Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
September 1974
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Reforming zeal

Balogh, Thomas, Fact and Fancy in International Economic Relations, Oxford, England, Pergamon Press, 1973, xiv + 116 pp., $7.50; Monroe, Wilbur F., International Monetary Reconstruction, Lexington, Massachusetts, U.S.A., D.C. Heath and Company, 1974, xiv + 191 pp., $13.50.

From the early 1960s, the United States began to experience significant balance of payments deficits, almost as a permanent feature, and the consequent increases in dollar liabilities gave rise to considerable tensions in the Bretton Woods system. By the summer of 1971, outstanding dollar liabilities were well in excess of United States gold holdings, and on August 15 the United States suspended convertibility of the U.S. dollar into gold and other primary reserve assets.

This date is an important landmark in the history of monetary relationships, not only because it marks the end of the Bretton Woods era but also because the search for a reformed system was to start soon afterward. However, progress in this direction has been slow and for most of the period since August 1971 the monetary world has been riddled with uncertainties and almost continuous instability. In recent academic writings, most authors find that the Bretton Woods system was useful and served the international community well, but almost invariably conclude that it contained the seeds of its own destruction. Thus, it is felt almost universally that a new system should be endowed with characteristics which would eliminate the earlier weaknesses.

Unconventional wisdom?

A forceful account along these lines can be found in Lord Balogh’s essay, which is the result of a wider project concerning the impact of economic theory and government organization on economic policymaking. The traditions of Oxford and of socialist doctrines surface regularly, and the ideas are unfettered by conventional thought on reform. Balogh’s theme is that a liberal monetary system—so far, he claims, undisciplined and based on entirely wrong classical premises of atomistic competition—is doomed for disaster. It is his view that “continuous balance of international trade depends on its being consciously maintained through an appropriate policy on incomes and on adherence to certain rules of conduct, especially with respect to capital movements both long-term and short-term.” Thus, the pillars of his system are good conduct by nations in general—and particularly so by the larger countries—with appropriate sanctions for delinquents, fixed exchange rates and a viable incomes policy to support such a regime, and strict controls over destabilizing capital movements—especially those arising via the Euro-currency markets.

Balogh has other concerns, in particular the supply of liquidity and aid to LDCs, intervention and the appropriate unit of account, and a more grandiose role for the IMF as the world’s central bank—all of which are in the direction of an enlarged SDR system. However, these matters are peripheral in the sense that they would be of little importance without coordination of policy on exchange rates, capital movements, and inflation. According to Balogh’s analysis, it is cost rather than demand inflation which must be dealt with and it is incomes policy rather than fiscal or monetary policy that is called for. Given a system in which nations have similar inflation rates and capital is not allowed to move destructively, a fixed exchange rate regime is not only permissible but also essential to maintain balance of payments discipline and the other objectives of growth and high employment. Floating exchange rates would only lead to disruption with currency depreciation unleashing an accelerated vicious circle of further inflation and depreciation, regardless of whether one adopted the Keynesian or the monetary approach. Moreover, he contends, devaluations are useful only if they are not used as an everyday method of national economic management.

However, we are left with a system which relies heavily on international cooperation between governments and on good conduct by powerful trade unions who must not be, for reasons extending beyond their own interests, unduly demanding. In part, Balogh himself admits the difficulties, but nevertheless, he sees this prescription as the only way to a stable world. International monetary matters have always been, and continue to be, a complex blend of economic and political considerations.

Out of the woods

Dr. Monroe’s book provides some further insight into the blend of economic and political interests that is demanded if there is to be reform of the monetary system. The main purposes of the book are to recount in broad outline developments leading up to the breakdown of the Bretton Woods system—including how, and in what context, the problems arose—and to consider the implications of alternative courses as they would affect countries or groups of countries.

The description of the pre-Smithsonian years is systematically set out and easily followed: it is indeed a preamble worth looking through to get a general feel for the issues of monetary reform which were considered by the Committee of Twenty and its Deputies during the last two years. The second half of the book focuses on the reform effort, the different positions taken by countries or groups of countries, and their implications.

The analysis does, of course, pre-date the substantial increases in oil prices that changed the framework of economic relationships dramatically. Nevertheless, the value of the book lies in the extent to which Dr. Monroe has been able to gather together, after meeting financial officials from a large number of countries, the various details of the reform discussions which were debated mainly behind closed doors. Dr. Monroe, in sharp contrast to Lord Balogh, expresses hope that an outline will emerge from the reform exercise, which he feels has the additional advantage of being more broadly based than that of Bretton Woods where a White-Keynes plan was presented almost as a fait-accompli.

Dhruba Gupta

Socialist industry

Zielinski, J.G., Economic Reforms in Polish Industry, New York, N.Y., U.S.A., Oxford University Press, 1973, xxxiv + 333 pp., $21; Spigler, lancu. Economic Reform in Rumanian Industry. New York, N.Y., U.S.A., Oxford University Press, 1973, xx + 176 pp., $12.50.

After some ten years of experiment with economic reform in Eastern Europe a detailed evaluation is due. These two books—the first in a series planned to describe the reforms in the industrial sector of each East European country—are amply documented and are valuable contributions to our knowledge of the subject.

In the early days of reform, most attempts at analysis of the economic systems emerging in the region tried to place them somewhere on a continuum ranging from the centralized planned economy to the decentralized market economy. This one-dimensional approach has proved inadequate in distinguishing between the various economic arrangements which have been tried. No country of Eastern Europe is now content with the traditional system of central planning and political constraints prevent the adoption of the market economy. Thus the history of economic reform can be seen as an attempt to devise some third economic system which is consistent and coherent and meets various efficiency requirements.

Mr. Zielinski’s book is a development of his earlier work on the theory of socialist planning and management. While he believes that the “guided-market” is ultimately the only satisfactory economic system for Poland, his work emphasizes the interrelations within the traditional centrally planned economy and the potential for its improvement. Since Poland first started reforming this system as early as 1957, Zielinski draws on this fund of experience to illustrate the problems involved in designing effective planning mechanisms, bonus systems, enterprise success indicators and so on. The interdependence of these subsystems leads Zielinski to criticize Poland’s reformers for their piecemeal approach in which small reforms in one sphere can be vitiated by subsequent reforms in another. A successful reform needs the prior elaboration of an overall model of the entire economic system. But reformers in Eastern Europe are hampered by the lack of a theory of possible economic systems. Zielinski’s book is a contribution to such a theory.

Where Zielinski is mainly theoretical, Mr. Spigler is descriptive. The Romanian reforms of 1968 and 1971 are largely unknown to the English-speaking world and Spigler fills this gap with his meticulous account. The book describes in detail the system prevailing at the end of 1971, but more recent legislation has modified that system. Romania’s reforms started considerably later than those of other East European countries and are still at the experimental stage so a degree of obsolescence is built into such a descriptive work.

To an outsider, one remarkable aspect of the reform debate in Eastern Europe is the degree to which each country has gone its own way. The level of knowledge about other countries’ experience in economic reform is extremely low. From its vantage point this series may provide the English-speaking world at least with a comprehensive guide to the theory and practice of economic reforms.

Mark Allen

Income from abroad

Ravenscroft, Donald R., Taxation and Foreign Currency, Cambridge, Mass., U.S.A., The Law School of Harvard University, International Tax Program, 1973, xxiii + 861 pp., $50.

The reader of this comprehensive work on U.S. tax problems concerning foreign currency cannot fail to be reminded of a schoolgirl’s report on a book on elephants: “This book told me more about elephants than I ever cared to know.” However, the growing importance of exchange rate changes makes this a very topical subject and Dr. Ravenscroft deals with it with great precision and a sharp analytical mind.

It is a pity, though, that he does not take a more comparative view of the subject, since this would have better emphasized the relativity of all income concepts based on one particular currency, be it the U.S. dollar or any other. A comparative aspect would also have highlighted the potential conflicts between the viewpoints of investors’ countries and source countries.

A case in point is the author’s recommendation that, in certain instances, foreign-source income should be computed for U.S. tax purposes on the basis of the foreign currency and the U.S. tax then be collected in that currency. It is suggested that such foreign currency payments be made in those cases where foreign exchange restrictions in the source country make the repatriation of profits impossible and U.S. tax payments must be deferred. The author does not deal with the possibility that such restrictions could likewise exclude the possibility of U.S. tax collections in the host country. In addition, the suggestion that funds collected, if not convertible, could be used as foreign aid seems to neglect national sensitivities.

Currency valuation

A more general suggestion—presented against a rather unsatisfactory background of exchange rate theory—is to apply for tax purposes a purchasing power exchange rate rather than the official foreign exchange rate. This would cope with the undervaluation of foreign currency. As a more practical substitute, the author suggests, once again, the determination of the income and the collection of the tax in foreign currency. Any reciprocal arrangement where foreign currency is overvalued against the dollar would, however, be excluded. But such a principle, though possibly satisfactory from a revenue point of view, would tend to be both difficult to apply and of doubtful fairness, as many developing countries have overvalued rather than undervalued currencies. Indeed one would have liked a broader outlook reflecting more than simply the interest of the U.S. Treasury or the rather narrow fairness doctrine of the author.

Although this impressive book might not be the definitive answer to all questions concerning taxation and foreign currency, it is a highly valuable contribution, putting in their right perspective fundamental issues of extreme difficulty. After Ravenscroft nobody will be able to write as simply about these matters as most of us have tended to do before.

Leif Mutén

Other Books Received

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.

Lin, Ching-yuan, Industrialization in Taiwan, 1946-72: Trade and Import-Substitution Policies for Developing Countries, New York, N.Y., U.S.A., Praeger Publishers, 1973, xix + 244 pp., $17.50.

Lees, Francis A., International Banking & Finance, New York, N.Y., U.S.A., Halsted Press, 1974, xv + 419 pp., $18.50

Tobin, James, The New Economics One Decade Older, Princeton, New Jersey, U.S.A., Princeton University Press, 1974, vii + 105 pp., $6.50.

Flow of Resources to Developing Countries, Paris, France, OECD (Organization for Economic Cooperation and Development), 1973, 447 pp., $8.

Streeten, Paul (editor). Trade Strategies for Development, New York, N.Y., U.S.A., Halsted Press, 1973, xvi + 375 pp. $25.

Annual Report from the World Bank

The 1974 Annual Report of the World Bank will be presented at the Annual Meeting of the Board of Governors to be held in Washington, D.C., September 30-October 4, 1974.

A copy of the report in English, French, German, or Spanish may be obtained free of charge from either address below:

World Bank Group

1818 H Street, N.W.

Washington, D.C. 20433, U.S.A.

World Bank Group

66, Avenue d’lena

75116 Paris, France.

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