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Finance … Development September 1979
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International Monetary Fund. External Relations Dept.
Published Date:
September 1979
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Fred Hirsch, John H. Goldthorpe (editors)

The Political Economy of Inflation

Harvard University Press, Cambridge, Mass., U.S.A., 1978, xi + 307 pp., $14.00.

The approach adopted in the collection of papers published under the title of The Political Economy of Inflation was very much in Fred Hirsch’s mind when he was still working in the Fund, before returning to the United Kingdom to take a chair at Warwick University. He had become dissatisfied with recommendations based only on economic analysis and was intrigued by the question: why, assuming that the economist did know how to control inflation and did know that it was ‘a blight on the stability and efficient performance’ of economies, were his recommendations so seldom fully implemented? Out of this concern came a conference held in Warwick in May 1977 and, more recently, the publication of the papers in book form.

The basic premise that threads through the papers is that economic factors, and they alone, can explain how inflation happens, but that they alone cannot explain why. Inherent in this premise are two thoughts. First, and unexceptionally, to control inflation there is a need for a greater understanding of the distributional conflicts that contribute to it. Second, and a thought seldom emphasized by economists, distributional conflicts can be traced to an interplay between the market and other dominating forces that affect the social order. The resulting behavior may not be rational in the economist’s sense, but may yet be perfectly logical from the point of view of each of the main actors.

The book begins with a succinct and balanced statement of the economics of inflation by J. S. Flemming. Flemming views inflation as the result of an excess supply of money relative to the supply of goods, and lays primary responsibility for its persistence at the door of the authorities for failing to control the quantity of money. The monetary authorities must be seen, if not as the prime cause of inflation, then at least as indispensable accomplices. He is prepared, however, to concede that should disturbances originate in the real sector it may be sensible to tolerate some inflation for the sake of mitigating the transitional unemployment that would follow, if the goal of price stability were strictly pursued.

Flemming also accepts that it is logically possible for a large body of workers to exercise an independent influence on the rate of inflation by holding out for large real wage increases, but he argues that this possibility is, in practice, not likely to be relevant. He argues that it is more likely that trade unions would shift the burden of any necessary economic adjustments from prices and wages to quantities and employment by reducing downward wage flexibility; whether this would result in inflation or not would depend on the policy response of the monetary authorities.

Sam Brittain takes the economic explanation of inflation one step further by analyzing the forces that lie behind excessive injections of money into the economic system. One defensible view of democracy is to regard it as a system under which rulers are chosen by competitive bidding for votes. Combined with the unpopularity of both expenditure cuts and tax increases, this might explain why governments frequently have recourse to inflationary finance; moreover, the commitment to full employment in the face of a deteriorating trade-off between unemployment and inflation accounts, in his view, for the observed tendency of the inflation rate to rise over time (rather than simply to oscillate within each political cycle). At least at the time he wrote the paper, Brittain thought that, though recent acute inflationary disorders might be transitional, they were more likely, on balance, to reflect underlying tensions that were not likely to subside.

The most knowledgeable response to the economic argument is to be found in John Goldthorpe’s paper on “The Current Inflation: Towards a Sociological Account.” He focuses on the “residual categories” in the economic analysis of inflation, by which he means “modes of social action which cannot in terms of the economist’s analysis be accounted for as rational.” Economists cannot in the end, he argues, avoid the question of why governments expand the money supply, or why trade unions force up wages faster than productivity growth. To say that these agencies are acting irrationally is intellectually safe, but at the same time intellectually unrewarding. Goldthorpe instead sets out to show how inflation, interpreted as the monetary expression of distributional conflicts, reflects stresses produced by the market mechanism itself.

His argument is developed in terms of a changing interplay between the market economy and other forces that affect the structure of society. Specifically, less advantaged groups have increasingly tended to free themselves of various constraints in the pursuit of what they see to be their sectoral interests. The operation of the market has contributed to a decay of the traditional status order without providing an alternative justification for sectoral inequalities. The progressive realization of equality between citizens has increasingly called into question the inequalities thrown up by the workings of market processes. Moreover, in countries that have been industrialized for several generations, the influence of traditional status values is now slight; instead, the rights of citizenship, which include full employment, are predominantly emphasized in public policy.

The major stake in the existing social order for such a working class, says Goldthorpe, lies precisely in the institutional and organizational features by which it can qualify the influence of market forces on its members’ lives, including, if need be, the political power “to hold up the country to ransom.” Against this background, inflation can serve as a vent for distributional strife—an escape hatch through which excess demands can be temporarily reconciled. Goldthorpe feels that the problem facing governments is not simply that of coping with inflation, but is, more fundamentally, with resolving the conflicts that lie behind it. Accordingly, economists who castigate politicians who have failed to contain the money supply as being guilty of error and unreason must themselves be regarded as simplistic or, at best, subject to an acute case of professional insularity.

There are other interesting papers in this collection that offer stimulating insights into the inflationary process. They deal, for the most part, with specific aspects of inflation, and their contribution to the debate on the underlying causes of price increases is indirect. In the conclusion, Fred Hirsch draws on the other contributions in the book to advance an integrated, if tentative, theory of inflation in which inflation emerges as the outcome of the interaction of technical monetary factors and of sociopolitical and broad economic influences.

Much of what is written in this book is unquestionably true. The distributional conflicts that can lead to inflation are most certainly to be found in most industrial countries; but, while distributional conflicts may certainly raise prices, they do nothing to increase the output that can be distributed. Put another way, distributional conflicts and struggles for political power have contributed to inflation, but inflation has done nothing, except arguably in the very short term, to resolve these underlying tensions. In fact, if anything, it has probably made such tensions even more difficult to resolve in so far as it has contributed to the recent worsening of growth performance in many countries.

Where then is one left? To the extent that inflation is a consequence of social and political tensions that have accumulated over generations, and may need a similar period to be resolved, we had better begin then to concentrate on how best we can confine it within tolerable limits and mitigate its most costly adverse economic and social effects. This indeed seems to be the message of many of the contributors. Another view would be that solutions to these tensions can be better sought and implemented in an environment of greater price stability. There seems to be no reason why stabilization policies should not be able to be accompanied by actions designed to deal with their most objectionable social and political effects.

L. A. Whittome

Development Assistance Committee

Development Cooperation

Organization for Economic Cooperation and Development, Paris, France, 1978, 278 pp., $17.00.

Martin McLaughlin et al

The United States and World Development Agenda 1979

Praeger Publishers (for the Overseas Development Council), New York, N.Y., U.S.A., 1979, 268 pp., $5.95.

These two volumes reflect the current state of the debate on international aid. The report of the Development Assistance Committee, by now a hardy annual, is an indispensable source of reference for aid practitioners around the world. The Overseas Development Council’s Agenda 1979 is addressed to a U.S. audience and advocates the support of trade and aid policies that will accord priority to the needs of the least developed countries.

It is arguable that an appeal to morality and compassion would be more persuasive in the long run than an appeal to logic and self-interest as a basis for mobilizing such support. Norway, the Netherlands, and Sweden, the three donor countries that in 1977 exceeded the aid targets set by the United Nations (0.7 per cent of gross national product), have all placed primary emphasis on the humanitarian rather than the strategic or commercial aspects of development cooperation. It is appropriate, therefore, that both the documents under review give prominence to “basic needs,” a slogan which has aroused a good deal of antagonism in the Third World, but which now seems to have become part of the accepted jargon of development specialists. At the same time, however, the Overseas Development Council recognizes that, without strong leadership from the White House, no program of action to redress world poverty is likely to carry much weight with a U.S. electorate already preoccupied with any number of more pressing local and national concerns.

Questions may, of course, be raised about the contributions that international trade and aid can make to the relief of world poverty, which is heavily concentrated in rural areas. Drought in the Sahel, recurrent floods in East and West Bengal, and a series of good monsoons in India have all had more direct impact on the lives of poor people than the shocks sustained by the world economy since 1973. As for basic needs, the obstacles encountered in meeting them tend to lie more in the areas of development management and political choice than in the availability of external finance as such, and these are problems for which individual solutions must be found by the Third World societies themselves.

Another theme elaborated in Agenda 1979 is the growing interdependence of the developed and developing countries. This is beyond dispute. Opinions may differ, however, about the desirability of policies that will further strengthen the economic ties between the North and the South. Most North Americans would like to see their dependence on energy imports from the South reduced, and there are many in the developing countries who would like to see their own economies liberated from cultural and technological dependence on the North. There is nothing, for example, that the North has been more successful in selling to the South than the private automobile; if one of the results of increasing the access of developing countries to markets in industrialized countries is to generate even more monumental traffic jams in the cities of the Third World, alternative patterns of consumption and growth may be worth exploring. Small developing economies have to rely heavily on exploiting their comparative advantages in trade with the rest of the world, but with some of the larger countries there is a greater range of choice, and the social, political, and economic risks of outward-looking growth need to be carefully weighed against the potential gains.

Outrageous though inequities in income distribution still are, both between and within countries, the progress of economic development since the end of World War II has surely been quite remarkable. Thirty years ago, few would have predicted the extraordinary advances that have taken place in life expectancy, infant survival, and literacy all over the world. The Overseas Development Council has rightly given prominence to these indices of human well-being; for those under the age of 20, who comprise half the population of the developing world, the opportunities not merely of surviving but of getting some fun out of life are surely greater than they ever were before. For many of the poor among them, and particularly for those who have moved to the cities, satisfying their craving for excitement and action may be just as much a problem for the future as meeting their basic needs.

The Report of the Development Assistance Committee is primarily concerned with international capital flows and is a mine of information on this subject. One striking table shows the estimated net flow of resources to developing countries from all sources over the years 1970-77: Official Development Assistance, which accounted for almost half this flow in the years prior to 1973, now accounts for less than one third; in addition, net disbursements of commercial banks in 1977 were more than twice as large as the financing by the World Bank Group and other multilateral agencies combined. It is remarkable and encouraging that so much nonconcessional capital has been absorbed and that no more than a handful of the recipient countries have run into serious debt servicing problems. Occasional liquidity crises for individual countries can be expected to recur, but the debt situation as a whole still looks manageable.

Peter Wright

Renaud Fabre

Paysans sans terres

Dunod, Paris, France, 1978, vii + 197 pp.

The author attempts to document the failure of policies aimed at developing agriculture in the Third World countries (the “South”) during the last two decades. The basic situation was that to increase domestic production of food throughout the South, large development schemes were financed with the help of international institutions, including the World Bank. These schemes consisted of developing irrigation, promoting the use of high-yielding varieties and inputs (which constituted the “green revolution”), introducing mechanization, and opening new land to agriculture. However, the developed countries (the “North”) control world market prices of cereals, the supply of inputs, prices, technology, and investments, and therefore continue to dominate the economy of the South.

The hypothesis is that, as a result, the economic dependency of the South on the North is greater than ever, and available production per capita has either decreased or remained substantially the same. The Northern-controlled agrobusiness and chemical industries continue to expand in the South at the expense of foodcrops available for human consumption. These conditions, and the failure of both land tenure reforms and new settlement schemes, have resulted in dividing the farmers of the South into two groups: the ones who have been able to use modern technology to increase the area cultivated and yields, and to reduce on-farm labor requirements; and the others, landless, who have lost job opportunities or have been relegated to less fertile soils. The author argues, with the help of many examples, that the first group expands at the expense of the second, often with the support of international institutions and national governments that want to control agricultural production and prices to satisfy the needs of urban areas at the expense of the rural population.

To sum up the author’s views: everything has gone wrong in the South, with the exception of a few socialist countries such as Viet Nam and the People’s Republic of China, where the benefits of the green revolution have been used for the prime benefit of small-scale farmers.

Financial efforts by the Organization of Petroleum Exporting Countries (OPEC) to develop agriculture in the Middle East, in particular Egypt and Sudan, have been lauded, but the author feels that decision-making remains in the hands of geopoliticians, and the state of the poor farmer is not always their first priority.

The book is didactic. It reads as though it were written by a pamphleteer criticizing the development policies of international institutions and the Northern countries, in particular the United States. It neglects major gains in output in many countries, especially in South Asia. However, the author presents good documentation and one has to concede that there are millions of farmers who have not yet benefited at all from the various efforts made to develop foodcrop production. Yet the author’s main suggestion—that more attention should be paid to small farms where the potential for improving productivity is high—is not practical. Such intensification of effort would require technical changes that, given the technology available, would further accentuate the small farmers’ dependency on input suppliers. This is also considered a major drawback to the green revolution.

More broadly, the author recommends considering technical, economic, and social factors altogether. Unfortunately, the argument would have been more convincing if the author had played with his ideas in a consistent manner: the author criticizes a lot of well-known development concepts (green revolution, use of inputs, settlement, and so on), but he also regrets the limited number of schemes that succeed. In the final analysis he offers no new ideas on how to succeed in the future.

Jacques Tillier

Other books received

International Rice Research Institute

Economic Consequences of the New Rice Technology

International Rice Research Institute, Los Banos, Laguna, Philippines, 1978, v + 402 pp., $6.90 (U.S. and developed countries), $2.75 (developing countries).

Yujiro Hayami in association with M. Kikuchi, P. F. Moya, L. M. Bambo, and E. B. Marciano

Anatomy of a Peasant Economy: A Rice Village in the Philippines

International Rice Research Institute, Los Banos, Laguna, Philippines, 1978, viii + 149 pp., $4.30 (U.S. and developed countries), $1.70 (developing countries).

Two studies of some of the broader social and economic effects of the new rice growing technologies in the Philippines and other major rice growing areas of South and East Asia. The first book contains a number of papers presented at a conference sponsored by the International Rice Research Institute, emphasizing that the officient use of fertilizers and modern varieties of rice is closely linked with the development of irrigation facilities. Control over water supplies also determines the effectiveness of price instruments.

The book by Hayami is a careful documentation of the flow of goods and services among households of a representative, rice growing village in the Philippines. There are chapters on the socioeconomic characteristics of the village, the outlay of labor by peasant households, measurement of income flows coupled with an evaluation of changing asset positions of households. Finally, there is an overall assessment of the village as an economic unit.

Jean Paul Cleron

Saudi Arabia 2000

St. Martin’s Press, New York, N.Y., U.S.A., 1978, 168 pp., $18.95.

A simulation model is developed and used to assess the consequences of different developmental strategies for the Saudi Arabian economy.

Kenneth E. Boulding and Thomas Frederick Wilson (editors)

Redistribution through the Financial System

Prager Publishers, New York, N.Y., U.S.A., 1978, xxxiii + 001 pp., $18.95.

The papers in this collection, originally prepared for a joint session sponsored by the American Economic Association and the Association for the Study of Grants Economy in 1975, constitute an original and specialized treatment of the costs and benefits of government regulations of financial institutions in the United States. The emphasis is upon the income redistribution effects of existing regulations and an identification of the pattern of financial subsidization which actually takes place.

Samuel C. Nana-Sinkam

Monetary Integration and Theory of Optimum Currency Areas in Africa

Mouton Publishers, The Hague, Netherlands, 1978, xi + 315 pp., DM 78.

A survey of the facts of intra-African trade and a critical survey of the literature on optimum currency areas. With the outline of a pattern of geographical groupings of African countries as part of a strategy for monetary cooperation.

D. J. Halikias

Money & Credit in a Developing Economy: The Greek Case

New York University Press, New York, N.Y., U.S.A., 1978, xii + 307 pp., $17.50.

Have Greek monetary and credit policies since 1946 been effective in their aim to promote economic development? An assessment, against background chapters on the structure of the credit system; the evolution of credit policies; sources and uses of funds in the credit system and the manufacturing sector. With a statistical appendix.

Jannik Boesen, Birgit Storgârd Madsen, and Tony Moody

Ujamaa—Socialism from above

Holmes & Meier Publishers, Inc., New York, N.Y., U.S.A., for Scandinavian Institute of African Studies, Uppsala, Sweden, 1978,183 pp., $8.95.

A case study of contemporary Tanzanian socialist ideology as it was originally used—between 1968 and 1973—to transform rural areas on a gradual and voluntary basis into socialist communities where political and economic life was collectively organized. The book illustrates the experience of the West Lake Region as part of general development in Tanzania and as a prelude to later mass resettlement.

Herman Kahn

World Economic Development: 1979 and Beyond

Westview Press, Boulder, Colorado, U.S.A., 1979, xxi + 519 pp., $20. William Morrow & Company, Inc., New York, N.Y., U.S.A., $7.95 (paperback).

A wide-ranging scenario for socioeconomic change that could be characterized by Mr. Kahn’s identification of the period 1974-2000 as l’époque de malaise. Among other things, the author and his associates of the Hudson Institute advocate continuous and rapid economic growth as essential for meeting the needs of the developed and developing countries.

Jude Wanniski

The Way the World Works: How Economies Fail—and Succeed

Basic Books, Inc., Publishers, New York, N.Y., U.S.A., 1978, xiii + 319 pp., $12.95 (cloth), $4.95 (paperback).

The author finds the key to both the wealth and the welfare of nations in the way citizens are taxed. He suggests that tax rates and the distribution of the tax burden should be set at levels that encourage savings and provide incentives for individual output.

Phillip Cagan and Robert E. Upsey

The Financial Effects of Inflation

Published for the National Bureau of Economic Research, Inc., by Ballinger Publishing Co., Cambridge, Mass., U.S.A., 1978, xiv + 89 pp., $12.50.

A brief, nontechnical summary of recent research on the financial effects of inflation. The authors found that there was greater volatility among key U.S. economic aggregates as a result of the inflation since the mid-1960s than standard thinking about the inflation process would have suggested. The uncertainty from inflation has greatly affected both U.S. interest rates and the market value of financial assets, and financial markets have not been able to adjust to it or to find ways to protect the values of the assets of savers.

Adrian Wood

A theory of pay

Cambridge University Press, New York, N.Y., U.S.A., 1978, ix + 251 pp., $18.95.

The author develops a theory of money wages based not upon the marginal productivity/real-wage relationship, upon which the Phillips curve and monetarist analyses usually depend, but upon the critical role played by workers’ perceptions of fairness in establishing relative wage levels—often a key factor in promoting inflation in the form of wage-wage spirals.

Laurent L. Jacque

Management of Foreign Exchange Risk

Lexington Books, D.C. Heath and Company, Lexington, Mass., U.S.A., 1978, xxi + 285 pp., $21.95.

This book, focused on how multinational corporations should protect their balance sheets against sharp fluctuations in exchange rates, emphasizes the importance for management of (i) reliable forecasts of future spot rates and (ii) projections of corporate exposure on a currency-by-currency basis. Recent theoretical and technical developments in the forecasting of foreign exchange rates are reviewed and evaluated, together with the recent literature on the twin problems of transaction and translation exposure. Of advanced academic interest.

Bruno S. Frey

Modern Political Economy

John Wiley and Sons, New York, N.Y., U.S.A., 1979, vii + 166 pp., $14.95.

A catalogue of contributions to the discipline of political economy, encompassing, among others, the writings of the Cambridge (United Kingdom) school of capital theorists; the New Left; the Old Guard comprising, among others, Myrdal, Galbraith, and Hirschman; analysts of social decision-making; political scientists; and economists who have been contributors to the literature of public goods. The book provides a synoptic overview of the main themes in political economy. The annotated bibliography that is appended to each chapter provides a useful guide to some of the significant writings in a particular area.

PUBLICATIONS OF THE FUND

International Monetary Fund, 1966-1971: The System Under Stress

by Margaret Garritsen de Vries

This two-volume history of the International Monetary Fund covers the six important years from January 1, 1966 through December 31, 1971.

Volume I, Narrative, traces in detail the negotiations leading to the establishment of SDRs. It goes on to describe the substantially increased use of the Fund’s financial resources, especially in 1968 and 1969, as industrial as well as developing countries experienced severe payments difficulties. Another major section explains the recurrent crises in gold markets and exchange rates in the late 1960s and early 1970s that culminated in the collapse of the Bretton Woods system. Here, the narrative begins with the devaluation of sterling in November 1967 and ends with the Smithsonian agreement in December 1971.

Volume II, Documents, makes available for the first time seven draft outlines of reserve-creating schemes that were prepared in the Fund as part of the process by which SDRs were established, and includes the most important documents that the Fund published from 1966 to the end of 1971.

The history was written by the Fund’s Historian, a longtime staff member, and is based on the Fund’s official records and documents. The principal source of information has been the minutes of the meetings of the Executive Board, but also included is material explaining the staff’s analyses, the management’s considerations, the economic developments that influenced the Fund’s actions, and the discussions taking place in forums outside the Fund which affected the Fund’s decisions.

Vol. I: 699 pp., including illustrations, tables, and index

Vol. II: 339 pp.

Price: US$15.00 the set

Vol. I: US$11.00

Vol. II: US$6.00

Legal and Institutional Aspects of the International Monetary System: Selected Essays

by Joseph Gold

This volume reproduces, with slight revisions, 14 essays by the author that he contributed originally to books and periodicals published under auspices other than those of the Fund. Attached to each essay is a note that comments briefly on the relationship of the Second Amendment of the Fund’s Articles, which became effective on April 1, 1978, to the subject matter of the essay.

The themes of the essays are linked together by a new introductory essay. The collection as a whole can be regarded as a resumption of the author’s discussion of constitutional development and change in the Fund, which he contributed to Volume II of the Fund’s History of its first twenty years. A major theme is the need for an international monetary system that is regulated by international law, with the Fund at its center. Another major theme is that the legal and institutional aspects of the system should provide flexibility in relation to the evolution of the system, its day-to-day operation, and the handling of crises.

The subjects of the essays include various facets of reform of the international monetary system, the negotiation of change, techniques of flexibility, “sanctions,” collaboration as a source of law, and creation of the SDR.

The development of policies of conditionality in connection with the use of the Fund’s resources, the metamorphosis of the Fund’s exchange transactions, and the invention and development of the stand-by arrangement are discussed from the standpoint of flexibility. The Fund’s principle of uniformity and the former par value system are discussed from the standpoint of inflexibility. Annexed to the essay on the par value system are the legal texts of the Fund on exchange arrangements from the origin of the Fund to the present day. xx + 633 pp., 1979.

Price: US$17.50.

IMF Glossary, English-French-Spanish

This glossary of English, French, and Spanish terms was compiled by the Fund’s Bureau of Language Services. It presents in the three languages accounting, economic, financial, and other terms used by the Fund, as well as translations of names of international and regional economic organizations, viii + 160 pp. 1979.

Price: US$5.00.

Advice on payment in currencies other than the U.S. dollar will be given upon receipt of your order. Address orders and enquiries to

The Secretary

International Monetary Fund

Washington, D.C. 20431

U.S.A.

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