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Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1974
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Harry Johnson on …

Lieftinck, P., The Post-War Financial Rehabilitation of the Netherlands The Hague, the Netherlands, Martinus Nihjoff, 1973, 49 pp., f 7.50.

Nearly 30 years ago, at the end of World War II, inflation associated with wartime losses of productive factors was the major problem facing most European countries. There followed nearly two decades of prosperous and only mildly inflationary growth, and then inflation again became a major world problem, associated this time with monetary mismanagement rather than military misfortune. It is obviously important to look back at the earlier episode in search of clues regarding what works and what does not in stopping inflation and restoring stable prosperity. In that episode, the Dutch were most immediately successful in finding and applying an effective and workable policy mix. Dr. Lieftinck’s survey of the techniques followed in the Netherlands for financial rehabilitation therefore appears as a most apposite and useful tract for the times. One could only wish that he had been less content to let the facts speak for themselves, and pointed the lessons for those more accustomed to explicit theorizing than the pragmatic Dutch.

The keystone of the rehabilitation policy was the “monetary purge” of September 1945, which involved an exchange of all notes in circulation for new currency, and a blocking of all deposit money followed by a gradual screened deblocking of bank accounts to allow for a growth of deposits in line with the economy’s real growth. This removed the immediate threat of inflationary disruption of the economy by “too much money chasing too few goods,” but the holders of blocked balances had to be permitted to use them for tax payments and purchases of government debt issued to finance reconstruction, and the result was an interim inflationary problem in spite of the continuance of virtually complete economic control designed to suppress inflation. The point was that there was little desire to hold such money but nor was it backed by real productive assets into which it could be converted; a real solution had to await the gradual generation of new real wealth, as well as depending on skillful monetary and debt management. Even so, there would have been an insoluble external problem had it not been for the Marshall Plan; but thanks to that contribution by the United States, the central bank could by 1949 report that there was no “inflationary pressure of a serious nature.” This was a premature judgment owing to the war in Korea and the associated speculative boom in commodity prices, but by early 1953 the country was strong enough internally and externally to terminate Marshall Aid.

What lessons can be learnt from the Dutch postwar success in controlling inflation for the present situation, given that their problem was a combination of grossly excessive liquidity and sharply reduced productive capacity, whereas the present one results from cumulative unspectacular monetary abuse against a background of steadily rising real income? One lesson is hard, but reassuring: it is possible to restore order from inflationary conditions by determined control of the money supply and fiscal policy. Unfortunately, many people persist in believing that “money does not matter.” The other, far more pessimistic, lesson is that behind a determined monetary and fiscal restraint lay a general belief that the problem had to be solved and that the methods employed were fair. What country today has the combination of technical knowledge of the means and popular acceptance of the ends that the Netherlands possessed 30 years ago?

Harry G. Johnson

The rural poor

Epstein, T. Scarlett, South India, Yesterday, Today and Tomorrow, Holmes & Meier, New York, U.S.A., xviii + 273 pp., 1973, $15.00; Richards, Audrey I., Ford Sturrock and Jean M. Fortt, (eds): Subsistence to Commercial Farming in Present-Day Buganda: An Economic and Anthropological Survey, African Studies 8, Cambridge University Press, New York, N.Y., U.S.A., x + 336 pp., 1973, $22.50.

Governments and development agencies are turning toward improving the well-being of the rural poor in LDCs by more direct means than have been used hitherto. These two books thus appear as timely and important contributions to the problem of poverty and to the literature of economic anthropology. It is depressing that anthropologists and economists have scorned each other so much, as these books show how much they need each other in order to provide theories of development that embrace all sectors of a community. To put it simply, many “noneconomic” variables (e.g. caste, networks of social links with neighbors, family ties and security) affect “economic” variables (e.g. labor supply and productivity, and income levels) too crucially for them to be ignored in any generalized economic model.

Professor Epstein’s excellent book is a sequel to her previous work. Economic Development and Social Change in India, which described her 1955 visit to two South India villages and which has become a classic in its own right. In her new book, based on a follow-up visit in 1970, she describes and discusses the socio-economic development and the changes which have occurred in one dry and in one irrigated Mysore village during the 15 years. She shows how and why the poor have become poorer, both absolutely and relatively; and reveals that in the village which has benefited from irrigation the social distance between the castes is as wide as ever whereas in the dry village it has narrowed.

The authors from Cambridge have tried to ask the question (which Epstein answers implicitly in her work): under what conditions have the Buganda cultivators taken the step from subsistence cultivation to commercial agriculture, and how successful have they been? The authors are honest about the limitations of their data and emphasize that, by definition, their survey only looks at successful farmers in a favorable economic and ecological environment. They do not address themselves as vigorously as does Epstein to the problem of poor and landless people. However, it is a mark of a good study that they raise more questions than they answer. They found no common characteristics among the innovators except that they had been able to select their own occupation. A favorable situation for entrepreneurial activity of this nature was produced by the introduction of the right of land purchase early on in this century.

Richard W. Longhurst

The renaissance of city-states

Geiger, Theodore, assisted by Frances M. Geiger, Tales of Two City-States; The Development Progress of Hong Kong and Singapore, Washington, D.C., U.S.A., National Planning Association, 1973, xii + 233 pp., $3.50.

In this well documented study, the authors lay to rest the popular assumption that the dynamism shown by the city-states of Hong Kong and Singapore is mainly due to the sociocultural characteristics of their Chinese elite groups and people. They point out that market forces made manageable and strengthened by governmental policies have been the mainsprings of the city-states’ developmental progress. They argue that a way has been found in Hong Kong by which elite groups can participate meaningfully in developmental policymaking; likewise, in Singapore, they claim the establishment has succeeded in generating a public awareness of developmental objectives and of what it takes to achieve these goals.

There is a discussion of the ways in which the Asian Dollar Market has been brought to Singapore’s doorstep, making Singapore Southeast Asia’s financial center.

While the current energy crisis undoubtedly will have a limiting effect on the city-states’ manufacturing activities, they consider the long-term outlook as good. Southeast Asia is developing into a major oil-producing area, and Singapore is expecting large investments in petrochemicals.

Some major problems of economic growth should have received more extended discussion in the study. Hong Kong’s increasing population has vexed its housing experts; it has also vexed transportation experts. This tiny city-state must go underground or face the traffic planner’s ultimate horror: miles and miles of major roads totally congested.

In Singapore, the need for more land and water continues to be a challenge. The problem, for the immediate future, is how to increase the city-state’s size; reclamation is part of the solution.

Also needing more discussion is the emerging regional grouping comprising the Southeast Asian states. How will these arrangements, in the long term, affect trade among the members themselves and with those countries outside the region? Can a city-state, such as Singapore, exert as strong a political and economic influence in regional councils as the larger states in the area?

Pastor B. Sison

Looking east

The 1974 Yearbook of the Far Eastern Economic Review, Far Eastern Economic Review, Limited, Hong Kong, 316 pp., $5.90.

The 1974 Yearbook is divided into four main sections: Politics and Social Affairs, Foreign Relations, the Economy, and Infrastructure—which is a survey of transport and communication projects, major investments, and foreign and private aid

The major themes in the coverage of the 28 countries are the continuing shortage of cereals, the energy crisis, and the impact of the changing relationship between mainland China and Japan. The Yearbook also reports on the change of government in Bangkok and the impact of the student revolt on Thailand’s ASEAN neighbors and on Korea.

Rangnekar, D.K. (Editor), India and Asia-The Economic Times Annual 1973, Bombay, India, The Times of India Press, 180 pp., Rs6.

Most essays on economic development written before October 1973 when the Organization of Petroleum Exporting Countries first increased petroleum prices might seem ancient history. Although much of the political and economic framework of the essays contained in this annual issue on various Asian countries and sectors is out of date, many of the conclusions are not.

In the opening essay on ‘The Asian Dilemma” Mr. Rangnekar writes, “The face (of India) has changed in many ways, but the bulk of the people remain miserably poor … inequalities of income, wealth, and opportunities have greatly increased … many countries have embarked on what looks like a rudderless course of development.”

The essay topics range from industrialization, nuclear power, and Asian concepts of management to the outlook for food production, illiteracy, rural economy, and “soldier’s socialism.” The variety of the Asian experience is well documented. One writer concludes: ‘The most striking feature of those Asian regions which experienced moderate to rapid growth rates in the 1960s and early 1970s is the lack of any consistent pattern in the way their economies were organized or in the economic policies they pursued.”

Rangnekar, who is also editor of the Economic Times, criticizes a variety of development practices. Asian countries must break away, he believes, “from the current intellectual ambivalence which prefers odd mixtures of irreconcilable ideas and concepts to rational economic and political behavior.” He also contends that employment-oriented strategies lay a misplaced emphasis on labor-intensive industries, that export stimulation programs are more important than simple import substitution for balance of payments relief, and that the failure to recognize economies of scale has resulted in inefficient enterprises.

Jonathan C. Brown

Ten troubled years

Kindleberger, Charles P., The World in Depression 1929-1939, Berkeley, California, U.S.A., University of California Press, 1973, 336 pp., $10.00. $3.45 (paper).

With admirable lucidity, Charles Kindleberger presents a concise account of the principal economic events of the decade before World War II. Concentrating primarily on New York, London, Berlin, and Paris, Kindleberger directs his narrative to an explanation of the length and depth of the 1929 depression.

The main lesson that Mr. Kindleberger draws from the interwar years is “that for the world economy to be stabilized there has to be a stabilizer.” He argues with much plausibility that the world economic system had been rendered unstable in the 1920s by British inability and United States unwillingness to assume responsibility for stabilizing the system by maintaining relatively open markets for distress goods, providing countercyclical long-term foreign lending and discounting in crisis. This lack of leadership, together with such postwar problems as reparations, war debts, overvaluation of the pound, undervaluation of the franc, and the deflationary bias following the German inflation of 1923, made stability difficult if not impossible to sustain.

A principal strength of Kindleberger’s analysis is that it eschews unicausal explanations of the depression, such as the Keynesian argument that the entire problem lay in mistaken deflation, the Friedman and Schwartz charge that United States monetary policy was the chief villain, or the secular stagnation hypothesis of Alvin Hansen. However, in adopting an eclectic approach, Kindleberger underplays factors of fundamental importance such as the impact of the United States depression on the world economy, or the importance of French, Benelux, and Swiss behavior on the stability of the international financial system. Similarly, Kindleberger must be criticized for failing to provide an adequate explanation of the changed pattern of international capital flows during the interwar period. While he correctly emphasizes the destabilizing nature of long-term capital flows in the depression years, he does not provide a satisfactory explanation of the difference between capital flows under the gold standard period prior to 1913, and those emanating from New York after World War I.

Despite these shortcomings, Kindleberger has written an excellent account of the economic collapse of a turbulent decade, skillfully combining description and analysis. His emphasis on the lack of leadership in the 1930s is clearly warranted, and his preoccupation with a breakdown in leadership in the present decade may well be prophetic.

Desmond Lachman

Taxing circumstances

Bird, Richard M., Taxing Agricultural Land in Developing Countries, Cambridge, Massachusetts, U.S.A., Harvard University Press, 1974,361 pp., $14.50.

By the author’s own admission, his look at the taxation of agriculture is, from a development point of view, somewhat depressing: “Where much revenue is collected, as through export taxes, the effects on agriculture are not likely to be desirable; and when the effects are at least in theory desirable, as through well ordered land taxes, little revenue is collected.”

Richard Bird offers no easy way out of such a dilemma. His whole book—one in the series of the Harvard Law School International Tax Program—comes down very strongly against a holistic, comprehensive approach to tax reform in favor of piecemeal measures carefully tailored to the peculiar circumstances of different developing countries. Chosen policy instruments and fiscal goals should take into account the limitations imposed in developing countries by political forces and administrative capabilities.

Mr. Bird thus advises poor countries to concentrate on establishing a solidly based simple property tax with meaningful rates and to follow the example of such countries as Colombia in using special assessments and betterment levies. Such taxes can avoid the serious disincentives on production associated with export taxes on agricultural products and income taxes on farmers. However, he frankly admits the difficulty of relying too heavily on land taxes which peasants have historically regarded as oppression by colonial powers and indigenous ruling classes.

The author emphasizes the key role which development economists used to assign to agricultural taxation in the dual sector growth model. Heavy taxes would, it was argued, transfer resources out of agriculture by expanding the surplus, reducing labor inputs, increasing the marketed supply of food, and by stimulating capital investment in the nonagricultural sector. He cites more recent evidence showing that the initial implication that marginal productivity is at or near zero is incorrect. In any case, agriculture itself will benefit from increased capital inputs especially after a land reform designed to increase equality and stimulate production from smaller land units.

The situation in many developing countries is now so urgent that comprehensive tax reforms adopted to foster a very long-term shift out of agriculture are something of a luxury. The author quotes President Nyerere of Tanzania in his support: “It would be grossly unrealistic to imagine that in the near future more than a small proportion of our people will live in towns and work in modern industrial enterprises.”

However, Bird also warns developmental economists who stress agricultural development per se that they run the danger of becoming “agrarian fundamentalists.” His basic conclusion is that “the impact of agricultural tax must be assessed in terms of a country’s social and institutional structure, its technological and market possibilities and the relative size and productivity of the agricultural and industrial sectors.”

Aids to research

Schumacher, August, Development Plans and Planning: Bibliographic and Computer Aids to Research, New York, N.Y., U.S.A., Seminar Press Inc., 1973, 195 pp., $9.25.

The author, an economist in the Agriculture and Rural Development Department of the World Bank, describes how to obtain access to research material on development plans and planning. The first part of the book contains over 100 bibliographies covering both sector programming and project planning in agriculture, transport, education, industry, and management. The second section evaluates the utility to consultants, planners, and researchers of the automated documentation centers which have appeared in recent years. Finally, Mr. Schumacher looks at how computer aids can speed up access to material and cut down on labor costs in research libraries. He points out that, in contrast to such automated library systems as Project Intrex at the Massachusetts Institute of Technology, “the operations of a typical social science research library have not changed in over a century.”

Other Books Received

Weerassoria, Wickrema, David E. Allan, Mary E. Hiscock, and Derek Roebuck, Credit and Security in Ceylon (Sri Lanka), New York, N.Y., U.S.A., Crane, Russak and Company, 1973, xxii + 303 pp., $17.50.

Lewis, John P., and Ishan Kapur, The World Bank Group, Multilateral Aid, and the 1970s, Lexington, Massachusetts, U.S.A., D.C. Heath and Company, xvii + 168 pp., $13.

Simha, S.L.N., International Monetary Reform: An Introduction, Bombay, India, Vora and Co. Publishers Private Ltd., 1973, xiv + 224 pp., Rs 30.

Chadid, Gustavo Dajer, Crisis Monetaria Internacional, Bogotá, Colombia, Editorial Temis, 1973, xiii + 325 pp.

Establishing a Manufacturing Plant in Europe, Noyes Data Corporation, Park Ridge, N.J., U.S.A., x + 373 pp., $28.

Vogl, Frank, German Business After the

Economic Miracle, New York, N.Y., U.S.A., Halsted Press, vi + 264 pp.

Shuster, M. R., The Public International Law of Money, New York, N.Y., U.S.A., Oxford University Press, 1973, ix + 356 pp., $19.25.

Enthoven, A.J.H., Accountancy and Economic Development Policy, New York, N.Y., U.S.A., American Elsevier Publishing Company, Inc., 1973, xi + 380 pp., $29.

Marshall, Adriana, The Import of Labour, Groningen, the Netherlands, Academic Book Serivces, 1973, xiv + 177 pp., $20.

Forrester, Nathan B., The Life Cycle of Economic Development, Cambridge, Massachusetts, U.S.A., Wright-Allen Press, 1973, x + 194 pp., $20.

Barraclough, Solon, Agrarian Structure in Latin America, Lexington, Massachusetts, U.S.A., D.C. Heath and Company, 1973, xxvi + 351 pp., $15.

Pasquier, Roger, L’Animation agricole, Fribourg, Switzerland, Editions Universitaires, 1973, 144 pp., F 19.

Karlin, Michel, Le Sens et la portée du contrôle du crédit, en France, depuis 1945, Paris, France, Société Privée de Gestion Financière, 1973, 308 pp.

Solnik, Bruno H., European Capital Markets, Lexington, Massachusetts, U.S.A., D.C. Heath and Company, 1973, xii + 114 pp., $12.50.

Fairbairn, Ian J., The National Income of Western Samoa, New York, N.Y., U.S.A., Oxford University Press, 1974, x + 215 pp., $22.50.

Dinwiddy, Bruce (Ed.), European Development Policies, New York, N.Y., U.S.A., Praeger Publishers, 1973, viii + 118 pp., $10.

Cleave, John H., African Farmers: Labor Use in the Development of Smallholder Agriculture, New York, N.Y., U.S.A., Praeger Publishers, 1974, xvi + 253 pp., $17.50.

Hingorani, N.L., and A.R. Ramanathan, Management Accounting, Delhi, India, Sultan Chand & Sons, 1973, xi + 484 pp., Rs. 15.

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