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Finance & Development, June 1979
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Book notices

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1979
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Marshall Sarnat (editor)

Inflation and Capital Markets

Ballinger Publishing Company, Cambridge, Mass., U.S.A., 1978, xiv + 251 pp., $17.50.

Gustav Donald Jud

Inflation and the Use of Indexing in Developing Countries

Praeger Publishers, New York, N.Y., U.S.A., 1978, xiii + 229 pp., $21.95.

The persistence of substantial inflation, with its concomitant of firmly rooted expectations of significantly rising and variable prices, is one of the most salient and disquieting features of the international economic scene in recent years. These two books are addressed to two specific aspects of inflation, namely, its impact on investors’ behavior and capital markets, and the scope and limitations of indexation (compensation for the distorting effects of price changes on assets through the use of a price index) in developing countries. As such they are welcome contributions to the state of the art in their respective areas, as well as to the ongoing debate on inflation which has tended to be somewhat overly aggregative in approach.

Marshall Sarnat’s book is a collection of 12 papers, 7 of which were originally presented in December 1976 at an international conference on inflation and capital markets sponsored by the Science Center, Berlin, through its International Institute of Management.

The book analyzes unanticipated inflation, and its attendant purchasing power risks, as a special case of the general theory of uncertainty. Part I examines the relationship between inflation and the expected and realized rates of return on financial investment as well as some of its broader implications for corporate asset management. Part II analyzes the capital asset pricing model under inflation. Part III evaluates the effects of indexation on the functioning of the capital market.

An interesting paper is the analysis of Israel’s experience by Menachem Brenner and Dan Galai. Its main findings are (1) the average rate of return on stocks moved together with the average inflation rate, but the quarterly changes of the former cannot be explained by quarterly changes in the inflation rate; and (2) stock values, both financial and manufacturing, tended to move together even under high and variable inflation, evidence that controverts the conventional net debtor-net creditor hypothesis.

Among the other noteworthy papers are “The Impact of Inflation on Share Yields and Holding Period Returns” (Myron J. Gordon and Shalom Hochman) and “The Demand for Risky Assets Under Inflation” (Irwin Friend, Yoram Landskroner, and Etienne Losq). And, Marshall Sarnat’s paper on “Monetary Risk, Stagflation and the Uneasy Case for Stagflation” shows that indexation in Israel did not preclude the development of a viable and efficient equity market.

Outside the equity field, indexation raises basic issues of economic rationale and policy, domestic as well as international, as shown by Gustav Jud’s eclectic survey of theory and empirical evidence. His analysis of the lessons of indexation in Argentina, Brazil, Chile, and Colombia is highly pertinent. He demonstrates, most importantly, that when the reduction of inflation occurred, it resulted from appropriate monetary and fiscal policies coupled with stringent control of wages. Insofar as indexing has been credited with lowering inflation, it reflects the use of indexing alongside these other policy instruments. Paradoxically, indexation stimulates the rate of inflation when the pace of price increases begins to decelerate. Its principal virtue is as a palliative to resource misallocations when administered prices are not allowed to adjust during rapid inflation. The author cogently argues that the indexation of international commodity trade is likely to generate adverse side effects, to tie Third World economies even more closely to the production of raw materials, and to reduce the incentive for rapid structural change. All in all, this book underscores that indexation is at most a second-best solution which requires the support of appropriate demand management and other adjustment policies in the fight against inflation. It is a pity that it lacks an index.

Anand G. Chandavarkar

John L. Palmer and Joseph A. Pechman (editors)

Welfare in Rural Areas: the North Carolina-Iowa Income Maintenance Experiment

The Brookings Institution, Washington, D.C., U.S.A., 1978, 273 pp., $11.95 (cloth), $4.95 (paper).

The nine papers in this volume analyze an income maintenance experiment conducted among poor families in rural areas of the states of North Carolina and Iowa (U.S.A.) between 1970 and 1972. The project followed an earlier (1968–72) and similar experiment among urban workers in New Jersey. Both experiments involved guaranteed payments to families with incomes below a specified level, and graduated tax rates applied to income earned above that level. The rural experiment was focused mainly on families headed by males, many of whom were self-employed farmers and managers of small businesses.

An overview of the experiment is presented by Larry L. Orr; two papers on “Design and Operation” and “Issues and Lessons of Experiment” by D. Lee Bawden, coauthored with William Harrar and Harold Watts; papers on the “Labor Supply Response of Farmers and Wage Farmers” by Finis Welch and Orley Ashenfelter; one on the “Consumption Studies” by Robert T. Michael; one on “Noneconomic Outcomes” by Michael T. Hannan, another on “Policy and Research Implications” by G. Edward Schuh and a “Summary of Conference Discussions,” involving some 30 analysts, by Marvin M. Smith.

The book should be of great interest not only to U.S. citizens concerned with domestic affairs but to a much broader audience of their counterparts concerned with the developing world, because of what the book does and does not say on the subject of basic needs as it applies to the United States.

Welfare has acquired unpleasant connotations in the United States. Welfare provisions run against a deeply rooted American belief in the work ethic. And yet the counterpart to this ethic—that people, especially in the developing world, have ‘basic human needs’ which should be fulfilled—is becoming a broadly accepted philosophy, although the United States commits to it only limited, and in real terms declining, development assistance in the developing countries. The argument for this assistance is that hundreds of millions of people in the Third World lack the basic physical necessities of life, and ensuring that these masses (or only a small part of them?) have adequate food, health services, education, and shelter is obviously justified on humanitarian grounds. And yet, because of the massive expansion in social welfare services that such an approach in effect seems to imply, there is much controversy and debate in the donor community about the precise concept and the definition of ‘basic needs,’ and about the feasibility of implementing a program to meet basic needs, except on a very limited scale.

The findings of the U.S. guaranteed income experiment reported in the Brookings publication indicate that, on the whole, participants in the program tended not to abandon work and live on welfare once they became eligible. In only one of the three subpopulations was there a statistically significant difference in hours worked by men involved in the experiment—whose incomes were “topped up” once they fell below a specified level—and men who were not involved and whose incomes were not guaranteed. On the contrary, the flow of labor into agriculture increased over the period of the study.

There was a statistically insignificant decline in the flow of labor in cases where, unlike in agriculture, self-employment was not the option. Interestingly, this decline was largely explained by a reduction in the participation of wives and dependents. Even more interesting, labor withdrawal was more significant in the lower-income group from North Carolina than in Iowa. A similar inverse relationship between rising income and desire to work is frequently observed among the poorest women in developing countries. (This situation is in contrast to the concern displayed by the largely middle-and upper-income dominated women’s rights movement in the U.S. about increasing poor women’s employment in the developing world.) The study did not explicitly investigate whether the time saved by the women by not working was spent with their children. Nevertheless, it found that the reduced participation of women in work was accompanied by both improved attendance and performance of their children in school. These findings lead the authors to infer that the withdrawal of mothers and dependent children from the labor market may have led to increased attention to schooling.

The study indicates that increased income also resulted in improved nutrition, again to a greater extent in the lower-income North Carolina community than in Iowa, and in reduced susceptibility to illnesses among children. The authors therefore conclude that by far the greatest contribution of the guaranteed income scheme may have been in the areas of accumulation of human capital, the consequent increase in labor mobility, and the opportunity provided of eventually escaping poverty.

Despite these positive inferences, the study emphasizes that too little is known about a variety of partial and general equilibrium factors, in particular as they affect labor supply and allocation in individual industries as well as in the overall economy. It argues that these forces could have economy-wide implications. It also points out the costs and the difficulties of implementing such a scheme effectively on a national basis without further examination, both at the policy and the research level, of the objectives and benefits of income maintenance schemes.

The questions about the feasibility of such a scheme on a national level raised by this study (carried out in one of the richest countries and by a group of distinguished analysts) make one wonder whether the international community is not proceeding precipitately in its ambitious program to deal with the basic needs of hundreds of millions of people in the developing world. Obviously, a clearer idea is needed of the magnitude of resource transfers and the problems of implementing such a program on a wider scale. In contrast to the United States most of the poor in the developing world live in countries with per capita incomes of $200 or less. They also have an institutional and trained manpower base that is a fraction of that in the United States. On the other hand, the poor as a proportion of the total national population constitute four to six times the corresponding proportion in the United States. Among other things the debate in the United States about meeting the basic needs of the world’s poor ignores the massive international transfers of resources that achieving this objective would necessitate.

Uma Lele

Other books received

Margaret Wolfson

Changing Approaches to Population Problems

Organisation for Economic Cooperation and Development (in cooperation with the World Bank), Paris, France, 1978,193 pp., $9.50.

This study, sponsored jointly by the Development Centre of the Organisation for Economic Cooperation and Development and the World Bank, concentrates on the changes that have taken place in thinking about the problems of population since the World Population Conference at Bucharest, 1974. It presents an analysis of the experience of 12 representative developing countries based upon a review of their population policies. The book also surveys the policies of the major agencies involved in assisting countries in this field.

Richard Blackhurst, Nicholas Marian, and Jan Tumlir

Adjustment, Trade and Growth in Developed and Developing Countries

General Agreement on Tariffs and Trade (GATT), Geneva, Switzerland, 1978, 98 pp., $8 (paperback).

An essay by GATT staff members dealing with specific problems in the area of adjustment and trade in both the developing and the developed countries.

Manfred Grathwohl

Energieversorgung—Resourcen, Technologien, Perspektiven

[Energy Supply—Resources, Technologies, Prospects]

Walter de Guyter, Berlin (Federal Republic of Germany) and Hawthorne (N.Y., U.S.A.), 1978, 294 pp., 42 illustrations and 49 tables, DM 68.

This comprehensive book deals with the problems surrounding the future supply of energy and the multifaceted questions related to it. It is oriented toward scientists and technicians who are active in special branches of theory and in research and development relating to energy.

Sue Schofield

Development and the Problems of Village Nutrition

Allanheld, Osmun & Co. Publishers, Montclair, N.J., U.S.A., 1979, 174 pp., $22.95.

Advocating the target program approach to the widespread problem of malnutrition, this study is concerned mainly with the methodology involved in collecting nutrition data, evaluating it, and making it the basis for specific programs at the microlevel. Village level data from all over the world are presented with an assessment of both the data and the methods of collection. For economic planners, nutritionists, and field workers.

Robert G. Hawkins (editor)

The Economic Effects of Multinational Corporations

JAI Press, Greenwich, Conn., U.S.A., 1979, xv + 330 pp., $28.50 (institutions) $14.50 (individuals).

A compilation of papers prepared by established specialists for a conference on the economic impact of multinational corporations held at New York University in December 1976. Eight types of economic effects are identified as areas of significant controversy. There is a survey paper summarizing the literature in each area, followed by a critical evaluation of controversial questions by both an academic and non-academic commentator.

Ukandi G. Damachi and Victor P. Diejomaoh (editors)

Human Resources and African Development

Praeger Publishers, New York, N.Y., U.S.A.. 1978, xix + 378 pp., $21.95.

This thematically diverse collection of essays on the development of human resources in Africa is offered as a tribute to the memory of Frederick Harbison. There is a brief paper by Sir Arthur Lewis on the increase in the level and the mix of skills and their effect on income distribution, and particularly interesting pieces on educational and job opportunities for women. On the brain drain, one study concludes that Africans trained in their own countries rarely migrate to the developed world; personnel losses are concentrated among those who go abroad for their education.

Ali Khalifa Al-Kuwari

Oil Revenues in the Gulf Emirates: Patterns of Allocation and Impact on Economic Development

Westview Press, Boulder, Co., U.S.A., 1978, xxiv + 218 pp.. $36.

An examination of the experience of four governments—Abu Dhabi, Bahrain, Kuwait, and Qatar. Most of the data and analysis of oil revenues and their allocation pertains to the period up to 1970.

Stephen H. Goodman (editor)

Financing and Risk in Developing Countries

Praeger Publishers, New York, N.Y., U.S.A., 1978. xv + 103 pp., $16.95.

The proceedings of a symposium, held in Washington, D.C. in April 1977 under the sponsorship of the Export-Import Bank of the United States, dealing with the debt situation of developing countries and with risk exposure and management of loans to such countries.

Gerard K. Boon

Technology and Sector Choice in Economic Development

Sijthoff & Noordh off International Publishers, Wilhelminalaan 12, The Netherlands, 1978, ξ + 313 pp., US$37, Df l80.

This book outlines a technique for estimating production functions using engineering and statistical data and then provides several chapters of analysis and testing of the so-called D.O.S. method, which is an amalgam of decomposition analysis, optimality analysis, and sensitivity analysis. The primary interest of this volume is methodological, demonstrating the usefulness of the D.O.S. model as a tool for computing factor intensities, sectoral linkages, and the effects, across sectors, of changes in final demand.

Brendan Brown

Money Hard and Soft on the International Currency Markets

Halsted Press, Somerset, N.J., U.S.A., 1978, xv + 183 pp., $18.95.

A technical survey of the functioning of, and major structural developments in, the principal international financial markets over the past decade. The behavior of exchange market participants under floating rates is explored.

Kenneth R. M. Anthony, Bruce F. Johnston, William O. Jones, and Victor C. Uchendu

Agricultural Change in Tropical Africa

Cornell University Press, Ithaca, N.Y., U.S.A., 1979, 312 pp., $25.

Agriculture is the economic mainstay of most of the countries in Sub-Saharan Africa, being the major source of employment and often accounting for the bulk of exports and gross national product. The book concentrates on the region’s need to increase the productivity of, and transport and marketing facilities available to, small farmers. Research and extension, infrastructure, pricing policies, and the lack of facilities for marketing foodcrops domestically are found to have been the main bottlenecks. A balanced book, which draws upon a wide range of field studies and other sources.

Supplementary financing facility enters into effect

The supplementary financing facility of the Fund entered into effect on February 23, 1979, when the Austrian National Bank joined 12 other members or institutions in making resources available for the facility. The agreement of the Austrian National Bank raised the total amount available for the facility to SDR 7,754 million. In August 1977 the Fund’s Executive Board had decided that the facility would become effective when agreements were completed for a total amount of not less than SDR 7.75 billion, including at least six agreements providing an amount of not less than SDR 500 million each.

In each borrowing agreement, the lender agrees to make resources available at call to the Fund for the facility during the following five years. Participation in the facility remains open to other lenders, and any further borrowing agreements will be announced as soon as they are completed.

The supplementary financing facility has been established to enable the Fund to provide supplementary financing, in conjunction with the use of the Fund’s ordinary resources, to members facing serious payments imbalances that are large in relation to their Fund quotas. Members can use the facility only under a stand-by arrangement reaching into the upper credit tranches or under an extended arrangement. A stand-by arrangement which in volves the use of supplementary resources will normally cover a period of more than one year and may extend up to three years. An extended arrangement normally applies to a three-year period. The facility is thus designed to assist those members which, because of the seriousness of their payments problems, can be expected to need resources in larger amounts and for longer periods than would be available to them under regular credit tranches.

The amounts available to a member will be apportioned between ordinary resources and supplementary financing in prescribed proportions. Initially, under a stand-by arrangement, a member will be able to draw under the supplementary financing facility an amount equivalent to 12.5 per cent of its quota, along with the unused portion of its first credit tranche (each tranche is equal to 25 per cent of a member’s quota), and 30 per cent of its quota along with each of the three upper credit tranches. From time to time, the Fund will review the proportions of supplementary financing to be used in the upper credit tranches. Purchases under an extended arrangement will be financed with ordinary resources and with supplementary credit in the ratio of one to one. In special circumstances of situations requiring an amount of resources beyond the above amounts, purchases may be wholly under the supplementary financing facility.

From the World Bank

Annual Review of Project Performance Audit Results.

November 1978.

This review, prepared by the Bank’s Operations Evaluation Department for the Executive Directors and for the Bank’s management and staff, brings together the results of 109 projects, audited in 1977, in the education, development finance/industry, public utilities, and transportation sectors, and for several nonproject or program loans, representing approximately $2,200 million. Analyzes experience with these projects, overall and by sector, in order to understand what could be done better in future. The report has been published in the belief that this operational experience will be of value to those engaged in similar work and to those interested in the Bank’s role in development.

A Program to Accelerate Petroleum Production in the Developing Countries.

January 1979. (Also in French and Spanish.)

Gives projections of the “energy balance” of the non-OPEC developing countries in 1980 and 1985, reviews the World Bank’s lending and technical assistance activities for oil, natural gas, coal, and electric power during the past 15 months, and examines the exploratory and other predevelopment work that needs to be done before investment can be made in petroleum and coal production. Shows how far this falls short of the need of the oil importing developing countries, suggests ways in which the Bank might help these countries to extend their knowledge of petroleum and coal reserves, and outlines an expanded program of lending and technical assistance by the World Bank in the energy fuel sector.

The World Bank and Education Projects.

February 1979. (Also in French and Spanish.)

A guide specifically for governments interested in securing World Bank assistance for the development of their education and training systems. Outlines what kinds of education projects are assisted with World Bank finance, how such projects are put together, what steps borrowers should take to expedite processing of Bank-supported projects, and what research projects on important issues of education are sponsored by the Bank.

World Bank Catalog of Publications.

1979.

This latest edition of the Catalog lists all publications that are available free of charge from the World Bank, as well as books published commercially for the Bank. Listings indicate the languages in which publications are available. Contains full ordering instructions and includes an author and a title index and a mailing list form.

Copies of the publications listed above are available free of charge from the World Bank, Publications Unit, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A.

NEW COUNTRY ECONOMIC REPORTS

Korea: Policy Issues for Long-Term Development

Parvez Hasan and D.C. Rao

The growth of Korea’s economy consistently satisfied and often surpassed the ambitious targets set by development planners in the 1960s and early 1970s. Although the country is not well endowed with natural resources, its social homogeneity, sound policies, and strong political leadership, combined with a firm commitment to growth and a favorable international environment, have created a striking success story in economic development.

Korea’s present rate of economic growth and its level of infrastructure development are among the highest in the developing world; its social services, left largely to market forces in the private sector, have substantially raised the standard of living in both rural and urban areas. Long-term development could by 1990 secure Korea’s place as a fairly high-income, heavily industrialized, export-dependent economy with a rapidly dwindling reliance on agriculture.

For rapid growth to continue, however, Korea must resolve numerous policy issues of social and economic consequence—issues associated with requirements for greater attention to equity, for structural changes to maintain the comparative advantage of Korean exports, and for the roles government is to undertake in response to the changing domestic and external conditions expected in the 1980s.

About 552 pages; index. Cloth $25.00 (£18.75); paperback $9.50 (£7.25).

Romania: The Industrialization of an Agrarian Economy under Socialist Planning

Andreas C. Tsantis and Roy Pepper

This first comprehensive study of the Romanian economy by the World Bank surveys its subject in a historical framework. It describes the growth and changes within the economy over the past three decades, looks at the major sectors, and shows the present level of the economy—all of which provides the basis for an assessment of what will happen to Romania during the current five-year plan and in the following decade. In addition, the book contains the most comprehensive possible data base of the economy and describes the planning and management systems. Because the Romanian economy has not been extensively studied before, the coordinating authors are in many instances descriptive rather than analytical in their presentation.

About 700 pages. Cloth $30.00 (£22.50); paperback $9.95 (£7.50).

Yugoslavia: Self-Management Socialism and the Challenges of Development

Martin Schrenk, Cyrus Ardalan, and Nawal A. El Tatawy

Spurred by a critical assessment of development trends that grew out of the economic reforms of the mid-1960s, Yugoslavia initiated a series of fundamental changes in the 1970s for the management of its economy—changes that culminated in a new constitution in 1974 and a complete overhaul of the laws affecting economic activity. There were two leading objectives: to promote direct democracy in economic matters by strengthening workers’ self-management against bureaucratic, technocratic, and managerial encroachment; and to institute mechanisms and instruments for macroeconomic coordination based on a new vision of self-management.

This book, a sequel to Yugoslavia: Development with Decentralization (Johns Hopkins, 1975), delineates the principal changes in economic management and their underlying rationale. It then analyzes the implications of the new economic system for issues the Yugoslavs regard to be crucial for long-term development: employment, stabilization, foreign trade, regional differences, and resource mobilization and allocation. The analysis shows that the new institutional framework concurrently strengthens the control of workers over enterprise management and, by extending the principles of self-management to the macroeconomic level, compels governments and enterprises to coordinate their economic undertakings.

About 512 pages; index. Cloth $25.00 (£18.75); paperback $9.50 (£7.25).

These new country economic reports 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 W1Y 1 AA England; or its agents in other countries.

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