Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
March 1986
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Willem H. Buiter and Richard C. Marston (editors)

International Economic Policy Coordination

Cambridge University Press, New York, 1985, xvi + 386 pp., $44.50.

This volume offers the collected papers and comments presented at a conference on policy coordination organized jointly by the Centre for Economic Policy Research and the National Bureau of Economic Research. With five of the eight main papers using game theory as an integral part of their analyses and only one eschewing formal mathematics, the book is of necessity technical and aimed at specialists. This remark is not intended to condemn the book but to warn those who might be attracted by the title, of what is in store for them.

Consider first the group of papers that invoke game theory. Max Corden’s opening paper is concerned more with exposition of concepts than with drawing applicable policy conclusions. He develops a two-country model in which real wages, prices, employment, and terms of trade are key variables and draws on game theory to introduce ideas of strategy in macroeconomic policy making. He discusses the scope for coordination first in the static context and later makes allowance for certain intertemporal effects.

Barry Eichengreen gives an interesting thumbnail sketch of issues of coordination that arose in the interwar period in connection with the operation of the gold standard, the Genoa Conference of 1922, and the tripartite monetary agreement of 1936. He was moved to bring static game theory to his analysis because “the very concept of conflicting objectives, much less strategies such as leadership and cooperation, are wholly incompatible with familiar attempts to model the gold standard’s operation.”

A highly formal piece by Marcus Miller and Mark Salmon serves as a handy introduction to a variety of key concepts in dynamic game theory. The paper by David Currie and Paul Levine has much the same structure in that a quite formal analysis using control and game theory is followed by illustrations based on a rather smallscale macro model.

Gillis Oudiz and Jeffrey Sachs in their paper give particular attention to the notions that governments have a rather short horizon and in any event are constrained by their presumed inability to bind their successors.

Two papers address the effects of US policy, especially fiscal policy, on the world economy. Jacob A. Frenkel and Assaf Razin in their theoretical paper evolve a rational expectations model that features the intertemporal solvency constraint upon government behavior and the prominent role of wealth or permanent income in determining private spending. Their analysis opens up the possibility that the effects of an increase in fiscal spending in the United States upon spending in other countries could be negative because of the higher world interest rates that would be induced.

Patrick Minford sketches an elaborate theoretical model that yields a broadly similar possible result of US fiscal policy. At one stage he uses his model to consider the effects of a rise for one year in the US budget deficit, financed without an increase in the money supply, and he concludes that “output abroad falls instead of rising as conventional theories would indicate.”

Finally, as one who has been involved in the practice of cooperation at the national level and in the European Economic Commission, Tommaso Padoa Schioppa gives a very readable account of the EMS experience.

The panelists’ comments contain several nuggets of wisdom. Matthew B. Canzoneri suggests “that the first order of business in policy coordination research is to achieve some sort of consensus on the sign and symmetry of policy spillover effects…the assumptions made in this regard are far more important than distinctions between utility functions and game theoretic solution concepts that dominate much of our present discussion.” Richard N. Cooper makes a similar point: “Economists these days sometimes cannot agree even on the sign of the effect of a particular policy instrument on target variables, much less the magnitude. These sharp disagreements on meansends relationships make macroeconomic policy coordination impossible.”

Ralph C. Bryant addresses the relationship of uncertainty to cooperation rather differently. “In the research discussed at this conference, the players know how economic forces are transmitted from one nation to another…and each player has the same model in mind. The practical situation confronting policy makers in national governments is of course entirely different…could we try to see how our inferences about strategic behavior and the potential gains from cooperation may be altered if we allow explicitly for uncertainty about what the true model is?”

International economic policy coordination is of course of great interest to the International Monetary Fund, one of whose most important responsibilities is to promote such coordination. The Fund may promote coordination in several ways. It may contribute to the formulation of the rules of the game, as for example when nations are prepared to negotiate what is acceptable, responsible, behavior with respect to exchange markets. It may contribute by refining and circulating relevant information and analyses. It may also help by monitoring performance and reporting upon the degree to which countries may be judged to be operating within the rules of the game. Finally it may, to some extent, provide the services of a mediator seeking to convince countries to alter their strategies so as to raise the probabilities that cooperative solutions to international economic policy “games” will be achieved.

Contributors occasionally mention the role of rules of the game; some acknowledge the importance of information. Conspicuously lacking, however, is attention to the role of a referee, or a party, that by common consent undertakes surveillance. Equally, there is no discussion of the role of the mediator in the policy conflicts that feature in the game situation. A study, theoretical and empirical, of the role of the mediator—of surveillance—in the international monetary system would be of interest and could be of benefit.

Wm. C. Hood

Stephen R. Lewis, Jr.

Taxation for Development—Principles and Applications

Oxford University Press, New York, 1985, xix + 306 pp., $29.95.

Should allowances for dependents be deducted from taxable income or from tax liability? Should capital allowances be granted when an asset is purchased, throughout the life of the asset, or when the asset is fully depreciated? Is a single-stage sales tax preferable to a multistage one? At what stage—manufacturer’s, wholesale, or retail—should one impose a single-stage sales tax? These and similar questions of practical tax policy are Professor Lewis’ subject. His answers draw on his experience as an advisor in several developing countries and derive from a consistent application of standard supply-and-demand theory.

The book is designed to provide practical guidance to those charged with formulating tax policy in developing countries. Its outstanding characteristics are simplicity and relevance. Nothing more than an acquaintance with introductory economics is required. The issues tackled, however, are real and the environment in which the analysis is conducted is clearly that of a developing country. Much of the analysis, for example, assumes a small, open economy with a relatively weak tax administration and with a large number of unrecorded and even noncash transactions. The book’s three major sections deal with taxes on income, wealth, and commodities. Readers are encouraged to test their understanding by tackling the more than 50 problems spaced throughout the volume.

By and large, Lewis’ analysis and recommendations are sensible and pragmatic. There are, however, two important exceptions. First, in contrast to his treatment of wealth and commodity taxes, Lewis does not explore the ultimate incidence of income taxation. As a result, his analysis of the effects of, say, personal tax on labor supply and saving are based on the implicit assumption that the entire burden falls on labor. And second, when presenting his preferred policy package for tariffs, Lewis recommends a uniform import tariff. Since such a policy causes a shift in the exchange rate that discriminates against exporters, Lewis supplements his proposal with a recommendation for a general export subsidy close to the level of the import tariff. While this may indeed eliminate the disincentive to exporters, it also reduces revenue from the taxation of foreign trade to zero or thereabouts.

These blemishes reflect a tendency to ignore or downplay some of the insights from more explicitly general-equilibrium approaches. This notwithstanding, Lewis’ volume is well worth reading by all those concerned with tax policy in developing countries.

Lyn Squire

D.P. Chaudhri and Ajit K. Dasgupta

Agriculture and the Development Process

Croom Helm, Dover, NH, 1985, 216 pp., $34.50 (cloth).

Belying its title, this scholarly and informative little book deals exclusively with the Punjab, providing an empirical review of its agricultural development from 1950 to 1980. Since many of the consequences of the Green Revolution are still disputed in some quarters, the achievements of the Indian Punjab bear witness to one of the outstanding rural development success stories of the postwar period (one that vitally affected India’s ability to feed its growing population, making it virtually self-sufficient in basic foodstuffs by the late 1970s).

An introduction provides historical context, contrasting the performance of East and West Punjab in the first and second halves of the twentieth century, but the book is principally concerned with the past 30 years in India’s Punjab. Its systematic analysis of the growth of agricultural inputs and outputs, using time series of available data, shows inter alia that the output of “all crops” increased about 300 percent during this period.

The book broadly surveys public sector investment, demographic trends and transitions, and product and factor markets (although only one page is devoted to the quite remarkable product markets, while factor proportions and labor and capital markets, as well as their fragmentation and imperfections, are discussed extensively). The study’s examination of income distribution and poverty reveals a “dent on poverty” achieved through the Green Revolution, and indicates that both poverty and inequality have decreased, at least in the latter half of the period. This is a very important, though carefully qualified, conclusion.

The book closes on a more forward-looking note, examining emerging patterns in growth and structure, reviewing capitalist tendencies in Punjab’s development, and examining the evolving sectoral structure of output and employment in agriculture and manufacturing. An analysis of the Punjab’s contribution to national development provides the final chapter.

Given the book’s empirical approach (based on the constructs of input-output analysis and a central planning perspective), it is unfortunate that so little is revealed about the role of economic management in the development process. For instance, the irregular spurts of growth in agricultural output are noted without explanation, although an analysis of changes in prices and of farmer incentives over the 30-year period might prove very revealing. In fact, the word “price” appears only once in the text, and that in relation to food consumption patterns. But of course this reflects the author’s Marxian perspective.

The book’s merits, however, include convincing documentation “that agricultural development in the Punjab has been truly remarkable not only by comparison with the period before independence but by any standards.” This development has demonstrably improved incomes, and the distribution of incomes, even though the proportion of households wholly dependent on income from wage labor has more than doubled (from 7.7 percent in 1950–51 to 15.8 percent in 1975). There is also clear evidence of benefits for the rest of the economy, state and national, through its strong backward and forward linkages. For those who would gainsay the benefits of the Green Revolution, this is powerful counter-evidence.

Graham Donaldson

C. Fred Bergsten, William R. Cline, and John Williamson

Bank Lending to Developing Countries

The Policy Alternatives

Policy Analyses in International Economics No. 10, Institute for International Economics, Washington, DC, 1985, 221 pp., $12.

Donald R. Lessard and John Williamson

Financial Intermediation Beyond the Debt Crisis

Policy Analyses in International Economics No. 12, Institute for International Economics, Washington, DC, 1985, 120 pp., $12.

The international debt crisis has stimulated numerous new (and some not-so-new) proposals for improving the organization of the international capital market. These two monographs perform the extremely useful service of categorizing and analyzing these proposals. The Lessard and Williamson study reviews the medium-term financing needs of debtor countries and analyzes the entire range of financial instruments available, while the study by Bergsten, Cline, and Williamson concentrates on ways to manage both outstanding external debt owed to commercial banks and future lending. There is some overlap between the two studies.

Lessard and Williamson build their discussion of alternative financial instruments around four criteria: cash-flow matching, incentives to borrower performance, impact on local financial markets, and contract enforceability. The detailed discussion of alternative forms of equity financing is especially useful. Concluding recommendations include, inter alia, a number related to World Bank operations: a general capital increase for the Bank and the International Finance Corporation, acceleration of Bank disbursements, extension of cofinancing, and approval of the Multilateral Investment Guarantee Agency. Also endorsed are the creation of new types of bonds and mutual funds for investment in developing countries, relaxation of developing country restraints on foreign direct investment and equity purchases, resumption by industrial countries of official export credits after a country initiates adequate adjustment measures, and encouragement in the industrial countries of the expansion of foreign investments of domestic nonbank institutions (e.g., pension funds).

Bergsten, Cline, and Williamson discuss 24 options related to the modalities of commercial bank lending in terms of four criteria: impact on debtors, impact on banks, implications for accounting outcomes and bank regulation, and systemic effects. Options classified in “recent changes and extensions,” and considered generally favorable in their impact, include reducing spreads and fees, multiyear rescheduling, lengthening maturities, currency conversion of existing debts, private and official insurance schemes, World Bank cofinancing, establishment of a secondary market in syndicated loans, and exemption of trade finance from rescheduling. The authors consider more problematical a number of proposals for payments smoothing and interest capitalization, although some of these may be required in the contexts of especially difficult restructuring cases or a new debt crisis. Options dealing with payments according to capacity and debt relief are considered less likely to be acceptable to lenders.

These works are useful both as analyses of complicated issues and as reference works. Their value in the latter respect would, however, have been enhanced by subject indexes.

Anthony Lanyi

Arnold Pacey and Philip Payne (editors)

Agricultural Development and Nutrition

Westview Press, Boulder, CO, USA, 1985, 255 pp.,$25.

This excellent collection fills an important need for a review of the major issues relating to both agriculture and nutrition. The book examines food systems; the interaction of health, work, and family structures; and indicators and measurements of malnutrition. It also reviews the causes of malnutrition and presents a framework for interventions. The broader agricultural issues, such as agrarian change and poverty, markets, and research, are also discussed. The editors have managed to integrate the contributions into chapters that read as if written by a single author (indeed, one of the editors coauthored many of the chapters). In sum, a book suitable for economists wishing to understand the nutritional issues related to agricultural development and for nutritionists interested in acquiring a broader, more policy-oriented perspective of their field.

Wilfred L. David

The IMF Policy Paradigm

The Macroeconomics of Stabilization, Structural Adjustment, and Economic Development

Praeger, New York, 1985, xiii + 140 pp., $34.95.

This slim volume is a well-written, though uneven and at times critical, exposition of the intellectual framework of Fund-supported programs. Whether or not a “paradigm” underlies Fund-supported programs, and how it affects policy recommendations, is debatable. In most situations, because there is neither an array of choices nor ample financial resources, Fund officials have to be pragmatic within the confines of the nature and gravity of the problem, and the availability of resources. The author is conspicuously silent on the question of resources, although he mentions, with obvious approval, other approaches that would entail a much greater commitment of financial resources. The categorization of balance of payments problems may be useful, and for some almost every problem is either “structural” or exogenous. But the crucial point is that, with or without the Fund, reality must be faced and hard choices made: sooner or later countries must learn to live within their means. The author concentrates on the role of the Fund as lender; the continuing policy dialogue with members, the considerable technical assistance, and the coordinating and catalytic role of the Fund in debt problems should also be mentioned. The author refers to the “pinpoint targetry” underlying the Fund’s policy approach (p. 116). Really?

Jacques Nusbaumer

Les Services

Nouvelle Donne de L’économie

Economica, Paris, 1984, 142 pp., F 75 (paper).

This is a thoughtful and original attempt to examine services, their present and future relevance in advanced and developing economies, and the problems they pose in economic analysis and policy making. The author starts with a deceptively simple question: how can we define a service? He proceeds to look at the valuation of services, the future of service societies, and the consequences—from the standpoint of economic policy—of the growth in the share of services in advanced economies. The book’s concluding chapter offers quantitative evidence on the production of, and international trade in, services. As a primer on services, this small book should appeal to a large audience. It is clearly written and its analysis is careful. Translation into other languages would make the book available to a broader audience.

Henry Butt and Bob Palmer

Value for Money in the Public Sector

The Decision-maker’s Guide

Basil Blackwell, New York, 1985, 187 pp., $45 (cloth), $19.95 (paper).

This interesting little book by British members of the Price Waterhouse international accountancy firm gives a short account—with many examples—of how the United Kingdom and some other industrial countries are trying to promote cost reduction in the public sector. Much of the value-for-money approach is good common sense, as some examples in the book show. Some of its applications, however, are thinly disguised political choices about the size and composition of public expenditure, which the authors’ enthusiasm brushes aside. The relation between value-for-money and wider economic efficiency is also not really discussed. A useful quick guide, albeit written on the standard management-consultancy assumption (which may well be correct) that most “decision makers” have short attention spans and rather simple minds.

Michael Connolly and John Mc Dermott (editors)

The Economics of the Caribbean Basin

Praeger, New York, 1985, xv + 355 pages, $41.95.

A misleading title for a volume that lacks focus and suffers from great variations in the quality and readability of its articles. Many of the 15 papers, from two separate conferences, deal with theory and are country related only in the sense of using data to illustrate or test theory. Most are state-of-the-art treatments of monetary and exchange issues primarily of concern to central banks in open economies: currency substitution, dual exchange rates, and interest rates. The themes of small ness and openness are admirably treated by A. Harberger and A. Krueger—tax policy and trade policy under such conditions, respectively. The former reads like a lecture; the latter like a good textbook. Both should be required reading for policy makers in small countries. The papers on debt are undistinguished; the one on Mexico suffers from the author’s (G. Ortiz) being far too close to what happened. A paper by M. Blejer and M. Khan demonstrates that in the Caribbean public investment has been helpful where it provided infrastructure but detrimental where it competed with the private sector. A real gem, however, is Mats Lundhal’s penetrating analysis of the development of the “kleptocracy” in Haiti over the past century. This one paper makes the book truly worthwhile.

Other books received

Listed below are some of the books we received in 1985 but were unable to review for lack of space.

Volker Bronschier and Christopher Chase-Dunn, Transnational Corporations and Underdevelopment, Praeger, New York, 1985, xii + I79 pp., $29.95 (cloth).

Ragaei El Mallakh, Qatar Energy and Development, Croom Helm Ltd., Dover, NH, USA, 1985, 184 pp., $31 (cloth).

Peter Enderwick, Multinational Business and Labor, St. Martin’s Press, New York, 1985, 234 pp., $27.50.

Bart S. Fisher and Kathleen M. Harte, Barter in the World Economy, Praeger, New York, 1985, 293 pp., $39.95 (cloth).

Jean-Claude Garcia-Zamor, Public Participation in Development Planning and Management—Cases from Africa and Asia, Westview Press, Boulder, CO, 1985, xi + 264 pp., $22.

Stephen Guisinger and Associates, Investment Incentives and Performance Requirements—Patterns of Trade, Production, and Investment, Praeger, New York, 1985, xi + 325 pp., $35.95.

James J. Hughes and Richard Perlman, The Economics of Unemployment—A Comparative Analysis of Britain and the United States, Cambridge University Press, New York, 1984, 258 pp., $39.50 (cloth), $12.95 (paper).

Charles Lipson, Standing Guard—Protecting Foreign Capital in the Nineteenth and Twentieth Centuries, University of California Press, Berkeley, CA, 1985, xvii + 330pp., $34,95.

Hubert Schmitz, Technology and Employment Practices in the Developing Countries, Croom Helm Ltd., Dover, NH, USA, 1985, 254 pp., $32.50 (cloth).

UN Economic Commission for Western Asia, International Migration in the Arab World, Volumes I and II, 1982, x + 649 pp. and iii +*536 pp.

Miguel S. Wionczek, Politics and Economics of External Debt Crisis—The Latin American Experience, Westview Press, Boulder, CO, 1985, xiii + 481 pp., $37.50.

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