In his guest article, “Devaluation and adjustment in developing countries” [June 1983], Professor Kaldor has pointed out some key issues that would otherwise have been swept into the background in the debate over the balance of payments difficulties of LDCs and devaluation as a possible cure. I should like to raise a few questions in the spirit of and linked to his analysis. First, the distribution of the burden of adjustment of the rest of the world to OPEC’s surplus cannot be said to be optimal in any sense. Were it not for the fact that financial markets in industrial countries have succeeded in monopolizing OPEC’s excess liquidity, the industrial countries would be faced with a chronic balance of payments position. As it is, the financial flow (from OPEC to Euromarket) has meant that LDCs bear a disproportionate burden of real adjustment.
Second, Professor Kaldor has good cause to be suspicious of the traditional deflation/ devaluation “medicine.” Either policy involves a substantial medium-term cut in real wages. Several well-grounded theoretical arguments can be adduced in favor of the hypothesis that such a real wage cut may aggravate the balance of payments further and plant the seed for a vicious circle of decline. Third, LDCs have often been accused of acting “irresponsibly” by over-borrowing from the Euromarket. It can be shown that even within the severe confines of a rational expectations model, LDCs did not overborrow—rather, they acted to maximize utility subject to rational expectations of the future price of financing and rationing constraints.
Fourth, LDC borrowing to finance deficits is often analyzed using supply and demand functions to portray the market for international finance. This is invalid and misleading. In fact, financial developments in the past few years may be more usefully approached using an intertemporal, game-theoretic framework from which it becomes evident that some of the debt problem is attributable to oligopolistic competition among commercial banks and problems of “moral hazard” when it comes to bailing out these banks. Hence, further study of competitive distortions within financial markets would be fruitful. (I myself am in the process of integrating the above factors).
In summary, there has been an excessive reliance upon the stale, neoclassical paradigm in explaining the LDC debt problem. A new problem such as this requires a new approach and I offer my thanks to you for stimulating the debate.
Deeds not words
With reference to your response to Peter Dodd’s letter [March 1983] on effective family planning in Africa, I should like to offer some comments as an observer. The local employees of a project in Africa that has a family planning component all have seven children or more. There is no question about their commitment to the success of the program—as long as it applies to other people.
It would appear that by far the most important factor is the desperate need to change deeply entrenched attitudes on family size. Perhaps this can only be accomplished by an expensive and intensive public relations and advertising campaign. Verbal exhortation is hardly enough.
David I. Marks
New from the Fund
Government Budgeting and Expenditure Controls: Theory and Practice
by A. Premchand
The book offers a comprehensive review of fiscal policies and their implications for budgeting and expenditure controls and provides an in-depth discussion of techniques, procedures, and processes of budgeting using illustrative material drawn from the experiences of industrial and developing countries.
Government Budgeting and Expenditure Controls seeks to build a bridge between public finance and public administration through a discussion of theories and related practices. Each chapter provides a perceptive, state-of-the-art introduction followed by a delineation of the role of techniques, their usefulness and limitations, and the directions of future improvement. It examines the problems of budget formulation, the relation of programs to the attainment of various policy objectives, and the interplay between the economic and administrative aspects of budgeting. The book covers developments in budgeting and expenditure controls and discusses the efficacy of recent budget reforms, analyzes their successes or failures, and describes their current status.
The book is addressed to the tasks of policymakers in financial agencies in central, state, and local governments, and considers issues involved in contemporary government budgeting and financial management.
About the author
Mr. Premchand, Advisor in the Fund’s Fiscal Affairs Department, has written extensively on government finances and financial administration. His earlier books included Control of Public Expenditures in India (1963 and 1966) and Performance Budgeting (1969). He has lectured at several universities and training institutions in India and the United States.
1. Fiscal Policy Parameters for Budgeting
2. Purposes of Budget and Determinants of Public Expenditures
3. Functional Approach to Budgeting
4. Budgeting: Approaches to Decision Making
5. Budgeting: Organizational Aspects
6. Development Planning and Budgeting
7. Expenditure Planning and Forecasting
8. Inflation Budgeting
9. Short-Term Adjustments in Public Expenditures
II. Structures, Systems, and Financial Management
10. Budgets: Structural Aspects
11. Budget Innovations: Performance to Zero-Base Budgeting Systems
12. Budget Execution and Cash Management
13. Government Accounting and Financial Information Systems
III. Budgetary Relationships
14. Public Enterprises and Autonomous Agencies
15. Intergovernmental Fiscal Management
Approximately 600 pages.
Advice on payment in currencies other than the U.S. dollar will be given on request.
For further information and to place orders, please write to: Publications Unit
International Monetary Fund
Washington, DC 20431 USA