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Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1988
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Giovanni Andrea Cornia, Richard Jolly, Frances Steward (editors)

Adjustment with a Human Face

Protecting the Vulnerable and Promoting Growth

Oxford University Press, New York, NY, USA, 1987, xix + 319 pp. $110.

This is an important book, the fruit of several years’ efforts by a large team of social scientists. The authors were among the first to address poverty alleviation during adjustment.

The books best chapters deal with the social sectors—health, nutrition, and education; they draw directly on UNICEF’s experience and include chapters on specific countries (Botswana, Republic of Korea, Sri Lanka, and Zimbabwe). They make a number of important recommendations on targeting benefits, user charges for services, and means to improve the efficiency of adjustment measures. Robert Macedo’s contribution (Brazilian Children and the Economic Crisis) is a model of imaginative scholarship, and the chapter on adjustment at the household level is informative.

However, the authors say surprisingly little on administrative demands. Korea and Chile have been most effective in creating and operating programs to protect vulnerable groups largely because their public administrations are exceptionally efficient. However, only a handful of developing countries have such administrative structures. Although the authors recognize this, they say very little about what can be done to protect vulnerable groups in such countries. Indeed most of the book’s recommendations about targeting and government support for productive sectors require extraordinary bureaucratic efficiency. Instead, what is needed is a practical menu of recommendations which can be carried out with minimal administrative resources.

The authors are even less convincing when they propose alternative macro- and microeconomic policies to promote stabilization and stimulate growth while protecting the poor. A number of countries in their sample have not in fact made serious efforts at stabilization and adjustment, and their experience is therefore irrelevant to this review of the problems of poverty and adjustment. Conversely, the authors especially criticize these policies in Chile as being “predominantly contractionary,” arguing that a more “gradualistic and selective” approach would have been better. Yet, Chile is the only high debt country that has been growing rapidly for several years. Botswana’s program has also been criticized in the same vein, while the country has been growing rapidly for several years. In contrast, the authors praise the Peruvian policy package, which inflated the incomes of the poor temporarily but failed to sustain those gains or to bring about recovery. Today, the poor are far worse off in Peru than in Chile, where unemployment is below European levels. Perhaps the authors expected stabilization and adjustment to yield benefits faster than has proven to be possible. They therefore recommend abandonment where persistence is called for.

This book does serve a useful purpose in drawing the attention of governments to the need to protect vulnerable groups during recession. Many of its recommendations in the social area are very relevant but their application requires efficient public administration. As for the authors’ suggestions to alter the design of the stabilization and adjustment policies themselves, it is best heard as a cri du coeur rather than a guide to policymaking.

Guy Pfeffermann

Hard Heads, Soft Hearts

Alan S. Blinder

Tough Minded Economics for a Just Society

Addison-Wesley, Reading, MA, USA, 1987, xi + 236 pp., $17.95.

Blinder is a “reconstructed” Keynesian whose twin guiding lights are efficiency (hence a respect for free markets) and equity (hence concern for what markets cannot do). He appears to have greatly enjoyed writing this entertaining, lucid, and folksy book on economic issues and policies.

On trade, he concludes that it is the politically powerful groups that clamour for protection: “It is not that trade restrictions can never benefit a country in principle, it is just that they rarely do so in practice.” When it comes to how to cope with workers displaced by foreign competition, however, Blinder appears to be oblivious to the relative ineffectiveness of the trade-adjustment programs that have been attempted in many countries at various times.

On the environment, he prefers the market solution: taxing polluters rather than setting up cumbersome control mechanisms. The perestroika of the US tax system effected in I986 is, for Blinder, a rare example of the triumph of the common good. By far the best—and most entertaining—chapter is Chapter 3 on managing the national economy. It is pure theatre, penned with gusto and barely disguised contempt for the perceived enemies of good policy making. In Act I the Keynesian realm is calm and prosperous, though the seeds of discontent are being sown: self-satisfied ministers pay no heed to the warnings of the sages and push ahead with under-financed schemes to produce guns and butter. Act II is action-packed. Different groups of marauders, heretics, and usurpers, catching a favorable political wind, set siege to the Keynesian fortress from all directions, preaching false doctrine and uttering specious, but crowd-pleasing, battle cries. First there are the Monetarists, bedecked in considerable statistical armor but lacking in statecraft (theories); next we have the Rational Expectationists (or born-again classical economists) wielding impressive theories of no relevance to the battle; and finally there are the Supply-Siders, bereft of both theory and evidence, but hurling “boldfaced assertions.”

Thus attacked, the Keynesian forces, with a few noble exceptions, hide, throw away their party cards, or simply defect to the enemy. But wait, in Act III people realize the true mettle of the attackers. In the test of battle the Monetarists fall flat on their faces; the Rational Expectationists are shown to have no relevance for policy making; and the Supply-Siders are not even to be taken seriously. The enemy is in full flight; Keynesians, chastened and a little wiser, emerge from the fray to reign once more.

Blinder is a little too prone to suggest at every turn how (with the benefit of hindsight, of course) Keynesians would have opted for the right policies. Indeed, his rendition of the facts may be considered selective and slanted by non-Keynesian economists. And his position can be questioned on many issues—for instance, he is against rent control and minimum wage laws, yet favors wage-indexing and incomes policies. Still, this book alerts us to a number of truths about the formulation of economic policy.

First, economists can be fickle and fashion-prone. Second, easy solutions wrapped in economic slogans may attract the semi-literate and mesmerize politicians and the media, but they can be dangerous. Third, whether or not a policy is adopted does not depend on the soundness of its underlying economics; economic policy is made by politicians whom economists must seek, however painfully, to educate.

Blinder analyzes, but does not really show a way—if there is one—around the causes of bad policy in a democratic society: ignorance, ideology, and interest groups. Further, efficiency and equity (however defined) can, and frequently are, in conflict, especially in the short run. Extending the anatomical metaphor of this book, Blinder might have added that what is often needed, in addition to hard heads and soft hearts, is strong guts.

The Economic Challenge of Perestroika

Abel Aganbegyan

The Economic Challenge of Perestroika

Indiana University Press, Bloomington, IN, USA, 1988, xxvii + 248 pp., $18.95.

Ed A. Hewett

Reforming the Soviet Economy

The Brookings Institution, Washington, DC, 1988, xi + 404 pp., $16.95 (paper), $36.95 (cloth).

Perestroika, or the “restructuring” of the Soviet economy, has become, along with glasnost, a catchword for the institutional and attitudinal changes that the reform leadership associated with Mikhail Gorbachev is attempting to introduce in the Soviet Union. These two books appear at a most opportune time for those wishing to better understand the economic changes taking place in the Soviet Union. The book by Aganbegyan, Gorbachev’s chief economic adviser, reflects the revival of economic thought that has been taking place in the Soviet Union; at the same time it is also an impassioned defence of the current policy of perestroika. Hewett, one of the leading Western experts on the Soviet economy, is more critical and sober in his evaluation of the current Soviet reform effort.

Aganbegyan presents perestroika as a “revolutionary qualitative transformation” of Soviet society, a “historical necessity” that is essentially a continuation of the 1917 October revolution that launched the Soviet state. Perestroika is required, according to Aganbegyan, to satisfy five basic needs of an economy burdened with a steeply declining rate of growth over the past two decades. These are: the shift from a strategy of relying on the accumulation of productive factors (extensive development) to one that emphasizes their more efficient use (intensive growth); the solution of serious societal problems such as inadequate housing and low quality consumer goods and services; the radical reform of the system of economic management; the development of cooperative and private “self-employed” activities; and “democratization” including glasnost and enterprise self-management.

Hewett concentrates on giving the reader an analytical framework for understanding Soviet reform. He juxtaposes a picture of how the Soviet economy is supposed to work in theory with how this system in fact operates. He foresees many obstacles impeding the current reform process, partly because of the extent to which the “culture of central planning” remains “deeply rooted in the psyche of the Soviet society”. He notes the natural tendency, certainly not unique to central planners in the USSR, to respond to problems created by increased decentralization by reverting to administrative methods rather than by letting the market forces operate freely. He also stresses the politically sensitive trade-off faced by reformers between efficiency, on the one hand, and equality of incomes and job security on the other.

Hewett suggests that possibly this time reforms might succeed where other attempts have failed. However, he emphasizes the importance of technical solutions to many fundamental issues. An example of such an issue would be price reform. That Soviet economists and politicians find it difficult to grapple with this issue is not surprising; according to Aganbegyan, most of the 24 million prices in the Soviet economy are set by central or local authorities, and they have rarely been changed. This lack of experience with pricing issues is reflected in the chapter on “plan and market”, in which the reform of prices and their liberalization are discussed almost exclusively in terms of the need to eliminate subsidies and to spur efficiency. Emphasis on the role of prices in eliminating market imbalances is virtually ignored. Although the demand side of price reform is somewhat neglected by Hewett as well, he does emphasize the complexities involved in sucessfully reforming (and possibly liberalizing) prices.

Unlike Aganbegyan, for whom a Marxist-Leninist determinism still seems relevant, Hewett makes no prediction about the success of perestroika. While this might be disappointing to the reader, such caution in the face of the enormous political uncertainties involved with the current Soviet reform effort is certainly understandable.

Although these two books are quite different in tone, they can profitably be read together, both for their observations on the Soviet reform process and for the insights they provide into the still very different cultural milieus in which Soviet and Western economists practice their profession.

Trade and Structural Change in Pacific Asia

Colin I. Bradford, Jr. and William H. Branson (editors)

The University of Chicago Press, Chicago, IL, USA, 1987, xix + 558 pp., $58.

Edward J. Lincoln

Japan

Facing Economic Maturity

The Brookings Institution, Washington, DC, USA, 1988, xiii + 298pp., $31.95 (cloth), $11.95 (paper).

Thornton F. Bradshaw, Daniel F. Burton, Jr., Richard N. Cooper, and Robert D. Hormats (editors)

America’s New Competitors

The Challenge of the Newly Industrializing Countries

Ballinger Publishing Company, Cambridge, MA, USA, 1987, xiv + 290pp., $32.

In the good old days, economic growth and development were viewed as a long-term process of structural transformation. Resources and production could be shifted gradually from less productive to more productive activities, along with changing technologies, tastes, and composition of demand. But, these are now turbulent times. Many economies, developed and developing alike, need to “adjust” to one shock after another. This new chapter in economic history is still in the making, but one thing is clear: economies differ greatly in their capacity to adjust and hence in their capacity to grow.

Why are Asian countries so good at weathering external shocks? The Bradford-Branson volume attempts to examine the causes and consequences of dynamic structural changes in the Pacific Asia, sans China, focusing on the growth of manufacturing exports. The volume is rich in detailed analyses of trade patterns between countries and territories of Pacific Asia and the industrial countries as well as among the region’s “three tiers”: Japan; the “Gang of Four” (Hong Kong, Korea, Singapore, and Taiwan, Province of China), catching up and competing with Japan in third markets; and finally the resource-rich “ASEAN Four” (Indonesia, Malaysia, Philippines, Thailand) with potential to graduate to the “Gang.” While the authors provide no definitive answers on the causes of these structural changes, the volume raises many suggestions for future research.

The other two works address the capacity of the two major industrialized nations—Japan and the United States—to adjust to the changing economic environment. Lincoln traces Japan’s ability to adjust to slower economic growth since the early 1970s. The two oil crises, the growing strength of the yen, and the associated deregulation of the financial markets brought about fundamental shifts within the economy. Lincoln seems skeptical of Japan’s future success, viewing Japan as a sluggish giant unable to make quick policy responses in face of slower economic growth. Lincoln ends the book with a listing of future macroeconomic policy choices available to Japan and their possible implications for the United States. None of these is particularly original. He also neglects analyses of trade-offs among alternative macroeconomic targets (growth, inflation, employment) in the context of both economic and political constraints at home and abroad.

The Bradshaw et al. volume brings together the views of academics and policymakers on what the United States must do to respond to the challenge of the Newly Industrializing Countries (NICs). Robert Hormats, in an introductory chapter, sets the tone of the volume by likening the challenge to that of Sputnik (no pun intended, I believe) and calling on the United States to respond in the same way, through technological breakthroughs and close cooperation between public and private sectors. Compared to Lincoln’s depiction of Japan’s “inward-looking” policy response, the volume’s perspective on the United States is refreshingly global. While addressing the cost of adjustment to the NICs’ increasing presence in the US market, the fundamental message of the volume is that economic liberalization and free trade are good for all and might even allow the United States to reassert its economic dominance. Though one contributor adds: “The developing world consists of countries in different stages and types of development, and the efficacy of market mechanisms cannot be assumed; it has to be examined.”

In Search of an East Asian Development Model

Peter L. Berger and Hsin-Huang Michael Hsiao

In Search of an East Asian Development Model

Transaction Books, New Brunswick, NJ, USA, 1988, xi + 243 pp., $29.95 (cloth), $16.95 (paper).

Hans Linnemann (editor)

Export-Oriented Industrialization in Developing Countries

Singapore University Press, Singapore, 1987, xii + 467 pp., $36 (cloth), $22 (paper).

David Greenway (editor)

Economic Development and International Trade

St. Martin’s Press, New York, NY, USA, 1988, xi + 211 pp., $45.

The Berger-Hsiao volume provides a fresh perspective on the experience with outward-oriented development strategies, stressing the importance of institutional, cultural, and sociological aspects in the success of Japan; Republic of Korea; Taiwan, Province of China; Singapore; and Hong Kong. For example, one paper examines the impact of Chinese “entrepreurial familism” on the dynamics of numerous small-scale export manufacturers and trading companies in Hong Kong, while another discusses the influence of Korean Shamanism on the pragmatism and adaptability of the actors in Korea’s development. Some of the papers offer a “culturalist” view as an alternative to the conventional view of development. These two aspects, however, should be seen as highly interconnected. For example, the manner in which development actors respond to policy instruments depends critically on the elements that culturalists stress. South Korea was able to capitalize on the cultural aspect of Shamanism through the pursuit of an outward-oriented strategy, while North Korea, with an identical cultural heritage, pursued a self-reliant strategy and has not achieved similar success. The question is not whether success can be replicated under a different cultural setting, but whether lessons can be learned from the East Asian experience in order to capitalize on some positive features of a unique cultural heritage.

The Linnemann volume reaffirms the gains from an outward-oriented strategy, based on a comparative study of five ASEAN economies (Indonesia, the Philippines, Thailand, Malaysia, and Singapore) and two East Asian economies (Korea and Taiwan, Province of China). While the empirical estimates of the effects of exports on production and employment are useful, the volume offers no new insights into the development process.

The Greenway volume is useful as supplementary reading on such diverse subjects as the measurement of comparative advantage and import protection, trade strategies, engine of growth, export instability, intrafirm trade, and export processing zones (EPZ). However, the lessons drawn for development policy instruments in some of the papers appear rather simplistic. The discussions regarding the choice between export processing zones and free trade, government versus market intervention, and aid versus trade in carrying out an outward-oriented development strategy are misleading as in most developing countries the initial conditions make these instruments complementary.

Agricultural Price Policy for Developing Countries

John Mellor and Raisuddin Ahmed (editors)

The John Hopkins University Press, Baltimore, MD, USA, 1988, xiii + 327 pp., $35.

Paul Streeten

What Price Food?

St. Martin’s Press, New York, NY, USA, 1987, viii + 127 pp., $35.

These two volumes make a significant contribution to the growing body of literature on agricultural price policies. In a cogently argued and lucidly written monograph, Paul Streeten outlines the major themes of agricultural pricing policy, spells out the dilemmas facing policymakers, and makes eminently workable suggestions to address the main issues. The volume edited by Mellor and Ahmed is more comprehensive in scope. In addition to detailing the content and ramifications of price policies for producers and consumers of foodgrains, the authors also describe international and domestic environments within which agricultural price policies operate and try to link these policies with a strategy to accelerate economic growth.

A distinguishing feature of both these works is their analytical eclecticism. The authors attach as much importance to the political imperatives of pricing policy in developing economies as to its economic rationale. Another common thread is the importance attached to non-price variables, particularly technological factors, which affect both the output response (by adding to the options available to producers) and the incomes of farmers.

Both the books cover a large area in the discussion of agricultural prices. Yet, there are some aspects of price policies which require in-depth discussion and a more analytical approach. The first area relates to the question of resource allocation among different crops—in particular food versus commercial crops (mainly plantation crops), an issue particularly relevant to Sub-Saharan Africa.

Although border prices are important for allocating resources among different crops, they cannot be the sole determining factor. The authors of both volumes recognize the practical problems in using border prices; however, they do not take into account the significance of adjustment costs arising from the shift of resources in and out of the food sector, particularly when rural demand for non food goods and services is not increasing.

A second area where more clarity is needed is price stabilization. In societies where the burden of uncertainty is borne by individual farmers, a price policy that shifts the risks of random fluctuations in agricultural production, and consequently in agricultural prices, from producers to the society at large creates a favorable climate for investment in agriculture. The beneficial effects of such a policy were evident in India where the success of new high-yielding varieties of wheat and rice owes as much to the guaranteed minimum prices offered for these commodities as to other technical and organizational factors.

The third critical area is the institutional support necessary to implement price policies. Neither volume addresses this aspect adequately. An active price policy essentially involves organizing the purchase of food grains when market prices fall below the minimum guaranteed level; logistic support in transport and storage; and arrangements to dispose of procured grains. The agencies performing these functions need not be in the public sector. However, the development of the private sector requires a clear understanding of institutional, political, and ideological factors—areas in which our knowledge is at best incomplete.

Africa in Economic Crisis

John Ravenhill (editor)

Columbia University Press, New York, NY, USA, 1986, xiii + 359 pp., $27.50.

This volume is a compilation of several recent articles on African economic issues. Some of the articles focus on the World Bank’s analysis of and prescriptions for the African crisis while others deal with sector-specific issues such as food, industrialization, and debt. The volume contains only one country study—Ghana—but that is now out of date. The general quality of these contributions ranges from careful analysis to mere assertions and rhetoric.

The general tone of the book is quite pessimistic; most of the articles portray a declining per capita income and a continuing regression for Africa for the next decade or so. Their pessimism is based on the findings that:

  • Marketing parastatals have played a significant role in the decline of Africa’s export agriculture;

  • The current anti-agricultural bias on the part of African governments is not only economically irrational but has also become increasingly politically irrational; and

  • There is little evidence that most African governments have begun to consider policy measures which may help reduce the anti-export bias.

Although these arguments may have been valid earlier, developments trends during the past few years have removed much of the basis for pessimism.

There is today a growing consensus among the governments of many African countries on the need to tackle important domestic policy issues. At least 20 countries in Africa have embarked on significant policy reforms and substantial external assistance is being mobilized in support of these reforms. Many African countries have attempted dismantling and restructuring state parastatals or opening up parastatals to competition from the private sector. New initiatives have also been undertaken by the international community to respond to the African plight. These have included more generous rescheduling and debt relief schemes, increased new aid money, higher allocation out of IDA, structural adjustment assistance by the IMF, replenishment of the African Development Fund, the capital increase for the African Development Fund, and cofinancing of adjustment programs by bilaterals.

The authors quite rightly argue that there are numerous “difficulties in implementing reformist, economically rational policies in contemporary Africa.” They state that although in the long term such moves may generate political as well as economic benefits, few African governments can afford to adopt this time horizon. The important issue is how to sustain these domestic policies for the next decade or so. There are at least three areas of concern on that score.

First, there is less agreement today on the speed and sequence of reforms, particularly in the areas of trade liberalization and phasing out of subsidies. Second, it is becoming clear that adjustment of economic policies involves some transitional costs, at least in the short run. The contrast between Zambia and Ghana in approaching this issue is quite illustrative. While the Zambian authorities concluded that the adversity caused by the economic reforms was clearly unsustainable, the leadership in Ghana remains undeterred in undertaking reforms for the sake of a better economic future.

The final point is the a priori assumption that as soon as the public sector institutions are dismantled, the private sector will rush in to take over these activities. Casual empirism suggests that a careful nurturing and well planned and articulated transition are essential for successful devolution. Whether Africa can overcome its economic crisis, or whether the prognosis presented in Ravenhill’s book will prove true will depend crucially on the design, management, and effective implementation of African adjustment policies.

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