U.S. inflation and the import demand of Ghana and Nigeria, 1967–1976

Conclusion Even though our empirical findings have shown that the sensitivity of the U.S. import demand of Ghana and Nigeria to the U.S. inflation rate is significant, especially in the case of Ghana, the effect of the inflation rate on imports is considerably understated. This understatement in the case of an LDC, unlike the MDCs, is due to statistical, political, and economic reasons. We may be tempted to suggest that if imports from tied aid are netted out, the degree of downward bias would be the same for the LDCs and MDCs. But this would be incorrect since the initial imports give rise to more imports over the years. For example, agricultural machinery purchased with tied aid will give rise to the importation of spare parts, etc., over the years. Hence this is not a simple once-and-for-all phenomenon. Inflation in a more developed country (MDC), such as the United States, may therefore have a greater inimical impact on the welfare of an LDC. This impact may be reduced considerably if the LDC can rescue the element of market choice in its spending of loans and grants from the MDCs. The large increases in oil prices since 1973 have enhanced the wealth of Nigeria immensely and partly cushioned the impact of U.S. inflation on this country. However, the lower elasticities shown in the case of Ghana indicate that the inflation may have had a greater detrimental effect on its welfare. For even though inflation had a significant effect on its import demand, the recorded elasticity is much less than unity even after an upward adjustment. The greater the inelasticity of import demand the more the country is bled of its reserves during a period of rapid inflation in a trading partner like the United States.