Development as a consequence of structural change

The countries specialising in primary production for export, within the framework of the system of international division of labour that developed in the nineteenth century, created economic structures with a highly inflationary bias. We have seen that cyclical crises in these countries entailed not only a fall in the quantum of exports but also deterioration in the terms of trade, flights of capital and obstruction of foreign credit lines. Thus there was a more accentuated and more rapid reduction in the capacity to import than in the flow of the money income generated internally by the export sector, creating pressures on the balance of payments which could not be eased simply by mobilising gold and exchange reserves. The immediate alternative was a devaluation of currency, bringing about an expansion in the export sector's money income, an increase in the tax revenue derived from exports and a rise in the prices of imported goods. Inflation was thus a consequence of the economic system's effort to adapt itself to a combination of external pressures. Since it was not feasible to defend the currency by manipulating interest rates and mobilising gold and exchange reserves, and since the short-term capital movements aggravated the critical state of the balance of payments on current account, it was natural that flexible exchange-rate systems should have come to prevail. The disadvantage of these systems is that they make speculation easier and thus accentuate the tendency to instability.