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Finance & Development, March 1978
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Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1978
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Terence E. Barker (editor)

Economic Structure and Policy

Halsted Press, New York, N.Y., U.S.A., 1976, xix + 412 pp., $25.

For more than a decade, members of the Cambridge Growth Project have been working, under the direction of Professor Richard Stone, on a large multisectoral model of the British economy. The present volume is the latest and most comprehensive report on that model and on its uses.

The book has three parts. Part One provides an overview of the model and a description of how it is solved. Part Two gives the specifications of the equations and the estimation results (from annual data) for the main endogenous variables in the model, namely, personal consumption, investment, exports, imports, employment, prices and profits, incomes and expenditures, and company profits, dividends, and retentions. In Part Three a “standard view” of the British economy in 1980 is set up and the model used to work out changes in policy instruments needed to compensate for less favorable external circumstances, or to effect various internal changes.

At the broadest level, the Cambridge model can be characterized as large (containing some 693 behavioral equations plus a large number of identities), highly disaggregated (with 35 industries, each of which has its own labor and investment requirements), medium term (so as to permit projections over the next four to six years), static (so that only end point or steady-state solutions are obtained rather than the adjustment path to them), and Keynesian (emphasizing real rather than financial flows and similarly, focusing on fiscal rather that monetary policy).

As regards the last characteristic of the model, we are told only that “… the role of money in the model, apart from its function as a numeraire, is very small with nodirect effects on consumption and only slight effects on investment via changes in the rate of interest. … It does not… play and part in the determination of our target for the balance of trade” (p. 16). This is hard to accept for a number of reasons. Many major industrial countries, including the United Kingdom, have recently adopted money growth targets; the recent Fund stand-by loan to the United Kingdom contains strict limits on the rate of domestic credit expansion; and the monetary approach to the balance of payment and the related asset-market view of exchange rates so prevalent in the recent literature have a strong monetary emphasis.

The individual chapters in Part Two presenting the specification and estimation of the model’s equations are by and large well written and display a good blend of economic theory and estimation practice. Of all the estimation results and assumptions contained in Part Two, two of the assumptions deserve particular attention: (1) the Cambridge group has now abandoned the idea of explaining money wage changes in the United Kingdom and instead is making alternative assumptions about the time path of money wages, rendering inflation exogenous in that domestic prices in the model are basically determined as a markup on labor costs; and (2) the estimated parameters of the model imply that the close association between the exchange rate and domestic employment, and that between tax rates and the balance of trade are much closer than the other way around. The traditional Mundell-Fleming pairing of instruments and targets (in a world of fixed exchange rates)—with fiscal policy assigned to internal balance and monetary policy to external balance—is thus turned on its nead. Because of the very high estimated income elasticity (1.8) of U.K. imports in the model, any reduction in spending induced by higher tax rates reduces imports by much more than it does domestic activity (and domestic employment)—thereby leading to an improvement in the trade balance. By contrast, a lower exchange rate leads to higher exports and domestic employment, but to only limited improvement in the trade balance, because higher imports follow from the rise in domestic activity induced by the export gain.

Part Three contains material of interest to those concerned about the United kingdom’s economic prospects. The authors propose a “standard view” of the british economy in 1980. They also assume two policy targets—full employment (that is, a 2 per cent unemployment rate) and balance of trade equilibrium taken here as a surplus of £600 million); and two instruments—the exchange rate assigned to the employment target) and the rate of income tax (assigned to the trade balance). The exogenous variables are set at their “most likely” levels for 1980. For example. North Sea oil production is assumed to increase from about 12 million tons in 1975 to about 147 million tons in 1980, and the rate of wage inflation assumed to be 14 per cent a year for 1975-80. The model is then solved for the values of the two policy instruments and be: endogenous variables that are consistent with the achievement of the policy targets in 1980.

The results indicate that an exchange rate of £1=$1.69 (versus the 1975 rate of $2.10) and an income tax rate of 30.4 per cent (versus the 1975 rate of 29.4 per cent) will do the trick, and that real gross domestic product (GDP) will grow at 3.3 per cent a year (versus 2.9 per cent for 1969-75) in the process. Thus, the overall picture painted for the United Kingdom in the standard view of 1980 is a bright one. Permutations of the original set of assumptions are also examined, including a “pessimistic view”—higher domestic inflation, slower growth in world demand, a lower investment ratio, and less North Sea oil. Not surprisingly, the result is lower consumption and investment, a higher tax rate, a lower exchange rate, and perhaps most importantly, an annual growth rate for real GDP of 2.7 per cent compared to 3.3 per cent under the standard view.

This is an important and interesting book that deserves the attention of students of the British economy and economic policy. However, with such a limited emphasis on the role of money, with almost no treatment of expectations, and with exogenous wage inflation, it makes one wonder whether big is better, no matter how much the Cambridge growth model can tell you about what goes on in each of 35 industries.

Morris Goldstein

Edward F. Denison and William K. Chung

How Japan’s Economy Grew So Fast: The Sources of Post War Expansion

The Brookings Institution, Washington, D.C., U.S.A., 1976, xvi + 267 pp., $4.95 (paperback).

Richard E. Caves and Masu Uekusa

Industrial Organization in Japan

The Brookings Institution, Washington, D.C., U.S.A., 1976, xi + 169 pp., $3.50 (paperback).

These are two highly competent and scholarly contributions to the analysis of Japan’s post-World War II growth, and yet they are disappointing. Although careful structuring and clear writing make their conclusions easily accessible even to those with a limited knowledge of formal economics, the analysis brings little new insight to how Japan caught up with the industrialized countries of Europe and America in the last 25 years.

The Denison and Chung book is the more disappointing of the two in this respect. In what has become a standard approach to “sources of growth,” the authors have mined a mass of statistical data to seek the source of economic growth in advances in knowledge, increasing use of capital, larger scale of production, shifts out of agricultural and nonagricultural rural employment, better education of workers, and changes in the structure of the work force. As was to be expected, all of these were important. As expected too, the contribution that each “source” made to total growth differed from the contribution of similar factors to the growth of the more mature economy of the United States. Denison and Chung, however, do not analyze the interdependence of growth factors and do not focus on the social and economic motivation and organization which made Japan’s remarkable achievement possible. They do not indicate to what extent the absence of significant military expenditures made Japan’s uniquely high rate of growth possible.

Despite a more institutionally oriented subject, Richard Caves and Masu Uekusa’s volume also fails to provide new insights into Japan’s growth. The authors conclude that while the concentration of ownership in manufacturing is about the same in Japan as in the United States, it is greater when the economy is seen as a whole. Caves and Uekusa were not able to draw any definite implications for either resource allocation or technical efficiency, beyond noting that periods of rapid growth reduced barriers to entry into new industries. Oligopolistic competition has clearly been prevalent; but it has been competition of a sort, and at times it may have been very competitive indeed. The government’s role in seeking to mitigate tendencies toward both excessive investment and inadequately scaled operation is discussed. The authors note the disadvantage under which the small-scale sector labors in access to capital, and, in contrast, its advantages in obtaining relatively low-cost labor. They are critical of the lagging efficiency of the distribution sector, although they note that this may to some degree reflect household shopping preferences and social factors. One is tempted to add that the Japanese distribution pattern may lead to higher social (particularly gastronomic) utility, than the supermarkets that appear to be the authors’ ideal of efficiency in distribution.

Both books are essentially written for the reader from the United States; all comparisons are in terms of the U.S. economy. In doing so, they generally neglect the role of economic factors and institutions in the “catching up” process that would be of interest to many countries now in the position Japan was in 25 years ago. Neither book pays attention to the role of small-scale industry as a holding reservoir of employment in the transition from a rural to an urban industrialized society and the various ways in which this encourages labor, management, and entrepreneurial skill formation. The role of exports in Japan’s economic growth is barely mentioned. The transfer of advanced technology from more highly industrialized economies and its adaptation to Japanese conditions, without significant direct foreign investment, are two of the most interesting aspects of Japan’s rapid economic growth. Here, they are not analyzed.

In sum, the books, in spite of their technical excellence, do not help the reader to learn why Japan grew so fast. They suggest how it grew so fast only in a very narrow, almost tautological, sense. It is hardly surprising that the industrialization process—the application of technology, investment, education, and the shift out of low productivity agriculture—should have been the main sources of growth. However, it is the nature of Japan’s socioeconomic and political framework and the policies that made the growth possible which are critical to a country wishing to follow the Japanese example. The Japanese model of growth does not conform to neoclassical or monetarist economic ideals. The economy has been highly managed since the beginnings of industrialization in the Meiji era, with a vast, complex bureaucracy in both the government and business sectors. Until the 1960s, protection—in terms of tariffs and quantitative controls—was high and regulation of foreign investment almost complete. Yet the economy grew very fast indeed. Why?

Helen Hughes

Peter Schran

Guerrilla Economy: The Development of the Shensi-Kansu-Ninghsia Border Region, 19371945

State University of New York Press, Albany, N.Y., U.S.A., 1976, 323 pp., S25.

John G. Gurley

China’s Economy and the Maoist Strategy

Monthly Review Press, New York, N.Y., U.S.A. and London, U.K., 1976, 325 pp., $15.

Allen S. Whiting and Robert F. Dernberger

China’s Future—Foreign Policy and Economic Development in the Post-Mao Era

1980’s Project Studies/Council on Foreign Relations, McGraw-Hill Book Company, New York, N.Y., U.S.A., 1977, 202 pp., $5.95.

These three books jointly span the years of consolidation of the Communist Party in the People’s Republic of China, and discuss the difficult tasks the Party faces now. They are scholarly without being dull or esoteric and should be useful to anybody interested in China’s recent development.

P. Schran’s book discusses and documents the strategy of the Communists in their base areas of the Northwest—the Shensi-Kansu-Ninghsia Border Region— where their main objective was to survive and gather strength militarily and politically. This required that production in the area be increased and diversified. The Communists had (1) to equip and expand their armies; and (2) to gain support among the base-area people in a region that was unstable, backward, and besieged. They sought to make the region self-sufficient within given technology by mobilizing both private and institutional households, primarily through institutional means. They promoted cooperative and public enterprises. The army, other organized groups, and schools had to produce for their own consumption. Although the Communists favored the use of nonmaterial incentives, they did not hesitate to employ conventional incentives with respect to the population at large. Only cadres were required to “embrace hard work for little remuneration” (p. 88).

P. Schran struggles bravely with severe data shortage and succeeds in presenting a very interesting account of the economic strategy of the Communists. Unfortunately the book does not contain a point of view. Nowhere does the author state and give arguments for what he thinks were the key features in the Communist strategy which gave it its power and resilience.

J.G. Gurley’s essays on China’s economic development put Mao at the center of the picture. The central theme of his essays is that Mao’s ideas on development have profoundly shaped events in China, transforming it from an oppressive, backward country to one of freedom and equality—a country within which all contribute to and benefit from a strong and growing productive base. Mao’s ideas focus on the need to release and harness man’s productive powers through fundamental changes in the structure of ownership, in the relations of production, and in man’s world view.

The author describes Mao’s ideas on development and how radically they differ from conventional western views, and he analyzes the strategies Mao adopted to implement his vision. In all his essays, Gurley discusses China’s economic performance in glowing terms and criticizes much of current China studies as lacking in insight. He claims that, despite their scholarliness, these studies are misdirected because they refuse to consider seriously and sympathetically Maoist approaches to development. Unfortunately Gurley goes to the other extreme. He adopts the Maoist viewpoint and heaps praise on China’s system in a most uncritical fashion.

The essays by A. Whiting and R. Dernberger consider the major factors in today’s China which will constrain her range of policy alternatives in the near future, in both domestic and foreign affairs. Both authors are duly cautious about predicting China’s future course of action since past predictions have fared poorly and much depends on the character of future leadership and on how world powers view China and approach it. Both authors, too, agree that forces of moderation are likely to prevail in the near future, although the struggle between the radicals and the moderates is likely to persist. The fundamental issue which divides these groups is whether growth of material production or ideological and social transformation should have priority The moderates maintain that China’s primary need is substantial growth and thorough social transformation may have to wait. The radicals fear that should the moderates prevail, socialism may well die in China.

China has tremendous problems to face. In the economic field, for instance experts argue that for any future rate of growth, China will need to exert itself even more strenuously than in the past decades. Expansion in agriculture and industry have to overcome severe constraints. The economic problem will absorb most of China’s energies and this will tend to reduce her activism abroad and bias it in favor of accommodation. In the realm of foreign policy, China may continue to use rhetoric extolling defiance, but economic considerations will make it very unlikely that China would mount a major military offensive. Foreign powers must be aware of this and act accordingly. The main message of the essays is that China will continue to be primarily immersed in domestic economic problems, that accommodation and compromise are in its best interests, and that foreign powers can deeply influence China’s policies because it depends on their technology and values it. These essays are not futile exercises in prophecy because they give good arguments for the positions they take.

I. Tsakok

Other books received

Paul McCracken, Guido Carli, Herbert Giersch, Attila Karaosmanoglu, Ryutaro Komiya, Assar Lindbeck. Robert Marjolin, and Robin Matthews

Towards Full Employment and Price Stability

The Organization for Economic Co-operation and Development, Paris, France, June 1977, 341 pp., paperback $16.00, £7.80, F 64.00.

A study by a group of distinguished independent experts which provides a detailed survey of the economic experience of nine OECD economies from the 1960s. They found for this period “an unusual bunching of unfortunate disturbances unlikely to be repeated on the same scale, the impact of which was compounded by some avoidable errors in economic policy.” Looking ahead, they regard high and accelerating rates of inflation as “the biggest single constraint in achieving reasonable rates of growth in the future—and the greatest barrier to a rapid return to full employment.” The group reviews in detail the broad policy options open to the industrial countries and favors “cautious but active” policies of demand management. The careful compilation of basic materials on the economic performance of the industrial countries and on their national policy decisions recommends this study as a primary reference tool.

Guillaume Guindey

The International Monetary Tangle: Myths and Realities

M.E. Sharpe, Inc., White Plains, N.Y., U.S.A., 1977, 122 pp., $10.

This summary of international monetary developments from 1944 to 1976 provides a rounded defense of the Bretton Woods charter as the basis for world monetary cooperation by a senior French finance official who served as Director General of the Bank for International Settlements from 1958 to 1963.

Heinz Riehl and Rita M. Rodriguez

Foreign Exchange Markets: A Guide to Foreign Currency Operations

McGraw-Hill Book Company, New York, N.Y., U.S.A., 1977, xv + 284 pp., $19.50.

This technical handbook attempts to explain the functioning of the foreign exchange market in simple practical terms. Specific problems encountered in foreign currency transactions are explored.

Stanley W. Black

Floating Exchange Rates and National Economic Policy

Yale University Press, New Haven, Connecticut, U.S.A., 1977, xvii + 204 pp., $12.95.

A study of the effects of floating rates on national economic policy decisions in five major industrial countries: France, the Federal Republic of Germany, Sweden, the United Kingdom, and the United States. The emphasis is on the influence of the altered exchange-rate arrangements upon the conduct of macroeconomic policy in each country. The author finds that the floating regime “favors countries with strong domestic institutions” and that countries with weaker institutions have “their troubles … magnified by a false notion of relaxed constraints combined with the tendency of floating rates to bottle up the effects of domestic inflation.” The book is policy oriented.

Gottfried Bombach, Bernhard Gahlen, and Alfred E. Ott (editors)

Probleme des Strukturwandels und der Strukturpolitik

J.C.B. Mohr (Paul Siebeck), Tubingen, Federal Republic of Germany, 1977, 575 pp., DM 78.

This volume contains the papers and summaries of the discussions of the 1976 Ottobeuren Economics Seminar on “Problems of Structural Change and Structural Policy.” It focuses on policies affecting the composition of output in the Federal Republic of Germany, and is divided into four parts: (i) recent trends, both national and international and an evaluation of structural theory and policy; (ii) the technical problems of structural and branch-of-activity forecasting; (iii) the theory of rational structural policy, with an emphasis on regulation; and (iv) the links between sectoral structoral policy and regional, investment, and research and development policy. A scholarly treatment of problems of national economic structure.

Erik P. Eckholm

The Picture of Health—Environ-mental Sources of Disease

w.w. Norton & Company, Inc., New York, N.Y., U.S.A., 1977, 256 pp., $9.95

A wide-ranging survey of the major causes of disease in both developed and developing countries. The author presents a useful synthesis of health problems and trends and of efforts to combat disease. For the general reader and researcher.

Robert M. Stern, Charles F. Schwartz, Robert Triffin, Edward M. Bernstein, and Walther Lederer

The Presentation of the U.S. Balance of Payments: A Symposium

Essays in International Finance, No. 123, International Finance Section, Department of Economics, Princeton University, Princeton, N.J., U.S.A., August 1977, vii + 64 pp., $1.

In 1976, the United States adopted far-reaching changes in the presentation of its balance of payments accounts. These changes were based on recommendations made by an outside body of experts. These recommendations were designed to adapt the presentation of the U.S. international accounts to the introduction into the international monetary system of more flexible exchange rate arrangements.

In the new presentation, no attempt is made to identify an overall surplus or deficit in the accounts. As a result, there has been the elimination of the official- settlements balance, along with all other measures of overall balance. This symposium of five U.S. economists is devoted to an evaluation of the new presentation and to a discussion of the statistical and analytical issues raised by the advisory committee’s recommendations.

Dennis A. Rondinelli (editor)

Planning Development Projects

Dowden, Hutchinson & Ross, Inc., Stroudsburg, Pennsylvania, U.S.A., 1977. x + 252 pp., $21.

Fifteen contributions focusing on the practical aspects of project planning and implementation in developing countries. A.O. Hirschman and A. Wildavsky write on problems of development planning; D. Rondinelli, W. Weiss, A. Waterston, J. Wilson, J.P. Gittinger, R.P. Sinha, and Y.J. Ahmad on identifying, preparing, and appraising projects; R.K. Vepa, G.W. Wynia, and F.A. Kramer on project implementation; and M. Esman, N. Caiden, and A. Wildavsky on alternative approaches to planning, programming, and controlling projects. Designed as an educational and training tool.

Richard S. Eckaus

Appropriate Technologies for Developing Countries

National Academy of Sciences, Washington, D.C., U.S.A., 1977, xiii + 140 pp., $6.25.

This report deals with the issues inherent in the concept of “appropriate” technologies and analyzes the relationships between technological choice and the economic, social, and political aspects of the development process. The focus is on the interaction of the many factors essential for the rational selection of a technology, with an emphasis on decision making in the industrial sector.

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