Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
June 1985
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John F. O. Bilson and Richard C. Marston (editors)

Exchange Rate Theory and Practice

University of Chicago Press, Chicago, 1984, ix + 527 pp., $50.

Consisting of 15 original papers prepared for a 1982 conference on exchange rate theory and experience with floating exchange rates in the 1970s, this volume is of almost uniformly high quality and most of its papers are accessible to the interested layman. A useful introduction by the editors is followed by a review of exchange rate theory by Michael Mussa. Mussa sets the tone for the volume by providing a compact and clear exposition of models that have been designed to explain the “empirical regularities”—the patterns in the behavior of exchange rates since 1973. The comments on this paper by several distinguished researchers serve both to clarify current understanding of the theory of exchange rate determination and to underline the fact that our understanding of many issues is still quite limited. Indeed a very brief summary of many of the remaining papers in the volume is that the “empirical regularities” continue to confound theories of exchange rate determination.

A popular explanation for this is that exchange rates seem to be dominated by adjustments in expectations caused by new information. Since it is difficult to determine (even ex post) how and why expectations change, it might be expected that models of exchange rates explain only a small part of the observed variation in rates in recent years. Nevertheless, given the variety of techniques reported in this volume and elsewhere, the reader may remain skeptical that a useful theory could be so thoroughly rejected by the data.

In his comment on Mussa’s paper, Rudiger Dornbusch challenges the generally accepted notion that exchange rate models should rest on the assumption that expectations follow only rational and stable paths. In another challenge to conventional wisdom, Penti Kouri suggests that we return to a more traditional model of exchange rate determination, one that emphasizes the role of the exchange rate in transmitting information and organizing economic activity among groups of market participants.

The remaining papers in the volume address a wide range of related issues. Many readers will find the papers by Jacques Artus, Stanley Black, William Branson, and Dale Henderson particularly useful in that they apply a variety of empirical techniques and theoretical frameworks to the problem of evaluating how developments in exchange markets shape, and are shaped by, economic policies of individual countries. Other papers included in this volume focus on empirical models of exchange rate determination, currency unions, international portfolio diversification, and the international role of the dollar.

Michael Dooley

Edward E. Learner

Sources of International Comparative Advantage

Theory and Evidence

MIT Press, Cambridge, MA, USA, 1984, xix + 353 pp., $45.

The author has set out to integrate international trade theory and empirical testing in order “to leave the reader with a clearer impression concerning the empirical validity of a central result of trade theory—the celebrated Heckscher-Ohlin theorem” (p. xiii). The theorem is restated in its Heckscher-Ohlin-Vanek (HOV) version, according to which a country will export the services of abundant factors and import the services of scarce factors. It is tested by relating net trade flows in 10 commodity aggregates to 11 resource supplies in an analysis of data for 58 countries.

Using data on trade and on factor endowments, Learner implicitly infers factor intensities. At the same time, he notes that “the way to measure the accuracy of the theory would be to obtain direct and independent measures of all three concepts and determine the extent to which these measurements conform to the HOV equations” (p. 49). Only an unpublished study by W. Bowen, E. Learner, and L. Sueikanskus is said to have used this methodology, but this reviewer also employed it in “The Changing Pattern of Comparative Advantage in Manufactured Goods,” Review of Economics and Statistics, May 1979.

The author introduces factor intensities indirectly by classifying two of the commodity aggregates as “capital-intensive” and “labor-intensive” manufactured goods. At the same time, limiting the analysis to 10 commodity categories is inevitably imprecise and raises questions about the proposed ranking of the categories. Thus, the author puts chemicals on the top of the list in terms of the process of development, although in 1958 Paraguay and Chile had relatively high ratios of chemical exports to GNP and this ratio was by far the highest in Jamaica in 1975. Clearly, natural resource availability has influenced the pattern of trade in chemicals.

Limiting the analysis to 10 commodity aggregates may also have been responsible for the observed switches in the relative importance of certain resources in determining the sources of comparative advantage in manufactured goods. As the author observes, “in 1958 success in exporting manufactured products was linked to abundance of knowledge-capital embodied in the professional/technical work force. In 1975, however, knowledge-capital continued to be the most important source of comparative advantage in chemicals, but physical capital and skilled and unskilled labor were the sources of comparative advantage in machinery and labor-intensive and capital-intensive manufactures” (p. 187). A future research agenda might usefully increase the number of commodities and introduce factor intensities directly in the analysis.

These comments, however, should not detract from a basically favorable appraisal of the book. The author has made an important contribution to the testing of the Heckscher-Ohlin theory and his study should be required reading for advanced students of international trade.

Beta Balassa

Gerald A. Meier

Emerging From Poverty

The Economics That Really Matters

Oxford University Press, New York, 1984, ix + 258 pp., $29.95.

This is a fine overview of development economics. It outlines the successes and failures in development since the end of World War II, traces the evolution of development economics (from Adam Smith through the postwar pioneers to the present), and highlights issues that need to be addressed more adequately in the future.

Meier’s clear style and wide-ranging perspective make this book attractive as a graduate or undergraduate text. For officials, academics, and business people, it offers an opportunity to step back from today’s work and take stock of broad trends. Meier’s brief history of development economics is especially salutary, since so many of the expert prescriptions of the past have proven misleading or, at best, only partially useful.

Meier’s central concern is with “what can realistically be done to lessen the pain of poverty still suffered by nearly two-thirds of humanity.” He notes the great achievements of the developing countries over the last few decades but also calls attention to the disappointments—the persistence of poverty, the population explosion, and widespread violence and political repression in the developing countries.

Emerging from Poverty also highlights problem areas, such as the continuing difficulties in agriculture, where further analysis is needed. Meier urges development econ omists to think more systematically about the political processes that can lead to improved economic policies. He opens and closes his book with reflections on the Bretton Woods institutions.

Books take time to publish, and Emerging from Poverty gives relatively little attention to the development crisis of the last several years. The most difficult challenge for development economists in the mid-1980s is to maintain Meier’s concern about poverty as they formulate policies for the resumption of rapid economic growth throughout the developing world.

David M. Beckmann

Ronald H. Chilcote

Theories of Development and Underdevelopment

Westview Press, Boulder, CO, USA, 1984, xiii + I78 pp., $25 (cloth), $12.95 (paper).

Presented as a critical review and assessment of the literature on development and underdevelopment, this book’s 132 pages of text have a narrower scope than the title suggests. A more accurate title might be Political Theories of Underdevelopment: Classical, Latin American, and World System Writers. The book provides potted summaries of Marx, Lenin, and Trotsky, and reviews the main ideas of Sunkel, Furtado, Casanova, Cardoso, Frondizi, Mandel, Baran, Frank, Wallerstein, Rodney, Amin, Emmanuel, and several more. Where the exposition is not of what has been said about the world system in general, it is mostly of what has been said about Latin America. The underlying idea is that development or underdevelopment has to do with the relations between social structures of various kinds: between states and especially between classes (seen as transnational). Not much room here for economics, as normally understood.

The book does not pretend to add anything new, beyond a taxonomy of the main lines of thought. Students who want an overview of the “theoretical” literature encompassed by the above-mentioned boundaries could well start here, for the book is very clearly and simply written, with few figures or facts to slow the exposition. The danger, however, is that the surveyed writers appear about as interesting and relevant to contemporary issues as husk is to food. It would be a shame if this book provides readers with a pretext for dismissing the underdevelopment perspective out of hand, for that perspective points to phenomena neglected in mainstream development studies that are too important to ignore. There is a useful glossary of terms relating to the underdevelopment literature, which defines such terms as “associated dependent capitalism” and “subimperialism” but does not, however, define “exploitation”—a favorite term.

Robert Wade

Richard M. Bird

Intergovernmental Finance in Colombia

Final Report of the Mission on Intergovernmental Finance

Harvard Law School/International Tax Program Cambridge, MA, USA, 1984, xvii + 414 pp., $20.

This book, which is the English translation of the Report Harvard consultants presented to the Colombian Government, analyzes intergovernmental fiscal relations in Colombia and offers proposals to increase the efficiency with which public sector resources are used, to improve the distribution of income, and to achieve an appropriate regional balance in the provision of public services. The Report’s perspective on fiscal problems differs substantially from the traditional approach, which links fiscal problems to insufficient revenues. The real issue for the Report is the efficiency with which revenues are distributed, transferred, and used. As Bird points out, even a substantial increase in the resources of the public sector may not, in the absence of structural and policy changes, result in much improvement in the level and the quality of services received.

In its overview of the Colombian public sector and the various aspects of intergovernmental finance, three main conclusions emerge: first, the central importance of the national government, both as a source of funds and as a place where allocation decisions are made; second, the large and growing importance of the national decentralized sector, particularly in public investment; and third, the declining importance of state and municipal governments.

The Report examines several facets of central government finance and finds that present artificial restrictions on estimating revenues and on balancing the budget have no economic advantage and make meaningful budgeting impossible. Reform of the central budgetary system is a prerequisite to any effort to increase efficiency.

The Mission’s most important recommendation concerning the organization of local governments is a call for substantially strengthened planning capabilities and lessened reliance on transfers from the national budget. It suggests the establishment of a differential system through which the largest cities can become autonomous, self-financing entities; the intermediate-sized cities can increase their autonomy and fiscal responsibility if they so desire; and the smaller municipalities can continue to receive sufficient support to enable them to provide a minimum level of public services.

Overall the Report makes an important contribution to the empirical analysis of public finance and provides an interesting alternative to other normative methodologies that rely upon the design of a model fiscal system and its comparison with the situation existing in a country.

Angel L Antonaya

Edgar Graham and Ingrid Floering

The Modern Plantation in the Third World

(Croom Helm, Kent, UK, 1984, xvii + 231 pp., £25 cloth).

Since the end of World War II, the plantation approach to agricultural production has been out of fashion. Policymakers and development economists alike have viewed it with suspicion, if not hostility, for what has been seen as its preferred position in a dualistic society, its emphasis on export rather than domestic food crops, its linkages with overseas manufacturing and marketing companies, and primarily for its foreign ownership and management that, until recently, dominated many of the more important plantation crops. Instead, looser forms of agricultural production, such as cooperatives and farmer associations, have been favored on political and social grounds, although their impact on production has all too often been disappointing.

With the renewed emphasis on production and productivity, this book is particularly timely. It sets out to defend not so much the plantation as a legitimate contributor to the development process (which it does) but the underlying principles of efficiency and unitary management that are the key to production achievement in any modern enterprise. For reasons that are not easy to understand, these principles have found more general acceptance in industry than in agriculture—which goes a long way to explain agriculture’s disappointing performance in many developing countries.

In this book, Edgar Graham examines the application of the plantation approach to a wide range of crops and, with a focus on oil palm, rubber, and sugar cane, reviews the great variety of estate and smallholder schemes that have emerged in the last 30 years and that have, with varying degrees of success, attempted to emulate the principles underlying successful plantation production. There are a number of interesting case studies of well-known projects, such as the Federal Land Development Authority in Malaysia and the Mumias Sugar Scheme in Kenya, as well as a useful review of factors affecting the market and production processes of sugar cane by Ingrid Floering. The whole is much enhanced by an excellent bibliography and references, including a comprehensive listing of agricultural projects.

This book will make fascinating reading for those involved in the design and management of agricultural projects. But because it explains what does and does not work—and why this is so—in this critical sector, it deserves a wider readership.

C.H. Walton

Malcolm Harper

Small Business in the Third World

John Wiley & Sons, Somerset, NJ, USA, 1984, xiv + 211 pp., $29.95.

This is a timely book on a question that has become of great interest in both the developed and the developing world: How can government policies and programs best support the emergence of a vibrant small business community?

The author comes to the task with substantial credentials. Malcolm Harper is currently Professor of Enterprise Development at Cranfield in the United Kingdom and is known as the organizer of one of the more successful courses in small enterprise development for developing countries. He also spent several years in Kenya assisting small businesses and studying their problems, and has worked in a number of other countries in Asia and Africa helping to develop programs in entrepreneurship development and management assistance for small business.

Harper has written a book for educated laymen rather than for experts. He has had an eye throughout on its possible use as a textbook, perhaps in his own course or in others, and therefore introduces and closes each chapter with a number of pertinent questions.

The style is principally anecdotal, telling the stories of a Nepalese jeweler, a Kenyan furniture maker, a wood carver in the Philippines, and other small-scale entrepreneurs. Harper makes no effort to present statistical data and, as a result, some of his broader statements may be challenged by some as lacking substantive verification.

Harper tends to believe that real entrepreneurship in small business is to be found in the very small informal-sector enterprises, so that most of his examples are taken from such individually owned or family-owned businesses. He strongly espouses the view that governments and international aid organizations do not do enough to help this very large and amorphous group of artisans and small enterprises. In the chapter on financial (or capital) support for small business he presses his opinion, expressed in other of his writings and papers, that for most of these very small enterprises such help is less important than management training or marketing assistance. He also argues that since financial assistance programs for small businesses are usually conducted with complex and bureaucratic procedures, there are high transaction costs and lengthy delays, and the whole exercise becomes of dubious value to the small businessman. To overcome these deficiencies Harper sees a positive role for private moneylenders, whose operations hold lessons for financial institutions lending to small businesses.

As one might expect from the background and experience of its author, the best chapters are those on management training and marketing. Here the examples and case studies reflect Harper’s own extensive involvement with these subjects. In some of the other chapters the descriptions and the cases, though presented in a lively readable style, are limited in their geographical scope. The short bibliography given at the end of some of these chapters is also sparse and somewhat out of date. Despite these shortcomings the book can be recommended as a general review and a useful introduction to the subject.

Jacob Levitsky

Samuel P S. Ho and Ralph W. Huenemann

China’s Open Door Policy

The Quest for Foreign Technology and Capital

A study of China’s special trade

University of British Columbia Press, Vancouver, 1984, viii + 277 pp., $29.95.

This timely book will be of great interest to anyone having either a particular concern or a general fascination with recent changes in China’s approach to industrial development. It comprehensively surveys China’s newly evolving “special trade” arrangements for inflows of foreign technology, capital, and other inputs in exchange for exports of goods produced with these resources. Transactions under this heading range from a very large number of small contracts for offshore assembly and processing to a small number of large contracts for industrial joint ventures and energy resource development. Though this trade is small in volume relative to both initial expectations and the magnitude of other trade, it is growing rapidly and is of central importance to China’s movement away from autarky and to foreigners’ commercial dealings with Chinese entities.

Drawing from available information and nine illuminating case studies (based on interviews with both Chinese and foreign participants), the authors provide rich detail about the institutions, legal forms, and incentive schemes involved in this trade as well as the economic environment in which it takes place, and they assess the benefits and costs of the various arrangements to both Chinese and foreign interests. There is ample recognition that all aspects of this trade are undergoing rapid change as experience accumulates and reforms in other areas affect the relationship of such trade to the local economy.

Chinese authorities expect special trade arrangements to play an important role in the shift from a narrow concern with “extensive” growth (increasing quantities) toward an emphasis on “intensive” growth (raising productivity and upgrading quality). The inherent flexibility of such arrangements is seen to facilitate the selective acquisition of individual elements of foreign technology—including capital equipment as well as technical, managerial, and marketing competence—to advance the capabilities of existing enterprises. This perception, and the growing ability to benefit from it, indicate that China’s approach to technology transfer is rapidly becoming more sophisticated. But, as the authors carefully discuss, many problems remain to be resolved, so that forecasts concerning special trade are fraught with uncertainty.

In establishing the context in which special trade has emerged, the book provides a valuable sketch of the reasoning behind and the content of all the major post-1976 changes in Chinese industrial strategy and policies. In addition, Chapter 6, in examining the important questions about using foreign assistance to overcome China’s energy constraint, offers an authoritative overview and assessment of present plans for the development of China’s energy sector to the year 2000.

Larry E. Westphal

Edith Archambault and Xavier Greffe (editors)

Les économies non officielles

Editions La Découverte, Paris, 1984, 248 pp., FI25 (paper).

Arnold Heertje and Philippe Barthelemy

L’économie souterraine

Economica, Paris, 1984, 144 pp., F89 (paper). Albert Sauvy

Le travail noir et l’économie de demain

Calmann-Levy, Paris, 1984, 304 pp., F68 (paper).

As recently as 1980, few economists paid attention to a phenomenon popularly called the “underground economy.” Today that phenomenon is contributing in no small amount to the growth of the publishing industry, not just in the United States but in many other countries as well. The three books reviewed here were all published in France in 1984 and all deal with this phenomenon, though they use different terms to describe it.

These are all useful books, especially for those unfamiliar with the literature on the subject. They are also sufficiently different from one another for someone with an interest in this field to read all three. For the general reader the most interesting is perhaps Sauvy’s book, mainly because it is broader in scope and reveals remarkable erudition, though this at times takes the author off the main road. I am not sure, for example, how many readers would be interested in knowing that in French there are at least 30 (sic!) synonyms for the underground economy.

Sauvy’s book has three sections—yesterday, today, and tomorrow—and 26 chapters. The first section makes it clear that the underground economy has been around for a long time; the second gives a wealth of information on underground activities in a very large number of industrial, developing, and socialist countries. Perhaps because it covered material relatively new to me, I found Chapter 7, on social losses, particularly fascinating. This chapter is closely linked to the issue of whether national accounts are properly measured. The book’s third part speculates briefly on whether the underground economy is pointing the way toward the economy of tomorrow.

Archambault and Greffe’s book, written more specifically for economists, is less of a survey than Sauvy’s, and is certainly less entertaining. Several economists who have made earlier contributions to the field are among its contributors. Some of the chapters may not be of general interest. Peter Reuter’s, for example, attempts to prove that the official estimates of incomes originating in the traffic of illegal drugs in the United States are greatly exaggerated. A particularly interesting chapter is that on Poland, by I. Grosfield and A. Smolar. A very good introductory chapter and bibliography by the editors add substantial value to this book.

Heertje and Barthelemy’s book is the shortest of the three and in some ways the most limited. It deals exclusively with the current literature in Western countries. Here one can find a comprehensive survey of the many estimates made of the underground economy in those countries and a good discussion of the role that taxes play in the determination of this economy, but not much beyond that.

All three books describe a phenomenon that raises serious questions about the quality of the information on which we rely in our daily work, about why this phenomenon was ignored for so long, and about why governments seem to be relatively indifferent to the problems created by some of their policies. Perhaps the answer is obvious: since underground economic activities are largely the result of governmental interference with the working of a market economy, governments may inevitably have a bias toward ignoring underground economies for as long as possible. It is equally likely that the acceptance by most economists of a large economic role for government made them ignore some of the negative consequences of that role until recently, when attitudes changed. Of course, there were always some who were aware of these negative consequences. Sauvy reports (p. 174) that when in the late 1940s a well-known American was asked whether he thought that there would be a World War III, he answered, “No, because we would have to reintroduce price controls!”

Vito Tanzi

Walter P. Falcon, William O. Jones, Scott R. Pearson, et. al.

The Cassava Economy of Java

Stanford University Press, Stanford, CA, USA, 1984, xvii + 212 pp., $38.50.

This is another in the excellent series by Stanford University’s Food Research Institute on the economics, technology, and politics of particular food crops. The importance of cassava is commonly understated. It is perhaps the world’s cheapest source of calories and the staple of some 400 million people in Africa, Asia, and the Americas.

A particular merit of this book is the skillful integration of diverse topics ranging from small-farm cropping to international trade. Four principal themes are posed: (1) How efficiently does the existing system in Java produce, process, and market cassava? (2) What is the potential for expanding this system? (3) What markets, domestic and international, exist for larger supplies of cassava? and (4) How do government policies in Indonesia affect the cassava economy and how might they be improved? A wealth of data and information, carefully analyzed, provides the basis for some of the major conclusions: despite an improved food supply situation in Java growing out of recent good rice harvests, cassava can make important contributions to improved income growth, income distribution, nutrition, and food security. For those interested in cassava’s potential role in a wider geographical context, this book can usefully be read in conjunction with J.H. Cock’s Cassava: New Potential for a Neglected Crop (Westview Press, 1985). T. J. Goering

Population growth re-examined

in her very interesting review article on “Population growth” (September 1984), Nancy Birdsall wrote, “Until the twentieth century, prosperity and population increase went hand-in-hand.” This strong proposition, probably because of a shortage of space, is likely to be misleading. It is not possible to discuss theoretical problems in a few words, but several points may be sufficient to raise some doubts about this proposition.

The standard of living of the great majority of people worsened with rising population density in the sixteenth century. Real wages dropped; diets changed; annual meat consumption fell from 100 or more kilograms per capita annually to less than 20 (Germany around 1840-50). Labor hours did rise. Some authors (Freudenberger) assume an increase from an estimated 1500-2000 hours per capita annually in preindustrial Europe to the better documented 3000-4000 hours in the first half of the nineteenth century. There are many indications that the standard of living did not increase with rising population density in China during the eighteenth and the first half of the nineteenth century, and there are many other examples to be quoted (Egypt, Bengal, Java, and so on).

This classical connection between harder conditions of life with rising population density seems to hold roughly in prein-dustrial agrarian societies. For the first time in history it seems to have been untied by industrializing economies in the late, not the early (Northwestern Europe roughly from the second half of the sixteenth to the first half of the nineteenth century), phases of their development. But this is another story.

Günter Hesse

University of Nürnberg

Who determines basic needs?

I wish to refer to Professor Kamarck’s article, “The World Bank and development: a personal perspective” (December 1984). Professor Kamarck states that “there has never been a satisfactory definition of what basic needs are or who is to determine them: the people themselves or experts? Nor is it clear whether satisfying basic needs today contributes to economic development (helping small farmers may stimulate growth more than assisting landless laborers). . . .” But, after all, to draw a line you need more than one point. In discussing basic needs, a comparative framework of reference can be found in Mahbub ul Haq’s article, “An international perspective on basic needs” in Finance & Development (September 1980). He supported an approach slightly different from Professor Kamarck’s, interpreting basic needs in the context of economic (and political) international relations and “North-South” relationships.

As is the case for the economic development of the “South,” the satisfaction of the most elementary needs of the individual are contained in the presumption of nationality; action must come, above all, from the citizens themselves. Haq argues that “Without a national commitment to eliminating such poverty, no amount of international concern can succeed in providing for the basic needs of the world’s poorest.” The issue of who is to determine basic needs is avoided but Haq does contend that “helping small farmers” cannot be “help” for “help’s sake.” In extreme cases, when this hypothesis is not viable, emergency relief for the poorest can, at least in short and medium term, provide the highest form of aid. (In this regard the problem of Ethiopia today is quite instructive.)

Furthermore, there are those of us who accept (and support) the idea that basic needs could be the basis for preparing the citizens of the nations for a very dynamic economic and social life; fully developing their physical and biological (health) and mental and cognitive (education) capacities. We believe that the doubts put forward by Professor Kamarck are not random ones, they are the fruit of what little has been done to date about basic needs.

Francisco Ceron Santacruz Pasto, Colombia

Book of readings

I want to congratulate you on the fine quality of the articles you have been publishing in Finance & Development. Your project of making available to a broader audience some of the high-quality research done within the Fund and the Bank is extremely valuable.

Could you take that enterprise one step further? It would be very worthwhile to bring together in a book of readings selected articles from issues of recent years. Analytical-empirical materials of this quality are not easily available in nontechnical form. A well-selected book of readings would make a real contribution as an educational resource for use in courses on economic development.

Nathaniel H. Leff

Columbia Univerity

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