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Book notices: World Inflation and the Developing Countries

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1982
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The Brookings Institution, Washington, DC, U.S.A., 1981, xiv + 266 pp., $15.95 (cloth), $5.95 (paper).

This book may be distinguished from the many inspired by the worldwide inflation of the 1970s by its focus on the developing countries and by its empirical bent. Cline and his colleagues cover a number of important issues, including the real economic effects of world inflation and recession on such variables as the terms of trade and external debt of developing countries; the channels through which the acceleration of world inflation was transmitted to their domestic economies; their policy responses—highlighted in four case studies—to the external shocks; and the cyclical links between the industrial and the developing countries. Although not always as thorough as one might hope, the authors paint on a wide canvas and provide many insights into a number of issues pertaining to economic development among the developing countries in the mid-1970s.

One of the authors’ principal conclusions is that the severe and pervasive worsening of inflation in the developing countries in the early 1970s was primarily due to external factors. Of these the main ones are seen to be the excessive monetary growth throughout much of the world, especially in the United States in 1970–72; the poor harvests of 1972–73 and the associated rise in food prices; the worldwide cyclical boom of 1973; and the rise in oil prices, although, as is pointed out, the initial worsening of inflation rates in the developing world preceded the oil price increases of late 1973. Surprisingly, there is no explicit reference to the role of export prices, even though developing countries are generally price takers in world markets, so prices could justifiably be viewed as an external factor. In any event, the authors generally exempt the policies of developing countries from the list of factors initiating domestic inflation, although not from the list of factors contributing to its persistence.

To reach such a judgment, the authors argue that the rapid acceleration of monetary expansion, evident throughout the developing world in the early 1970s, cannot be accounted for by such internal factors as increased fiscal deficits or wage claims but is, rather, the result of a rapid growth in external reserves. This growth is then attributed, in part, to improving trade balances, but the most important cause is seen to be accelerated external borrowing stimulated by excessively liquid conditions prevailing in the industrial world.

Given this context, the book does fault the authorities in the developing countries for their failure to sterilize the avalanche of external reserves flowing to these countries in 1972–73. The authors do not, however, seem to realize fully that in developing countries central banks have limited power to control money flows. Without organized capital markets, the initial effects of the inflow of funds cannot readily be neutralized, since exporters and borrowers take their receipts directly in cash and bank deposits. Secondary effects can, in principle, be offset by raising the statutory or marginal reserve requirements of commercial banks high enough to put a brake on net lending. But raising reserve requirements could undermine the profitability of the banks and is hardly a practical course of action. The authors might have criticized developing countries more justifiably for not attempting to control inflation by reducing the deficits of the Treasury or of public sector agencies, by such measures to forestall the initial rise in reserves as export duties or taxes on capital inflows, or by not permitting the exchange rate to depreciate with the U.S. dollar.

Monetary expansion, spurred by the growth of external reserves, is found to be a major factor behind the rise in inflation in the developing countries. This conclusion stems, in part, from the authors’ comparison of the results of a “monetarist” and a “real activity” model—both modified to take account of the influence of import prices and food shortages. The explanatory power of the real activity model is generally poor, while that of the monetarist model is considerable. In individual-country as well as cross-country analysis, it is found that the price of imports, the relative price of food, and the money supply are the most significant explanatory variables accounting for the acceleration of inflation in developing countries.

The four case studies (on Brazil, India, the Central American countries, and Malaysia) are good complements to the general chapters and serve to emphasize the diversity among the developing countries of both experience and policy responses to the external shocks of the early 1970s. Some countries, such as India and the Central American countries, opted for rather restrictive financial policies. Others, notably Brazil, were more concerned with sustaining investment to maintain the upward path of output. However, the omission of any African country from the case studies may have colored the authors’ views in some respects. For many of the countries in Africa, it appears that enlarged fiscal deficits were a significant contributory factor to domestic inflation. Countries are also shown to have varied widely in their use of the exchange rate. Malaysia, for instance, had the good fortune of being able to partly insulate its economy from the rest of the world via an appreciation of the exchange rate, whereas others compounded their difficulties by remaining pegged to the U.S. dollar at a time when it was depreciating. More generally, Cline et al. make the point that combating inflation does not appear to have necessarily resulted in output shortfalls. In a general analysis covering 30 countries, they find little or no association between price and output performance.

The book is peppered with interesting findings on, for instance, the terms of trade, the real value of external debt, the redistributional aspects of inflation, and the effects of the world business cycle. Occasionally, the analysis becomes too sweeping and too fast-paced to be borne out by extended analysis of the data. For instance, the claim that the worsening of deficits in the developing world in 1974 stemmed in large part from sharp acceleration in the growth of demand for imports is contingent upon a particular set of import unit value estimates for these countries. In fact, the margin of error in the statistics for that year is sufficiently large so as to reverse the conclusion; accordingly, some qualifications would have been in order. For the most part, however, the reader does get an eminently readable, straightforward, and generally accurate and relevant overview of inflation in the developing countries in the mid-1970s.

Abul K.M. Siddique

Other books received

Felix Paukert, Jiri Skolka.and Jef Maton

Income Distribution, Structure of Economy and Employment

Croom Helm, London, U.K., 1981, 169 pp., £12.95.

This International Labor Office-World Employment Program study is an interesting empirical examination of the influence of income redistribution on economic structure and employment in Iran, the Republic of Korea, Malaysia, and the Philippines. The authors use a semiclosed static input-output model for their analysis, in full recognition of its limitations. The existence of a significant positive link between redistribution and employment emerges with progressive redistribution leading apparently to smaller increments in employment. A surprising result is the negligible effect of redistribution on imports of consumption goods, apparently due to the large share of food in this category.

Asian Energy Problems:

An Asian Development Bank Survey

Praeger Publishers, New York, NY, U.S.A., 1982, xxxviii+ 363 pp., $33.95.

This extensive review of the trends in demand and supply of energy in Asian developing countries, excluding India, provides the basis for projections for each country and source of energy to the year 1990. Policy issues such as the increasing foreign exchange burden of oil imports, the search for alternative fuels, and the effects of rising prices of traditional energy sources on the rural economies of the region are discussed on the basis of detailed data.

V. V. Bhatt

Development Perspectives: Problem, Strategy and Policies

Pergamon Press, Inc., New York, NY, U.S.A., 1980, xx + 313 pp., $50.

A wide-ranging collection of essays by a World Bank scholar, most of which have been published earlier. At the core of the book are ten essays devoted to technological change and the financial structure. Here the author shows his versatility by skillfully straddling both the general and the particular and in using the Indian experience to elucidate his ideas.

Giuseppe Pennisi

Development, Manpower and Migration in the Red Sea Region:

The Case for Cooperation

Deutsches Orient-lnstitut, Hamburg, Federal Republic of Germany, 1981, xi + 264 pp.

This broad-ranging research report by a World Bank staff member offers extensive discussion of the issues relating to flows of migrant labor to the oil producing countries of the Middle East, remittances, and prospects for the 1980s.

Brian Griffiths and Geoffrey E. Wood (editors)

Monetary Targets

St. Martin’s Press, New York, NY, U.S.A., 1981, x+238 pp., $29.95.

A collection of seven papers on the experience of the monetary authorities on monetary targets presented at a conference in London in May 1979. There are two comments on each paper. The primary emphasis is upon British experience, but developments in Switzerland and in other industrial countries are also discussed.

Alexander J. Yeats

Shipping and Development Policy: An Integrated Assessment

Praeger Publishers, New York, NY, U.S.A., 1981, xiii+171 pp., $21.95.

An attempt to demonstrate that transport costs frequently pose a more important barrier to the exports of developing countries than tariff restrictions and that they can have a significant effect on the cost and direction of industrial development. Drawing upon his many published papers on the subject and on the work done at the United Nations Conference on Trade and Development where he is currently employed, Yeats analyses the trends in ocean freight rates and demonstrates that these costs are compromising export competitiveness. Some suggestions are made on policies that might arrest, if not reverse, the spiral of shipping prices. This slim book is a useful addition to a literature that seems especially scant in an era of rising energy prices.

Richard H. Sabot (editor)

Migration and the Labor Market in Developing Countries

Westview Press, Boulder, CO, U.S.A., 1982, xiv+254 pp., $31.25.

A collection of largely conceptual papers by a World Bank economist on issues in urban unemployment and rural-urban migration, the contributions to this technically rich volume do not offer much hope for policymakers faced with deteriorating rural economies and burgeoning labor forces in the cities of the developing world.

Directory of Non-Governmental Organizations in OECD Member Countries Active in Development Co-Operation

Volume I: Profiles (xxxiii+741 pp.)

Volume II: Index (xv+773 pp.)

Development Center of the Organization for Economic

Cooperation (OECD), Paris, France, 1981, $64 (set).

These two volumes provide a valuable source of information for organizations in both the developed and developing countries on nonofficial bodies dealing with development issues. The first volume carries brief information on each nongovernmental organization (NGO) and its area of interest. The second volume offers indexes by country and organization in both donor and recipient countries to facilitate access to information on the work of NGOs. Each volume has entries in English and French.

Timothy M. Shaw (editor)

Alternative Futures for Africa

Westview Press, Boulder, CO, U.S.A., 1982, xxiii+365 pp., $30 (cloth), $14 (paper).

Ten papers from a group of distinguished Africans and scholars on Africa compare alternative projections for population growth, food production, and the terms of trade, and discuss the implications of African countries engaging in outward-looking strategies or in self-reliance. Different aspects of the African dilemma are emphasized, among them the potential for integration, with particular discussion of existing economic cooperation schemes; dependence on Europe; and the impact of computer technology and nuclear power.

Judith B. Balderston, Alan B. Wilson, Maria E. Freire, and Mari S. Simonen

Malnourished Children of the Rural Poor:

The Web of Food, Health, Education, Fertility, and Agricultural Production

Auburn House Publishing Company, Boston, MA, U.S.A., 1981, xix+204 pp., $19.95.

A result of the Berkeley Project on Education and Nutrition, this study examines the consequences of poverty among rural communities in Guatemala and emphasizes the key roles of health, nutrition, and the social environment in the ability of the rural poor to take advantage of educational and other opportunities. Major findings were that diet, parental affluence, and the need for children’s work have a direct effect on school achievement; that schooling farmers improves their productivity; and that educating women reduces the number of children they bear. The policy implications are that poverty cannot be alleviated simply through education but through coordinating a variety of other social policies.

William W. Murdoch

The Poverty of Nations: The Political Economy of Hunger and Population

The Johns Hopkins University Press, Baltimore, MD, U.S.A., 1980, xv+382 pp., $22.50 (cloth), $7.50 (paper).

A well-documented and vigorously argued volume covering the synergistic effect on economic development of the relationship between food and population. The author also assesses the political factors affecting national and international decisions on food production and distribution. For a general audience.

Gerry Rodgers and Guy Standing (editors)

Child Work, Poverty and Underdevelopment

International Labor Office, Geneva, Switzerland, 1981, xii + 310 pp., Sw F 25.

An analysis of the role of children in the growth process in the developing world, this lengthy (over 300-page) volume contains nine papers heavily weighted in favor of empirical studies in Africa, Asia, and Latin America of the determinants and consequences of child labor.

RECENT FUND PUBLICATIONS

Adjustment and Financing in the Developing World:

The Role of the International Monetary Fund

edited by Tony Killick

Papers of a seminar jointly arranged by the Overseas Development Institute and the International Monetary Fund, held in Croydon, U.K., October 1981

Contents

An Overview

by Tony Killick and Mary Sutton

Disequilibria, Financing, and Adjustment in Developing Countries

by Tony Killick and Mary Sutton

Economic Management and International Monetary Fund Conditionality

by Manuel Guitián

Alternative Approaches to Short-Term Economic Management in Developing Countries

by Daniel M. Schydlowsky

Roles of the Euromarket and the International Monetary Fund in Financing Developing Countries

by Richard O’Brien

Some Issues and Questions Regarding Debt of Developing Countries

by Bahram Nowzad

The Position and Prospects of the International Monetary System in Historical Context

by Brian Tew

Developing Country Interests in Proposals for International Monetary Reform

by Graham Bird

232 pages, US$12.00 (cloth) ISBN 0-939934-18-3 (cloth)

US$8.00 (paper)* ISBN 0-939934-19-1 (paper)

*Special price to university libraries, faculty, and students: US$4.00 (paper only)

World Economic Outlook

1982 Edition

The 1982 Edition of the World Economic Outlook is now available. It provides a comprehensive picture of the international economic situation and prospects. It contains up-to-date information on the outlook for industrial, oil exporting, and non-oil developing countries and offers scenarios of likely developments in the medium term.

The difficult problems caused by stagflation, high interest rates, volatile exchange rates, oil price changes, and growing central government deficits are examined in detail. The analysis of the impact of these changes on national economies makes the World Economic Outlook an essential and authoritative document.

By air mail: US$11.00 per copy (US$8.00 for university libraries, faculty, and students)

By surface mail: US$8.00 per copy (US$5.00 for university libraries, faculty, and students)

Copies of the above publications are available from:

Publications Unit

International Monetary Fund

Box A-100

Washington, DC 20431 U.S.A.

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