Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
September 1983
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Charles P. Kindleberger and Jean-Pierre Laffargue (editors)

Financial Crises:

Theory, History and Policy

Cambridge University Press, New York, 1982, ix + 301 pp., $37.50.

Victor Argy

The Postwar International Money Crisis:

An Analysis

Allen and Unwin, Winchester, MA, USA, 1981, x + 438 pp., $37.50 (cloth), $15.95 (paper).

Financial Crises is a promisingly topical title for a book published in the second half of 1982. One’s admiration for the foresight of its editors is further increased by learning that it represents the proceedings of a conference organized in 1979.

On closer inspection, however, it proves a mixed bag. In the conference’s theme paper, Hyman Minsky, who has devoted much of his career to this subject, sees financial fragility lurking at the root of most contemporary economic phenomena, though he is often unable to explain clearly why and how. The basic hypothesis seems to be that long periods of stability breed incautiousness and undermine the system’s ability to resist a random shock. This is certainly a plausible mechanism but, as John Flemming points out in his comments, it is not uniquely financial.

More concrete are the case studies that form the second part of the book, though these are sufficiently removed in time and circumstances to be of largely academic interest. For the most part scholarly and well presented, they are useful for those interested in the development of central banking.

In terms of lessons for the 1980s, however, the five chapters on “Policy” have the most to offer. Solow’s chapter, “On the Lender of Last Resort,” is characteristically lucid and insightful, as well as witty. It is, however, to Metais’ paper on “Less Developed Countries’ Rising Indebtedness” that the casual reader looks first to see whether the shadow of recent events had been foreseen in 1979. The answer is, “in part.” Clearly there were concerns about the overall vulnerability of the system, but the systematic problems of international bank lending (the “feast or famine” syndrome, the “free rider” issue, and the question of “moral hazard”) were not seen with any clarity. McClam comes closest to presaging current issues with a thoughtful chapter on “Financial Fragility and Instability.” Probably no one would disagree, however, with Coulbois’ observation “… that detecting the occurrence of a foreign exchange crisis and fighting it with appropriate measures are far easier for someone speaking in a classroom … than for those who are in charge of the national currency.”

Victor Argy’s book, despite the deceptive similarity of its title, is quite different. Essentially a textbook, its objective is to provide an understanding of the present international monetary system and how it evolved. The sections of the book are somewhat uneven in style—though this should not necessarily be taken as a criticism, for they have different purposes. A historical section with a political economy flavor guides the reader briefly and skillfully over developments in the international monetary system from 1945 to the late 1970s. Argy’s experience in the Fund enables him to distinguish the significant from the insignificant events of those years and to explain the political rationale that often makes sense of arrangements that at times might appear bizarre on purely economic grounds.

The second section is conceptually more rigorous; it involves the formulation of a fairly standard model of an open economy and the discussion of its properties, as well as their implications for the use and effectiveness of policy instruments such as monetary targets and exchange market interventions. This provides the general background for the discussion of inflation and unemployment that is the subject of Section 3. To this reader, the less than 50 pages (including charts) that Section 3 devotes to describing recent developments, analyzing the various theories and presenting the empirical tests, is just a bit too brief.

Sections 4 and 5 focus more specifically on the exchange rate, analyzing the operation of managed floating regimes and comparing the broader costs and benefits of different regimes. In this, Argy is an analyst not an advocate. He presents a concise description of the case that can be made for and against different kinds of arrangements but fortunately eschews proselytizing.

Section 6 represents once more a change in gear, with the topic being widened from the particular issue of the exchange rate regime to cover the broader canvas of macroeconomic policy. Argy favors the standard targets/instruments approach to analysis and provides a useful elaboration of the familiar taxonomy. Particularly valuable is his classification of the different kinds of disturbances to which an economy is subject, and their distinct implications for the appropriate policy response.

In sum, this is exactly the kind of book for those who want to absorb (or teach) their economic theory in a context that continually bumps up against real world problems. To his credit, Argy maintains intellectual rigor while not sacrificing practical relevance.

Andrew Crockett

John Williamson (editor)

IMF Conditionality

Institute for International Economics, Washington, DC, 1983. xvi - 679 pp., $30 (cloth).

Conditionality is one of the more controversial and misunderstood aspects of the Fund’s policies and practices. It has frequently borne the brunt of criticism for unsuccessful economic policies and the cost of retrenchment from economic positions that had become untenable. Anything, then, that contributes to a better understanding of conditionality is welcome. The present volume brings together the papers presented at a conference in March 1982 (which this reviewer attended). While the quality of the papers varies and many of the participants simply reiterate their well-known positions on Fund conditionality, the papers on the whole provide a reasoned discussion of several aspects of conditionality.

Part I, on the role of the Fund, includes a broad review of Fund activities by William Dale, the Deputy Managing Director of the Fund. The other contributions in this section really belong to Part II, which deals with specific issues relating to conditionality. The longest section, Part III, is devoted to country studies in which the authors examine Fund-supported programs in a dozen countries. While many of these country studies are of interest, they would have been more enlightening if the stabilization stories recounted by participants could have been matched with accounts of the Fund officials responsible for negotiating and monitoring the programs in question. This, however, would probably have presented difficulties, since the officials would not have been at liberty to recount details of the situation and the choices that had to be faced.

Part IV provides the conclusions and policy implications. Chapter 22, in particular the contributions by Cooper and Beza, is perhaps the most useful and interesting part of the book. Cooper provides a well-balanced overview of the conditionality debate, its intent and limitations; it is, in the words of another participant “a fundamental statement, and one that touches.. .just about all the bases.” He concludes that “There was some disagreement over just what the conditions should be, but that there should be rather rigorous conditions imposed by the IMF as part of its lending programs commanded general agreement in this group.” Cooper goes on to speculate that “… we could choose any five people present and make a team to work up an economic adjustment program for a particular country other than our own… .the program we came up with would not differ greatly from a typical IMF program… . In short, arguments over a particular program would reflect differences in technical judgments rather than differences of principle.”

In his summing up, Beza, who is a senior staff member of the Fund, provides a sort of unofficial Fund response. It is a low-keyed response, although, had he wanted, he could have met in a more asseverative way some of the critical points concerning conditionality in previous papers. He gives reasoned answers to some of the suggestions made by different speakers for changing, or changing the emphasis of, Fund conditionality, and some of the comments on how it has worked—noting the “intriguing… thought that conditionality should be broadened.” In reference to the more critical points made, he points out that “… discussion of how conditionality was applied… assumed that the management and staff of the Fund and the national authorities met to consider the bases of financial programs with all aspects of policies open. This is not the case, of course … . The variety of initial conditions faced is very large … . What the Fund management and staff are charged with doing is to ensure that the programs developed give reasonable prospect of adjustment that is adequate in the light of circumstances, and that the programs are in general conformity with the policies supported by the Fund.”

Bahram Nowzad

Angus Maddison

Phases of Capitalist Development

Oxford University Press, New York, 1982, xiv + 274 pp., $29.95 (cloth), $9.95 (paper).

This book is an ambitious exercise in quantitative economic history of 16 advanced capitalist countries. The author has amassed an immense volume of material on annual movements of major economic indicators since 1820 and it is on the basis of this data that he sets out to identify turning points in growth momentum and behavior patterns that differ significantly between periods.

The period of capitalist development is thus divided into four phases: 1820-1913 (the liberal phase); 1913-50 (the beggar-your-neighbor phase); 1950-73 (the golden age); and 1973 onward (the phase of blurred objectives). The explanation of the movement from one phase to another, the author contends, is not to be found in the theories of long waves (a la Kondratieff, Kuznets, and Schumpeter) but rather in major systemic shocks at the relevant points. These shocks may be either accidental or the result of some inherently unstable situation that eventually breaks down (for example, the Bretton Woods parity system).

In explaining the particular features of each phase, the author emphasizes the nature of the institutional policy mix and the consequences of the resulting harmony or conflict of interests within and between countries. The breakdown of the golden age in 1973 and the continued weak performance of the capitalist economies is, for example, attributed in part to the erosion of price constraints, changing expectations, and more recently to the pursuit of policies that give undue weight to inflation control and external payments balance. The author asserts—more or less intuitively—that less cautious policies would have been conducive to a more balanced economic recovery.

Subimal Mookerjee

Leroy P. Jones (editor)

Public Enterprise in Less-Developed Countries

Cambridge University Press, New York, 1982, xvii + 348 pp., $39.50.

Today, when financing for development is tighter than ever, developing countries are searching for ways to sustain growth in the face of shrinking resources. Public enterprises stand out in this effort because of their hybrid nature and because they frequently absorb the lion’s share of public investment funds in developing countries. This volume thus makes a timely appearance.

Consisting of 16 papers presented to a conference in 1980 on public enterprises in less developed countries, this book covers a broad range of topics. These include why governments create public enterprises, how they can be controlled, how they take decisions and handle risk, how they behave in international markets and provide incentives, and how they compare with other intervention mechanisms. While the volume is more like a large buffet than a focused, coherent menu, one can still select a full and satisfying meal.

Especially noteworthy is the chapter by Leroy Jones and Edward Mason on the reasons why governments create public enterprises. In a refreshing departure from the usual polemics on this subject, the authors contend that public ownership is often a pragmatic response to economic problems, citing the strikingly similar ownership pattern of two countries with very different ideologies, histories, and power structures—the Republic of Korea and India. Jones and Mason suggest that public enterprises may, in some circumstances, have an institutional advantage, such as in sectors where they are large in scale relative to product markets or are capital intensive. This advantage, the authors argue, plays a role in determining the size and structure of public ownership. The empirical evidence for this economic rationale is limited and some obvious exceptions, such as the Malaysian use of public ownership to redistribute ownership from other ethnic groups, notably the Chinese, to the indigenous Malay population, are noted. Richard Mallon, in a separate chapter, examines the Malaysian experience in more detail.

The problems of determining the opportunity cost of financing public enterprises are analyzed in a paper by Malcolm Gillis, Glen Jenkins, and Donald Lessard. Here the emphasis is not on the government’s choice among alternative policies but on the effect of the distorted price of capital on managerial behavior. The authors note that providing finance to public enterprises at prices well below opportunity cost can lead managers to misallocate and waste resources. The book also contains some careful and scholarly case material on how decisions are made and how public enterprises act in international markets.

A few of the contributions in the book, however, are highly technical and seem only marginally relevant to the practical problems of developing countries. In general the book gives short shrift to the special difficulties of the least developed countries in Africa and Asia. This is especially unfortunate since public enterprises are often critical actors in such countries, where, for example, the structure and level of agricultural production may be determined by the policies of a state marketing board. The problems of the poorest countries, trying to manage state enterprises in the face of an acute shortage of managers, will have to await another volume.

This collection makes an important contribution to a subject that has not always received the attention it merits. It is to be welcomed as part of a growing trend to analyze the problems of public enterprises in developing countries with greater rigor and give more attention to operationally relevant issues.

Mary Shirley

Takafusa Nakamura

Economic Growth in Pre-War Japan

Yale University Press, New Haven, CT, USA, 1983, xv + 326 pp., $35.

Richard J. Schonberger

Japanese Manufacturing Techniques:

Nine Hidden Lessons in Simplicity

The Free Press, New York, 1982, xii + 260 pp., $14.95 (cloth).

Frank Gibney

Miracle by Design:

The Real Reasons Behind Japan’s Economic Success

Times Books, New York, 1982, xv + 239 pp., $15 (cloth).

These three books should satisfy very diverse tastes. For those who prefer their history grounded in detailed statistical time series, Nakamura provides a helpful guide to economic developments in Japan from the fourth quarter of the nineteenth century until the eve of World War II. This book, the Japanese edition of which was issued in 1971, has been infused with fresh data and provided with a succinct overview chapter that takes the reader quickly, but in great factual detail, through successive stages of Japanese development and prepares the ground for the nine remaining chapters, whose coverage extends from wages and employment to wartime economic controls.

Businessmen and the curious lay readers, alike, will find Schonberger’s book on the management of industrial production instructive. Quality control, inventory regulation, plant configurations, production scheduling, and other topics are analyzed with the benefit of numerous examples. The author concludes on a hopeful note, finding much that U.S. industry can learn from Japan and reason to believe that with some trying it can rise to the challenge.

Frank Gibney, a businessman who has resided in and written about Japan, brings a very different perspective. Gibney attempts to explain Japan’s unparalleled success in terms of its culture and institutions. He does not gloss over the flaws in the Japanese model or ignore the pitfalls that may lie ahead, but the book is suffused with the author’s admiration for Japanese methods. He believes that the United States can learn from Japan’s experience despite the cultural divide, particularly by devising industrial policies aimed at steady and long-term progress rather than some form of immediate gain that could jeopardize the strength of the economy.

Shahid Yusuf

John S. Odell

U.S. International Monetary Policy:

Markets, Power, and Ideas as Sources of Change

Princeton University Press, Princeton, NJ, USA, 1982, xvi + 385 pp., $35 (cloth), $8.95 (paper).

International economic policies are part of overall foreign policies, Odell believes, and he uses as an example the role of the United States in the evolving international monetary system from the 1960s to the late 1970s. The author argues that economic rationales alone are insufficient to explain the breakdown of the Bretton Woods system; sociopolitical factors were also at work. His major contention is that explanations or forecasts of U.S. international monetary policy require an examination of (1) the conditions of the international currency market that affect policy; (2) the shifting international economic power structure; and (3) changes in policy ideas or preferences that dominate the authorities’ position.

Five approaches to analyzing foreign economic policy—one of which is market conditions—are described in detail. Odell applies a sociopolitical interpretation to each, even relating the discussion on market conditions to government behavior. The author states that “the central task of economics … . is not to explain government behavior but rather to explain trade flows, the commodity composition of trade, and production, financial flows, price movements, and so on.” Thus, while an economist views an exchange rate as a price in a market, a political economist views an exchange rate as a feature of government behavior.

These five approaches are then combined in the analysis of the international monetary system during the 1960s and 1970s. Specifically analyzed are the creation of the SDRs, the untying of the U.S. dollar from gold in 1971, and the emergence of generalized floating in 1973. Much of the discussion is based on extensive and enlightening interviews with people who were influential in shaping events. From this analysis the author concludes that by 1971 the relative economic strength of the U.S. economy had weakened and its ability to defend currency convertibility was rapidly diminishing. However, the domestic policy consideration of high unemployment dominated the decision to cease convertibility to gold in 1971.

Overall, the book is well written and provides an interesting alternative explanation for the events in the international monetary system.

Esther Suss

Other books received

A. Sid Ahmed

Développement sans croissance

L’éxperience des économies pétrolières du tlers-monde

Editions Publisud, Paris, 1983, xvi+524 pp.

Almost half of this book is devoted to the significance of oil in OPEC economies and the need for diversification. The second half takes up the issue of “petrolization” of domestic economies and the necessity of global cooperation. In the author’s view the costs of oil-financed development—in terms of conspicuous consumption, investments beyond absorptive capacity, waste involved in short-circuiting the development process, widening domestic income gaps, growing disparity between workers’ efficiency and their remuneration, and the decline of work ethics—have been enormous, resulting in slower growth, high inflation, payments deficits, structural dislocations, smaller non-oil exports, and a trend toward new economic dualism. While the book’s major findings and recommendations deviate little from the conventional wisdom, its misgivings about multinational corporate behavior, its defense of OPEC’s right to be consulted on all international monetary issues, and its advocacy of industrial countries’ cooperation with OPEC as the best guarantor of their security give the book a distinctly, and expectedly, “Southern’’ flavor.

Paul D. Reynolds

China’s International Banking and Financial System

Praeger, New York, 1982, xvii + 221 pp., $23.95.

A brief survey of China’s banking system, based on developments between 1978 and the middle of 1981. It presents a valuable summary of the Bank of China’s activities in China and abroad, foreign banks’ activities within China, and China’s international payment and borrowing practices. Since the book was issued, more data has become available on China and China’s borrowing needs and policies have undergone some changes. Despite some inevitable obsolescence, the book remains relevant in most areas and is a useful handbook for those involved in financial or commercial transactions with China.

W. W. Sharkey

The Theory of Natural Monopoly

Cambridge University Press, New York, 1982, viii + 29 pp., $32.50 (cloth), $9.95 (paper).

There has been a significant amount of economic work in the recent past on the problem of defining and regulating natural monopolies, much of it on multiproduct monopolies. This book reviews many of these developments and presents their implications in language accessible to policymakers. The review is enhanced by several examples from the telecommunication industry, although the problem of limited information about the regulated industry—and the issue of policy formulation in such a context—is neglected.

R. Ballance, J. Ansari and H. Singer

The International Economy and Industrial Development:

Trade and Investment in the Third World

Allanheld, Osmun and Co., Totowa, NU, USA, 1982, 326 pp., $29.50.

A book for the specialist. It discusses, at a highly technical level, various analyses of industrialization that have been undertaken to back UNCTAD and UNIDO policies. It has a welcome historical range and attempts to marry Marxist, neoclassical, and institutional approaches to industrialization in both theoretical and empirical approaches to the subject. In the latter, the authors sometimes slip into quite complex algebraic formulations that might daunt the nonmathematical reader.

J. A. Martinez Serrano, M. Mas Ivars, J. Patricio Torregrosa, F. Perez Garcia, J. Quesada Ibanez, and E. Reig Martinez

Economia Española:

1960-1980, Crecimlento y Camblo Estructural

H. Blume Edition, Madrid, Spain, 1982, 384 pp.

Between 1960 and 1974, Spain experienced rapid economic growth, but in the second half of the 1970s its economic growth decelerated. The authors attribute the growth between 1960 and 1974 to the introduction of modem technology, the reallocation of resources to more productive sectors, and increased capital formation. Growth decelerated as the investment climate deteriorated with higher energy costs, rapid increases in labor costs, and the effects of the belated adjustment efforts to the energy crisis. Structural changes are highlighted in useful chapters on the agricultural, industrial, services, and external sectors. Two other chapters analyze areas of particular current policy concern: the labor market and Spain’s regional disparities. Spain’s financial system and the role of the public sector in the Spanish economy are also examined.

Jon Woronoff

Japan’s Wasted Workers

Allanheld, Osmun and Co., Totowa, NJ, USA, 1983,296 pp., $19.95 (doth), $10.95 (paper).

After a flood of almost adulatory books on Japan’s success in managing its industries and manpower resources, a contrary view is offered by this book. It contains a series of critical commentaries on aspects of the Japanese labor market—its structure, incentives, and training—fleshed out with data from previous studies. The book, written originally for a Japanese audience, suggests the shedding of traditional management practices. The author warns that the demographic balance in Japan is shifting toward the old and aging; workers’ wages are rising rapidly, making labor quite expensive; and, except for manufacturing, large numbers of women and young workers are underutilized in most sectors of the economy.

A. Jorge, Jorge Salazar-Carillo, and Rene P. Higonnet (editors)

Foreign Debt and Latin American Economic Development

Pergamon Press, Elmsford. New York, USA, 1982, xiii+183 pp., $30 (cloth).

The proceedings of a conference held in February 1982, this book contains 17 articles, heavily laced with statistics, on an issue and a region of the world that is exercising the wits of bankers throughout the industrial countries. Seven articles, which provide a background to the borrowing and the external debt problems of Latin America, are followed by ten case studies. The case studies on the Central American nations are quite brief, but fairly extensive coverage is given to the Brazilian situation. For the general reader, the first part of the book is by far the more interesting.

D. J. Storey

Entrepreneurship and the New Firm

Praeger, New York, 1982, 233 pp., $24.95 (cloth).

The small firm could be a force in development, but it remains an uncertain force. This even-handed treatment of the role of small enterprises in industrial economies draws primarily from studies of small firms in the British economy. The author recognizes the contribution of small firms to economic activity in the last few years but feels the relative eclipse of larger enterprises is the result of recession, and recovery will see them regain their earlier preeminence. He notes that the employment created by small firms is usually for skilled labor in prosperous cities and is less likely to benefit the current unemployed, who are poorly endowed with skills and located in the more depressed areas. He doubts the advisability of preferential treatment for small firms—a useful reminder for policymakers in the advanced countries but also perhaps in some of the newly industrialized countries, where there is renewed interest in the small-scale sector.

Jagdeep S. Bhandari and Bluford H. Putnam (editors)

Economic Interdependence and Flexible Exchange Rates

The MIT Press, Cambridge, MA, USA, 1983, xvii+547 pp., $30 (cloth), $15 (paper).

This is a valuable compendium of essays on a very important topic. Since the late 1960s, much of the debate on flexible versus fixed exchange rates has centered on (1) the merits of flexible exchange rates in the context of the balance of payments adjustment and (2) the advantages of flexible rates for the independence of domestic economic policy. These essays mostly address the second set of issues. The first and third sections of the book, on exchange rate determination and policy interdependence, are of greatest interest to this reviewer. The second part, on energy and adjustment, and the fourth, on simulations, will no doubt appeal to others. The usefulness and readability of this book would have been considerably enhanced had the editors requested the authors to provide summaries to each essay and had they themselves prepared an overview commentary for each section.

Hyman P. Minsky

Can “It” Happen Again:

Essays on Instability and Finance

M. E. Sharpe, Inc., Armonk, NY, USA, 1982, xxiv+301 pp., $35 (cloth)

Instructive reading in a season when financial crisis is very much in the air. Minsky’s thesis is that the condition of the financial systems in capitalist economies has been rendered precarious through an over-reliance on debt financing by households and firms alike. The emergence of a many layered debt structure, combined with the heavy recourse to short-term borrowing during business upswings, greatly increases the probability of a financial collapse when rising interest rates nudge the economy into a downturn in which the problem of deteriorating company balance sheets is compounded by declining profits and liquidity. That such a crisis has been averted on several occasions in the past 20 years, Minsky ascribes to stimulative fiscal policies and the willingness of the U.S. Federal Reserve to ease sudden shortages of liquidity. The papers collected in this volume are only moderately technical and could be profitably sampled by all those interested in national as well as international financial policies.

Mohammed A. Qadeer

Urban Development in the Third World, Internal Dynamics of Lahore, Pakistan

Praeger, New York, 1983, xiv+282 pp., $29.95.

The author is concerned with the processes underlying the changing economic, social, and physical organization of a city in a developing country. He pays his scholarly dues in the first two chapters by providing a theoretical framework and the obligatory potted account of Pakistan’s brief political and social history. In the later and more interesting chapters, the author describes how Lahore has grown and changed on a social as well as a physical plane; the chapter on the workings of the bazaar in the urban economy is especially revealing.

Klaus J. Keller

Die internationale Konjunktursynchronisation

Empirischer Befund, Ursachen, Auswirkungen. “Reihe Soziookonomische Forschungen,” 16 Haupt, Bern and Stuttgart, 1982, 324 pp., SFr. 68, DM 75.

A welcome attempt at the empirical description, causal explanation, and discussion of the policy implications of internationally synchronized cycles in economic activity. Keller’s empirical findings, based mainly on data from OECD countries, suggest considerable convergence; from the late 19th century to the present, cyclical swings have tended to become more closely synchronized between these countries. Various hypotheses are statistically tested to arrive at tentative explanations. Over periods covering more than one full cycle, for instance, the degree of synchronization is mainly determined by the prevailing exchange and trade system (“Währungsordnung”) and the degree of openness of the economies involved. Statistical evidence for the important influence of economic policies at the individual country level is found only in the short term.

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