Different bottlenecks and gaps in the growth process of underdeveloped or developing economies which generate inflationary tendencies in these economies are discussed below:
1. Resources Gap:
The underdeveloped countries generally try to industrialise themselves through public sector.
But the socio- economic-political structure of these economies is such that the government is not able to raise enough resources from taxes, public borrowing and profits of the public sector undertakings to meet the expenditures on the developmental programmes.
The government has to resort to deficit financing which makes these economies inflation-prone. Similarly, the resource gap in the private sector, caused by low voluntary savings and high costs puts further pressure for excess expansion of money supply and bank credit, which, in turn, accelerates the inflationary spiral in the economy.
2. Food Bottlenecks:
Due to various structural factors, such as, defective land tenure system, primitive methods of cultivation, lack of irrigation facilities, low level of investment in agriculture, growing pressure of population on land, agricultural output (especially food supply) fails to keep pace with the increase in demand for food arising from growing population and urbanisation.
This food bottleneck first leads to a rise in the prices of food grains, and then affects the whole of the structure of prices.
3. Foreign Exchange Bottlenecks:
The underdeveloped countries suffer from a structural disequilibrium in the balance of payments due to high imports and low exports.
These economies, during their development phase, on the one hand, require the import of capital goods, essential raw materials and semi-manufactured goods and, in many cases, food grains and other consumer goods, and on the other hand, have low export earning due to small exportable surplus, trade restrictions the world over, and relatively poor competitive power of their exports.
Due to this foreign exchange bottleneck, the domestic availability of goods in short supply cannot be easily improved through imports. As a result, the prices of these goods increase and the increase spreads to other prices.
4. Infrastructural Bottlenecks:
Due to resource and foreign exchange gaps, widespread inefficiency and corruption, and faulty planning and plan implementation, most of the underdeveloped countries face infrastructural, bottlenecks in the field of power and transport.
This restricts the growth process in other sectors and causes underutilisation of productive capacity of the economy. Underutilization of resources does not absorb the full increase in money supply and leads to an inflationary rise in prices.
5. Market Imperfections:
Various imperfections, such as, factor immobility, price rigidity, ignorance of market conditions, rigid social and institutional structures, lack of training and socialization, etc., in the underdeveloped economies do not allow an optimum allocation and utilisation of resources.
Hence, an increase in money supply is not accompanied by the increase in the supply of output, thereby raising the prices.
6. Capital Bottlenecks:
Underdeveloped countries are characterised by low rate of capital formation which is both the cause and consequence of poverty in these economies.
In fact, these economies are caught in the vicious circle of poverty; low income leading to low investment, low investment leading to capital deficiency, capital deficiency leading to low income.
Thus, monetary expansion in such economies, instead of breaking this vicious circle, tends to become inflationary because of structural inability of these economies to increase saving and investment.
7. Entrepreneurial Bottlenecks:
Entrepreneurial bottleneck in the underdeveloped countries arises due to the lack of entrepreneurial skill and the spirit of boldness and adventure.
These economies have only a small class of merchants and traders who mostly deal in consumer goods and act as money lenders and real estate agents.
They do not attempt productive and innovational activities. Thus, increased money supply makes little impact on real output and causes rise in prices.
8. Labour Bottlenecks:
A peculiar feature of the underdeveloped countries is the large magnitude of disguised unemployment which is not responsive to the increase in money supply.
Thus, due to the existence of disguised unemployment, the increase in money supply does not increase employment and output, and often generates inflationary pressure.