Inflationary financing, industrial expansion, and the gains from development in Brazil

In Latin America there is the phenomenon of "locked inflation" in which inflation rates increase, growth diminishes, and distribution of income is such that demand will not sustain the pattern of industrial production already achieved. The disequilibrium in commodity markets was partly the result of government subsidization of investment in industry which resulted in a transfer of income to the entrepreneurial class. The added spending by this class was primarily for luxury goods and investment goods which are more capital-intensive than wage goods. Thus, the implicit tax of inflation on wage earners was reinforced by a relatively reduced demand for labor services. The inflation could have eventually led to a lock-in whereby further economic growth became impossible with or without inflation, and without continued and increasing foreign aid and/or exports. Since foreign aid has been diminishing, if growth based upon expansion of exports became less feasible over time, the lock-in could become inevitable. Through the use of budget studies, simulation, production data, factor intensity and input-output we determined that although credit distribution was heavily biased, and worsened income distribution, consumer demand was never sufficiently weak to support a lock-in in Brazil.