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International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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Peter Bauer

The Development Frontier

Essays in Applied Economics

Harvard University Press, Cambridge, MA, USA, 1991, viii + 241 pp., $24.95.

This is a provocative book, raising many issues of interest in economic policy, not necessarily applied only to developing countries. Even where the reader clearly disagrees with the author, he would be forced to critically examine his own positions, which, in itself, is a valuable service.

Of the 17 essays included in this book and written since the 1950s, six were done specifically for this volume; others are revised versions of previously published essays. The subjects covered include the importance of traders in economic development, the theory and evidence of the correlation between per capita income and the sectoral composition of GDP, as well as occupational distribution, the relationship between population growth and economic development, foreign aid and economic development, agricultural pricing and marketing policies in developing countries, import capacity and economic development, government-sponsored industrialization in Nigeria, and the theoretical basis of development economics.

This wide range of subjects is woven together by a unifying theme: the significance of the market mechanism for the development process and the adverse impact of all types of government intervention. This theme is developed not only on the basis of logical arguments but also on the author’s first-hand experience gained during his long periods of field investigations in South East Asia and British West Africa.

The essays on pricing and marketing, highlighting the adverse effects of government interventions, particularly in the form of commodity marketing boards, were out of the mainstream thinking and unpopular when they first appeared. But, with time, he has been proven right. In this volume, he is at it again with his highly critical essay on the now conventional wisdom that views population growth as inimical to economic development. Will the future prove him right again?

For all the good things that may be said about this book, one gets the feeling in reading it of being caught in a time-warp. Part of the reason for this is the publisher’s failure to provide the date on which each essay was originally published so that the reader can put the arguments and examples used in an historical context. More significantly, however, this feeling arises from the appearance that Professor Bauer is unaware that the current view on development policy—at least among economists—has shifted toward his position. Indeed, active attempts have been made since the early 1980s to roll back state economic interventions and move to the market.

This obvious lack of awareness on current events is particularly evident in the highly critical essay on foreign aid and economic development written specifically for this volume. While some of the criticisms made in the essay are valid, many are exaggerated, and Professor Bauer completely neglects to mention the fact (of which he cannot be unaware) that the removal of unnecessary government regulations and a move toward the market have increasingly become conditions for help from most donors and financial agencies, particularly from the World Bank and the IMF, since the early 1980s. There are several thorny issues still to be resolved in the design and implementation of such market-oriented adjustment programs. One would have hoped that in the new essays written specifically for this book, Professor Bauer would have devoted his considerable intellectual abilities and experience in helping resolve these issues. Instead, it seems the Professor rather enjoys his role of damning governments too much to venture any positive suggestions.

Professor Bauer’s discussion of trade in British West Africa and his references to trade in British East Africa neglect to mention the role played by the British colonial administrations in discriminating against the indigenous populations with respect to entry into wholesale and foreign trade, and the consequent monopoly positions afforded British enterprises and those of Levantines (in West Africa) and Asians (in East Africa). In the light of this curious omission, Professor Bauer’s brilliant exposure of the follies of government interventions in trade in these regions are marred because many of the specific market interventions by government in these areas cannot be properly understood without taking into account reaction against this colonial practice.

Callisto Madavo

Rudiger Dornbusch and Mario Draghi (editors)

Public Debt Management: Theory and History

Cambridge University Press, New York, NY, USA, 1991, ix + 353 pp., $54.50.

During the 1980s, there was a marked increase in the ratio of public debt to gross domestic product in both the United States and Europe. The two main factors behind this rise in debt ratios were high real interest rates—a result of the sharp anti-inflationary policies of the early 1980s—and relatively low growth. In some European countries—Belgium, Ireland, and Italy—debt ratios stood at 100 percent or more at the end of 1989, raising concerns about both the amount of resources needed to serve such levels of public debt and the sustainability of the underlying fiscal policies.

The experience of the 1980s with high public debts attracted considerable attention from researchers on both sides of the Atlantic. In addition to re-examining familiar topics in the literature such as Ricardian equivalence and the macroeconomic effects of large debts, the theoretical discussion has focused on two new issues. First, the sheer size of the public debt in some countries raises important questions about what types of bonds should be issued—short- or long-term—and whether bonds should be indexed to the price level or denominated in foreign currency. Second, since public debt provides a key link between different governments over time, its management provides the opportunity to impose constraints on the behavior of future governments. Therefore, political and economic considerations have been brought to bear on public debt issues by a number of authors.

This volume—a collection of papers presented at a conference in Castelgandolfo, Italy, in June 1989—contains an excellent sample of the growing body of research in the two areas mentioned above. In addition, the volume includes some insightful discussions of historical experiences that examine how governments reacted when debts became too large and how they funded the crisis that arose as a result of difficulties in rolling over debt as it matured. By combining theory and history in a cohesive and attractive way, this volume opens an inviting door to the world of public debt management.

Carlos Vegh

Alan Richards and John Waterbury

A Political Economy of the Middle East

State, Class and Economic Development

Westview Press, Boulder, CO, USA, 1990, v + 495 pp., $56 ($21.95 paperback).

This is an excellent, well-written book. All too rarely are we given the opportunity to review such a rich tapestry that does justice to the complex subject at hand. The authors, acknowledged specialists in Middle Eastern affairs, have skillfully interwoven three themes throughout their treatment of this vast material. The breadth of their coverage is illustrated by the extensive bibliography and index.

The three interwoven strands used as a framework for the study are class, state structure (and policy), and structural transformation of the economy. This linkage is a far superior approach to reductionist views that have tried to interpret the complex reality of the Middle East by a single overarching theme—be it oil or the Arab-Israeli conflict.

The authors posit that, while state-led growth did produce some economic transformation, this transformation has been overwhelmed by population growth, and that such state-led growth has led to distortions and contradictions that necessitate serious—but carefully crafted—structural adjustment programs. The authors consider, quite correctly, that “we are at the end of a major developmental phase in Middle Eastern societies and perhaps LDCs as a whole” (p. 236).

The real contribution of this book lies in the authors’ avoidance of simplistic prognoses, recognizing as they do that “passing the baton to the private sector” is not automatic. Their sociopolitical analyses of the political regimes, the military and the state, and class interests are perceptive and thought-provoking.

The authors’ conclusions will leave many readers dissatisfied because they do not indicate from whence the main lines of future developments in the Middle East are likely to come nor where they will lead. With as complex a subject as the political economy of the Middle East, this is the course of practical wisdom. My only real criticism of this important work is what I consider an inadequate treatment of Islam—as a factor in formulating identity, as an inspiration, as a political and social reality, and as a legitimating source of a number of militant political movements, as well as quite a few governments.

Nevertheless, this is a book that I would strongly recommend—not only to all those concerned with the Middle East but also to many of those concerned with development issues in these complex times.

Ismail Serageldin

Hossein Askari

Saudi Arabia’s Economy: Oil and the Search for Economic Development

Jai Press, Greenwich, CT, USA, 1990, xxiv + 248 pp., $60.

Robert E. Looney

Economic Development in Saudi Arabia: Consequences of the Oil Price Decline

Jai Press, Greenwich, CT, USA, 1990, xxii + 289 pp., $63.50.

These books provide very useful insights into the economy of Saudi Arabia and offer future policy options. While they appear to have been intended as complementary volumes, they take different approaches to the basic economic challenge for Saudi Arabia: promoting long-term economic growth in a heavily oil-dependent economy.

The book by Looney takes a highly aggregated macroeconomic route to conclude that non-oil growth is inextricably linked to the level of government expenditures and that, in the event of lower oil revenues, stable expansion of money should be used to maintain economic stimulus for the private sector. However, these conclusions are based on a methodology and estimation techniques that might not be the most appropriate for economies like that of Saudi Arabia, where availability of data is limited. Moreover, the book does not take adequate account of the rapidly changing structural relationships in the economy. Given that the analysis is based on data up to 1985, the study is somewhat outdated, and its conclusions may well have been different if more recent economic developments had been taken into account.

The book by Askari, on the other hand, takes a more pragmatic approach by interweaving macroeconomic assessment with a detailed analysis of sectoral policies. These policies have had an important impact on the growth and structure of the non-oil sector in Saudi Arabia. This study calls for an oil policy that would maximize long-term oil revenues. Future economic development through the use of such revenues should adequately compensate for the depletion of oil and should promote efficient—that is, competitive on world market prices—domestic economic diversification. For this purpose, Askari proposes a better balance between domestic and foreign investment and calls for more determined efforts at investment abroad. The efficiency of domestic investment should be enhanced through far-reaching financial sector reforms, reduction and rationalization of subsidies, a trade-weighted exchange rate to avoid overvaluation, a diversification of revenue sources to the non-oil sector, and strengthened government-expenditure management. While these conclusions may appear to be sound, Askari’s estimates of subsidies to the private sector, which underlie his recommendations for balancing domestic and foreign investments, may be exaggerated. Moreover, this book could have benefited from a more rigorous analysis of the interaction of fiscal, monetary, and exchange rate policies to complement the analysis of sectoral policies.

Zubair Iqbal

Fiorella Padoa Schioppa (editor)

Mismatch and Labour Mobility

Cambridge University Press, New York, NY, USA, 1991, xxvi +493 pp., $50.

G.D.N. Worswick

Unemployment: A Problem of Policy

Cambridge University Press, New York, NY, USA, 1991, xvi + 280 pp., $49.50.

High and persistent unemployment has been a feature of many industrial countries during the last two decades and its causes have been the subject of much debate. These two volumes, each from a different perspective, analyze some of the factors that may have contributed to the sustained upward movements in unemployment rates during the 1970s and 1980s.

The volume, edited by Fiorella Padoa Schioppa, contains the proceedings of a conference sponsored jointly by the Centre for Policy Performance at the London School of Economics and the Centra Interuniversitario di Studi Teorici per la Politica Economica in Italy. It covers the labor market experiences of a number of industrial countries, including the United States, Japan, (West) Germany, the United Kingdom, and Italy; in addition, there are two overview papers on the concept of labor market mismatch.

The contributors use the term labor-market mismatch in two rather different ways. Some contributions treat mismatch as referring to a situation in which there are persistent differences in unemployment rates among different labor market groups or regions, with the problem essentially being to identify those aspects of labor market conditions that sustain these differences. The chapter on the Italian labor market, influenced by the persistent differences in unemployment across the different regions of Italy, essentially takes this long-term view. The other approach regards mismatch as essentially a short-run adjustment problem, arising partly as a result of intersectoral shocks that lead to transitory mismatches between the supply and demand relating to different kinds of labor. The result, unfortunately, is a volume that is less focused than might have been and that falls short of providing the kind of unified treatment of mismatch its title might suggest.

Notwithstanding this difficulty, the volume contains much detailed information on the structure of unemployment across different labor force groups, and it reaches a number of interesting conclusions regarding the role of mismatch. Perhaps the most interesting one is that neither occupational nor regional mismatch of the short-run kind have been very important in explaining the sharp increases in unemployment experienced by most countries during the 1980s. This conclusion may, however, as suggested by Katherine Abrahams in her comments at the conference, be as much an indication of the difficulties in measuring mismatch as it is suggestive of the possibility that mismatch has not been important. At the least, the conclusion can be expected to lead to attempts to sharpen the measures used to assess mismatch and to further endeavors to determine its importance for understanding unemployment.

The second volume discusses the major factors underlying the high rates of unemployment experienced by the United Kingdom during the 1970s and 1980s and the policy options for achieving lower unemployment. After a detailed examination of the statistics for employment and unemployment, the author focuses on the roles of several factors in contributing to higher unemployment, including faster structural change, nominal and real wage behavior, and macroeconomic policies. Drawing on a wealth of information, the author discusses the implications of several options for addressing simultaneously the relatively rapid nominal wage growth in the United Kingdom and its high unemployment, including the roles of wage subsidies, profit sharing, incomes policies, and demand management.

In the author’s view, demand management remains an effective tool for addressing unemployment, and it has been changes in policy objectives that have been primarily responsible for the persistence of high unemployment. While some readers will no doubt take issue with several of the arguments, the volume nevertheless contains much interesting material and provides challenges to some of the standard structural explanations for high and persistent unemployment.

Charles Adams

Paul Champsaur, Michel Delear, Jean-Michel Grandmont, Roger Guesnerie, Claude Henry, Jean-Jacques Laffont, Guy Laroque, Jacques Mairesse, Alain Monfort, Yves Younes (editors)

Essays in Honor of Edmond Malinvaud

Volume 1: Microeconomics; Volume II: Macroeconomics; Volume III: Empirical Economics

The MIT Press, Cambridge, MA, USA, 1990, 279, 356, and 260 pp., respectively, $29.95 for each volume.

Professor Edmond Malinvaud is probably best known to economists throughout the world as the author of innovative and advanced textbooks on microeconomics and econometrics. Those who followed the macroeconomic debates that have taken place, particularly in Europe, since the mid-1970s, will also know him for his major contributions to the theory of unemployment.

It is perhaps less well-known outside France that Professor Malinvaud also had a brilliant career as a civil servant. Indeed, in 1947, he joined INSEE—the Institut National de la Statistique et des Etudes Economiques—the French statistical office, where he installed the French System of National Accounts. After almost 20 years of research and teaching, he was appointed to various senior level positions in the French civil service. First, as head of “Direction de la Prévision,” the Department in charge of advising the Minister of Finance on economic policy, then as Director General of INSEE which, besides being the French statistical office, is also a center for applied economic research. During his years there, he had considerable influence on the development of the French statistical system and on applied economic research, in particular, the development of macroeconometric modelling.

These three volumes, written to honor Professor Malinvaud’s outstanding work and achievements, cover a broad range of topics, reflecting Professor Malinvaud’s own research. Many of the authors share Malinvaud’s intellectual background or have been his students. It is thus not surprising to find in their papers the same rigor and quality that is so characteristic of Malinvaud’s work.

Each volume contains 13 papers. Volume 1—on “Microeconomics”—covers topics such as learning processes and expectations, planning procedures, stability and expectations, sunspot equilibria, and intertemporal efficiency. A second subset of papers provides new results in some more standard areas of microeconomic theory, such as optimality of marginal cost pricing in a general equilibrium framework and production economies with nonconstant returns to scale. Finally, a third subset of papers, which are regrouped under the label “sectoral microeconomics,” deals with applied second-best optimal pricing, oligopolistic competition and product quality, network externalities in telecommunications, insurance markets, potential competition, and incentives in cooperative research and development.

Many of the papers in Volume II, “Macroeconomics,” address issues that are at the core of Professor Malinvaud’s own research in the last 15 years. The concept of disequilibrium, so important in Malinvaud’s work, permeates most of the papers. While some of the papers are purely theoretical, others are more applied or policy oriented. Particularly noteworthy among the more theoretical papers are those that explore new aspects of fixed-price equilibria in a dynamic setting. For example, following some of Professor Malinvaud’s insights, several papers examine the transition between different unemployment regimes in a fixed-price equilibrium model. This takes into account the problems of aggregation in economics and econometrics, for which Professor Malinvaud has always shown a deep interest. The applied papers tackle a variety of issues covering the analysis of investment behavior, the inefficiency of bank lending, sovereign borrowers, and the impact of unemployment.

Volume III, “Empirical Studies,” is, in fact, a mixture of applied statistical and econometric work and the development of such methods in statistics and economics. Most of the applied studies deal with labor markets, unemployment, and wages. Several of them use data and models produced at INSEE and illustrate the importance of building models that are at the same time theoretically sound, relevant for policy, and can be tested with appropriate statistical data.

In the words of Mr. Milleron, Professor Malinvaud’s successor as Director General of INSEE, “these volumes are intended as testimonial for the scholarly community, of the intellectual debt that French economists owe to Edmond Malinvaud.” Such a testimonial is well deserved. The papers collected in these volumes are worthy of the scholar they intend to honor.

Bernard Ziller

Peter Diamond (editor)

Growth, Productivity, Unemployment

The MIT Press, Cambridge, MA, USA, 1990, vii + 243 pp., $30.

In April 1989, prominent former students of Robert Solow gathered to celebrate his birthday with papers in three fields that owe much (or everything) to his work. The resulting volume sparkles with the wit and common sense for which its honoree is famous.

The celebration of Solow’s accomplishments- is particularly timely, because of the revival of interest in the academic literature in growth and productivity after a hiatus of two decades. The “new growth literature,” begun by Paul Romer and Robert Lucas, is not directly represented in this volume, but lurks in the background of much of the analysis. In contrast to the new literature, this volume continues the old growth theory tradition of paying little attention to the developing world, which would have seemed like the natural laboratory for students of growth (or lack of growth). Nonetheless, the volume is full of insights for development.

The first two essays in the volume review growth theory. Both Avinash Dixit and Frank Hahn make much of the externalities and increasing returns (“extra” benefits to capital that make it possible to more than double output by doubling inputs) that are prominent in the new growth literature. They note that many outcomes are generally possible in such models, implying that where a country winds up can have as much to do with where it begins as with policy. However, Joseph Stiglitz questions the treatment of increasing returns in the new growth literature, arguing that very special assumptions are needed to make increasing returns consistent with the assumption of market competition, which is sacred to most economists.

William Easterly

Todd G. Buchholz

New Ideas from Dead Economists

An Introduction to Modern Economic Thought

Plume Books, New York, NY, USA, 1990, xi + 321 pp., $8.95 (paper).

Imagine that during a cocktail party someone asks what you do for a living. When you answer “I am an economist,” boredom covers your interlocutor’s face, and listeners stampede in search of a more attractive topic of conversation. You were the latest victim of economics’ reputation as “the dismal science.” This book makes a valiant attempt to challenge the myth. Sprinkled with amusing examples, Buchholz offers an entertaining and broad description of major contributions to economic thought followed by a discussion of some recent trends. He shows that many of the ideas introduced by the classics remain fresh and, more importantly, that their presentation does not have to be dull. The interplay between government and markets is a recurrent theme, anchoring the discussion of the ideas of past and present economists.

The list of classic economists comes as no surprise: Smith, Malthus, Ricardo, Mill, Marx, Marshall, and Keynes. The overall discussion is clear and captures their major contributions. It is almost inevitable that in a short book the contributions of some will receive only brief notice. Although it is difficult to argue against the above choice of economists, some readers may wonder why references to the Lausanne and Austrian schools are absent. The contributions of Walras, for example, are only briefly mentioned as a contrast to Marshall’s partial equilibrium approach.

The last part of the book covers recent topics, namely, the new institutionalism and the economics of law, monetarism, public choice, and the emergence of rational expectations. The basic tenets of public choice are addressed briefly, and the opportunity is seized to revisit Keynes’ view of public interest and to return to the question of efficacy of government intervention and costs of government flaws. Keynes’ view is described as somewhat naive because he underestimated the political economy aspects of encouraging the expansion of government and the possibility of a divergence between political self-interest and public interest. Rational expectations receives a harsh review. Despite the shortcomings associated with the full information and market-clearing assumptions that underlie the hypothesis of rational expectations, many economists would agree that this perspective raises important issues that have jolted mainstream macroeconomics thought.

In sum, if the reader is looking for a detailed discussion of the contributions of the classical economists, Schumpeter’s work, or another comparable source, would be the right choice. As a quick refresher on the history of economic thought, or as an introduction to the subject, Buchholz’s book is definitively more fun, and who knows, by drawing upon some of its illustrations, the reader may attract a crowd.

Rui Coutinho

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