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International Monetary Fund. External Relations Dept.
Published Date:
September 1987
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Toward World Prosperity

Irving Friedman

Reshaping the Global Money System

Lexington Books, Lexington, MA, USA, 1987, xiii + 317 pp., $24.95.

This book reviews the performance of the international monetary system over the past two decades and proposes ways of improving its future performance. The analysis centers on the debt crisis of the early 1980s and on proposals for restoring creditworthiness and economic growth in the affected countries, while creating institutional mechanisms for avoiding a repetition of the recent experience.

Friedman argues that the creditworthiness of the major developing borrowers in the 1970s was well established, based on their previous economic performance, domestic economic management, and debt-servicing record. This creditworthiness was lost in the early 1980s as a result of delays in undertaking needed adjustments, symptoms of which were overvalued exchange rates and capital flight; overreaction by commercial banks fueled by “loud, ill-informed public discussions;” and inadequate official national and international assistance, owing partly, in Friedman’s view, to the inadequacy of the Fund’s resources.

The author characterizes the resulting crisis as essentially one of economic development. The central need for borrowing countries is new money, which requires restoration of creditworthiness, and this, he maintains, cannot be accomplished simply through austerity and debt restructuring. Borrowing countries must show evidence of modernization, growth, and improved export competitiveness; and their policies must be convincing to lenders. This process would be assisted by longer-term Fund programs, where conditionality would be the combined responsibility of the Fund and multilateral development banks; by more innovative bilateral assistance; and a better “early warning system” by the Fund and commercial lenders. Naturally, a more rapidly growing world economy would also facilitate restoration of creditworthiness.

The author’s major proposals for strengthening the international monetary system include a supplementary financing scheme to cover unexpected falls in export prices, increases in interest rates and import prices, and cutbacks in capital inflows. He also proposes a new international lending institution, privately run but with participation by the multilateral development banks, to channel private resources into development lending. Also included are proposals that the resources and activities of multilateral development banks be expanded, with a greater use of guarantees; that the Fund’s resources be greatly augmented; and that the Fund engage in countercyclical lending and exercise greater influence over the economic policies of major members. With such reforms in place, Friedman concludes, the international banks would perceive less risk in renewing voluntary new lending to heavily indebted developing countries.

Although at times prolix, this volume is full of wise reflections based on Friedman’s extraordinarily wide experience in the Fund, the World Bank, and international banking. His proposals deserve serious attention.

Anthony Lanyi

Monetarism and Liberalization

Sebastian Edwards and Alexandra Cox Edwards

The Chilean Experience

Ballinger Publishing Company, Cambridge, MA, USA, 1987, xxi + 233 pp., $25.

This book provides a thorough, incisive, and very professional analysis of one of the most fascinating economic experiences of recent years-that of Chile during 1973-83. In that decade, Chile underwent one of the most radical changes in economic management in Latin America.

In the years prior to 1973, the Chilean economy was characterized by extensive government intervention. In most markets, this resulted in major distortions that were accompanied by significant financial imbalances, eventually resulting in a sharp acceleration of inflation, a deterioration of the balance of payments, and low average rates of economic growth.

In the period under review, various areas of the Chilean economy were liberalized, the role of the private sector was enhanced, financial imbalances were reduced, exports increased, and the rate of inflation declined. Eventually and notwithstanding a worsening of Chile’s terms of trade, the economy experienced a rapid expansion of output, and particularly of investment. However, this experiment in market liberalization unintentionally contributed to a major crisis in the early 1980s that aggravated the impact of weakening export prices and the advent of the debt crisis. By 1983, Chile was left with a weakened private sector, low levels of savings, and an extremely high ratio of external debt to GDP, with the public sector having taken over most of the external debt obligations.

The Edwardses analyze developments of the period and discuss the policy stance that led to deteriorated economic conditions. They show a high degree of professionalism in their presentation, combining a pointed description of events and a lucid economic analysis of these events. The result is a book that will be an asset to readers keen on Chilean economic history and also to those interested in the application of general economic theory to the experience of developing countries.

The book reviews several aspects that were essential to the Chilean experiment. In particular, it discusses the stabilization policies that were pursued, first through a closed economy and then through an open economy and fixed exchange rate-management approach. In addition, the book reviews financial liberalization and its impact on interest and exchange rates; the process of privatization and deregulation; the liberalization of international trade; the effect of the experiment on unemployment and income distribution; and the sequencing of the liberalization reforms.

The authors conclude that the liberalization effort failed because of several major mistakes in economic management, identified as the lack of supervision of the banking system; the excessive concentration of economic power in a few economic groups; and the indexing of wages to past inflation. Other mistakes that they cite were the fixing of the exchange rate while the capital account was being liberalized; a mistaken sequence in liberalization of the external current account and capital account; and more fundamentally, a passive and somewhat rigid approach to macroeconomic management on the part of the economic authorities at the time.

The authors make it clear that the mistakes that affected economic policies did not preclude major advances in modernizing Chile and inducing it to become more integrated in the world economy, thereby creating the conditions for sustained growth. This structural reform eventually helped Chile to recover from the crisis of 1982-83. The book helps identify dangers inherent in any process of liberalization and points out the need for a consistent and credible set of policies to achieve that goal. While emphasizing the mistakes, the book also makes clear that they did not weaken the validity of the reformist goals that the Chilean experiment embodied.

Claudio Loser

The Keynesian Revolution and Its Critics

Gordon A. Fletcher

Issues of Theory and Policy for the Monetary Production Economy

St. Martin’s Press, New York, USA, 1987, xxiii + 348 pp., $35.

It is a mark of great thinkers that they give rise to coteries of avid supporters and fervent opponents, including many who have never read a word of the master’s works. Keynes, like Marx and Adam Smith, belongs to this elite category. Savior of liberal capitalism in his own mind and for one group of supporters, he was adopted as the respectable intellectual imprimatur for democratic socialism by another group, and has been cast as the corpus vile of all the wrong-headed policies of the past two decades by the growing ranks of his detractors. Keynes’ seminal General Theory of Employment, Interest, and Money was published 50 years ago, in 1936. It inspired a new approach to economic analysis and macroeconomic policy that lasted well into the 1960s and 1970s, and continues to affect policy decisions under different labels. His principal message, that unimpeded market forces will not necessarily lead to full employment and stability, and that limited government intervention may be necessary to fill the gap in effective demand, has often been confused with an unquestioned support for all forms of central planning and government intervention in the economy. The general indictment against Keynes has been that, regardless of successes of Keynesian policies in the 1950s and 1960s--which, in any case, may have had more to do with the post-war recovery-the Keynesian approach was found to be sadly wanting when it came to the stagflation of the 1970s.

The story of the Keynesian revolution has been told many times before, and the present volume adds little that is new. The earlier parts deal in detail with the minutiae of Keynesian theory on various matters (especially the debates with Robertson); to this reviewer they give the impression of lecture notes, augmented by text. The latter parts, in particular Chapter 23 on Keynesian policy in action, are far more interesting. Most of the actual policy examples are drawn from the United Kingdom, and there is relatively little on international economic policy and the role of Keynes in the Bretton Woods system. This book will be of most interest to the student of macroeconomics, though it is a convenient reprise of the various threads of the Keynesian revolution for all economists.

In the end, how important was the Keynesian revolution? Few would try to belittle his insights into theory and his legacy of a whole new framework for economic analysis. As regards Keynesian economics as a policy guide, the answer is less clear, and Fletcher betrays an oddly ambivalent attitude. He is a faithful disciple and adumbrates all the reasons why the prophet was right but the prescriptions no longer seem to work: his theories have been misapplied; economic circumstances have changed; the political pressures of a democracy proved too strong; there was a loss of control over economic policy; and so on. But if this is the case, in particular if the theory was right but “…the conditions which produced the need for the Keynesian revolution passed away,” then was the Keynesian revolution but of transitory relevance, applicable only in the circumstances of the 1930s, and hence an anachronism now?

One would dearly like to know how Keynes would have reacted. He is buried, but it would be unwise to bury his economics.

Bahram Nowzad

Elitism and Meritocracy in Developing Countries

Robert Klitgaard

Selection Policies for Higher Education

The Johns Hopkins University Press, Baltimore, 1986, xi + 190 pp., $24.95.

Why should economists be concerned about selection for higher education in developing countries? If countries do not choose their leaders from among their brightest citizens, it can have a grave effect on economic performance. By one estimate developing countries could improve their GNP per capita by 5 percent if they were to base leadership upon merit; by another estimate the economic benefit of meritocracy to developing countries would be three times greater than if OECD countries were to remove restrictions on imports of third world goods. Though hardly precise in results, both estimates are based on sound theory.

The theory suggests that certain elements of social selection, which provides social groups with the opportunity for leadership positions, are amenable to policy manipulation. There are basically three questions that can be addressed by policy makers: (1) whether a wide group of citizens enters school; (2) whether they stay in school; and (3) how they are selected to attend university. Klitgaard concentrates upon the third.

This is one of the first books to look at how developing countries might improve their selection mechanisms. Like many pioneering efforts, it is more heroic than polished. The author successfully addresses three areas of college testing dilemmas: policy (whether social groups are proportionally represented, the definition of merit etc.); technical (fairness in the phrasing of questions, achievement versus aptitude, multiple-choice versus open-ended testing format); and economic and managerial (who pays for the tests and how should they be given). Since much of the material has been drawn from previous work, subjects rarely flow easily from one to the next; gems of insight are nestled next to sections overflowing with regression formulae.

Nevertheless, the book has several virtues. It contains a fascinating discussion of “market-signaling” in higher education selection. For social reasons most testing in developing countries rewards those who perform well vis-a-vis other local contestants rather than reward them against their marginal productivity on an international scale. This can produce a higher education product of questionable quality. The wrong selection mechanisms may also encourage people to overinvest (from the social point of view) on the basis of the market signal, diverting energy away from more productive activities. This is true where tests overemphasize recall rather than evaluative thinking, interpretation, and synthesis.

The case examples from China, the Philippines, Indonesia, and Pakistan also demonstrate the incentives provided by the university selection policy. The policy exerts a powerful influence on the kinds of teaching likely to be found in classrooms; on the kinds of students likely to think it possible to advance socially; on the kinds of talent likely to be selected for future leadership; and on the kinds of leaders likely to be available to interpret international market conditions and to make economic policy.

This book is among the first of what may become a series of research and policy investigations on the academic selection process in developing countries. It bypasses the very popular liturgy of the 1960s, which held that testing was a form of tyranny, a mechanism of the already privileged to perpetuate their social and economic status. In the intervening years we have seen what happens when, as in the case of China’s Cultural Revolution (or, in a less extreme example, in Tanzania), selection into university is based not upon academic merit but on more subjective social and attitudinal criteria. We have also seen research results indicating substantial differences between industrial and nonindustrialized countries. Perhaps because of relatively great rewards associated with in-school learning, less-privileged students in developing countries perform academically almost as well as contestants from socially privileged backgrounds from within the same country. This book accurately represents a number of conclusions relevant to selection policy: (1) the upper range of any normal distribution of talent constitutes an elite which countries must identify; (2) if well-designed, testing can be more fair and more efficient than are social and attitudinal criteria; and (3) testing can create either very positive or very negative incentives, both within and well beyond the school system.

The future prospects of developing economies will be determined to a large extent by the talent of their leadership. That, in turn, will be powerfully influenced by the degree to which they are selected for higher education on the basis of merit. This book represents a good start toward giving the selection mechanism the attention it deserves.

Stephen Heyneman

Multinationals of the South

Khushi M. Khan (editor)

New Actors in the International Economy

St. Martin’s Press, New York, 1986, 261 pp., $29.95.

A.E. Safarian and Gilles Y. Berlin (editors)

Multinationals, Governments and International Technology Transfer

St. Martin’s Press, New York, 1987, 223 pp., $37.50.

The pace of writings on the multinational corporation has slowed markedly during the 1980s. In part, this is because the subject has matured, and there is something of a consensus on why multinational corporations exist, how they operate, and what policies should be adopted to deal with them. As governments have gained confidence to flex their regulatory muscles, their fear of domination by multinationals has diminished. On the contrary, the onset of debt problems and the greater need for advanced technologies has led many governments to regard multinational corporations with open arms or, at least, cautious welcome. The era of exciting polemics has ended.

Current literature tends more to make marginal additions to old themes or to examine some new manifestation to the complex multinational phenomenon. The books under review provide an example of each. Both are conference proceedings. The Safarian-Bertin volume goes over the well-trodden field of multinational corporations and technology transfer, with the slight variation that it concentrates on Canada and France (rather than the United States or the United Kingdom, the traditional beat of the analysts). The Khan volume adds to the new and growing body of literature on developing country multinationals. It has no particular country focus, but surprisingly neglects Latin America.

Both volumes have interesting features, though they display the inevitable unevenness that plagues conference publications. The Safarian-Bertin volume is generally of better quality, with short, well-written papers: some provide competent reviews of recent research in their chosen fields, others provide interesting new data. The most valuable were those by Bernard Bonin, Gilles Bertin, and D. G. McFetridge who examined the role of multinational corporations in different forms of technology transfer. None reaches startling conclusions, but they confirm that multinational corporations prefer direct investment to transfer valuable proprietary technology, and that they are increasingly flexible in their strategies to transfer other forms of knowledge. There is also an interesting paper by Alan Rugman on the competitive advantages of Canadian multinational corporations. The author argues that these competitive advantages lie in mature, resource-based activities rather than in advanced research and development. Melvyn Fuss and Leonard Waverman offer a very stimulating analysis of Japan’s competitive edge in auto production and debunk a number of common beliefs about the size of the Japanese productivity advantage.

The Khan volume has some good papers as well. The best ones are by John Dunning, on the “investment development cycle,” and by Louis Wells, summarizing his pioneer research on developing country multinational corporations. Dunning brings out clearly the evolutionary nature of factors that determine international investment. The rise of multinationals in developing countries is clearly a manifestation of the process of technological and organizational learning on the part of industrializing developing countries, an aspect that Wells recognizes but downplays.

More attention should have been paid to the new breed of multinational corporations in developing countries that are competing head-to-head with established developed country firms in highly sophisticated industries. An example can be seen in the Korean firm, Samsung, which assembles its videocassette recorders and color televisions in the United States. As it is, too many of the papers in the Khan volume accept the rather static conventional wisdom on developing country multinationals: their competitive edge lies in mature, undifferentiated products where price competition is predominant, and their technological strength lies in down-scaled, labor-intensive facilities. While it is true that there are many corporations of this sort, there are a large number which are, apart from their size and spread, practically indistinguishable from conventional multinational corporations.

There is a tendency in many papers in the Khan volume to treat developing country multinational corporations as a vehicle for South-South cooperation and collective self-reliance. The time for such naive analysis is past. It does the subject of developing country multinational corporations a disservice to force their analysis into this mold.

Sanjaya Lall

Macro-Policies for Appropriate Technology in Developing Countries

Frances Stewart (editor)

Westview Press, Boulder, CO, USA, 325 pp., $29.85

With this collection of essays, the appropriate technology movement joins the search for a better policy environment. Although in parts of the book the jargon of appropriate technology makes it appear to be regarded more as an end than a means, good sense mostly prevails. Appropriate technology, aimed at promoting employment and equity, is defined here by its small scale, labor intensity (high labor/ output and low capital/labor ratios), use of local materials, and output of “appropriate” products that are low cost, with minimal packaging, less standardization, and, as a result, perhaps of lower quality.

A theme repeated throughout is the bias towards more sophisticated mechanized solutions shared by rich entrepreneurs, western machinery manufacturers, their agents in developing countries, and governments that want “modernity.” Other groups lose from these technical solutions, but would gain from “more appropriate” ones. While the analysis of these gains and losses gropes for better methods of measurement, they are described plausibly and clearly. Few good ways are proposed, however, to overcome biases so rooted in existing power structures. The collection assesses technology choices widely across sectors and social settings, opening the subject for further scrutiny rather than providing definitive answers about what policies to use.

Among individual papers, Ashok Rudra, in an otherwise ill-conceived attack on Green Revolution technology in India, is right in criticizing subsidized farm tractors, for which no good case can be made--a view also espoused by the World Bank’s recent policy paper on agricultural mechanization. Stephen Biggs and Jon Griffith are persuasive about reducing subsidies on mechanized irrigation methods in Bangladesh, and eliminating taxes on their favored technology, the manually operated shallow tubewell.

It is interesting to see a book on appropriate technology embracing the axial flow paddy thresher, which, as Bart Duff’s lucid account shows, has thrown a lot of people out of work. It makes the point that appropriateness is relative: the thresher is judged “socially beneficial” in Thailand where policy distortions in its favor were few and labor not in surplus, but “inappropriate” in the Philippines where the reverse was true on both counts. Whether international research should develop such technologies is answered ambivalently.

Jeffrey James discovered that in spite of different ideologies, development goals, and macro environments, parastatals in Kenya and Tanzania chose similar developed country technologies for making textiles, ceramics, detergents, shoes, and processing cashew and sugar. This happened because the parastatals were driven to western financiers. To deal with these biases, he advocates restoring incentives for efficiency, seeking finance from developing countries and multilateral sources, getting independent technical advice, and being wary about choosing technologies on the basis of their making “export quality” goods.

Raphael Kaplinsky compares two distinct sugar refining techniques in Indian and Kenyan settings, while Gustav Ranis and Frances Stewart assess implications for appropriate technology of rural growth linkages in Taiwan and the Philippines. Finally, Philip Maxwell, using examples from Latin America, describes how crucial are in-house resources for the hundreds of adaptations that firms have to make in manufacturing technologies. The initial choice of technology is followed by patterns of technical change which may be more or less “appropriate” for their context.

Graeme Donovan

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