Does Inflation affect the development?

Over the past few decades, the relationship between inflation and economic growth have drawn extensive attention of macroeconomists, policy makers and the central bankers of both developed and developing countries. Specifically, the issue that whether inflation is necessary for economic growth or it is harmful generates a significant debate both theoretically and empirically.

In this connection, Mundell (1965) and Tobin (1965) predict a positive relationship between the rate of inflation and the rate of capital accumulation, which in turn, implies a positive relationship to the rate of economic growth.2 They argue that since money and capital are substitutable, an increase in the rate of inflation increases capital accumulation by shifting portfolio from money to capital, and thereby, stimulating a higher rate of economic growth (Gregorio, 1996).

Conversely, Fischer and Modigliani (1978) suggest a negative and nonlinear relationship between the rate of inflation and economic growth through the new growth theory mechanisms (Malla, 1997). They mention that inflation restricts economic growth largely by reducing the efficiency of investment rather than its level.

In terms of Bangladesh

Bangladesh is the youngest country in the South Asian region. The economy has experienced accelerated economic growth during the early 1990s in comparison with the 1980s. However, after that period, the economy experienced most severe exigency states like increasing inflationary pressures, deteriorating government’s budgetary balances and decreasing foreign exchange reserves.

The GDP growth rate declined moderately during the second half of 1980s when inflation rate gradually decreased to below 8-percent. However, a moderate rate of inflation and an increasing rate of GDP growth are observed throughout the 1990s. Throughout the first half of the 1990s, inflation rate was, on average, 5.37 percent, while GDP growth rate was 4.06 percent. Although inflation rate increased, on average, to 5.52 percent in the second half of the 1990s, the growth rate of GDP continued to increase. The increasing trend of inflation rate during the latter half of 1990s had been corrected since the beginning of the new decade after 1990s and was observed at 4.14 percent, on average, during 2001 to 2005, when growth rate of GDP was, on average, 5.19 percent. So the GDP and inflation rate both the positive and negative relations between them.

The development of the economy largely depends on the proportional development of middleclass and poor people. And these classes of people are most affected by the inflation rate or rise in price because of limitation in income. The continuous rise in GDP holds the GDP growth nearly 6% for couple of year.

The price level chart shows that increase in price is the main constraint of savings and investment by both public and private.

If we look the today’s economic giant India and china we see that they were the developing country and now they are the economic giants.

It is surprising but true that both of the country took almost same strategy for developing their nation and that is ‘Banned foreign import to protect, retain and sustain the domestic industry ’ 
Now china and India open their market but their own industry established that time and now they share the export and import in Asian and as well as in America.

But Bangladesh has no similar strategy like that,
• Import destroys our local industry.
• Decreasing the purchasing and standard of living.
• Due to destruction of domestic industry the unemployment rise.
• Import relates with foreign currency and reserves of foreign currency measure the exchange rate, huge volume of import decrease supply and decrease the real exchange rate as well as PPP.

And all this things ultimately affects the GDP, which is the measurement of economic growth and development.