This document outlines the structural theory of inflation in less developed countries. It discusses how structural defects and bottlenecks exist in these economies that cause inflation, making the traditional quantity theory of money not applicable. Three main types of bottlenecks are described: agricultural bottlenecks due to issues like land ownership that limit food production growth; government resource constraints that force them to print money to fund infrastructure projects leading to inflation; and foreign exchange bottlenecks from low exports and high import payments causing currency devaluations and price increases. The structural theory argues these bottlenecks must be addressed through balanced investment instead of just monetary or demand-side policies to effectively reduce inflation in less developed economies.

1. STRUCTURAL THEORY
OF INFLATION
Prof. Prabha Panth,
Osmania University,
Hyderabad

2. 2
Structural theory of inflation
• Myrdal and Streeten have contributed to
this theory of inflation.
• To explain inflation in less developed
countries, especially Latin America.
• Structural defects exist in less developed
countries,
• Therefore the traditional QTM does not
apply to less developed countries.
Prabha Panth

3. 3
Structure of Less developed
countries
1. Market imperfections,
2. Structural rigidities,
3. Under utilisation of resources,
4. Unemployment,
5. Lack of demand,
6. Non monetised sectors,
7. Unorganised sectors
Prabha Panth

4. 4
Bottlenecks in less developed
countries
• Sectoral bottlenecks create imbalances
that lead to rise in prices.
• It is necessary to study these imbalances
to understand inflation in under developed
countries.
• These bottlenecks arise in the process of
economic development.
• So inflation has to be understood in the
context of these structural imbalances.
Prabha Panth

5. 5
• There are three types of bottlenecks:
1. Agricultural bottlenecks: food grain production
cannot increase due to bottlenecks in
agriculture.
So agricultural output is inelastic to rising
incomes.
Bottlenecks in agriculture include:
a) Disparities in land ownership and defective
land tenure system.
b) Use of backward agricultural technology.
c) Lack of knowledge and access to finance.
Prabha Panth

6. 6
2. Government’s Resource constraints:
• Infrastructure, Heavy industry, and Basic
industries have to be started in less
developed countries.
• Mostly by Public sector.
• Government may not have enough funds
to invest in such projects.
• Therefore it prints money to pay for them.
• This leads to inflation.
Prabha Panth

7. 7
• Prof. Gautam Mathur (1975) calls such
investments as “Inflation Creating Activities”
• To reduce prices, equal investment in
production of food grains and other
necessaries is required.
• These are known as “Inflation Dampening
Activities.
• Mathur calls the balance between Inflation
Creating and Inflation Dampening activities as
“The Balanced Allocation Ratio.”
Prabha Panth

8. 8
3. Foreign Exchange Bottlenecks:
• Less developed countries have shortage
of foreign exchange.
• Exports earnings are low, but import
payments are high.
• To encourage exports, government
devalues currency,
• This increases local prices, as well as
prices of imports.
• Leading to inflation.
Prabha Panth

9. • Hence traditional measures to control
inflation will not work.
• Merely reducing the supply of money will
not reduce prices.
• Controlling demand also will not work, as
in Ldcs employment is rising due to
economic growth.
• There is mismatch between demand and
supply of goods.
• Investment in necessary consumer goods
is required to lower prices.
9Prabha Panth