TITLE:
International Crises, Characterization of Contagion and Social Well-Being in Developing Countries: A Theoretical Model
AUTHORS:
Giscard Assoumou Ella
KEYWORDS:
International Crises; Social Well-Being; Imported Inflation
JOURNAL NAME:
Theoretical Economics Letters,
Vol.4 No.1,
February
18,
2014
ABSTRACT: This paper has two objectives: to characterize
the exposure of developing countries to the international income, prices and
monetary shocks and to calculate the social well-being in the period of
contagion. Firstly, we develop a theoretical model with a world composed of two
countries (developed and developing countries) and measure the level of the
exposure of income in developing country to the external shocks trough external
trade, international tourism, migrant transfers, external debt, foreign aid,
FDI and other private financial flow channels. And, we characterize imported
inflation in studying the effect of the international shocks on real exchange
rate. Secondly, we search the social well-being. The results suggest that
economic disequilibrium in developing country is socially optimal and that the
dependence of its income to the domestic industry is necessary to reduce
contagion. This conclusion is important for African countries because they
import finished products for the households’ consumption. In these conditions,
they are exposed to the imported inflation. The domestic monetary and tax policies
are not adapted to fight against inflation. Also, they produce and export raw
materials essentially toward industrialized economies. Thus, they must develop the
domestic industry in order to influence the demand (or prices) of raw materials
and to substitute imports by domestic goods in period of hyper-inflation in
advanced economies in order to reduce imported inflation.