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Finance & Development, June 1981
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International Monetary Fund. External Relations Dept.
Published Date:
June 1981
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The Cruel Dilemmas of Development

Basic Books Inc., New York, NY, U.S.A., 1980, 243 pp., $15.

The theme of this book is that poverty and repression have become deeply engrained in the pattern of Brazilian development over the past few centuries and that these trends have speeded up with the recent emphasis on rapid growth. A highly stratified society emerged during the colonial period, up to 1900, and was ossified by an economic system that concentrated on primary production for export. The author contends that as the country began to modernize, policymakers simply built upon existing social structures. So Brazil has never really gone through a social and economic revolution as it evolved from a primary to an industrial economy.

Brazil was a late participant in the industrialization process compared with European countries, beginning to modernize only after World War I. Initially, the Government sought to accelerate development through capital-intensive production techniques—first focusing primarily on import substitution and later on promotion of exports. As a consequence of this pattern, employment opportunities lagged behind the increase in the country’s labor force, which was growing at over 3 per cent annually between 1940 and 1976. Rapid economic expansion was promoted by the state, which intervened widely in the operation of the economy, both by controlling the means of production and by offering incentives with programs that primarily benefited the existing economic elite. Inequities were further aggravated by a large inflow of foreign investment, since multinational companies concentrated on producing sophisticated goods for the wealthy who were the major source of effective demand. Finally, an entrenched rural oligarchy monopolized ownership of land and capital, which meant that income distribution in rural areas remained highly skewed.

The author posits that these inequities have increased since World War II and that even with well-intentioned leaders the best that the poor can hope for are marginal improvements in their lot over the next decade or so. The possibilities for political liberalization are limited by the economic circumstances of the country, particularly by the balance of payments (BOP) position and high domestic inflation. The author contends that significant change could only be accomplished through a radical alteration in the political system.

Even though the book is critical of the persistence of inequity in Brazil, its conclusions are ambiguous about whether any drastic change would be desirable. As the author points out, the combined social, political, and economic costs associated with growth in Brazil are no worse than the costs paid by countries that have tried more radical approaches to development, such as the Peoples Republic of China, or even by those using “softer” reformist approaches, such as India or Peru between 1968 and 1975. These costs of growth are unique neither to capitalism nor to the Brazilian experience.

This book has interesting parts, particularly the discussions of inflation and the role of the state. On the other hand, it has some important shortcomings. The author’s attempt to demonstrate that rapid growth has been a root cause of increased suffering and poverty is unconvincing. Even though income distribution remains a serious problem, it is unlikely that a larger proportion of the Brazilian population is now living under worse conditions than 30 or 40 years ago. Although, admittedly, existing data are fragmentary, it appears that real incomes of all strata of the population, including the poor, have risen substantially over this period. (This is even demonstrated in the book’s statistical appendix.)

The judgments about Brazil’s development experience, particularly over the past half century, also seem unjustifiably onesided. Although it clearly implies that something might have been done to achieve a more equitable society, perhaps through a more inward-oriented development strategy with a lower growth rate, the possible benefits and costs of such an approach are not systematically analyzed. The author does not explore the hard choices policymakers actually faced during the past few decades, nor does she consider what actions might have improved the situation. Thus the book never really addresses the real dilemma—how to build an economy capable of competing in the modern world and, at the same time, to create enough productive job opportunities in a sufficiently open political environment to ameliorate poverty and the maldistribution of income. The solutions to these problems are not mutually exclusive (as the author implies) but neither can such difficult goals be realized overnight. Unfortunately, the author offers no insights on what constructive steps might be taken to speed up progress in this direction in the future.

Jack Sweeney

Richard Blackhurst and Jan Tumlir

Trade Relations Under Flexible Exchange Rates

GATT Studies in International Trade, Geneva, Switzerland, 1980, 80 pp., $8, Sw F 12.

One of the more enduring issues in the long and continuing debate on the relative merits of fixed versus flexible exchange rates is whether greater exchange rate variability adversely affects the level and pattern of international trade. In this pamphlet, Richard Blackhurst and Jan Tumlir of the General Agreement on Tariffs and Trade (GATT) take stock of the last seven years’ experience with floating rates, as well as of the relevant theoretical and empirical studies, to make an evaluation of the effect of flexible exchange rates on trade flows. This is a solid piece of work: questions are clearly posed, theory and empirical evidence are nicely entwined, and the authors’ conclusions are reasonable. There are some imbalances—such as a preoccupation with inflation to the neglect of unemployment—and some important exclusions—for example, the discussion of monetary policy omits any mention of the rational expectations critique of active stabilization policy, but readers interested in a succinct review of the relationship between flexible rates and trade should find this pamphlet well worth an hour or two of their time.

The pamphlet is organized into four chapters. In Chapter I, Blackhurst and Tumlir examine the prima facie link during the 1970s between the increase in exchange rate variability and the slowdown in the growth of world trade. Like most other analysis, they reject the view that one causes the other and instead favor the explanation that trade slowed during this period mainly because of the slow growth of real output (particularly during the 1974/75 global recession). They go on to posit that the slower output growth was a consequence of the prevailing high inflation rates, which led, in turn, to restrictive monetary and fiscal policies. Because of the large differences in inflation rates across countries, large exchange rate changes were inevitable. Hence, in the end, Blackhurst and Tumlir single out inflation as the root of both high exchange rate variability and slow world trade growth.

The latter half of Chapter I looks at the effect of exchange rate changes on the trade positions of major industrial countries. Quite correctly, the difference between nominal and real exchange rate changes is emphasized, as is the dominance of cyclical real income movements over relative price changes as an explanation of observed trade balance changes. One problem here is that the authors expend so much effort in countering the (by now straw-man) view that there is a close connection between nominal exchange rate changes and changes in trade balance positions that they give insufficient recognition to the significant effect of relative price changes on trade volumes in the long run, other factors held constant. Nor do they give sufficient attention to the effects of flexible rates themselves on the size of relative price elasticities or to the role of such nonprice characteristics of traded goods as delivery schedules, after-sales service, and general product quality in dampening the effects of exchange rate changes. These complaints aside, the authors build a strong case that exchange rate changes have not distorted the geographical patterns of international trade, at least in the 1970s.

Chapter II tackles the question of whether the existing system allows a country deliberately to undervalue its exchange rate to obtain a temporary trade advantage. The authors reject the effectiveness of quantitative controls on trade and/or capital flows, both because these cannot increase a country’s share in world exports and because the sophistication, size, and efficiency of capital markets preclude any single country from exercising control. Nor do the authors regard official intervention as a promising form of manipulation: first, because its track record is poor—the volume of intervention tends to be largest when the magnitude and frequency of exchange rate changes are also largest; and second, because its impact on the expectations of private participants in exchange markets is so uncertain. A country can of course alter its (floating) exchange rate by altering its monetary policy. The authors regard this, however, not as manipulation but rather as the exchange rate responding to underlying economic conditions. Further, they point out that the slow response of trade flows to relative price changes limits the short-run possibilities of letting the exchange rate “overshoot” to a country’s advantage. Blackhurst and Tumlir conclude that the exchange rate should not be considered as an instrument of national economic policy in the same way as, say, the government budget, because the exchange rate is ultimately determined by private transactions in the exchange market and because, as the ratio of the two national currencies, it cannot be determined by the policy of one government alone.

The chapter on whether countries have been “injured” by exchange rate changes is interesting in part because the authors attempt to define injury as comprising those (exchange rate induced) repeated shifts of resources between sectors that could, at least in principle, have been avoided. But such a definition does not lend itself easily as a basis for even rough estimation. Thus, their conclusion that injury has been limited under flexible rates must rest on the proposition that firms will react only slowly to exchange rate changes whose duration is uncertain. To their credit, Blackhurst and Tumlir do recognize that in appraising injury, a distinction needs to be made between individual firms and the economy as a whole. Here, they do acknowledge that export and import competing firms in countries whose currencies appreciated in real terms suffered losses, in the forms of temporary unemployment and writing down of capital values. They also provide a useful discussion of what types of injury are inherent and unavoidable in the process of external adjustment and what types are not.

The final chapter on the real costs of international monetary stability serves to inform the reader that while Blackhurst and Tumlir regard the costs of exchange rate instability on international trade as having been overestimated by others, they regard the nontrade costs as having been underestimated. Specifically, they point to the microeconomic costs associated with the loss of information about relative prices on the world market and to the macroeconomic costs deriving from the difficulty of conducting national monetary policies in the absence of a stable international reference currency. After discussing the various functions that an international currency should fulfill, they attempt to detail the costs that arise when these functions are not fulfilled. In the end, they decry the post-1970 instability of the dollar and the inflationary policies of the United States.

In my view, this is the weakest chapter in the pamphlet, not so much for its conclusions but rather because of the lack of depth in the analysis. There is little discussion, for example, of the benefits and costs of being the issuer, as opposed to the user, of the dominant international money. Nor is there any appraisal of how much of the decline in the role of the dollar was consistent with the growth of political and economic power of Japan and Western Europe versus irresponsible U.S. economic policies, or of how a multicurrency reserve system compares to a single currency reserve system, or of how the role of the dollar as an intervention currency has changed vis-à-vis its role as a reserve currency.

Morris Goldstein

Alex Radian

Resource Mobilization in Poor Countries—Implementing Tax Policies

Transactions, Inc., New Brunswick, NJ, U.S.A., 1980, xxiv + 266 pp., $19.95.

Books, like products, must comply with requirements of truth in packaging. If this book had carried the title Problems of Income Tax Administration in Four Developing Countries, my attitude toward it would be somewhat more favorable than it is. Unfortunately, and presumably to increase its sales appeal, Professor Radian chose to call this book Resource Mobilization in Poor Countries. Now this title does raise some questions.

Consider these two limitations: first, the book is essentially based on field research, consisting of interviews with tax officials, in four countries—two Caribbean (Jamaica and Trinidad) and two Southeast Asian (Thailand and the Philippines). Surely this small and hardly random sample cannot be considered representative of “poor countries’; it excludes all of Africa, all of Latin America, and all of the Middle East. Second, and in my opinion more important, the book deals only with income taxes, which, as is well known, play a relatively minor role in the “resource mobilization” of developing countries. The truly important revenue sources—foreign trade, domestic indirect taxes, and deficit financing—receive hardly a mention.

The basic assumption that affects much of the discussion is the belief, fashionable in the 1960s but clearly out of favor in the 1980s, that the basic problem of poor countries is lack of public revenue. If only the governments of these countries could raise the average tax rate to, say, the level prevailing in rich countries, they would be able to solve many of the economic problems associated with low incomes, including that of slow economic growth. This assumption affects much of the discussion of tax reform for which success seems to be measured exclusively in terms of increase in revenue.

Professor Radian shows no awareness that, given the level of a country’s income, private revenue—and consequently private consumption and saving—must fall when public revenue goes up and that this fall may create more serious problems than the ones the government is attempting to solve. There is no discussion of the effect of higher taxation on the allocation of resources nor of the possibility that governments may use the additional resources for purposes unrelated to the solution of the serious national problems. This pro-government bias may be due to the fact that the book was written (or at least the research on which it is based was done) in the early 1970s. This is confirmed by the dates of publication of most of the works cited and by the data used in various chapters (as for example those on tax ratios).

In spite of these shortcomings, this book is not without merit. In fact, once one gets over the fact that the book deals just with problems of income tax administration and collection in selected developing countries, the book is useful. It is for the most part very well written and contains a fair amount of common sense and wise advice. Of particular interest is the second section entitled “The Instruments and Resources of Implementation.” This section consists of four chapters dealing with (1) the limitation of resources to tax administrations, (2) audit and assessment, (3) collection, and (4) compliance and enforcement.

Chapter 4 discusses issues such as the limitation and unreliability of data available, the impact of decentralization on revenue, the allocation of resources between head office and regional offices, the shortage of well-trained personnel, the low level of salaries, the frequent turnover of qualified personnel, and, finally, the consequences of these factors. Chapter 5 deals with methods to reduce evasion. The sample for audit must include all areas of activity; it must be sufficiently large so that the chance that a taxpayer will be audited is not negligible; and the audit must be thorough. The author discusses the strategy that the auditor must follow as well as possible outcomes. Chapter 6 deals with the collection process itself. This process is far more complex in poor countries than in highly industrialized countries where it may just involve sending a check through the mail. Consequently a far larger proportion of available administrative resources will need to be spent on this activity in the poor countries. This means that fewer resources will be left for pursuing delinquent accounts. Chapter 7 deals with enforcement and with penalties to induce the taxpayer to comply.

This is, in my view, the core of the book and the part that can be productively read by anybody interested in developing countries. The remaining five chapters—1 through 3, dealing with theories and policy, and 8 and 9, dealing with reforms—can be ignored by the busy reader without much loss.

Vito Tanzi

Other books received

Gary S. Fields

Poverty, Inequality and Development

Cambridge University Press. New York, NY, U.S.A., 1980. xi + 281 pp., $29.50 (cloth), $7.95 (paperback)

An addition to the compendium of recent work on estimating the incidence of poverty, analyzing the usefulness of relative and absolute measures, and on determining the effects of growth on income distribution. Fields reviews material on these topics, arguing persuasively for giving primacy to distributional objectives and concentrating attention on how the rate and type of growth influences the attainment of equity. He draws copiously on studies conducted in Brazil, Costa Rica, India, the Philippines, Sri Lanka, and Taiwan.

Jagdish N. Bhagwati

International Trade: Selected Readings

MIT Press, Cambridge, MA, U.S.A., 1981, xxii + 414 pp., $25 (cloth), $9.95 (paperback).

In 1969, the Penguin Modern Economics series published a collection of 16 essays on international trade edited by Jagdish Bhagwati. The current volume may be seen as a successor to the earlier book. It includes 28 articles, only 6 of which are carried over from the Penguin edition. This gives some indication of the turnover in so-called classic articles in trade theory. The new collection also shows how the continuing interest in economic distortions, the theory of tariffs, the effects of foreign exchange constraints, and the nature of comparative advantage has now been joined by a greater concern for general equilibrium conditions and for tracing the consequences of capital accumulation in models of open economies.

M. C Kemp and N. V Long (editors)

Exhaustible Resources, Optimality and Trade

North Holland Publishing Company, Amsterdam, Netherlands, 1980, xii + 250 pp., $44.50.

Walter C. Labys

Market Structure, Bargaining Power and Resource Price Formation

D.C. Heath and Company. Lexington, MA, U.S.A., 1980, xiv + 238 pp., $22.95.

Both these books are about the economics of mineral resources but they differ considerably in their focus and in the level of theoretical sophistication. The Kemp and Long volume is concerned with deriving optimal rules for the exploitation and trade of natural resources, and considerable mathematical skill is required to comprehend each paper. Labys’ book is more down to earth. It goes quickly over the basic framework for analyzing price formation and then applies it to the pricing of copper, tin, bauxite, and iron ore in world markets. Although the empirical material does not extend much beyond the mid-1970s, this is an informative book—especially about the institutional arrangements underlying pricing actions.

Christopher P. Brown

The Political and Social Economy of Commodity Control

Praeger Publishers, New York, NY, U.S.A., 1980, xvii + 375 pp., $39.95.

An attempt to identify the principal economic, political, and organizational factors that fashioned the Integrated Program for Commodities worked out by the United Nations Conference on Trade and Development. A useful guide to recent international efforts in the field of commodity stabilization with a bibliography.

Warren L. Coats. Jr. and Deena R. Khatkhate (editors)

Money and Monetary Policy in Less Developed Countries: A Survey of Issues and Evidence

Pergamon Press, Oxford, U.K., 1980, xiv + 827 pp., £40/$95 (cloth), £8.50/$20 (paperback), and £12.50/$30 (cloth, developing countries).

A collection of 46 articles, of which some 40 have been published previously in academic journals, exploring aspects of the general problem of adapting monetary theory to monetary management in less developed countries. Both editors are members of the Fund’s staff.

P. J. Drake

Money, Finance and Development

John Wiley & Sons, New York, NY, U.S.A., 1980, xi + 244 pp.. $27.95

A useful and lucid introduction to the role of money in development. The nine chapters cover such topics as the money supply, informal finance, financial development and economic growth, and the securities market, combining fairly elementary concepts with the main findings of relevant research. A ten-page bibliography testifies to the author’s efforts in this regard. However, a reader expecting to find fresh ideas and angles may be a trifle dissatisfied.

David Bigman and Teizo Taya (editors)

The Functioning of Floating Exchange Rates: Theory, Evidence, and Policy Implications

Ballinger Publishing Company, Cambridge, MA, USA, 1980, xiii + 419 pp., $25.

A collection of 13 papers by academic or institutional economists and 5 papers by prominent economic policymakers on the workings of the system of floating rates since 1973.

a practical approach to financial policy making… FINANCIAL POLICY WORKSHOPS: The Case of Kenya a publication of the IMF Institute

This book offers a series of workshops on Kenya that are used as a case study in the IMF Institute’s course on Financial Analysis and Policy for officials of the International Monetary Fund’s member countries. The workshops combine theory and practice to provide a better understanding of the use of major financial policy instruments in the management of national economies.

Topics of the Workshops:

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  • Balance of Payments Statistics

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  • Balance of Payments Forecasting

  • Financial Programming

In addition to the workshops, the book includes background information on Kenya as well as exercises and issues for discussion (with answers to many exercises). Numerous tables present the data for analysis, forecasting, and financial programming on a national level. Charts and a map illustrate the book.

xx + 315 pp.; clothbound, US$12.50.

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