The African Business Review May-Jun 2014 | Page 24

Introduction

The negative effects of inflation on economic activity are widely
recognized. Inflation exerts a constraining effect on the key drivers
of growth. The price increase reduces consumption and therefore
production and employment. It exerts an inhibitory effect on
investment, due to the rise of the nominal wages and the prices
of raw materials, both in local and foreign currency.

Inflation also contributes to the deterioration of trade
balance when the prices of domestic goods and services rise
more than those of foreign competitors. To this are added its
negative effects on social activity because of the deterioration of
the purchasing power.

On the academic side, the economic literature has not
stopped searching the causes of this phenomenon and finding
its cures. It was first discussed the role of monetary and fiscal
policies, and then discuss other factors such as the degree of
central bank independence.

However, over the last decade, a new wave theory has
enriched this debate by focusing on the role of socio-political
factors such as the degree of democratization of countries,
considering these factors as the “deep determinants” of inflation
and other macroeconomic pathologies.

The thesis proposed by this new theoretical wave can
be summarized by the following proposal of Satyanah and
Subramanian (2007): If monetary or fiscal policy causes
prices, what in turn causes monetary or fiscal policy and hence
instability? Similarly, if the lack of central bank independence
causes instability, why do some countries chose to have such

24 | The African Business Review

independence and others not? Such questions justify a search
for deeper causes for instability.

The present study falls within the framework of this
academic renewal, which gives to socio- political and institutional
factors, and more specifically, the degree of democratization, a
leading role in explaining the causes of inflation and considers
political participation a determinant tool for reducing it.

Without calling into question the importance of the ‘classic’
instruments of control of inflation, that is monetary