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Books

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1994
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Pedro Aspe

Economic Transformation the Mexican Way

The MIT Press, Cambridge, MA, USA, 1993, ix + 280 pp., $27.50.

Nora Lustig

Mexico: The Remaking of an Economy

The Brookings Institution, Washington, DC, USA, 1993, xvii + 186 pp., $28.95.

A great deal has been written about the Mexican stabilization and reform efforts of the 1980s and early 1990s. One of the most comprehensive and certainly the most authoritative accounts is Economic Transformation the Mexican Way, the writer having had a front seat for several years, serving in various capacities in the Mexican Government, including as Minister of Planning and Budget and currently as Minister of Finance and Public Credit.

This book, which is a compilation of lectures given in 1992 under the Lionel Robbins Lecture series, provides an overview of the stabilization and structural reform program undertaken over the period 1983–91. Its central theme is that the significant demand adjustment in 1983–87 left the economy in severe recession with persistently high inflation mainly because of structural imbalances in the real sector and inflation inertia. According to Aspe, stabilization and growth were achieved only after the adoption of a new strategy centered around a social pact (involving labor, farming, and the business sectors) that forged a consensus on a path for incomes, key prices, and the exchange rate. In return, the Government committed itself to achieving a permanent solution to fiscal imbalance, accelerating structural reforms, and negotiating a comprehensive external debt rescheduling agreement.

Aspe provides interesting insights as to the mechanisms employed to build mutual confidence among the participants and credits the pact with facilitating the sharp deceleration in inflation (from 159 percent at the end of 1987 to around 20 percent in 1991) and the economic recovery that began in 1989. His discussion of the structural reforms also serves as useful advice to policymakers on operational issues and sequencing. For example, he emphasizes that once-for-all revenues from privatization must not be used to finance recurrent spending; that external debt rescheduling needs to be comprehensive enough to be perceived by economic agents as a lasting solution; and that trade liberalization is likely to be more successful if it begins with an exchange rate that bolsters competitiveness.

The author identifies a number of important challenges that lie ahead for Mexico, including the need to increase the rates of domestic savings and investment (in human as well as physical capital), the need to raise productivity so as to remain competitive and, importantly, the need to make sure poverty is eradicated. Aspe notes that overcoming these challenges will require continued adherence to sound economic policies.

Since 1992, when the research for the book was completed, the process of economic modernization in Mexico has continued apace. The North American Free Trade Agreement has been approved, foreign investment regulations have been liberalized further, and the Bank of Mexico has been granted operational and administrative autonomy. It has not been smooth sailing all the way, however. Economic growth has stalled since mid-1993, in part reflecting the effort to bring down inflation and the ongoing restructuring of the manufacturing sector, while social and political uncertainties resulted in occasional pressure on financial markets in the first half of 1994.

Aspe explains that his main reason for writing the book was to provide a straightforward description of the way in which Mexico had been going through the transition. He accomplishes his objective with a comprehensive and generally readable account. As Aspe was one of the architects of the social sector strategy initiated in the mid-1980s (under which there was a substantial increase in social spending in real terms), it is to be hoped that he will complement what he has presented so far with a discussion of the requirements for successful social policies.

Nora Lustig’s less technical and faster-paced book, Mexico: The Remaking of an Economy, covers much of the same ground as Aspe’s, but as an outsider (she was a Professor of Economics at Mexico City’s prestigious Colegio de Mexico before becoming Senior Fellow at the Brookings Institution in Washington, DC) she takes a more questioning approach, focusing on the social costs of the adjustment program.

Lustig attributes the economy’s stagnation and persistent inflation during 1982–88 to the large negative resource transfers (mainly due to the onerous debt-service burden and adverse external conditions) that discouraged private investment and to the frequent depreciation of the peso. However, she agrees with Aspe that the social pact combined with the intensified structural reforms (in particular, privatization and the prospect of the NAFTA) and external debt rescheduling, were crucial to the ultimate economic turnaround.

Lustig attempts a detailed accounting of the social costs of the adjustment in the earlier period, highlighting the sharp fall in real wages, increased income inequality between high and middle-income households, and large cuts in social programs. Although the data are not conclusive, she suggests that cuts in social sector spending were related to a decline in nutritional standards and health services and to increases in crime and the incidence of school dropouts. More recent data suggest that some of the social costs cited by Lustig were transitory. The proportion of households living in extreme poverty peaked in 1989 and fell to pre-crisis levels by 1992. The minimum wage, on which Lustig bases much of her discussion, has become much less important as an indicator of wage developments (covering only about 16 percent of all workers compared to over 40 percent in the late 1980s), and negotiated wages have advanced strongly in real terms in the last four years. Further, debt reduction using the proceeds from privatization has permitted policymakers to increase sharply social expenditures in real terms since 1989.

Lustig raises several questions about the economic strategy pursued in the 1980s (among them, whether incomes policy came too late and trade liberalization too early) and wonders whether a less costly adjustment (in social terms) and an earlier recovery, would have been possible. She finally agrees with the Government’s overall strategy but argues that the social costs could have been reduced and an earlier recovery achieved but for the delay in the provision of assistance by the international community. This contention is debatable. For while the existence of a resource restraint could always be blamed for slower than expected progress, the facts are that during 1982–88, Mexico received significant external support through debt rescheduling from commercial and bilateral creditors and new disbursements from multilateral agencies.

Like Aspe, Lustig also finishes on an optimistic note. She sees the large current account deficits that accompanied the recovery in 1990–91, as the result of a temporary surge in consumer and capital goods imports reflecting trade liberalization and the need to modernize productive capacity. In her view, with NAFTA and with continued macroeconomic stability, these deficits should be viewed as manageable.

Ewart Williams and John Thornton

John Williamson (editor)

The Political Economy of Policy Reform

Institute of International Economics, Washington, DC, USA, 1993, ix + 601 pp., $25.

This is a refreshingly different entry in the genre of recent political economy studies; it gets away from the earlier focus on developing countries and includes a few industrial countries among its 13 case studies (Australia, New Zealand, Portugal, and Spain) and one transition country (Poland) on the reasoning that “at least in intellectual terms, we today live in one world rather than three.” It also breaks new ground in seeking as authors for analyzing the political process through which economic reforms work (or fail to work, as in Brazil and Peru among the countries examined), a slate of “technopols” or economists-turned-politicians who played a decisive role in crafting the economic content of the reforms and then implementing them, for most cases, in a politically successful manner.

Despite being a conference volume, this one avoids the discursiveness and lack of focus that characterizes most such collections of papers. The editor sets forth in advance, for his distinguished cast of authors to address, a series of hypotheses about the circumstances under which policy reform becomes possible and the ways in which reform can be promoted. In the final chapter, John Williamson and Stephan Haggard pull together the main conclusions regarding the economic and political conditions that are necessary for successful adjustment.

An initial distinction is drawn between democratically run countries and non-democratic regimes. Some of the hypotheses are not relevant to the latter group of countries—e.g., the exploitation of a “honeymoon” period when difficult decisions can be blamed on an outgoing administration. What is important for “technopols” is that they exploit whatever opportunities come to hand, whether by way of an economic crisis or a political one (such as the example of the Qureshi caretaker administration in Pakistan). Similarly, an authoritarian regime need not seek social consensus, although some would go as far as to assert (with Jeffrey Sachs) that the latter condition is not essential anywhere. If reforms succeed, it is argued, a social consensus will emerge in support of them and if they fail, no amount of prior social consensus building will prevent their rejection. This proposition is belied by most of the successful cases, where political support has been essential to consolidate—and even initiate—reforms. The unfortunate experience in Venezuela is an example where radical policy changes were sprung on a public that saw no crisis justifying them.

Among the hypotheses that are sustained in most of the successful cases is the requirement for strong “visionary” leadership. In addition, a necessary, though not sufficient, condition for success is a competent economic team invested with enough authority to withstand the pressures of interest groups and competing centers of bureaucratic power.

A hypothesis of great interest, especially to those working for the international financial institutions (IFIs), is the role of external agencies. The ability to secure conditional financial support greatly strengthens the hands of reformers in countries that either do not have access to markets or that have temporarily lost access in a crisis.

Of perhaps equal, or even greater importance than conditional financial assistance, was found to be the intellectual support that is offered, often in times of crisis, by outside agencies. Here the role of the IFIs as suppliers of technical assistance and training facilities is quite appropriately emphasized. What is missing in the analysis is the comparative advantage of IFIs, relative to bilateral lenders, in two respects: first, that conditionality is politically more palatable when applied through institutions to which the borrowing country itself belongs and on whose policy-making board of directors it is represented; second, the fact that in a number of instances, the “technopols” may have themselves worked in the IFIs and have personal connections that help in facilitating the negotiating process.

Three hypotheses for which sufficient data were not forthcoming relate to the use of media in “selling” reforms, the payment of compensation to “losers,” and the deliberate acceleration of gains from reforms through rapid improvements in one or two critical areas, such as selected basic services like urban transport. Some of these issues have been explored in a developing country context by political scientists like Joan Nelson and her colleagues (see review by Charles Gardner Finance & Development, June 1990) The fact that these issues were not fully addressed by the authors contributing to this volume should not be taken to gainsay their undoubted importance to a successful consummation of the reform process.

Aziz AH Mohammed

Jeffrey A. Frankel and Miles Kahler (editors)

Regionalism and Rivalry

Japan and the United States in Pacific Asia

The University of Chicago Press, Chicago, IL, USA, 1993, ix + 472 pp., $63.

The policy community is sharply divided among those who believe that markets in East Asia, particularly Japan, are closed and those who argue the opposite. Over time, the view has gained ground that Japan is quietly building a trade and investment bloc around itself in East Asia. This conference volume, consisting of 11 papers, including a commentary on each paper, subjects this view to a systematic analysis and rejects it resoundingly. An important strength of the volume is that it brings together economists and political scientists and provides a broader analysis of the issue than normally done.

The volume is divided into three parts. Part I faces the issue head on: Is Pacific Asia becoming a regional bloc? The first paper, by Peter Petri, traces carefully the history of the evolution of intraregional interdependence in East Asia. Though the paper analytically falls far short of the author’s aspirations, it establishes conclusively that the interdependence within East Asia in the post-Second-World-War era is far below its prewar level. Frankel takes a more quantitative approach and tests for the existence of an informal bloc in East Asia. He finds that once we control for the expansion of intraregional trade due to faster growth in the region, the hypothesis of either the existence of a bloc or a trend toward it is rejected conclusively. Frankel also fails to find evidence of a special Japanese effect on trade within East Asia. On the financial front, he finds some evidence of Japanese influence but concludes that it is less than the US influence. Gary Saxonhouse finds that, controlling for income levels, trade patterns of leading economies in the region are biased not in favor of itself but North America! Moreover, using a model of international price discrimination, he finds that Japanese firms are able to segregate markets in East Asia but not in North America. This evidence is doubly damning to the claims of highly integrated markets in East Asia.

Since the preceding papers have established that East Asian markets are not highly integrated with regard to trade, proponents of the view that Japan is quietly building an East Asian bloc are left arguing that it is establishing pernicious links via investment and aid. Part II analyzes the role of Japanese direct foreign investment in East Asia in promoting East Asian market integration. While topical, the papers in this section are unfortunately less rigorous in their economics.

Richard Doner argues that East Asia is becoming increasingly integrated in terms of production and diffusion of Japanese-style institutions. Many of these arrangements, however, are simply responses to prevailing economic conditions and not conscious attempts at establishing a regional bloc. Peter Katzenstein and Martin Rouse use case studies of Thailand and Indonesia to demonstrate how Japan is exercising its role as a regional power in East Asia. While drawing conclusions about regional arrangements from particular country case studies is questionable, drawing unwarranted ones is doubly so. That Japan has been the most significant source of foreign investment in these countries hardly leads to the conclusion that it has been acting as a regional economic hegemon. Particularly puzzling is their suspicious view of Japanese aid in the development of infrastructure. Given their public good and nonexclusive nature, investments in infrastructure benefit Japanese and non-Japanese alike.

Part III covers a variety of themes. Topics in this section range from coprosperity spheres and money and finance to security aspects of US-Japan economic relations. Of particular interest is the paper by Shafik Islam on foreign aid and burden-sharing that addresses whether Japan is an international “free-rider.” The author reviews the pattern of Japanese aid and trade and finds little evidence that Japan systematically biases its aid to promote its trade and investment interests. The paper by Martin Feldstein contains an interesting discussion about whether Japan wants to establish a hegemonic position in the future. He concludes that the costs of doing so—in terms of conflict with the United States—significantly outweigh any potential benefits. Given its large investment and trade interests in the United States, Japan is acutely aware of its vulnerability to changes in US tax and trade policy.

The book is not the last word on the subject. But the authors have undoubtedly helped place the debate on a higher analytical level and, in the process, scored one victory against Japan bashers.

Arvind Panagariya and Sethaput Suthiwart-Narueput

Kathleen Newland and Kamala Chandrakirana Soedjatmoko (editors)

Transforming Humanity: The Visionary Writings of Soedjatmoko

Foreword by Clifford Geertz

Kumarian Press, West Hartford, CT, USA.1994, vii + 212 pp., $42 ($8.95 paperback).

Soedjatmoko was very much rooted in Indonesian culture yet deeply committed to internationalism. In his early life, he was active in Indonesia’s independence movement and later became his country’s Ambassador to the United States. Yet, never fully at ease in the political climate of his own country, he often found a more receptive audience overseas, ending his distinguished career as Rector of the United Nations University in Tokyo.

Although his formal education was limited, Soedjatmoko was well read in the works of both Western and Eastern scholars and moved comfortably in intellectual circles. But the strength of his ideas comes more from his own personal concern and commitment to development, including the dimensions of development that are too often neglected such as, freedom, democracy, human rights, and tolerance. In this book, the editors have done an excellent job of compiling 18 papers, written between 1970 and 1987, capturing both the breadth and evolution of Soedjatmoko’s thoughts. The limited introductions accompanying each chapter provide sufficient context and continuity, without distracting from the primary force of Soedjatmoko’s own work.

Two broad themes run through all of these papers. The first is Soedjatmoko’s personal philosophy of “responsiveness, resilience, restraint, and open-mindedness.” He has a healthy distrust of ideology, experts, and simple solutions. The second is his very broad view of development as “a process of social change, a process of transformation of the soul, and the creative adaption of culture.” Soedjatmoko’s writings are not easily characterized in terms of conventional disciplines and subject matter. Rather they stand out for the clarity with which they present an eclectic view of a complex world.

Soedjatmoko’s vision captured many aspects of development, and their interrelationship, well before they became part of the accepted paradigm. Reading these papers today, one is struck by the attention given to issues such as popular participation and governance, the power of new information technologies, and management of the natural environment. Above all, Soedjatmoko stresses that development is learning. Education provides the basis for participation and tolerance. Yet Soedjatmoko was also frustrated by the inability of intellectuals to marshall their own skills—social science, humanities and technology—to solve development problems.

These writings leave me with two regrets. The first is that Soedjatmoko himself was often not able to bridge the gap between intellectual conviction and political reality. As a result, his vision is at times unduly pessimistic, focusing on what is left to be done and undervaluing the very real economic and social progress that has been made in many parts of the developing world. Finally, echoing a thought by Clifford Geertz, I too regret that Soedjatmoko did not have time to compile his own thoughts before his death. The result may well have been new insights into the challenges now facing the world in the 1990s.

Mark Baird

Norman K. Humphreys

Historical Dictionary of the International Monetary Fund

The Scarecrow Press, Inc., Metuchen, NJ, USA, 1993, xxxvi + 227 pp., $35.50.

A writer of dictionaries, a harmless drudge”: thus did Samuel Johnson, himself the author of the monumental Dictionary of the English Language, define the labor-intensive burden of a lexicographer. No one, however, would dispute the value of the finished product. In his Historical Dictionary of the International Monetary Fund, Norman Humphreys, Chief Editor at the IMF from 1972 until 1986, has likewise performed a valuable service. Humphreys has pulled together a wide-ranging and disparate collection of facts about the IMF, together with succinct, jargon-free definitions of the IMF’s operations, its instruments, its structure, and its idiosyncratic spin on economic concepts—all within a clearly defined (and helpfully cross-referenced) historical perspective.

For instance, under devaluation, Humphreys covers the Bretton Woods system of fixed exchange rates, the failure of the Bretton Woods system, the second amendment of the IMF’s Articles of Agreement, and the effect that the arrangements that replaced the Bretton Woods system had on the ability of countries to adjust their exchange rates.

The Dictionary also includes brief descriptions of IMF departments; short biographies of principal players and personalities; histories of the IMF’s relations with the World Bank and the United Nations; a statistical appendix; and a bibliography listing publications on the history and evolution of the IMF, as well as most of the IMF’s own publications.

The dictionary entries are preceded by a chronology, which runs from July 1, 1943 through June 30, 1993; and an introduction, which provides a historical overview and discussions of the evolution of important IMF concepts and operations, such as conditionality and surveillance over exchange rate policies.

Humphreys’ Historical Dictionary neatly encapsulates a half-century of international economic developments. The appearance of this immensely useful reference work on the eve of the 50th anniversary of the Bretton Woods Institutions is perfectly timed.

Sara Kane

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