STRUCTURAL INFLATION

 Structural approach explains inflation in the developing countries in a slightly different way.   The increase in investment expenditure and the expansion of money supply to finance it are the only proximate and not the ultimate factors responsible for inflation in the developing countries.
 Why aggregate output, especially of food grains, has not been increasing sufficiently in the developing countries to match the increase in demand brought about by the increase in investment expenditure, and money supply and why the investment expenditure has not been fully financed by voluntary savings and as a result excessive deficit financing has been done.

 There is a lack of balanced integrated structure in developing countries where substitution possibilities between consumption and production and inter-sectoral flows of resources between different sectors of the economy are not quite smooth and quick so that the inflation in them can not be reasonably explained in terms of aggregate demand and aggregate supply.

 Economies of the developing countries of Latin America and India are structurally underdeveloped as well as highly fragmented due to the existence of market imperfections and structural rigidities of various types. 

The consequences of these structural imbalances and rigidities is that whereas in some sectors of these developing countries, shortages of supply relative to demand are found, in others under utilization of resources and excess capacity exist due to lack of demand. 

These structural features of these countries make the aggregate demand-supply model of inflation inapplicable to them. Therefore, it is appropriate to analyze  sectoral demand-supply imbalances to explain inflation in the developing countries. There are several sectoral constraints or bottlenecks which generate the sectoral imbalances and  lead to rise in prices. Therefore, the forces which generate these bottlenecks or imbalances of various types in the process of economic development of these developing countries explain the origin and propagation of inflation. These bottlenecks are of three types: 

(i) agricultural which make supply of agricultural products inelastic, 
(ii) resources constraint or Government budget constraint, and
 (iii) foreign exchange

These constraints and bottlenecks are rooted in the social, political and economic structure of these countries. Therefore, a broad-based strategy of development aiming to bring about social, institutional and structural changes in these economies is needed to bring about economic growth without inflation. In order to ensure price stability giving higher priority to agriculture in the strategy of development is advocated. Thus, we find that the structuralist view is greatly relevant for explaining inflation in the developing countries and for the adoption of measures to control inflation.