Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
January 1993
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Is a “Gradualist” Transition an Oxymoron?

Christopher Clague and Gordon Rausser (editors)

The Emergence of Market Economies in Eastern Europe

Blackwell, Cambridge, MA, USA, 1993, 229 pp., $20.

Michael Ellman, Egor Gaidar, and Grzegorz Kolodko

Economic Transition in Eastern Europe

Blackwell, Cambridge, MA, USA, 1993 128 pp., $21.95.

Michael Keren and Gur Ofer (editors)

Economic Reform in the Former Communist Bloc

Westview Press, Boulder, CO, USA, 1993, vii + 308 pp., $44.95 ($17.95 paper).

Andras Köves

Central and East European Economies in Transition

Westview Press, Boulder, CO, USA, 1993, ix + 150 pp., $49 (S17.95 paper).

With the rejection of central planning in Eastern Europe and the breakup of the former Soviet Union, the “economics of the transition” has emerged as a growth industry of sorts. It has attracted some of the most respected mainstream economists as well as longtime experts on the former centrally planned economies (CPEs). Three of the books under review are collections of essays written for conferences held in 1991. The fourth volume, by Andras Köves, focuses on the international dimension of the transition.

By now it is a cliché to say that there is no theory of the transition, but one is not disabused of this judgment from reading these books. If one fundamental truth does emerge from them—if only inadvertently—it might be that thinking about the transition is likely to be, in a word, “transitional.” When these essays were written, Poland was only one or two years into its celebrated adjustment cum reform program, the Czech and Slovak Federated Republic (which no longer exists) had just launched its program, and the former Soviet Union had not yet dissolved. Many of the contributors to these volumes were particularly impressed by the fact that output was declining sharply in Eastern Europe and the former Soviet Union, foreign trade was collapsing, inflation was not yet licked in those countries with major stabilization programs and was accelerating in other former CPEs, and privatization was getting off to a very slow start. (Köves, incidentally, makes the interesting point that the foreign trade collapse in Eastern Europe in 1991 was due mainly to the political and economic crisis in the former Soviet Union, not to the abandonment of the Council for Mutual Economic Assistance (CMEA) trading mechanism per se.) If there is a preoccupation that runs through these volumes, it is the issue of whether gradualism might not be preferable to the “big bang” or “shock therapy” approach that was rapidly becoming the norm among transitional economies.

The issue is unfortunately not as straightforward as commonly believed. Thus, Gur Ofer (in the volume edited by Keren and Ofer) and others point out that while liberalization and macroeconomic stabilization policies can be adopted virtually overnight, fundamental transformation of the legal and regulatory structure and privatization almost inevitably are much more drawn out. The “big bang” only applied to part of the task, and the issue for many of the authors is whether liberalization and macroeconomic stabilization policies should not be pursued more gradually in order to achieve a kind of consistency across all the dimensions of the transition. Indeed, noting that the behavior of economic agents and organizations cannot be changed overnight, Peter Murrell (in the volume edited by Clague and Rausser) and others argue for a more “evolutionary” approach, which would lay greater stress on changing old institutions and creating new ones than on getting economic policies “right” in the short run.

Anne Krueger and Stanley Fischer (in Clague and Rausser) present a compelling case for concentrating effort early in the transition on reaping the relatively quick payoff from new private sector activities rather than attempting to privatize the state-owned industrial behemoths that dominated the CPEs. Murrell goes further and argues for avoiding the costs associated with privatizing existing enterprises and instead closing them down “in coordination with the gradual rise of new private enterprise.” It is not at all clear, however, how this phasing process should or could be operationalized.

Ronald McKinnon (also in Clague and Rausser) is more precise in his gradualist prescriptions, although not necessarily more persuasive. For example, instead of the immediate liberalization of foreign trade, McKinnon calls for the “tariffication” of the old quantitative restrictions implicit in central planning, followed by the phasing out of tariffs over 5 to 10 years to allow the restructuring of industry rather than its destruction by foreign competition. McKinnon more generally suggests that there is a “natural” or “optimum” order of economic liberalization, but one wonders about the waste of resources in the meantime.

Gur Ofer argues that a one-time price revision by the authorities is the best way to avoid a price-wage spiral, whereas full liberalization of prices carries much greater risks. Yet this prescription ignores the relatively positive results of the Polish price liberalization of January 1990 and the abject failure of Soviet price revisions in 1991. More generally, it is not at all clear how the authorities could know what either the right price level or the equilibrating structure of relative prices would be.

The reader of these volumes will thus find a host of ideas about how to avoid a radical dismantling of the old system so as to preserve, presumably, the momentum of reform. The argument seems to be that while output would still decline during the early stages of the transition, gradualism would ensure that the drop would be less sharp than with the big bang and that the rebound would come soon enough to result in smaller cumulative adjustment costs. The advocates of gradualism, however, leave a number of crucial questions unanswered. For instance, if relative prices are permitted to change only gradually, what will happen to the accumulating stocks of overpriced goods (in the absence of planners determining effective final demand), and how will the authorities respond to continued complaints about shortages? Alternatively, if most prices are liberalized, where will the money come from to keep traditional producers in business? Wouldn’t this money be better spent on a social safety net (including job retraining and selected public works) for workers laid off by firms unable to adapt to the new environment?

McKinnon proposes that different classes of enterprises receive very different treatment. At one extreme, “traditional” state enterprises would have their output and prices controlled by the planners, and their inputs would be centrally allocated. New private entities, by contrast, would basically operate under liberalized market conditions. The incentives for corruption and black markets in such a situation would seem to be overwhelming. And what is the political dynamic that would ensure that the traditional sector would not retain sufficient political clout to preserve indefinitely its initial commanding position? The limited market-oriented reforms in Hungary and Poland in the 1970s and 1980s have certainly taught us a number of lessons, including the need for the political leadership to yield to the market (and therefore to society at large) the determining influence in resource allocation and to permit the development, as quickly as possible, of a genuine market culture rather than attempts to simulate the market. The attempt to control the pace of liberalization and stabilization somehow seems out of synch with the new democratic realities in most of the countries in question.

Michael Ellman (in Ellman et al) hits it on the head when he notes that the issue in the 1990s is not the reform of an existing system but its replacement. If one plans for gradualism, there is the danger—as Anne Krueger notes—that uncertainty will persist as to whether the transformation will actually take place and that this will only encourage those who have a vested interest in preserving the old system. Unless prices are liberalized early on, the bulk of investment will continue to be misallocated, and genuine restructuring will only be delayed. It is also difficult to imagine a policy of gradualism encouraging needed foreign direct investment and foreign assistance.

In the end, it is an issue of the credibility of the reformers. There is no doubt that their credibility will be affected by short-term economic performance. But as we have seen, there is more than one way to interpret this performance. If the initial slump in output and growth in unemployment under radical reform is viewed as an absolutely essential first step in restructuring rather than a downward spiral set in motion by misguided policies, the credibility of reform need not suffer—particularly if the transitional economy has an adequate social safety net. These interesting essays, written very early on during the transition, tend, however, to lean toward the latter view. In looking forward to the next round of stocktaking, the betting from this corner is that there will be fewer voices advocating gradualism.

Thomas A. Wolf

Anthony B. Atkinson and John Micklewright

Economic Transformation in Eastern Europe and the Distribution of Income

Cambridge University Press, New York, NY, USA, 1992, viii + 448 pp., $64.96 ($18.95 paper).

Income distribution is a difficult subject to write about, as the topic is often more descriptive than analytical, containing a number of details and insights that need to be woven into a coherent picture. However, in their book, Atkinson and Micklewright have succeeded in doing just this.

The authors analyze income distribution and poverty up to the final years of communism in Czechoslovakia, Hungary, Poland, and the Soviet Union. They note that wage distribution in socialist economies tended to be more equal than in the West, and they point out differences among the four countries studied. Czechoslovakia, for example, had the most equal wage distribution. The average state-sector wages in the Czech and Slovak Republics were almost identical; the gap was gradually closing to the point of disappearing in the 1980s. This was probably caused by the tradition of egalitarianism, conscious attempts to reduce income differences between the republics, and stricter planning than elsewhere. Hungary and Poland have also been more egalitarian than Britain, but less so than the Soviet Union, where widely differing economic conditions and development levels in the individual republics resulted in greater inequality.

How did economic reforms of the 1960s and later in the early 1980s affect distribution of wages? Not surprisingly, in Hungary and Czechoslovakia, wage dispersion increased. In the Soviet Union, on the other hand, wage inequality declined almost evenly following the end of the Stalinist period. In Poland, wage inequality was never as narrow as it was in the heyday of Solidarity in 1980–81.

Wages are the most important source of income both in market economies (where they account for about 70 percent of gross household income) and in Eastern Europe (about 60 percent). What happens when we move from wage distribution to overall income distribution? In market economies, inequality increases because self-employment and capital income (the latter often underestimated) are fairly unequally distributed, although positively correlated with total income. Progressive taxes and social transfers reduce the inequality, but disposable income still remains more unequal than wages.

In socialism, disposable income is more equally distributed than in capitalism, because self-employment income (relatively unequally distributed) and social transfers (more or less uniform per capita) balance each other off. The difference in inequality between the two systems, however, is not major. The average Gini coefficient—a measure of the concentration of income, with the maximum being 100 points—in developed capitalist economies is about 30, compared with 25 for Eastern Europe.

Atkinson and Micklewright introduce the concept of “distributional advantage.” For example, if Czech or Hungarian income distribution were to take the shape of British distribution, then the income of the lowest decile would have to increase by 40 percent just to keep the absolute income level of the lowest decile unchanged. This underscores the problems faced by the transition economies: the poor will be hurt both through a change in the income distribution curve (as it becomes more unequal) and an overall decline in income.

This introduces the issue of poverty. In Czechoslovakia, in the 1980s, equal income distribution was accompanied by very little poverty: less than 1 percent of the population was considered to have insufficient income for subsistence, and 7 percent was living below the minimum. In Hungary and Poland, poverty rates ranged between 15 and 25 percent. The brunt of the increase in poverty in the 1980s fell on workers’ households in both countries. In the Soviet Union, decentralization prior to the breakup led to divergence in average income and wage levels as well as in poverty rates.

The authors also discuss the issue of equivalence scales (meaning that a two-member household does not need twice as much as a single-member household to be equally well off). They point out that economies of scale in consumption are less important if rents, electricity, heating, and other overheads are relatively cheap. Thus, the East European statistical offices’ long-standing practice of using per capita rather than household (or equivalent household) income makes more sense than it would in market economies.

At the end of the book, Atkinson and Micklewright have compiled practically all the existing published data on income and wage distribution for the four countries from the mid-1950s to the late 1980s. This easily accessible data, as well as the authors’ success in providing benchmark work on income distribution at the end of the communist rule, leaves little doubt that researchers will use the book frequently in years to come.

Branko Milanovic

Donald G. Moggridge

Maynard Keynes, An Economist’s Biography

Routledge, New York, NY, USA, June 1992, xxxi + 941 pp., $37.50.

Robert Skidelsky

John Maynard Keynes, The Economist as Saviour, 1920–1937, A Biography

Volume Two, Macmillan, London, UK, November 1992, xxxv + 731 pp., £35.

Why yet two more massive biographies of arguably the most researched and most publicized economist of the twentieth century? The reader may feel entitled to an answer after the publication (in the same year) of two such densely textured panoptic biographies, both with an awesome scholarly apparatus that draws on virtually every extant archival source. The answer lies in the progressive enlargement of sources available to successive biographers since the pioneering—and only official—biography of Keynes by Roy Harrod (1951). Even the 30-volume Collected Writings of Keynes (CW), (1971–89), coedited by Moggridge, does not contain the complete papers of Keynes. New evidence justifiably warrants the type of reappraisals found in these two books, which should be evaluated as “warts and all” biographies and not as explications of “what Keynes really meant, or should have meant,” or as contributions to the history of economics. These biographies must also be judged in terms of their differing frames of reference. Moggridge’s single-volume, full-life biography attempts to cast Keynes in his “natural mould” and to give the reader a glimpse of “what Keynes might have been like as a colleague,” whereas the second volume of Skidelsky’s projected three-volume biography of Keynes describes Keynes’s “metamorphosis from aesthete, philosopher, and administrator into world saviour…out to save a capitalist system he did not admire.”

Moggridge succeeds admirably in telling the story of Keynes as a precocious pupil at Eton and King’s College; a creative civil servant at the India Office; a life-long Fellow of King’s College, who passed up successive chances of becoming a Provost of King’s and Pigou’s successor to the Cambridge professorship of political economy; and a man who straddled with seemingly effortless distinction the diverse worlds of academia, artistic Bloomsbury, official Whitehall, the City of London, public affairs, and journalism. Not mentioned are his little known role as the only non-Jewish member of the Advisory Committee on Palestine, which submitted the Report to the Peace Conference in Paris (February 23, 1919), and his nomination for the Nobel Peace Prize in 1923—a year in which no award was made.

Of particular interest are the perceptive chapters on the genesis and evolution of Keynes’s major works, Probability, Economic Consequences of the Peace, Treatise on Money, and General Theory. The chapters on the Clearing Union and Bretton Woods, which draw on the papers of James Meade and Lionel Robbins, among others, spotlight the little known but crucial role of E.M. Bernstein (of the US Treasury and the IMF’s first Director of Research), which led Keynes to say: “Both the currency scheme and the investment scheme are, I think, largely the fruit of the brain, not of Harry [White], but of…Bernstein. It is with him rather than Harry that the pride of authorship lies.” Moggridge’s biography is an impressive but somewhat truncated edifice that lacks just the final copestone—a concluding evaluation of Keynes.

The subtitle of Skidelsky’s multilayered biography is interestingly paradoxical: was Keynes really the savior of capitalism, as Skidelsky claims? Indeed, Skidelsky also admits that Keynes was “spectacularly wrong” in the belief that capitalist economies would simply stagnate under the laissez-faire system and that countries with vastly different political and social systems—democratic Sweden, paternalist Japan, totalitarian Germany, and New Deal America—all recovered from the slump of the thirties through successful ‘Keynesian’ policies “based on theoretical constructs quite different from that of the General Theory.” In fact, Keynes himself acknowledged that much of the General Theory “is illustrated and expounded mainly with reference to the conditions existing in the Anglo-Saxon countries.”

“Keynes as Saviour” is a strangely flawed theme, which only obscures Skidelsky’s masterly analysis of Keynes’s enduring economic contributions, notably the much neglected Treatise on Money, which Skidelsky puts on a par with the General Theory. The author sagely cautions against “reading off” Keynesian prescriptions from a single book and rightly identifies Keynes as “the first economist to visualize an economy as an aggregate.” This “new way of seeing the architecture of an economy,” Skidelsky maintains, may be the General Theory’s most enduring legacy. He might well have added that Keynes’s ideas are still the most fruitful source of testable hypotheses, which indeed is the ultimate test of scientific status. Skidelsky also does well to point out, apropos of the much misunderstood Keynes-Tinbergen controversy, that “Keynes objected not to econometrics but to the method of econometrics.” Keynes is rightly portrayed as a political economist who “invented theory to justify what he wanted to do,” a characteristic that stamps Keynes as a heresiarch and innovator rather than an economic messiah.

Skidelsky’s scrupulous scholarship has not spared him some demonstrable errors and omissions. For instance, J.V. Joshi was not the Deputy Governor but Executive Director of the Reserve Bank of India; Henrik Ibsen, the Norwegian dramatist, is described as a “Swedish playwright.” Meade’s first at Oxford is cited but not his Nobel Prize, which is mentioned in the biographical entries for Hayek, Hicks, and Tinbergen; and A.W. Phillips and W.T. Newlyn are not identified as the inventors of the Keynesian hydraulic machine. It is surely odd to describe Harold Laski, a political theorist, as “a jurist.” But less forgivable are the gratuitous references to Roy Harrod (“a great economist but not a good biographer”); Austin Robinson (“more an academic politician and administrator than a theorist”); and Maisky, Soviet diplomat (“surprisingly long lived”).

It is also ironic that both Moggridge and Skidelsky, for all their comprehensiveness, manage to overlook some of Keynes’s pioneering contributions, notably the seminal concept of “the fringe of unsatisfied borrowers,” which is the genesis of the modern literature on credit rationing and financial market imperfections; the theory and organization of central banks, particularly their developmental role; and his prescient warning of technological unemployment due to economies in “the use of labour outrunning the new uses of labour,” which is so relevant to the contemporary phenomenon of the jobless recovery in industrial economies.

Finally, some nagging questions: do monumental biographies also need to be monumental in size and length? Is there no room to wield that most hallowed and serviceable instrument, Occam’s Razor, which maintains that entities ought not to be multiplied except from necessity? Or do biographers adhere subliminally to Gogarty’s Theorem, “There is no such thing as a large whiskey”?

Anand Chandavarkar

Matthew B. Canzoneri, Vittorio Grilli, and Paul R. Masson (editors)

Establishing a Central Bank

Issues in Europe and Lessons from the US

Cambridge University Press, New York, NY, USA, 1992, ix + 307 pp., $44.95.

Since the inception of the European Community (EC), there have been several attempts to move toward a European Monetary Union. The treaty agreed to at Maastricht in the Netherlands in December 1991 is the most recent bid to create a European central bank and a single currency. The papers in this volume, originally presented at a conference held at Georgetown University some months before the Maastricht treaty was signed, address a number of the most important issues involved in the design of a monetary constitution for the EC. The federal structure of the proposed bank, its political and economic independence, and its role in prudential supervision and as a lender of last resort are discussed, as are the benefits and costs of a common currency, the role of fiscal policy in a monetary union, and the implications of economic and monetary integration in Europe for the world financial system.

Although already overtaken by history, the book continues to be worthwhile reading. In particular, several of the fundamental questions it raises have re-emerged in the debate surrounding the ratification of the Maastricht treaty by EC member states and will continue to be of interest for years to come, whether or not the Maastricht process is ultimately successful.

First, there is the central problem of whether the formal independence of the monetary authorities is sufficient to ensure price stability in a monetary union made up of participants with very different monetary and economic policy traditions. Central banks are often subject to considerable political pressure to provide easy money, even in countries where they have traditionally been independent. The wide range of arguments marshaled by Alesina and Grilli and their discussants makes clear that this question has many facets that are not easily amenable to analysis and will be settled only by experience.

Second, the chapter by Jeffrey Sachs and Sala-i-Martin discusses fiscal stabilizers, a topic on which the Maastricht treaty is silent. They argue that in the absence of exchange rate adjustments, an EC-wide system of such stabilizers will be needed to offset regional shocks to economic activity; the discussants clearly disagree. This juxtaposition of views provides a number of valuable insights and is a useful point of departure for further thinking about the role of fiscal policy in a monetary union.

The most notable omission is a discussion of labor market issues. In a monetary union, regional wage shocks resulting from excessively rigid wage bargaining arrangements cannot be offset by exchange rate changes and may lead to higher structural unemployment. Monetary union is also likely to affect the behavior of labor unions and employers in ways that are not well understood and may increase the international migration of workers.

All in all, this volume provides a considerable wealth of arguments and ideas. It will be helpful to scholars and policy analysts with an interest in European monetary integration.

Karl Habermeier

Moises Naïm

Paper Tigers & Minotaurs

The Politics of Venezuela’s Economic Reforms

A Carnegie Endowment Book, distributed by The Brookings Institution, Washington DC, USA, 1993, v + 180 pp., $24.95 ($8.95 paperback).

Paper Tigers & Minotaurs. The title harks back to a saying by an Italian political theorist: ‘The ancient is dying and the new has yet to be born. In the interlude, monsters are bred.” This is an exceptionally good book, all muscle and no fat, combining political economy and world-class economics. To abuse metaphor, Moises Naïm, a former Minister of Industry in Venezuela, was one of the preux chevaliers who set out to slay the many dragons of entrenched vested interests and to dismantle the age-old system of collusion between government and powerful private interests—a process punctuated by riots and attempted military coups.

So long as the dragons were alive and breathing fire, they trampled Venezuela’s economy. As a result, the country achieved the dubious distinction of suffering living standards that stagnated during the 1970s and fell during the 1980s in spite of two whacking oil price increases. The courageous reform program of 1989 was meant to end the rot and to revitalize the economy. In that, it was spectacularly successful. Venezuela’s economy took off in the years following the reforms, and today a consensus has crystallized that liberalization is the best course. Indeed, Carlos Andres Perez, the “father of the reforms” having been ousted on charges of corruption, the interim government might have tried to reverse the process but instead is moving it forward.

The book starts off with a vivid description of the ancien régime—how it bred corruption and corroded entrepreneur-ship—then describes the “policy shock” of 1989, its initial effects (including “public outcry and crime waves”), the subsequent solid economic improvements (“the private sector: from courting the State to courting the Market”), and tells the tale of the attempted coups. Naïm then steps back and reflects on why improved economic performance may not ensure popular support; the somewhat downbeat conclusion is that new economics do not mix well with old politics and that a reform of the State must be part and parcel of the modernization process.

He argues that the building of a competitive market economy requires a competent and relatively autonomous state. Countries in the process of building a market economy will increasingly discover that they cannot have a competitive private sector without a competitive public sector. This is borne out by the successful experiences of Japan, the East Asian “Miracle Countries” and, more recently, Chile. Naïm also places great stress on media management, one of the weakest aspects of reform. Few governments in the developing world succeed in explaining their reform programs to the public.

A preface by Jeffrey Sachs flags the relevance of the book to a whole lot of reforming countries, especially some of the former communist economies. I agree. This is a hard-to-put-down book, full of wise and practical advice to knights fighting dragons elsewhere in the world. It should be read by anyone interested in developing countries.

Guy Pfeffermann

Edward Clay and Olav Stokke (editors)

Food Aid Reconsidered

Assessing the Impact on Third World Countries

Frank Cass, London. England. 1991, xv + 209 pp., $28.

Food aid has been one of the most controversial forms of aid. This set of essays provides a useful updating of the key issues associated with food aid, especially its effectiveness, but it does little to resolve the main controversies. Unfortunately, as is so often the case with discussions of food aid, it seems easier to identify areas of dispute than to move on to more definitive operational conclusions about its usefulness as a development tool or as a device to achieve higher levels of food security. Perhaps for this reason, food aid has declined from nearly 20 million tons in the early 1960s to about 10 million tons (of cereal equivalent) since the early 1970s and has become more concentrated on emergencies, where controversy is least evident.

Saran and Konandreas, for example, examine at some length whether food aid has any element of “additionality.” On balance, they think not, but their conclusion is far from certain. Similar doubts surround the issue of the “disincentive” effects of food aid—the “storm centre” of the debate on food aid. Most analytical studies have not been able to identify large-scale disincentive effects; instead, they rely on multiple examples of anecdotal evidence. Simon Maxwell presents a useful “checklist” for practitioners to guide judgments regarding possible food aid disincentives. He argues convincingly that where they do exist, they can be overcome by integrating food aid into an overall food policy.

Reaching a rather different conclusion, John Cathie argues that the success of Botswana, a country much praised for its use of food aid to achieve food security, has been at some cost to local production. “The basic problem facing the Government of Botswana cannot be solved by food aid, and it has yet to be shown how this form of aid can contribute to the economic growth of a country.”

Hans Singer, a respected and long-time advocate of food aid, argues for a renewed use of food aid to help offset adverse food consumption impacts of structural adjustment in sub-Saharan Africa. He identifies a “menu of potentialities” for food aid to contribute to structural adjustment, which are, in a different form, the traditional arguments for effective utilization of food aid. Unfortunately, as in the traditional discussions of food aid, his arguments are not likely to convince those strongly opposed to the use of food aid.

Overall, one is left with the feeling that the arguments surrounding food aid are caught in an analytical stalemate. There is clearly a need to bring some of these arguments to a conclusion. And, in a world where nearly one billion people lack sufficient food largely because they cannot afford to buy it, the issue of economic efficiency cannot be the only criterion on which the effectiveness of food aid is judged.

Pierre Landell-Mills

Richard M. Bird

Tax Policy and Economic Development

The Johns Hopkins University Press, Baltimore, MD, USA, 1991, xiii + 270 pp., $48.50 ($15.95 paper).

Etisham Ahmad and Nicholas Stem

The Theory and Practice of Tax Reform in Developing Countries

Cambridge University Press, New York, NY, USA, 1991, xvii + 344 pp. $29.95.

Jacob A. Frenkel, Assaf Razin and Efraim Sadka

International Taxation in an Integrated World

The MIT Press, Cambridge, MA, USA, 1992, xi + 239 pp., $27.50.

These three books each deal with taxation, but in very different ways. They are different in content, intended audience, and style. Bird’s book is written in a clear, nontechnical, punchy, attractive style, without a single table, graph, or equation. He deals with taxation, growth, and distribution; and with taxing income, consumption, and wealth. His most interesting chapters are on the administrative dimensions of tax reform, in which he emphasizes that there is a great discrepancy between what the legislative tax system appears to be and how it actually works; this affects all aspects of public finance, including the effective distribution of income and wealth. Anyone can read this book with interest. All tax advisors and reformers should do so, and even politicians could do so with profit.

Ahmad and Stern combine text and data to produce a readable book that is somewhat mistitled; it should really include a subtitle, “Pakistan—A Case Study,” for the bulk of the text involves an interesting application of the authors’ ideas on the principles of tax design and reform to the existing tax structure in Pakistan, with numerous asides to an earlier study on India. There is a link with Bird’s book in that Ahmad and Stern in their analysis never forget to pay attention to the need for simplicity in administration, an easy way to measure the tax base, and the possibilities of evasion and corruption. However, Ahmed and Stern’s interest is fixed more on the distributional characteristics of each tax. The text is technical but not too burdensome. Anyone working on tax reform in developing countries could read this book with profit, and students could learn a great deal from it about good data preparation and testing.

Frenkel, Razin and Sadka’s publication is of a very different nature. It deals not with developing countries, but with an integrated world economy. As economic integration progresses, the effects of taxation in any country may have significant implications for households in other countries and for flows of capital and labor. The authors reduce the multiple tax options available by using many equivalences among tax instruments and from this simplification derive some interesting results. Inevitably, such a book raises more questions than it answers. But for that very reason it is stimulating, especially in the context of the increasingly integrated monetary, capital, and labor markets of Europe and North America. It is by no means as easy to read as the previous two publications, with a text liberally sprinkled with equations, but it is a most serious attempt to deal with public finance in an increasingly integrated world. The questions raised involve issues that all public financiers should pay attention to.

Alan Tait

New readers who wish to receive Finance & Development regularly should apply in writing to Subscription Services, Finance & Development, International Monetary Fund, Washington, DC 20431, USA, specifying the language edition and briefly stating the reasons for their request. The contents of Finance & Development are indexed in Business Periodicals Index, Public Affairs Information Service (PAIS), and Bibliographie Internationale des Sciences Sociales. An annual index of articles and reviews is carred in the December issue.

Credits: Cover art and art on pages 2, 10, 24, 32, and 33: Luisa Watson. Art on pages 6, 37, 40, and 44: Mark Robinson; page 14: Dale Glasgow. Charts: Dale Glasgow and Luisa Watson. IMF photos: Demo Zara and Padraic Hughes-Reid. Bank photos: M. Iannacci. Photo on page 10 by Curt Carnemark.

New for the International Monetary Fund

Transition to Market: Studies in Fiscal Reform

edited by Vito Tanzi

The International Monetary Fund has been a major participant in the challenge of transforming many African, Asian, and European countries from centrally planned to market economies. The authors of this book, mainly staff members of the IMF, have distilled their first-hand experience with fiscal reform in transition economies into 15 case studies of these countries. In doing so they analyze issues of privatization, fiscal federalism, social safety nets, and the net worth of the Soviet Union.

Available in English. ix + 387 pp. (paper) 1993. ISBN 1-55775-275-3

To order, please write or call:

International Monetary Fund

Publication Services, Box FD-303

700 19th Street, N.W.

Washington, D.C. 20431 U.S.A.

Telephone: (202) 623-7430

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New Occasional Papers from the International Monetary Fund

China at the Threshold of a Market Economy

by Michael W. Bell, Hoe Ee Khor, and Kalpana Kochhar

Occasional Paper 107 reviews China’s experience with market-oriented reform since 1978, including domestic reforms, the opening of the economy to foreign trade and investment, and the decentralization of decision making. It identifies special conditions that may have affected China’s capacity to implement reforms, assesses the impact of the reforms on the structure of the economy and on its integration into the world economy, examines the effect of the reforms on macroeconomic management and stability, and draws implications for the direction of China’s future reform strategy.

Available in English, (paper) ISBN 1-55775-349-0 Stock #S 107

Economic Adjustment in Low-Income Countries: Experience Under the Enhanced Structural Adjustment Facility

by Susan Schadler, Franek Rozwadowski, Siddharth Tiwari, and David Robinson

Occasional Paper 106 evaluates progress made under ESAF-supported programs in attaining external viability, restoring economic growth, and implementing structural reforms. Performance is evaluated for the 19 countries that entered ESAF arrangements by mid-1992, against the background of their initial conditions, external environment, and implementation of structural and macroeconomic policies.

Available in English, (paper) approx. 50 pp. ISBN 1-55775-336-9 Stock #S106

The Structure and Operation of the World Gold Market

by Gary O’Callaghan

Occasional Paper 105 describes the structure of the world gold market, its sources of supply and demand, and how it functions. The paper also examines the composition and origin of physical stocks of gold, their flows, and their market destinations, and also reviews the operation of bullion and paper gold markets.

Available in English, (paper) approx. 60 pp. ISBN 1-55775-281-8 Stock #S 105

Price Liberalization in Russia: Behavior of Prices, Household Incomes, and Consumption During the First Year

by Vincent Koen and Steven Phillips

Prices in the Russian Federation have been decontrolled in several steps since early 1991, after decades of near fixity. Occasional Paper 104 documents and analyzes the behavior of prices, incomes, consumption, and savings before and after the January 1992 price liberalization, with emphasis on developments during 1992, and with focus on households more than on enterprises. Comparisons are made with recent experience in Central and Eastern Europe, along with consideration of evidence on shortages and income distribution.

Available in English, (paper) vii + 51 pp. ISBN 1-55775-295-8 Stock #S 104

Liberalization of the Capital Account: Experiences and Issues

by Donald J. Mathieson and Liliana Rojas-Suárez.

Occasional Paper 103 explores the industrial and developing countries’ use of capital controls since World War II, including their rationales for using them, and describes their experiences with relaxing controls as part of broader liberalization and structural reform efforts. The paper also outlines the potential medium-term costs and benefits of an open capital account and the policy measures that would help sustain capital account convertibility.

Available in English, (paper) v + 39 pp. ISBN 1-55775-280-X Stock #S 103

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