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Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1982
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P. T. Bauer

Equality, The Third World and Economic Delusion

Harvard University Press, Cambridge, MA, U.S.A., 1981, x + 293 pp., $17.50.

Professor Bauer has made major contributions to development thought during the more than 40 years he has been an observer of the development scene. Significant among his perceptions were his early recognition of the importance of price incentives to farmers, the key role of traders and other entrepreneurs, and the weaknesses of state marketing boards—all of which were too long neglected by policymakers. His latest book sums up his views on the development process and its principal agents.

The core of the book examines the relationships between the West and the Third World in the context of such topics as the population explosion, poverty, foreign aid, commodity stabilization, and colonialism. It is prefaced by a broad attack on egalitarian-ism and a more parochial defense of the British class system (which he maintains is much less rigid than its stereotype). Professor Bauer concludes by expressing his disquiet about the present state of economics, particularly its preoccupation with mathematical methods, the “investment fetish,” and general theories of economic development based upon a selective interpretation of history.

The author clearly relishes being an iconoclast. His writing is vigorous and provocative. He shows little respect for conventional taboos and shibboleths. His confrontational method, by which he cites the more extreme views of his opponents and then proceeds to deny or dispute the substance of their claims, makes for stimulating reading. He is most effective in exposing the political rhetoric about development for what it is. But his desire to remain an “enfant terrible,” outside the mainstream of political and economic opinion, sometimes takes the upper hand and leads to distortions of his own.

This is most apparent in his critique of foreign aid. He seriously misrepresents the practices of aid donors and development institutions. For example, he states that “it is a rule of the World Bank that no political strings whatever should be attached to funds which are provided to it and its affiliates” and comments—”it is plainly anomalous to give taxpayers’ money to foreign governments without examining, or even questioning, their policies.” In reality, the Bank conducts detailed analyses of the policies of member countries, maintains a continuous dialogue with them on policy issues, and often makes policy reform a condition of its investment projects. Bauer points out that “the assessment of the economic productivity of such projects requires systematic examination of their costs and benefits,” but insists that “there have been few such methodical assessments.” In fact, the Bank uses rigorous appraisal techniques for all its operations and many are subject to independent ex post evaluation. This evaluation has revealed that the large majority have yielded high rates of economic return.

Again, on the effects of aid, Professor Bauer denies that it can reduce poverty because “aid does not go to poor people.... it goes instead to their rulers, whose spending policies are determined by their personal and political interests, among which the position of the poorest has very low priority.” This is misleading on two grounds. First, many countries have made substantial progress in alleviating poverty and this can be traced to specific programs (in education, health, water supplies, and so on) that are focused on the poor and to macroeconomic policies that create more productive jobs and thus raise their incomes directly.

Second, aid funds are rarely, if ever, handed over to governments to use as they think fit. Donors and development agencies set their own objectives and select target groups. In the case of the World Bank, projects must be approved by a Board of Directors, appointed by member governments, on which the principal donors have a large voting majority. Project components are negotiated with the recipient countries. Donors are free to (and do) withhold aid if agreement cannot be reached on project conditions.

Bauer also contends that the contribution of aid to development cannot exceed the avoided cost of borrowing the investable funds. This assumes that aid is only a substitute for and can never supplement commercial loans. Yet anyone familiar with the lending criteria and behavior of commercial banks recognizes that the type and number of projects they are willing to finance fall well short of the viable investment opportunities within the Third World. Less than 2 per cent of commercial bank loans (medium and long term) went to low-income countries in 1980, although they account for 69 per cent of the population in the Third World.

On the other side of the balance sheet, Professor Bauer greatly exaggerates the risks of adverse repercussions from aid, which he believes have promoted “the disastrous politicization of life in the Third World” by increasing “the power, resources and patronage of governments.” There are cases of excessive government intervention, but they are not attributable to aid. Perceptive leadership and sound government policies have played a prominent part in the most successful developing countries, such as Korea, which have received large amounts of foreign aid. Sixty per cent of World Bank aid for rural development goes to private agents (small farmers) and private enterprises are granted the bulk of the sub-loans from development finance companies, which act as intermediaries in Bank industrial operations. Further, procurement practices which incorporate competitive bidding are closely supervised by the World Bank, as is project implementation, to ensure that the funds are used for their intended purpose. So the opportunities for abuse of aid funds are tightly controlled.

Professor Bauer’s candor and clarity should be a tonic. It is always salutary to be reminded that economic development depends largely on people’s own faculties, motivations, and mores; on their institutions; and on the policies of their rulers. But regrettably, the distorted analysis of aid Professor Bauer indulges in is likely to be a further cause rather than a cure for the growing “aid fatigue” in the general, tax-paying public. Both rich and poor may suffer as a result.

Keith Marsden

Michel Lelart

Les Opérations du Fonds Monétaire International

Economica, Paris, France, 1981, viii + 272 pp.

Professor Lelart can be credited with publishing a very valuable and useful book on the Fund’s operations which, to my knowledge, is the first detailed and thorough publication on this subject. The book’s appeal is not limited only to central bankers, officials of member countries of the Fund, and scholars in international economics. The author has chosen to analyze the accounting and legal aspects of the Fund’s operations from an historical perspective, turning this very intricate subject into a widely interesting analysis of the influence of the changing economic and political environment on the origins and functioning of the Fund.

The brief introduction depicts the main phases of the rapidly evolving role of the Fund in the international financial system. The first part of the book then describes the evolution of the Fund’s operations through the two fundamental amendments to the Articles of Agreement that took place in 1969 and 1978. This analysis demonstrates that the technical aspects of these operations were largely dominated by changes in the relative power of the United States vis-à-vis other industrial nations and of the industrial countries vis-à-vis the developing countries.

The amendments enhanced the role of the Fund in the international monetary system by (1) an important enlargement of its various lending facilities to countries experiencing serious balance of payments (BOP) difficulties, particularly after the Second Amendment; (2) a corresponding increase in its resources either through an increase in quotas or through direct bilateral borrowings from countries with BOP surpluses; and, finally, (3) a suppression of the international role of gold and the creation of the special drawing right (SDR).

The second part of the book deals with the accounting mechanisms of the Fund’s operations and the way they impinge on international liquidity and BOP financing. The first topic is developed at length and focuses mainly on the SDR, on the concept of reserve positions, and on the use of Fund credit by Fund members. The author demonstrates that from 1948 to 1979 the Fund granted up to 50 per cent of its direct net financial assistance to only four developed countries and that five developed countries and five oil exporting countries financed nearly 85 per cent of this assistance. However, these percentages have changed substantially over the last three years. In particular, the Fund’s net financial assistance to the above four industrial countries has dropped from 50 per cent to less than 39 per cent, reflecting the dramatic rise over the period of financial assistance provided by the Fund to its developing members.

On the second topic, the author concludes that the effects of the Fund’s activities on international liquidity are negligible, particularly when the concept of “actual” versus “potential” liquidity creation is used. He admits, however, that his conclusions might be questionable due to the rigid and somewhat unrealistic assumptions that had to be made in order to conduct the analysis.

The author’s conclusions on the Fund’s role seem rather ambiguous. On the one hand, observing that the Fund’s assistance to developing countries remains insufficient, he wishes that it could be substantially increased; on the other hand, he believes that such an increase would not be acceptable if it led to the Fund’s creating more international liquidity, particularly through new allocations of SDRs (a view that may not gain every reader’s agreement).

The author’s aims—to describe the current activities of the Fund and their consequences on the evolution of international liquidity, to analyze the actual functioning of the international monetary system, and to reflect on what should be the very nature of an international central bank—can be only partly fulfilled by an historical and institutional approach. Yet, this book is quite useful and unique in the information it provides on Fund operations since its inception.

Dominique Berthet

Peter Richards and Mauricio Leonor

Education and Income Distribution in Asia

Croom Helm, London, U.K., 1981, 190 pp., $35.50.

This book, an International Labor Office-World Employment Program study, reflects the current disillusionment with policies that aim to equalize income distribution in developing countries by expanding education. The authors cite evidence from several Asian countries (India, the Philippines, Sri Lanka, and Thailand are analyzed in detail) to show that the expansion of education in the 1960s and early 1970s induced few changes in the distribution of income in these countries.

They suggest two main reasons for this lack of change. First, the prevailing occupational structure of an economy determines both its levels of schooling and its pattern of income distribution. Since governments in Asia play a major role both as employers and in setting wage levels, when labor market conditions change in response to market variations, job availability and unemployment levels adjust rather than wages. Since people perceive that their most direct route to self-advancement is through education, and as wages are rigid, the highest wage jobs are filled by people with the highest credentials. Thus, if educational achievement in the labor force grew more rapidly, say, than the number of jobs that require such qualifications, “education inflation” would be expected to result where greater levels of education are required for the same occupation. Evidence is cited from the Philippines and Sri Lanka to show that to a large extent factors such as these have resulted in distributions of incomes that are determined more by the distribution of occupations than by the pattern of educational attainment.

The second reason given for the lack of effect of education on income distribution is that educational achievement reflects social inequalities in these countries. Using tests of reading comprehension and “cognitive ability,” the authors find that such socioeconomic factors as family background, the occupational status of the household, and an urban or rural domicile largely determine students’ achievements, even among pupils with the same years of schooling. Further, they find that while a similar pattern occurs in industrial countries when cognitive ability is tested, reading comprehension results show that students from richer nations have better test scores. Thus, if the market is able to select and reward those with greater cognitive skills, poverty would perpetuate itself and influential groups would continue to increase not only their levels of educational attainment but thereby their incomes as well. Also, the authors submit that since vocational and other training to develop manipulative skills is directed at poorer socioeconomic groups and is less rewarding than the development of cognitive skills, it tends further to depress the chances of the economically less privileged to move into higher groups. Income distribution therefore remains relatively unaffected and may even worsen over time.

The ideas presented in this book are appealing. The book does, however, have deficiencies. First, the statistical methods used, although acceptable, do not provide a conclusive case. The most objective test of any hypothesis is to set up a “null” or contrary one and see if the data reject it. But instead of testing whether educational attainment does induce more equal income distribution and then seeing if the data reject the hypothesis, the authors set out to use the data in such a way that their ideas are simply corroborated. This they do admirably well, but the conclusiveness of their case is weakened. They also base analysis on the assumption that cognitive skill attainment is both identifiable and directly rewarded in most labor markets. But it is not proven that employers can judge actual skills; they may well rely instead on job-market “signaling,” which identifies the level of schooling, diplomas from better schools, and so on as a proxy for ability. If such signals of ability are used, those from the poorer groups who have acquired the “right” credentials would not be distinguishable from the privileged and could move up the income ladder, which would weaken the authors’ thesis.

Finally, it has become a matter of current controversy whether or not the tests of ability used by the authors are valid. Richards and Leonor recognize that intercountry comparisons of the results of these tests could well be biased and should not be used to judge absolute levels of “intelligence.” There is, however, a more fundamental point, that the tests should measure what employers need, and the book contains no discussion of these questions.

The positions taken from the start by the authors are clearly a step toward dispelling some of the entrenched myths in development economics. This book could have represented an important contribution to current thinking on the influence of education expansion on income distribution if the presentation were clearer and the methodology more sound.

Sayeed Sadeq

Other books received

Leland B. Yeager and associates

Experiences with Stopping Inflation

American Enterprise Institute. Washington, DC, U.S.A., 1961, 184 pp., $14.25 (cloth). $6.25 (paper).

A timely, informative, and somewhat disheartening book. It surveys the experience of 18 nations with inflation and its control during the course of this century and attempts to distill recommendations for combating chronic intermediate-level inflation. Although more or less effective recipes for dealing with hyperinflation, imported inflation, and creeping inflation can be found, a cure for the problem faced by countries like the United States turns out to be very elusive. But even if the precise policies cannot be discerned, this study suggests that any action must be sufficiently drastic and sustained to change price expectations. A gradualist approach is likely to be ineffectual.

Roger D. Hansen and contributors

U.S. Foreign Policy and the Third World Agenda 1982

Praeger Publishers, New York, NY, U.S.A., 1982, xv+249 pp., $25.95 (cloth), $7.95 (paper).

Roger Hansen, Albert Fishlow, Robert Paartberg, and John P. Lewis emphasize a U.S. foreign economic policy primarily geared toward fostering trade, food production, and aid for the developing world. “Development assistance” says the report “remains a vital policy instrument.” As usual, this annual report presents a cogent set of statistical indicators on aid, trade, and military expenditures—produced by James Wallace—to buttress its main proposition.

P. S. Dasgupta and G. M. Heal

Economic Theory and Exhaustible Resources

Cambridge University Press, New York, NY, U.S.A., 1980, xiv+501 pp., $16.95 (paper).

On the basis, first, of a simple model of price formation for an exhaustible resource, and then a variety of more complex models, the authors analyze the consequences of resource depletion for capital formation, economic growth, and equity among generations; the impact of alternative forms of market structure and of taxation on the pace of depletion; and finally the effects of uncertainty on the production of exhaustible resources.

Anne O. Krueger (editor)

Trade and Employment In Developing Countries, Volume 2: Factor Supply and Substitution

University of Chicago Press, Chicago, IL, U.S.A., 1982, xv + 266 pp., $29.00.

The second of three volumes on the effects of alternative trade policies on employment, sponsored by the National Bureau of Economic Research, it contains six papers exploring the experience of a wide range of developing countries. By estimating the scope for substitution between factors of production and the responsiveness of the industrial sector to changes in relative prices, the authors attempt to discern how distortions in factor markets and export incentives are likely to affect employment and the industrial output mix. A number of interesting results are obtained. For policymakers and practitioners.

Frances Calmcross (editor)

Changing Perceptions of Economic Policy

Methuen, London, U.K., 1981, xii+276 pp., £11.95.

The proceedings of a conference held at Oxford in March 1981 to celebrate the seventieth birthday of Sir Alec Caimcross. It includes seven papers—five by former chief economic advisors to the U.K. Government—that review aspects of British economic policy and the international economic environment since the turn of the century. While all the papers are worth perusing, Bryan Hopkin’s piece on demand management and Henry Phelps Brown’s paper on labor market policies are especially noteworthy. They highlight the potential and limitations of demand management in the Government’s efforts to attain a low rate of unemployment without inflation, and the importance of understanding as well as regulating the wage determination process.

Terry A. Powers (editor)

Estimating Accounting Prices for Project Appraisal

Inter-American Development Bank, Washington, DC, U.S.A., 1981, xi+430 pp., no charge.

This book develops and illustrates the Littte-Mirrlees and Squire-van der Tak approaches toward the economic analysis of development projects by means of case studies in Paraguay, El Salvador, Ecuador, and Barbados.

Richard N. Cooper. Peter B. Kenen, Jorge Braga de Macedo, and Jacques van Ypersole (editors)

The International Monetary System Under Flexible Exchange Rates: Global, Regional, and National

Bellinger Publtoning Company, Cambridge, MA, U.S.A, 1982, xvi + 320 pp., $38.00.

Eighteen essays by distinguished scholars and central bankers in honor of Robert Triffin on the practical issues raised by floating rates. Part I covers the theory of exchange rate flexibility and its policy implications; Part II discusses the international monetary system “from global, regional, and national perspectives,” looking particularly at such aspects as currency areas, the European Monetary System, and monetary reforms.

Saad Eddin Ibrahim

The New Arab Social Order:

A Study of the Social Impact of Oil Wealth

Westview Press, Boulder, COT U.S.A., 1982, xiv+206 pp., $18.00

This book, derived from a larger study of poor and rich Arab states, employs the tools of sociology for an analysis of recent economic trends in the Arab world. Major emphasis is on Saudi Arabia and Egypt, but general chapters explain the emergence of new social and economic relationships in Arab society.

We have also received the following monographs, reports, and research reports on topical subjects:

Robert V. Roosa, Wolfgang Rieke, Michiya Matsukawa, Fritz Leutwiler, Rene Kästli, and Christopher W. McMahon

Reserve Currencies In Transition

Group of Thirty, New York, NY, U.S.A., 1982, 73 pp., $15.00.

The Search for a New Economic Order: A Ford Foundation Report

Ford Foundation, New York, NY, U.S.A., 1982, 44 pp., no charge.

Budget Financing and Monetary Control

Organization for Economic Cooperation and Development, Paris, France, 1982, 124 pp., $13.00.

New Bank publications

IDA in Retrospect: The First Twenty Years of the International Development Association

As a background to current discussions of the future of the International Development Association (IDA), this study examines what has been accomplished with IDA funds during the past 20 years. It summarizes the history of the institution, the amounts and kinds of financing it has provided, and the effectiveness of its assistance in promoting economic growth and reducing poverty. Case studies show the effect of IDA assistance at various economic levels and its influence on government policies and institution building in developing countries. The changing political support for IDA and the relation between IDA and other bilateral and multilateral aid programs are examined. The report deals frankly with criticisms of IDA and objectively balances its successes and failures.

International Development Association. Approximately 144 pages. Paper only, US$5.95.

World Development Report 1982

The Report this year focuses on agriculture and food security. As in previous years there is also a section on global prospects and international issues, as well as the statistical annex of World Development Indicators. For the first time the annex includes full-color maps. (See the summary of this year’s Report on page 6 of this issue.)

Oxford University Press. English edition approximately 200 pages. Cloth US$20.00 (£15.00); paper US$8.00 (£5.95). (Arabic, French, German, Japanese, and Spanish editions, paper only, will be available in October at US$8,00 each.)

Poverty and Human Development

Since economic growth alone has not reduced absolute poverty, it has been necessary to consider other strategies. The strategy examined in this study—human development—epitomizes the idea that poor people should be helped to help themselves. Four chapters provide an overview of alternative strategies; a detailed look at health, education, nutrition, and fertility; lessons from existing programs; and an examination of broader issues in planning.

Oxford University Press, 96 pages. Paper only. US$7.95.

India’s Exports

Martin Wolf

Despite improved performance, the growth of India’s exports continues to lag behind need, potential, and the achievements of several of its competitors. This study examines India’s overall export performance in the 1960s and 1970s, with emphasis on the central role of incentives. The major problems and policies are discussed, as well as current strategic options.

Oxford University Press. Approximately 224 pages. Cloth only, US$22.50 (£10.50).

Development Strategies in Semi-Industrial Economies

Bela Balassa and associates

This book provides an analysis of development strategies in semi-industrial economies that have established an industrial base, it endeavors to quantify the systems of incentives that are applied in six of these economies—Argentina, Colombia, Israel, Korea, Singapore, and Taiwan—and to indicate the effects of the systems on the allocation of resources, international trade, and economic growth.

The Johns Hopkins University Press. 416 pages. Cloth only. US$39.95 (£30.00).

Aspects of Development Management

William Diamond and V. S Raghavan (editors)

This is the first book to deal exclusively with the management of development banks—with their problems and the various ways, of tackling them. The book comprises eight sections, each focusing on one aspect of management. Each section opens with an introduction by the editors that highlights the relations affecting the various issues confronting management and the role of management in dealing with them.

The Johns Hopkins University Press. 320 pages. Cloth US$29.95 (£22.50); paper US$12.95 (£9.75).

These books are available from The World Bank. Publications Distribution Unit (Dept. F). 1818 H Street, N.W.. Washington, DC 20433, U.S.A.

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