, given the high degree of downward pricerigidity prevalent in such sectors, the overall downward flexibilityof
moneypricesis bound to diminish. There may be also a tendency,based on
the operation of the so-called principleof countervailingpower, 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-pricefixingon behalf of other activities where,as is the rule in
agriculturalmarkets,full competitionexists among the producers.
Contrariwise,the mobility of resources can be expected to show a
broadly rising trend. The mobility of land will be favoured by the improvement 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 labour is also likelyto
increase over time. This will be due to a decreasing influenceof nonpecuniaryelementson the election of employment;to better and cheaper
transportationand, in general, to lesser 'transfercosts' associated with
mobility; and also to the improvingeducational level of the population.
It is true that, at a certain stage, the growthof the labour unions may
resultin restrictionsto occupational mobility; but, anyhow,the degree of
is likely to be,
responsivenessof the labour forceto wage rate differences
on balance, considerablygreater in the more than in the less advanced
phases of economic evolution.
and mobility of
Combiningthe long-runtendencies of price-flexibility
factors, it is quite clear that the risk of structural inflation must be
minimumbothforprimitive,pre-industrialsocieties,and forfullydeveloped
industrialsystems. This is so, in the formercase, because the fluctuation
of absolute prices impedes any sizeable effectof relative-pricevariations
upon the price-level; whereas, in the latter type of economy, the comparatively high mobility of factors maintains relative-pricevariations
withinmoderate limits. If structuralinflationappears therein,it must be
ratherunder the formof 'creeping inflation'.
However, there may be some intermediatestage in the course of economic advancement-a halfwayperiod whichmay well include some large
part of the conversioninto a fullyindustrialeconomy-where downward
exists side by side with low mobility of factors. The
price-inflexibility
occurrenceof such a stage is not inevitable, fora sustained rise in factormobilitymay precede the emergenceof any significantlack of flexibility
in prices; and, as a matterof fact,this is reallywhat happened duringthe
historicalevolution of the now developed economies. Nevertheless,under
contemporaryconditions,the order of events in the lapse of time is frequently 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.

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J. H. G. OLIVERA

331

present in certain developing nations) where a scant measure of factor

mobilityoccurs with an almost completedownwardinflexibilityof money
prices.
In such a context, the degree of exposure to the peril of structural
inflationis evidentlygreat. Any change of price-ratioswill reflectitself
on the price-level,while the rigidityof the structureof supply, derived
from sluggishnessin factor movements, will magnifythe amplitude of
relative-pricevariations. If there comes about any important shift in
the basic data of equilibrium,a process of structuralinflationis certainto
ensue. It seems logical, therefore,that the existence of intense structural
inflationhas been noticed with respect to some 'middle-class' countries,
and not to those in more extremestages of economic development.

VII
Perhaps the main weakness of the 'structuralistschool' lies in its policy
prescriptions. Its advice on how to combat inflationis little better than
overt conformism.Sometimes 'structural' changes such as (principally)
land reform,intended to increase the mobility of factors,are offeredas
means to a 'basic and lasting cure'. But there is a notorious lack of
proportionbetweenthe efficacyof such long-runmeasures,howeverbeneficialwe may suppose them to prove, and the necessityto counteractprocesses of inflationwith 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 involuntaryunemployment,
recommendedlong-termstructuralchanges favourable to price and wage
flexibilityas a practical way of correctinga slump.
Is it possible to develop a more 'operational' attitude? It must be
recognized,of course, that structuralinflationis by much the most unmanageable species of the inflationgenus. It is far less susceptible to
instrumentsof economicpolicy than 'demand-pull inflation',and even less
than 'cost-push inflation'. But we may doubt whetherit is completely
intractableas most structuralistsbelieve it to be. In orderto perceive the
problem in its true magnitude it is necessary to take some mental precautions. The term 'structural' is a slipperyword, that carries the risk
of lettingthe analysis glide into a harmfulambiguity.
Many countries,in fact, by force of their 'structural' features,have a
strong proclivityto 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 deeprooted in their economic structuresuch propensitymight be, the corresponding inflationarydisturbances cannot be envisaged as structural

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332

ON INFLATION

AND LATIN-AMERICAN

'STRUCTURALISM'

inflation. This is quite clear from the above analysis, but the 'structuralistschool' has not been very particularabout the point. One thingis
structuralinflationand another structuralpronenessto inflation. Sometimes the 'structuralistschool' sound as if they were includingeverycase
in which an underdevelopedcountrytriesto growat a rate higherthan the
(ex ante) equilibriumof saving and investmentwould permit. This has a
far-reachingimplication fromthe standpoint of economic policy. Even
if genuine structuralinflationis also at work in such cases, the element
that it contributeswill be thereinassociated with a wave of sheerdemandpull inflation.
There is another widespread characteristic among the 'structuralist
school' which tends to make the policy problem more formidablethan it
needs to be. It is theirunderratingof financialpolicy as a possible means
against structural inflation. The representative 'structuralist' believes
that, since the cause of structuralinflationis non-financial,its remedy(so
far as a remedybe conceivable) should be procuredthroughnon-financial
policies: a sort of economic analogue to similia similibuscurantur.Nevertheless, such a correspondencebetween causes and therapies is not a
matterof logical necessity. If it were foundthat business fluctuationsare
due to sun-spot changes, as some authors have held, it would not follow,
of course, that the only chance for stabilization policy would be to discover the way of paralysingsun spots.
It would be useful, we think, to examine the possibilities of financial
policy with respect to structuralinflation. Although such a study would
exceed the limitsof this paper, let us note that it is a subject-matterfrom
which interestingpractical conclusions could be derived. The degree of
price flexibility,in so far as it depends on the price policies of business
enterprises,is not entirelyforeignto the liquidity situationin which they
are accustomed to operate. Furthermore,the mobility of liquid capital
can largely compensate for the lack of mobility of other factors in the
adjustment of supply. This is a most importantpoint, since the mobility
of capital is quite amenable to the influenceof skilfulfinancialpolicies,
all the more if they are backed by adequate tax regulations. Even in
the shortrun,this opens a considerablespace of manoeuvreagainst structural price-rises.

The University,Buenos Aires

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