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International Monetary Fund. External Relations Dept.
Published Date:
March 1988
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Charles P. Kindleberger

International Capital Movements

Cambridge University Press, New York, NY, USA, 1987, vi + 99 pp., $24.95.

This book, based on the Marshall Lectures delivered by the author at the University of Cambridge in 1985, is a sampler of his many ideas and contributions on international capital movements. The topic of the book is the same as the author’s 1937 doctoral dissertation, and many of the subjects are introduced by reference to his views of the same problems 50 years ago.

It is, in fact, remarkable how recurrent many problems and subjects of research in international finance have been. Capital flight is a very current problem for developing countries, but it has always been the case that gross capital movements dwarfed net flows. In the 1920s, “psychological” theories of exchange rate determination were proposed to explain wide exchange rate fluctuations that did not seem to be supported by fundamental changes—much resembling foreign exchange markets in recent years. The stages of the balance of payments of a growing economy, a subject of occasional interest in international finance since the 1920s, has been again proposed as a framework to explain the persistency of the unbalanced current account positions of Japan and the United States. The transfer problem which emerged with reference to German reparation payments, may have implications for the current debt situation. The validity of Gresham’s law is of central importance to discussions on the international monetary system.

A number of Kindleberger’s ideas found in this book are quite thought-provoking and certainly worthy of further reflection. My favorite ones are: the idea that direct international investment is a topic to be examined within the context of industrial organization rather than international economics, because it is mainly strategic considerations of imperfectly competitive multinational firms that lead them to undertake direct international investments; the view of the United States as the world financing intermediary in the 1950s and 1960s, providing dollar-denominated assets to the rest of the world by engaging in both international borrowing and lending; the possibility of destabilizing speculation, particularly when central banks are taking part in the game.

Finally, special consideration should be given to the author’s proposal for coordinated macroeconomic policies, preferably in the context of fully integrated world financing and trade systems. Reflecting his balanced views, Kindleberger advocates a world monetary policy that is monetarist over the long run, but activist over the short run, that is, a policy that follows a monetarist rule with no feedback from economic conditions as a general guide, but that, in periods of trouble, becomes an activist policy attempting to dampen economic fluctuations. He supports domestic and international financial deregulation, but expanding the function of lender of last resort also to the international level.

Kindleberger’s method is that of historical economic analysis, but he does not ignore economic theories (both traditional and more current) and contrasts their predictions to historical events. The policy-minded reader will also find plenty of discussion on current policy issues.

Eduardo Borensztein

John Williamson and Marcus H. Miller

Targets and Indicators

A Blueprint for the International Coordination of Economic Policy

Institute for International Economics, Washington, DC, USA, 1987, xii + 108 pp., $10 (paper).

In writing this book, the authors have made an important contribution to the public discussion of policy coordination, one which nicely complements and supplements Williamson’s own seminal work on the topic (The Exchange Rate System, revised edition, 1985). Like its predecessor, the new work makes a strong case in favor of target zones for exchange rates among currencies of the major industrial countries. The major underpinning of its argument is that a commitment to stable exchange rates will also be a commitment to stable and mutually consistent macroeconomic policies and will thereby help to improve economic performance. The earlier book focused on the technical and political issues associated with estimating appropriate zones for exchange rates. The new work turns to the issues related to the management of such a system: how should macroeconomic policies be implemented so as to keep exchange rates within a reasonably narrow band, while simultaneously ensuring that domestic objectives are not neglected?

The authors’ answer to this question is the “blueprint” to which the title refers and is a three-pronged strategy for the coordination of policies among the major countries. First, the aggregate stance of monetary policy, in the form of a targeted “world” rate of interest, would be set so as to be consistent with the desired aggregate growth of nominal domestic demand for the countries combined. Second, the individual monetary policy stances of each country would be set so as to keep exchange rates within their target zones. Third, the fiscal stance of each country would be aimed at keeping nominal domestic demand growing at the desired rate. To illustrate, suppose that there was a general inflationary problem, that the Japanese yen was relatively weak in terms of its target zone, and that domestic demand growth was weak in Japan. This particular combination of circumstances would require Japan to undertake a monetary contraction to appreciate the exchange rate and enough fiscal expansion to strengthen domestic demand. The other major countries would agree to adjust monetary growth if necessary to keep the world interest rate within range.

For this blueprint to work automatically would require an extraordinary stability among the key variables: exchange rates, interest rates, and growth of nominal demand—as well as a high degree of flexibility in the implementation and the effects of monetary and fiscal policies. The authors do not explore the practical difficulties in great detail, but they do note that it would be necessary for countries to be prepared to adjust the various targets in response to changing circumstances.

What are the weaknesses in this appealing scheme? Are the macroeconomic relationships involved stable enough to permit countries to coordinate policies on the basis of a set of rules, adjusting them when conditions change? If so, would the specific rules suggested by the authors help these countries improve economic performance? A brief review such as this cannot do justice to these questions, but the difficulties may be illustrated by the following.

A key assumption in this book is that there is a straightforward medium-term relationship between real exchange rates and current account balances: “to have a target for the current account implies a target for the exchange rate.” Without this assumption, the calculation of target zones is not unique, and the blueprint becomes more complex; as countries change their policies, the target zones may also have to change. Most recent empirical studies show that there is no stable relationship between real exchange rates and current account balances. Notably, fiscal policy has a much greater effect on the current account balance in relation to its effect on the exchange rate than does monetary policy. In this situation, the international coordination of monetary policies will do little if anything to reduce current account imbalances, even if it keeps real exchange rates well within the target zones, unless fiscal policies also are set so as to maintain current account balances within mutually consistent and sustainable bounds.

Even though the blueprint itself probably needs closer empirical examination, this book provides a great deal of clear analysis about one of the key issues of the day. It should be read by everyone who seeks to understand the conditions under which countries should and could coordinate macroeconomic policies.

James M. Boughton

Robert L. Paarlberg

Fixing Farm Trade

Policy Options for the United States

Ballinger Publishing Company, Cambridge, MA, USA, 1987, xiv + 159 pp., $16.95.

International trade in agriculture has long been subject to a wide array of interventions in practically all countries, developed or developing. Interventions can be transparent (tariffs and export subsidies at the border); others remain hidden in various types of quantitative controls, state trading, bilateral deals, and in a host of domestic measures designed either to help farming or to extract resources from it.

While it is difficult to measure precisely the cost of all these interventions, the highly conservative estimate given in the Bank’s World Development Report 1986 sets it at least at $50 billion a year. The true figure could be much higher. The largest costs are borne by those countries which follow the most distortionary policies: Japan, the countries in the European Community, and the United States. While these countries would benefit the most from wholesale trade liberalization at the Uruguay Round, developing countries also would gain significantly.

“Beggar-thy-neighbor” policies have ruled unchecked in agriculture since the 1930s, and in fact have grown much worse. The interests of all countries would be served by any big push toward free trade. This book is a timely addition to this important subject. It begins with an overview of the persistent disorder in agricultural trade, drawing heavily on the discussion in the World Development Report 1986. This is followed by an excellent account of the GATT’s history in relation to agriculture and the strategic options that might be taken in the Uruguay Round. Four “grand strategies” for US negotiators are defined and compared: conversion of existing trade barriers into tariffs; a comprehensive measurement of all existing agricultural subsidies; a piecemeal tightening of existing GATT rules on the most illiberal trade practices—for example, the Subsidies Code; and finally, bilateral or commodity-specific agricultural trade agreements such as those reached with Japan during the Tokyo Round.

The first two options—the more difficult ones—would pave the way for progressive liberalization, and the last two would essentially preserve the current system. One hopes that US negotiators would not dilute the admirable idealism with which they began by giving up on the harder choices. The author notes that the best way to avoid that is for trade officials and congressional agricultural committees to negotiate with each other in advance. The US should be prepared to meet the EC demand that all relevant interventions, domestic or at the border, be considered jointly.

The usefulness of working within the GATT is demonstrated by examining various non-GATT options. The ineffectiveness of commodity agreements, of unilateral production restraints such as the 1983 payment-in-kind (PIK) program, and of export subsidies such as the Export-Enhancement Program are brought out. Appropriate lessons are drawn from wheat sales to the USSR and wheat flour sales to Egypt. There is little that the US can do through special devices to increase, or even maintain, its export shares. If there is a deficiency in this book, it is that the author does not emphasize strongly enough that neither export shares, nor acreage planted at home, nor farm employment are proper indicators of national interest. Even if some ad hoc measures could be devised to increase export share, this “victory” would very likely be Pyrrhic.

Finally, the author turns to the necessary reforms of domestic farm policies in the US. The author ends on the right note by saying that it does not make sense to postpone reforms because of the belief that the current high-cost policies are bargaining chips for the ongoing trade negotiations. Bad policies at home should be reformed regardless of what others do. The currently low loan rates and the sharp depreciation of the dollar should help the situation by increasing the budgetary burdens of the EC. This is the time to pursue national and world interests rather than the misconceived notions of what farm interests actually are.

As the largest trader of agricultural products, the United States is in a position of leadership in the area of international policy reforms. Without its best efforts there is no chance of progress in the GATT negotiations. It is appropriate therefore that the author takes the American perspective in examining the desirability and feasibility of various proposals for change. This well-written and responsible account of the issues should, however, be of general interest.

Anandarup Ray

John Kenneth Galbraith

Economics in Perspective

A Critical History

Houghton Mifflin Company, Boston, MA, USA, 1987, 324 pp., $19.95

Galbraith’s latest book can be considered on many levels. As writing, it is vintage Galbraith, a joy to read. In contrast to much of the literature on this subject which, in Galbraith’s words, is “aggressively dull,” he has provided an instructive, entertaining, and chatty narrative. His many bons mots and turns of phrase delight the reader, such as his prescient recommendation that Wall Streeters should read Aristotle on the pursuit of money. On occasion, however, his efforts are distinctly tepid: to say that Plato’s views might have rendered him subject to FBI surveillance in the 1950s is as meaningful as suggesting that Galbraith might have had his problems with the Spanish Inquisition.

The book is a mélange of history of economic thought and economic and social history, prepared according to the author’s recipe, and served with elegance and humor. Economic ideas and their authors come alive. Scholars may complain about the depth of coverage and the pithiness of presentation. But the author’s ability to convey the essence of ideas and controversies will encourage the interested reader to dig deeper. Like any historian, Galbraith is selective. To take but one example, this reviewer is surprised to find, in a tome on the history of economic thought, not even a footnote mention of John Hicks or Roy Harrod (except for his biography of Keynes) while being regaled with the contributions of Henry Spencer, Henry Beecher, and Rexford Tugwell.

Also debatable is Galbraith’s underlying thesis that economic ideas are “always and intimately” a product of their own time and place. True, the theory of free trade was developed in England at a time when it was advantageous for her to have free trade. Yet the general protectionist mindset of the 1930s in the United States did not produce valid theoretical contributions favoring protection. Or, to take an entirely different example, in which sense was the theory of monopolistic competition a product of its time and place? That theory could just as well have been “discovered” much earlier (or later). In brief, the neat and universal causality claimed by Galbraith cannot be demonstrated. Ideas and events seem to leapfrog each other. Events often pose the problem to which theory responds, and not always in ways that please the influential power groups.

In persistent asides, Galbraith seldom misses an opportunity to deflate the balloon of the market zealots—those who claim that the market is the panacea for all economic problems (epithets such as “dogma,” “totem,” “mythical,” and “theology” are liberally applied to these claims). While agreeing with Galbraith on this point, one wishes, for the sake of balance, that he had a word or two about the many failures of the planning-cum-intervention school which dominated economics in the 1950s and 1960s. The prevailing economic philosophy often gives the impression of being a matter of fashion; the market model has replaced the planning style, because the latter no longer fits the body economic and politic.

Galbraith expresses doubts about economic forecasting in general, but this does not prevent him from devoting the last two chapters to futurology. His prognostications are interesting, in particular the forecast that Japanese ideas will become the new source of economic thought. Surprisingly, he has little to say about the increasing globalization of the world economy.

Economics deals with magnitudes and relationships, which are measurable, and with motivations and reactions, which are not. There is room for both the mathematical economist, playing with models, and the political economist, plying policy analysis. Both should be keenly aware of the rich legacy of economic thought and will benefit from Galbraith’s enjoyable account.

Bahram Nowzad

Lawrence J. Lau (editor)

Models of Development

A Comparative Study of Economic Growth in South Korea and Taiwan

Institute for Contemporary Studies, San Francisco, 1986, XV + 217 pp., $29.95.

This book chronicles the contemporary economic history of two of the most rapidly developing economies in the world. Raymon Myers describes the economic development of Taiwan Province of China during 1965–81 and Sung Yeung Kwack covers the development of the Republic of Korea during the same period. The third essay, by Tibor Scitovsky, examines the two economies together and asks how their growth rates could be so similar, yet their approach to promoting growth so different.

Well written and free of jargon, the essays offer a wealth of summary statistics on macroeconomic variables and the principal factor markets. The book should appeal particularly to readers in search of an overview of the performance of these economies and a neoclassical explanation. Myers argues that the supply-side factors that came together to produce the industrial transformation of Taiwan Province of China are primarily its trade regime, the capital and labor markets, and its macroeconomic stability. Relations between public and private sectors also are examined with particular attention to their connection with the economic policies that modulated the economic growth mechanism. Sung covers the same ground for Korea, but gives a much longer discussion of the financial markets, monetary policy, exchange rate policy, and inflation.

How could the growth rates of both economies be so similar, yet have been promoted in such different ways? The major difference, according to Scitovsky, was the force and aggressive spirit with which Korea’s policymakers pursued their aims in credit and tax policies and the policy on the size of firms.

The essays tend to exaggerate the extent of trade liberalization, especially in the earlier part of the study period. Even in Taiwan Province of China very little liberalization of imports for domestic market sale took place from 1960 to the early 1970s, by which time exports were booming and the balance of payments was in surplus.

Technological change is assumed to be automatically induced from the demand side, and the role of government in promoting technological change and faster growth in selected sectors is downplayed. Taiwan Province of China is less different from Korea in the role of government than Scitovsky says. In terms of competition, Scitovsky sees the advantages of the small firms of Taiwan Province of China and the disadvantages of Korea’s conglomerates, but overlooks the disadvantages of small firms in terms of the acquisition of technological mastery, as in advanced electronics production.

Robert Wade

carles E. McLure, Jr.

The Value-Added Tax

Key to Deficit Reduction?

University Press of America, Inc., Lanham, MD, 1987, xi + 184 pp., $21.00 (cloth), $10.75 (paper).

The purpose of this book is advertised in the second part of the title. The author is arguing a case for a value-added tax (VAT) as a possible way to reduce the huge US fiscal deficit. Indeed, Chapter 5 briefly reviews other suggested ways of increasing revenue, the oil import fee, energy taxes, excises and tariffs, and the business transfer tax; however, the author concludes that “all things considered, a well-designed VAT or some other form of general sales tax would be far superior….”

“The other form of general sales tax” would be a federal retail sales tax (RST). This might be preferable to a federal VAT and might be easier to integrate with the existing state RSTs that pose major problems for the authorities contemplating a US federal VAT. However, an RST is more tempting to evade, especially when rates arise above 10 percent (and a combined federal RST at 5 percent and existing state taxes would put the RST at or above 10 percent for most of the population).

So a VAT is an alternative to be considered seriously. McLure (and Mark Bloomfield in a “Commentary”) deal with the major objections: regressivity, the temptation for government to use the VAT as a “money machine” to expand the size of the public sector, the possible inflationary consequences, the invasion of states’ rights, and the administrative problems. Each of these is rebutted and the VAT emerges as an attractive possibility.

The author examines alternative issues in designing a VAT, including the controversial US suggestion of a “business transfer tax” and the “Superfund VAT.” There are brief discussions of some problems in the treatment of small businesses, farming, housing, and financial services. Excellent chapter notes give references to more extensive readings.

This is very much an American book, for American audiences, and is a contribution to an American debate. There is a page on the “Relevance of the European Experience” and four on the “Economic Effects of the Value-Added Tax in Europe.” McLure is the best known writer on VAT in the United States and his style is lucid and uncomplicated, making this book required reading for anyone who wishes to debate the crucial issue of the appropriate federal sales tax for the United States.

Alan A. Tait

Statement of Ownership, Management, and Circulation required by 39 USC 3685.

1a. Title: Finance & Development. 1b. Publication No. 123-250. 2. Date of filing: 10/28/87. 3. Frequency: Quarterly.

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