Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
January 1990
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Joan M. Neison (editor)

Economic Crisis and Policy Choice

The Politics of Adjustment in the Third World

Princeton University Press, Princeton, NJ, USA, 1990, xii + 378 pp., $45 (paper $14.95).

Political science is making valuable contributions to the understanding of problems of economic adjustment, and policymaking in the 1990s can benefit from this well-focused examination of political factors making for success or failure of adjustment efforts by 19 governments in 13 countries in the 1980s.

Joan Nelson edited the study, contributed introductory and concluding chapters, and analyzed the experience of Costa Rica, the Dominican Republic, and Jamaica. The other studies are by Robert Kaufman (Argentina, Brazil, and Mexico); Barbara Stallings (Chile, Peru, and Colombia); Stephan Haggard (the Philippines), and Thomas Callaghy (Ghana, Zambia, and Nigeria). Miles Kahler traces the evolution of the remarkable consensus that emerged during the 1980s in favor of market-oriented policies that combine stabilization measures with growth objectives supported by structural reforms.

Cooperating since the mid-1980s, these political scientists have also produced a policy-oriented study, “Fragile Coalitions: the Politics of Economic Adjustment” (reviewed in Finance & Development, June 1990). A forthcoming study will synthesize the results of these earlier studies.

This volume brings out the differences among countries, from the persistence of Mexico and Chile in pursuing comprehensive reforms, to the total rejection of them by Peru and Zambia. It seeks clues to three questions: (1) At what point in the deterioration of an economy do its authorities decide that adjustment is unavoidable? (2) What then determines their choice of measures, particularly whether policies are limited to stabilization, or include comprehensive structural reforms? and (3) What determines whether a country follows through on the program it has adopted, or allows it to flag and fail?

A bleak conclusion is that a country is most likely to persist with a comprehensive program of adjustment if the recent record has been dismal and the public is deeply discouraged about the economic prospects. Ghana, Callaghy observes, had lived the counterfactual of inaction, and did not want to go back to that situation.

The study is optimistic on the capacity of democratic regimes to make painful economic reforms. To succeed, the governments must have authority “based on permanent or temporary institutions and on broad support coalitions.” But these regimes should not be confused with authoritarian regimes, which often lack the strength to make economic change because their political life depends on a corrupt network whose power would be threatened by measures that improve market efficiency. The authoritarian Marcos regime in the Philippines, for example, could stabilize its economy over the short-term, when required by the IMF and the World Bank, but proved incapable of making longer-term, structural changes.

A country’s recent history also plays an important role in determining the capacity of democratic governments to achieve economic reforms. Where statist policies of the past are associated both with economic failure and repression, the popular will can be brought behind liberalization. This suggests that leaders of emerging democracies have the opportunity to opt for balanced, market-oriented policies.

The study highlights a problem to which the Bretton Woods institutions have been prone: “dualistic” decisionmaking, illustrated particularly in the Philippines and the three African economies, in which authoritarian regimes hide behind respected technocrats who have the confidence of the international community. In the Philippines, for example, World Bank and IMF confidence in the country’s internationally prominent civil servants was shattered in 1983 by revelations of perfidy in financial reporting, and their inability to deliver the reforms they promised.

The Bretton Woods institutions get less than their due in the study’s tendency to associate their advice with some of the extreme anti-government sentiments popular in the 1980s. This fails to credit the IMF and World Bank dedication to institution-building, and their long-standing support for strong government, capable of effective economic management, and providing the framework in which markets can work. The study misses the point that cutting bloated government payrolls and selling off inefficient public enterprises are entirely compatible, if not essential to, strengthened centralized macroeconomic policymaking.

An underlying theme of the book is that a country’s economic fate is substantially within its own control. The study suggests that the durability of the new consensus on the need for market-oriented reforms will be determined by how widely and deeply policymakers learned the political lessons of the 1980s.

Charles Gardner

Edward M. Graham and Paul Krugman

Foreign Direct Investment in the United States

Institute for International Economics, Washington, DC, USA, 1989, xiii + 161 pp., $11.95.

At a time of growing political discussion over the role of foreign direct investment (FDI) in the United States, this book provides a careful presentation of the facts and a systematic analysis of the arguments for and against FDI. The conclusions, while not especially remarkable, need to be emphasized in what is becoming an increasingly polemical debate.

Perhaps the study’s most important conclusion is that although FDI is increasing quite rapidly in the United States, the share of the total economy controlled by foreign firms (about 3 to 4 percent) is still well below that in most other industrial countries. The authors argue that the growth of FDI inflows largely reflects industrial organization factors rather than shifts in macroeconomic imbalances or cross-country differences in the cost of capital. Specifically, as the clear-cut technological lead of the United States has been eroded, more foreign firms have found it advantageous to invest in the United States as a means of reaping economic rents from firm-specific skills, such as specific technology or management expertise. Indeed, the upsurge in FDI inflows preceded the. emergence of large US current account deficits, and the single largest source of FDI (the United Kingdom) is not even a significant overall exporter of capital.

The study convincingly demonstrates that there is little empirical justification for concerns about the possible harmful economic effects of FDI. In fact, foreign firms’ behavior, for example, in terms of research and development effort, does not differ significantly from that of domestically owned enterprises. The only discernible difference is that foreign firms have a somewhat higher propensity to import, although this may simply reflect the type of industries in which they are located. Nor does the argument that the United States is selling its assets at below their true value stand up to scrutiny; it is hard to believe that there are systematic market imperfections in capital or foreign exchange markets that would make a voluntary exchange of assets between foreigners and US domestic residents a bad deal for the residents.

At the political level, the authors recognize the potential difficulties associated with defense contracting by foreign-controlled firms. However, concerns that the political lobbying of foreign firms may undermine sovereignty or unfavorably redistribute income through the political process seem overstated. Indeed, the authors point to numerous examples where domestic special-interest groups have successfully pressed for costly and inefficient policies, such as voluntary export restraints, that would probably have been resisted more strongly if foreign-controlled firms had been the beneficiaries.

David Goldsbrough

Anand Chandavarkar

Keynes and India

A Study in Economics and Biography

Macmillan Press, London, UK, 1990, ix + 209 pp., £35 ($63).

The tragedy of Chekhov’s “The Three Sisters” is that they could not return to the Moscow of their dreams, but there is something a little comic in the failure of Keynes to get to India notwithstanding his lifelong interest in its problems. This failure was not an intellectual tragedy, however, because he could ignore Miss Prism’s warning to her ward: “Cecily, you will read your Political Economy in my absence. The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side”. The longest chapter in Chandavarkar’s admirable monograph is on Keynes’s involvement in reforming the rupee, including its relationship to monetary metals. “He even understood the Indian Rupee” is a statement by Paul Samuelson that serves as an epigraph for this chapter.

The author has been resolute in his study of all relevant publications, his scrutiny of unpublished archives, both official and private, and his contacts with surviving acquaintances of Keynes. Among the correspondence reproduced by the author is a delightful letter to him from I.G. Patel about Keynes’s views on the expanding population of economists (p. 142).

We see Keynes in the India Office, as a member of, and expert witness before, successive official bodies, and an advocate of central banking for India. Keynes is at all times both a man of affairs and an innovative economic scientist. The author emphasizes the interplay between Keynes’s specialized experience and his general studies.

After a slack period in Keynes’s concentration on India, his interest revives with plans to create the Bretton Woods organizations. The chapter on his reactions to the proposals put forward by India’s vigorous negotiators at Bretton Woods and Savannah will be particularly interesting, and even instructive, for the readers of this journal.

The author examines not only Keynes’s exposition of his views on India’s affairs, but also the influence of those views and of his broader theories on Indian economic thought and policy. Throughout the book, the author, although an admirer of his subject, behaves as a measured critic and not an undiscerning idolator. A prominent criticism is that Keynes totally disregarded the nonmonetary aspects of Indian economic policy.

The book concludes with three chapters that are more obviously biographical. In one, Keynes appears as the friend of Indians at Cambridge, first as fellow undergraduate and then as guru. In both roles, he was an antagonist of colonial prejudice, except perhaps in failing to sponsor the entry of brilliant Indians into the Apostles. Many of the names in this chapter will reverberate for readers familiar with the early history of the Fund.

The next chapter discusses the gap that the author sees in Keynes’s liberalism because of his failure to oppose India’s constitutional dependency. The final chapter attempts to evaluate what India and Indians meant to Keynes and to answer the question whether India had a greater influence on Keynes than Keynes had on India.

It is unwise to predict that any work will be definitive, but surely others will hesitate to tread the same path that Chandavarkar has taken. It is unlikely that others would perform the task with equal insight and lightness of touch.

Joseph Gold

Maurice Scott and Deepak Lai (editors)

Public Policy and Economic Development

Essays in Honor of Ian Little

Oxford University Press, Oxford, UK, 1990, xviii + 396 pp., £40.

This volume of essays is a fitting tribute to one of the most distinguished economists of the postwar era and begins appropriately with a salute: Inter Vivos to Ian Little. It deals with different aspects of public economic policy and economic development—the two themes on which Little has made and is making significant contributions. While not comprehensive, the essays succinctly and lucidly sum up the main ideas on each theme and discuss many important policy questions, providing guidance to policymakers in the choice of development strategies.

The broad themes relate to macro-economic management (macroeconomic adjustment to correct payments imbalances and inflation, adjustment to temporary shocks, exchange rate policy, and commodity price stabilization), industrialization strategies and policies (import substitution, trade policy, and public sector management), development policies (relating to tax policy and reform, international capital flows, and social cost-benefit analysis), political economy aspects of policy (trade and foreign investment), population and employment (population pressure and urban labor markets) and colonial burden in a comparative perspective.

In the essay on macroeconomic adjustment, W. Max Corden rightly emphasizes the need for fiscal austerity, competitive exchange rates, sound financial markets, and deregulation for restoring macro-economic stability. However, stabilization so attained may lead to stagnation rather than growth if expectations are not adapted in time to the new policy regime. There could be a coordination failure among market participants as the market or the price mechanism by itself does not ensure the required coordination. Restoring confidence in the sustainability of the new policy regime may also require, in addition to orthodox policies, some heterodox measures like incomes policy and, in particular, stabilization loans. To provide such stabilization loans is, in fact, a major function of the International Monetary Fund and one would have liked to see a critical analysis of the policies it supports.

If policies suggested by economists are of general interest, why do governments quite often fail to adopt them? This question is discussed by Anne O. Krueger in relation to trade policy and by Jagdish Bhagwati in connection with foreign investment. They draw attention to the political aspects of economic policymaking that are crucial for understanding government behavior as well as for analyzing public policy. In this process, they raise some fundamental questions.

The choice of development strategy and institutions in this connection appears to be of crucial significance. It seems to determine the nature and characteristics of the interaction among various parts of government, different interest groups, and intellectuals—an interaction that shapes the contours of economic policy. If the initial strategy is outward looking, it has its own logic that disciplines the process of policymaking, while if it is autarkic and inward looking, it provides much more scope for politicking and contradictory policies.

Deepak Lai raises this issue pointedly with regard to capital mobility. The direct effects of capital flows on growth may not be substantial. However, their impact on the political aspects of policymaking may be considerable. He notes that“… free capital movements are likely to provide an even more effective shackle on the irrational dirigiste impulses of governments in both developed and developing countries” (p. 267). However, as Vijay Joshi argues, since “the dynamics of such liberalization are not yet well understood… it would be rash of developing countries to eliminate capital controls entirely” (p. 54). The difference of views, it appears, relate basically to timing and sequencing of liberalization measures.

V.V. Bhatt

Michael Lipton, with Richard Longhurst

New Seeds and Poor People

The John Hopkins University Press, Baltimore, MD, USA, 1989, xi + 473 pp., $35.

The authors have attempted a task, long overdue, of appraising the contribution made by new agricultural technology to the fight against poverty and hunger. Theirs is a pioneering effort that covers close to a quarter century of the application of new agricultural technology in developing countries.

In the early 1960s, the combination of population and poverty in many developing countries presented a challenge that many policymakers considered insurmountable. However, high yields of rice and wheat—the products of intensive agricultural research—raised both harvests and hope. The “new seed” was widely used by the rice and wheat farmers of South Asia in 1966. By 1968, harvests had exceeded all expectations. International elation at the success of the new technology was so great that William S. Gaud, Administrator of USAID at the time, was provoked into encapsulating the whole process, from research to consumption, in a picturesque, catchy, but unscientific, phrase, the “green revolution.” The title stuck.

As with most human experience, the euphoria was eventually replaced by doubt, questioning, even skepticism. Was the green revolution really a “revolution” or was it only another mechanism by which the already rich became richer? Was the new technology “green,” or was it hostile to the environment? And so on.

Now, after some 25 years of experience, Lipton and Longhurst examine the “green revolution” specifically in terms of its impact on the poor. They analyze the complex interactions between technological progress based on modern varieties of the world’s major food commodities and poverty in developing countries. Further, they assess the green revolution in terms of the physical features of modern agricultural varieties and their input requirements, the distribution of land, access to credit among the poor, the labor market, and nutrition. Then, they measure the effects of policy on the factors mentioned above.

Advances in technology, they argue, are the major driving force in agricultural and rural development, once policy distortions have been removed. But they caution that technological progress and poverty reduction are not synonymous. The interaction between these two phenomena are complex and, so far, less well understood. The most crucial lesson they draw from their analysis is that detailed attention is required to three interconnected determinants of development: the technical viability of new varieties, their relevance to the economic and social circumstances of the poor, and a policy framework that supports the specific needs of the poor.

The book is timely and highly relevant to a discussion of development issues in general and poverty reduction in particular. Even those who disagree with the underlying thesis of the authors will find plenty to challenge them in its vigorously argued pages.

Alexander von der Osten

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