INFLATION AND ECONOMIC DEVELOPMENT STUDIES IN THE MEXICAN EXPERIENCE*

Abstract

THE HYPOTHESIS THAT moderate inflation can be used as a tool for accelerating the rate of economic development of underdeveloped countries is widely held. The theoretical rationale for this point of view is that inflation promotes a rise in the share of national income going to profit receivers and hence increases the aggregate propensity to save. Moreover, by favorably affecting incentives, rising prices are presumed to enhance the rate of capital formation. The Mexican experience, 1935-55, is inconsistent with the above propositions; for, despite an average annual increase in prices of 10 per cent, which drastically redistributed national income in favor of profits, the private aggregate propensity to save did not increase. Rising prices and profits had little effect upon the pace of real private investment; indeed, for a number of years after 1948, real investment actually declined, while prices and profits continued to rise. The disparities between the theoretical expectations and the observed behavior in Mexico may be explained as follows: inflation redistributes income indiscriminately; it increases the relative share of unprogressive and unthrifty profit receivers, as well as that of the progressive and thrifty. Moreover, wealthy Mexicans, because of tradition and the influence of the higher material standards in the United States, are high spenders. Investment, especially in massmarket industries, has been discouraged because of the low purchasing power of the population at large; inflation has intensified this problem. Inflation in Mexico has probably reduced the rate of economic growth. It has encouraged investors to specialize in real property and inventory accumulation. The growing population has, therefore, been absorbed into the labor force at an unsatisfactory rate, and the aggregate increment to the capital stock required to produce a unit increase in national income has been raised.