Development by Inflation

Inflation is widely deplored in Latin America--and widely used by governments as a technique to speed economic progress. The theory of development by inflation works in a five-phase cycle:

Printing: To spur productivity in factory and field, governments need money. The bulk of it is simply printed.

Spending: Out from state banks goes the crisp, new money to develop public and private enterprises.

Price Rise: The greater quantity of money in circulation bids up the cost of goods and services. When labor finds prices shooting up, it strikes and riots, threatening political stability.

Wage Rise: To regain labor's support, politicians raise wages. Both prices and wages have then reached a new level.

Devaluation: The rising cost of goods and labor prices the countries' exports out of foreign markets. Governments must devalue their currencies in relation to the dollar in order to cheapen exports.

Last week Argentina, Brazil and Chile were each caught in one phase or another.

In Argentina, prices overtook a general wage increase of 60%, granted by President Arturo Frondizi shortly after he took office in May. With bigger paychecks bidding for the same goods and services, the cost of transportation has gone up 50%, newspapers 70%, a cup of coffee 60%, beer 70%, the movies 50%. Result: Buenos Aires movie operators struck for higher wages, closing theaters, and butchers shut up shop rather than sell price-controlled meat.

Brazil was in the third phase. Buckling under labor pressure, President Juscelino Kubitschek offered Brazilians the merriest Christmas in history--a 60% increase in minimum wages, and a 30% pay boost for the army and government employees, effective immediately. Playing Santa Claus would raise Brazil's record budget deficit of $285 million, but the news of the proposed wage hike ended the recent rash of cost-of-living riots (TIME, Nov. 24).

Chile was in the final phase. Confronted by a 20% budget deficit, a $718 million foreign-trade debt and an unemployment rate of 10%, President Jorge Alessandri's month-old "businessman's government" devalued the currency. Down 18% went the value of the peso, from 837 per dollar to 989, in the hope that such exports as steel and wine, thus cheapened, would rise proportionately.

Under shrewd control and held tightly to limits, development through inflation works. But if inflation gets out of hand the currency collapses. Development by debasement of the currency is a tempting game--but a perilous one, too.

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