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Finance & Development, March 1979
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International Monetary Fund. External Relations Dept.
Published Date:
March 1979
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Richard Blackhurst, Nicolas Marian, and Jan Tumlir

Trade Liberalization, Protectionism, and Interdependence

General Agreement on Trade and Tariffs (GATT) Studies in International Trade, Geneva, Switzerland, November 1977, 79 pp., $6.00.

This timely essay surveys the trends in production and trade since World War II, reiterates the case for further reductions in the barriers to trade, and examines the roots of the recent rise in protectionism in the industrialized countries. This review deals only with the latter two parts.

At the outset, it may be noted that the essay would appeal to specialists and nonspecialists alike; while it minimizes the use of jargon, there is no loss in analytical rigor. The case for further liberalization of trade is based on the concept of comparative advantage and the essay recalls its main elements for the nonspecialist reader. Briefly, such liberalization reduces the distortion of domestic prices relative to international prices, leading countries to produce and export more in sectors in which they are relatively more efficient and to import more in sectors in which they are relatively less efficient. This specialization leads to lower prices (a gain for consumers) and to greater output given the existing amount’ of resources (a production gain). It is well known that for these gains to accrue, there is a need to shift resources from less efficient to more efficient domestic uses and not necessarily to sectors in which any given country has the absolute advantage (that is, in which it is the most efficient in the world). In addition, there are two other gains that might be expected from trade liberalization, namely, the economies of scale that could be realized through the enlargement of markets and the pressure for innovation and higher productivity arising from increased foreign competition.

The essay reviews the three main arguments commonly advanced against reducing barriers to trade: (1) that the transitory or permanent income effects of liberalization are unevenly distributed within a given economy; (2) that an increase in the importance of foreign trade in national income formation would heighten the domestic economy’s vulnerability to macroeconomic disturbances of external origin; and (3) that excessive dependence on imports is undesirable, especially in view of the 1973 oil embargo.

The authors of this essay find none of these arguments convincing. First, it is argued that the focus should be on the gains for the economy as a whole rather than the costs of adjustment in the adversely affected sectors in terms of a transitory or permanent contraction of activity and employment.

With respect to the second argument, it is conceded that when the world’s major economies are on the same phase of the business cycle (as was the case in the boom and subsequent recessions of 1972–75) it is more likely for the international economy to be a source of economic disturbances than a buffer for domestic instabilities. However, it is stressed that over the long term there is no evidence of an increasing tendency for business cycles to be synchronized and that, in any case, the costs of increased vulnerability to external shocks must again be measured against the gains from trade liberalization.

As for the third argument, the notion of excessive dependence on imports is not considered to be as important as the first two arguments because it is identified with the fear of exposure to embargoes and other arbitrary actions of producer cartels. From this point of view, the study rightly points out that the prospects for the formation of successful cartels for important products other than petroleum are quite slim. However, if the same notion is alternatively expressed in terms of desired levels of domestic production, it could not be as easily dismissed. To the reviewer, this is the fundamental rationale for import restrictions accompanying agricultural support programs in industrialized countries, “emergency planning” in certain countries, import-substituting industrialization in the developing countries, and for other longstanding programs which are defended not only on economic but also on political grounds.

The last part of the essay deals with the subject of recent protectionism in the industrial countries. While there has been a marked proliferation of import restrictions in these countries since the onset of recession in 1974, it is rightly argued that protectionist pressures would persist even after a general recovery because of difficulties of a secular nature in certain sectors.

An internal source of such difficulties has been the virtual maintenance of relative wage patterns despite wide disparities in the rates of productivity growth among sectors. The essay cites evidence to the effect that since the late 1960s, real wages had been rising faster than labor productivity in most industrialized countries, sharply cutting the rates of profit. Instead of permitting the least profitable industries to contract, there have been pressures to restore their profitability through higher prices which, to a varying extent, could be achieved through relief from import competition. Such pressures have been particularly strong in cases where the economies of certain regions are highly dependent on the industries involved.

An external source of the difficulties mentioned above has been increased trade competition from the developed countries themselves (particularly Japan) and from the developing countries. The essay points out that, as expected, the greater growth of population in the developing countries has led them to become increasingly competitive in products capable of being manufactured by intensive use of nonskilled or low-skilled labor; such products include clothing, textiles, footwear, and electronic consumer goods. What has not been expected is the speed at which they have been able to increase their shares in the domestic markets in the developed countries, often outrunning the latter’s capacity to absorb the economic and political costs of adjustment.

The essay rightly emphasizes that the growth of export capacity in the developing countries has also meant the growth of their import capacity and, with the exception of some oil-producing developing countries, the latter has normally exceeded the former. While increased import competition from the developing countries has caused difficulty for certain sectors in the industrialized countries, it has also enabled other sectors to expand. Therefore, the shift in comparative advantage in certain activities to developing countries could also be viewed as a factor enabling a more effective exploitation of the developed countries’ own comparative advantages.

As a concise examination of the current problem of protectionism, the essay deserves to be widely read. One hopes that there will be a sequel on possible solutions.

Roy C. Baban

Charles Pearson and Anthony Pryor

Environment North and South: An Economic Interpretation

John Wiley and Sons, New York, N.Y., U.S.A., 1978, xxi + 355 pp., $19.95.

The authors claim this book to be the first comprehensive analysis of the relations between economic development and the environment and environmental relations between the industrial countries of the North and the developing countries of the South. Since the topics treated are of such paramount significance to the future well-being of our world, the book is to be highly commended.

Following the initial chapter on concepts and issues, encyclopedic Chapter 2 scans the “environmental landscape”—rainfall, soil, demography, urbanization—bolstered by 50 detailed, often lengthy and useful, tables—many covering over 100 countries. The more theoretical economics of Chapter 3 addresses the impacts of trade and investment. The environmental dimension of development projects is narrowly appraised in Chapter 4, and transnational pollution in Chapter 5. Possibly the most satisfactory, final Chapter 6 limns the pivotal relations between agriculture and environmental integrity in developing countries.

Readers expecting to find clear position statements may be disappointed: “… environmental deterioration … a possible consequence of and constraint on economic growth. …” The truth is that nothing environmentally unsound can ever be economically healthy in the long term.

Pragmatic readers expecting guidance concerning how development can be improved and environmental problems avoided will be dissatisfied. The book may be largely correct in what it says, but some fundamental issues are not addressed. The authors note environmental problems arising from development—such as depletion of the resource base—but fail to recommend improved courses of action. The folly of adapting the environment to suit the crop is perpetuated, and “externality” is not exposed for what it is—a euphemism for larceny.

Economists unaware of the environmental costs of their schemes will greatly benefit from the book. Environmentalists will regret the almost total exclusion of bionomics, quality of life, resource management (vis-à-vis exploitation), conservation, and the transfer of nuclear technology (Canada to India, the Federal Republic of Germany to Brazil) from north to south. The next edition of this important study should try to reduce the large number of what may charitably be called “typos.” (Trypanosomiasis is not a waterborne disease (p. 94); pesticides should indeed be managed, even eschewed, but it is preferable to manage the pests (p. 98); how does solar energy leach nutrients (p. 99)?)

Robert Goodland

Changes in the Structure of Employment with Economic Development

A. S. Oberai

International Labour Office, Geneva, Switzerland, 1978, 42 pp., Sw F7.50.

Labour Force Participation and Development

Guy Standing

International Labour Office, Geneva, Switzerland, 1978, xiii + 267 pp., Sw F 30.

Guy Standino and Glen Sheehan (editors)

Labour Force Participation in Low Income Countries

International Labour Office, Geneva, Switzerland, 1978, vii + 338 pp., Sw F 22.50.

The three books under review are part of the output for the world employment program of the International Labour Office (ILO). A.S. Oberai uses the labor force data from the censuses for 1960 and 1970 from 51 countries (as summarized in the ILO Yearbook of Labour Statistics) to study “the nature and determinants of structural changes in wage employmen in the course of economic development.” Simple regression models are used to “test” various hypotheses.

This reader, however, found that in spite of the relatively sophisticated methodology used, most of the conclusions were rather banal, or else could be derived from simple arithmetic deductions. An example of a not particularly original conclusion is the following—“wage-earners as a proportion of total employment in each occupation tend to rise with economic development.” Nevertheless, the conclusion that “irrespective of the level of economic development attained, tertiary employment accounts for the largest proportion of wage employment” does seem surprising.

The author presents his results clearly, and, given his modest aims, this slim volume does fulfill them. So even though the book does not significantly extend the frontiers of our knowledge, it may be useful simply to lend our commonplace assumptions further empirical support.

The other two books under review are companion pieces. The Guy Standing-Glen Sheehan volume presents 19 case studies of the determinants of participation rates (primarily those for females) in a number of developing countries. Whilst these are likely to be of interest mainly to specialists, the companion volume by Standing—which attempts to survey the demographic, economic, and sociological literature on the determinants of labor force and labor supply—should be of much wider interest. The author has done a very commendable job of synthesizing and summarizing a vast literature, and this part of the book—the bulk of it—can be highly recommended. The initial and concluding sections, where the author seeks to set out the welfare and policy implications of differences in labor participation rates, are, however, much weaker.

As the author shows clearly, the major sources of divergence between activity rates between countries, and during different stages of economic development, are due to differences in the participation rates for females and young and aged males (there is little significant variation in the participation rates of males aged between 25 and 55 years). The essential problem, therefore, is to explain variations in female participation rates. The author uses the framework provided by the conventional economics of household economics to see whether the model’s predictions are borne out by the empirical evidence, which aims to cover both developed and developing countries, even though most of the evidence comes from the United States. The evidence broadly tends to confirm the model’s predictions, despite the authors’ penchant for saying a more dynamic model determining “tastes” would do even better. The assembled evidence supports several findings. Female labor force participation “responds to employment opportunities, that wives in higher-income families are relatively likely to be outside the labor force, and that female labor supply is more responsive to changes in female wages than changes in family income” (p.81). There is no “clear universal association between education and labour force participation; either at any particular stage of the life cycle or over the whole life cycle” (p.161). Despite the questionable nature of much of the evidence on the relationship of fertility to female activity rates “the general conclusion is that the demand for childcare time acts as less of a constraint on female participation in rural areas and where domestic employment predominates. In urban-industrial areas an inverse relationship is more likely, though it is still unclear whether or not the effect is greater for women with relatively low opportunity wages” (p. 190).

However, when the author seeks to provide a rationale for maximizing participation rates, he is on much shakier ground. Despite these reservations the book can be recommended to those interested in both demography and economic development.

Deepak Lal

Other books received

Brian Abel-Smith with Alcira Leiserson

Poverty, Development, and Health Policy

Public Health Papers, No. 69, World Health Organization, Geneva, Switzerland, 1978, 109 pp., Sw F 10.

A survey of the role of health in the development process and of the application of economic analysis to health planning. It seeks to provide to senior health administrators and teachers of health personnel in developing countries a summary of the economic concepts and issues which are used to evaluate health policy.

Emiel A. Wegelin

Urban Low-Income Housing and Development

Martinus Nijhoff, Leiden, the Netherlands, 1978, viii + 347 pp., Dfl. 48.

One of a series contributing to the debate on optimal investment options in low-income housing for the developing world. This case study uses quantitative analysis to evaluate several squatter rehousing schemes in Peninsular Malaysia in the context of the country’s economic and social background and development priorities. It is intended to aid in the formulation of policies on the allocation of resources and on financing arrangements in the housing sector in Malaysia.

W. B. Morgan

Agriculture in the Third World—A Spatial Analysis

Westview Press, Boulder, Colorado, U.S.A.. 1978, xiii + 290 pp., $25.

On the principle that agriculture in developing economies frequently follows a pattern that depends on geographical location, this book examines Third World agriculture, first at a global level, then at national, regional, and farm and village levels. With a broad range of practical and theoretical illustration.

T. W. Hutchinson

On Revolutions and Progress in Economic Knowledge

Cambridge University Press, New York. N.Y., U.S.A., 1978, xiv + 349 pp., $29.50.

This collection of papers presents an historical review and assessment of the major intellectual events in the history of economics. The studies proceed from an examination of Adam Smith’s notions about the competitive market through the analytical developments of Ricardo and Mill to the emergence of mar-ginalist economics in the hands of Stanley Jevons and others. Three papers are devoted to the place of Keynes in economic thinking. The author concludes with an appreciation of the contributions of these thinkers to the main currents of economic thought.

F. Gerard Adams and Sonia A. Klein

Stabilizing World Commodity Markets

Lexington Books, D.C. Heath and Company, Lexington, Massachusetts, U.S.A., 1978, xvii • 335 pp., $24.95.

A selection of papers prepared by well-known economists for a conference on “Stabilizing World Commodity Markets: Analysis, Practice, and Policy” held in 1977 in Virginia. The papers are grouped under these main topics: (i) modeling world commodity markets, (ii) theoretical considerations of commodity market stabilization, (iii) economic, political, and institutional considerations in commodity policy, and (iv) integrated commodity stabilization programs.

Reserve Bank of India

Recent Developments in Monetary Theory and Policy

Reserve Bank of India, Economic Department, Bombay, 1978, 198 pp., $2.50.

This collection of papers presented at a seminar organized by the Reserve Bank of India. Can be divided into two parts. The first covers the monetarist-Keynesian approaches to the theory of money. The second group of papers tests a number of monetary hypotheses. Several of the authors, on the basis of Indian data, conclude that the effectiveness of traditional monetary instruments is rather limited because of exogenous factors such as the existence of quasi-money.

Steven W. Kohlhagen

The Behavior of Foreign Exchange Markets—A Critical Survey of The Empirical Literature

Monograph Series in Finance and Economics. Salomon Brothers Center for the Study of Financial Institutions, Graduate School of Business Administration, New York University, New York, N.Y., U.S.A., Monograph 1978-3. 54 pp., $3.00 (paperback).

A survey of the recent empirical academic research on the foreign exchange market. The primary emphasis is upon models which attempt to explain the behavior of the foreign exchange markets under contemporary conditions.

Klaus-Walter Riechel

Economic Effects of Exchange-Rate Changes

Lexington Books, D.C. Heath and Company, Lexington, Massachusetts, U.S.A.. 1978, x + 155 pp., $15.95.

This study addresses itself to a rather comprehensive application of the monetary “approach to balance-of-payments adjustment” to exchange rate changes. It extends a simple aggregate model to analyses of commodity market and markets for financial assets, and considers the effects of money illusion and price expectations on the success of exchange-rate changes. Of advanced theoretical interest.

OECD

A Medium-Term Strategy for Employment and Manpower Policies

OECD, Paris, France, 1978, 130 pp.. $10.

The purpose of this study is “to clarify the proper role of selective employment and manpower policies within a medium-term strategy aimed at regaining full employment.” The report first describes the changes in the structure and functioning of labor markets and in manpower policies over the past two decades. This is followed by a discussion of the types of policies required to, first, raise the general demand for labor in the short run, and second, counteract medium-term structural imbalances in the labor market. Estimates of the relative importance of cyclical, “capital-shortage,” and frictional influences on recent unemployment rates in eight industrial countries are included in an annex.

Image and Reality in Economic Development

Lloyd G. Reynolds

Yale University Press, New Haven, Connecticut, U.S.A., 1977, xiii + 497 pp., $25.

This book distills the wide experience of the author over a 20-year period of research and teaching. Part 1 contains a general discussion of development theory with a detailed look at agriculture. This is followed by a model of a closed economy in which the agricultural sector plays an important role and a discussion of the open economy, which deals with trade and transfers of capital and technology.

Part 2 examines the development experience of various countries, starting with Japan. A comparative analysis of the economic growth of 15 nonsocialist developing countries follows. A chapter on growth acceleration under socialism and reflections on development policy round off this volume.

William Glaser

The Brain Drain—Emigration and Return

A UNITAR study, Pergamon Press, Oxford, U.K., 1978, xlvii + 324 pp., $30 (cloth), $15 (paperback).

This book presents the combined findings of 13 international surveys which attempted to identify not only the economic factors but also the social and psychological motivations of students and professionals from developing countries who remained in developed countries. Some popular notions about the causes of emigration are contradicted by this evidence. For example, the level of income is found not to be the strongest determinant of a choice between staying or returning home; furthermore, a higher level of economic development in a country does not necessarily reduce the outward flow of trained personnel. A 41-page bibliography and detailed presentation of the survey results make this book a useful guide for researchers and policymakers.

FROM THE WORLD BANK

A NEW SERIES OF BOOKS

The Planning of Investment Programs

Alexander Meeraus and Ardy J. Stoutjesdijk, editors

Books in this new series describe a systematic approach to investment analysis in the public and private sectors and its application to specific industries and to multicountry investment. Each volume is designed to provide a useful tool for the practical planner as well as the student of development economics. The series is entirely self-contained, requiring no prior knowledge of either mathematical programming or the specific industry under consideration.

Now available, volume one:

The Planning of Industrial Investment Programs: A Methodoloey

David Kendrick and Ardy J. Stoutjesdijk

This introduction to a systematic approach to investment analysis places special emphasis on complications arising in the presence of economies of scale. Although the approach is presented as a powerful aid to project identification, the authors also provide a candid assessment of the method’s limitations. Readers unfamiliar with mathematical programming techniques will find this volume a helpful grounding in linear and mixed-integer programming, facilitating understanding of subsequent books in the series. The authors describe an analytical framework step by step and set out guidelines for its use, which includes the making of decisions about size, location, time-phasing, technology, and product mix to be made within its framework. Attention is also paid to the procedures that can be used to obtain numerical results with the use of a computer.

150 pages; index. Cloth $12.50 (£9.25); paperback $5.95 (£4.50).

Available Me spring 1979, volume two

The Planning of Investment Programs in the Fertilizer Industry

Armeane M. Choksi, Alexander Meeraus, and Ardy J. Stoutjesdijk

About 300 pages; index. Cloth $16.95 (£12.75); paperback $6.95 (£5.25).

Subsequent volumes will deal with the formulation of sectorwide investment programs in the forestry and forest products and the steel industries. A volume on multinational investment programs will be followed by a user’s guide to the methodology.

World Atlas of the Child. 1979.

This new Atlas was published in recognition of the International Year of the Child. Nine global maps visually present child-related indicators of GNP and population, number of children, crude birth rates and number of births, life expectancy, infant mortality, children in the labor force, primary and secondary education (female and total), and pupil-teacher ratios in primary education, for countries in seven income groups. The data are shown in a range of colors and patterns. Four statistical annexes provide data for 185 individual countries and territories by region, for 1960, 1970, 1975, and with projections for the year 2000. The preface and introduction are in English, French, and Spanish. (A Japanese edition is available from the World Bank Tokyo Office, Kokusai Building, 1-1, Marunouchi 3-chome, Chiyoda-ku, Tokyo 100, Japan.)

World Bank Atlas. Thirteenth edition. 1978.

Statistics of population (mid-1976), GNP at market prices and per capita (1976), and average annual growth rates (1960-76 and 1970-76) for 185 countries and territories. Three global maps illustrate data by country income groups, two computerized maps show GNP per capita and population by major regions, and six regional maps provide data for individual countries. A statistical annex gives current US dollar estimates for 1975, 1976, and 1977 (provisional). A technical note explains the methodology used. (Introduction is in English, French, and Spanish.)

World Bank Research Program: Abstracts of Current Studies. October 1978.

Outlines 85 projects currently in the World Bank’s central research program, grouped into eight functional categories. (In English.)

Single copies of the publications listed above are available free of charge and will be sent by surface mail. They can be ordered from: The World Bank, Publications Unit, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. In Europe they can be ordered from: The World Bank, European Office, 66 Avenue d’lena, 75116 Paris, France.

World Development Report. 1978.

The first in a series of annual reports by World Bank staff on global development issues is available in English, through booksellers, distributors, and Oxford University Press offices in Europe and the Middle East, and in Australia, Canada, Hong Kong, Japan, New Zealand, Singapore, South Africa, and the United States.

Books in this series are available through booksellers or directly from the publisher, The Johns Hopkins University Press, Baltimore, Maryland 21218, U.S.A.; 2-4 Brook Street, London WlY 1AA, England; or its agents in other countries.

Readers in other countries can order a copy in English from: The World Bank, Publications Unit, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A.

Copies in Arabic, French, German, and Spanish can be ordered from: The World Bank, Publications Unit (see address above) or from: The World Bank European Office, 66 Avenue d’lena, 75116 Paris, France.

Publications from the Fund

Volume 29 of Balance of Payments Yearbook

Completed in December 1978

The Fund’s Balance of Payments Yearbook contains data reported by 110 countries, enabling the Fund to publish figures that are comparable for each country included. About 30 countries provide quarterly or half-yearly figures as well as annual data. The Yearbook is published in monthly parts with a comprehensive final issue.

Volume 29 was completed by publication in December 1978 of the annual issue, which contains definitive tables and notes for the 110 countries. For most countries the nine years through 1977 are covered, although some quarterly summaries continue into 1978. This annual book supersedes the 11 booklets issued monthly during 1978. A supplement to Volume 29 contains some 60 series of standard categories organized by topic instead of by country.

Volume 30 commenced publication in January 1979. Volume 29 was the last to be based on the Third Edition (1961) of the Balance of Payments Manual. Henceforward, figures will be published according to the concepts and definitions of the Fourth Edition (1977).

Subscription: $20.00 a volume ($8.00 to university libraries, faculty, and students).

FORTHCOMING

Legal and Institutional Aspects of the International Monetary System

a collection of fourteen essays written by Joseph Gold, the General Counsel and the Director of the Legal Department of the Fund. The essays, originally published outside the Fund, discuss or are related to certain broad themes that are relevant to the organization of the international monetary system. The author has written a comprehensive introduction to the collection, with special emphasis on aspects of the Second Amendment of the Articles of Agreement. Detailed indexes and a bibliography. Estimated at 750 pages. Price not yet set.

Staff Papers

makes available to the public selected studies prepared by Fund staff members on monetary and financial problems. Studies published thus far have dealt with such subjects as balances of payments and exchange rates, monetary systems and analysis, inflation in relation to economic development, national monetary and fiscal policies, methods of taxation, and international liquidity. Papers on the Fund’s Articles of Agreement and bibliographies of publications about the Fund are also published. Summaries of each article in English, French, and Spanish are included. Quarterly.

Subscription: $7.00 a year ($3.00 to university libraries, faculty, and students).

IMF Survey

is designed to help readers keep abreast of changes in the field of international trade and payments under four major headings.

Fund Activities chronicles week-to-week developments in the International Monetary Fund, including all press releases, major statements, and summaries of publications. Currently, emphasis is being placed on the evolution of the new requirement of firm surveillance of members’ exchange rate policies and on measures aimed at strengthening the role of the SDR.

Selected Topics offers a variety of original articles, mostly by Fund staff members, including coverage of world financial markets, balance of payments developments, trends in international assistance, reserves, and debt of developing countries.

National Economies comprises articles on individual countries, stressing the continuing efforts of both industrial and developing countries to attain stable growth.

Brief Notes summarizes news of major importance in international finance, countries’ economic policies, and exchange rate policies and changes. A new feature is a continuing series of charts on the exchange rates of 12 currencies, covering four weeks prior to each issue date, together with charts on gold prices and principal short-term interest rates.

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