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International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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Niall Ferguson

The Cash Nexus

Money and Power in the Modern World, 1700–2000

Allen Lane, Penguin Press, London, 2001, xix + 553 pp., £20 (cloth).

A POWERFUL strand of contemporary opinion regards globalization as being driven by an unstoppable economic logic. The familiar mantra of writers like Francis Fukuyama is that the worldwide trend toward free markets and liberal democracy is inherently desirable and, at the same time, inevitable. In the view of Niall Ferguson, one of the leading younger members of the Oxford University history faculty who has made his reputation with books on military history and on the Rothschild family, this formula rests as much on fallacious economic determinism as did Marxism. Although he takes his title from a phrase in the Communist Manifesto, nowadays the economic determinists are at the opposite end of the political spectrum.

To economic determinism, Ferguson counterpoises his own model of the “square of power,” first developed in Great Britain during the late seventeenth and early eighteenth centuries. Its efficiency in mobilizing resources for war was behind Great Britain’s triumph over rival European powers like France and powered the growth of empire. Subsequently, all the Western powers, including the United States, adopted the square of power.

This model postulates a much richer and more complex relationship between economics and politics than the simple, unidirectional causation implied in the proposition that capitalism gives rise to democracy and internationalism. Each corner of the square is occupied by a different institution: a professional, tax-gathering bureaucracy comprising salaried officials; parliamentary institutions in which taxpayers are granted a measure of political representation, thus tending to enhance the amount of revenue a state can raise; a system of national debt that allows a state to anticipate tax revenues in the event of a sudden increase in expenditures; and a central bank, responsible not merely for managing the debt issuance but also for extracting seigniorage from the issuance of paper money.

Ferguson uses his model to illuminate not only the foundations of military power—the book’s main theme—but also a wide range of issues of political economy. He is no fan of the welfare state, attributing it to the momentum acquired by bureaucratization and parliamentarization during the twentieth century, with the result that resources were increasingly diverted “away from military towards civilian employment and redistributive transfers.” He also concludes that the European Economic and Monetary Union (EMU) could unravel because of the asymmetric fiscal effect on member countries “caused by unaffordable social security and pension systems.” Noting a parallel with the ill-fated Austro-Hungarian Monetary Union of 1867–1914, Ferguson argues that unfunded pension liabilities will play the same role in undermining EMU that the First World War had on the monetary arrangements of the Habsburg empire.

Although it is not a theme Ferguson explores in any depth, the square of power is also a useful device for understanding financial crises. The roots of such crises can often be traced to inefficient or corrupt tax administrations, parliaments dominated by vested interests that resist granting the needed revenues to government, and central banks that have insufficient institutional autonomy. Conversely, a country’s access to international capital markets goes much better when all the elements of the square of power are in place.

This leads us back to the globalization theme. The cash nexus is “no more than one link in the long and tangled chain of human motivation,” Ferguson argues. Other motivations can dominate pure economic advantage, with the result that there is nothing inevitable about globalization, free trade, or international capital markets. Globalization requires strong institutional foundations—international order, the rule of law—and these institutions need to be deliberately constructed where they are lacking. The book concludes with a plea for the United States to devote “a larger percentage of its vast resources to making the world safe for capitalism and democracy.”

Ferguson has produced an important and illuminating historical account of the key institutions of the modern state. But his case would have been more compelling had he written a shorter, tighter, more focused book. He was unable to resist pontificating on every political topic of the day, even when it was not relevant to his main theme. These parts of the book would have been better consigned to the opinion pages of the daily newspapers. He also wanted to ensure that the reader was aware of his wide reading and considerable erudition. The contents of an industrious scholar’s notebooks come tumbling onto the page like bags on an airport luggage carousel. If Ferguson had been able to resist these temptations, he could have written a very good book indeed.

Michael Taylor

Senior Economist

IMF Monetary and Exchange Affairs Department

I.G. Patel

Glimpses of Indian Economic Policy

An Insider’s View

Oxford University Press, New Delhi, India, 2002, 205 pp., $29.95/Rs 395 (cloth).

IN THE IMF’s early years, the two Cambridges (England and Massachusetts) were the source for its staff of a stream of brilliant young economists. I.G. Patel, who joined the IMF’s Research Department in 1950 after studying economics at both places, was perhaps the most outstanding of these recruits. Half a century later, in his modestly titled Glimpses of Indian Economic Policy, he recounts how his four years at the IMF—under the friendly tutelage of Director of Research Edward Bernstein, who selected Patel to accompany him on a lengthy IMF mission to India—rounded off his training and prepared him for a long career as economic advisor and economic policy diplomat.

The book follows the succession of positions that Patel occupied in the Indian economic hierarchy after 1954, concluding with his stint as Governor of the Reserve Bank of India from 1977 to 1982. It contains its share of tales of infighting with successive ministers of finance and prime ministers, including Indira Gandhi in both positions, but these are relieved—where possible—by praise for the intelligence, decency, or charm of the antagonist. Written entirely from memory and without the benefit of official sources—between December 1999 and May 2000 in Paris, New York, and London—the book makes no attempt to describe the evolution of Indian economic policy following independence. Instead, it focuses on a few seminal events in Indian economic history in which the author was an active participant. These include the Second Five Year Plan and the role of Professor PC. Mahalanobis in its overly ambitious design, India’s drift into foreign aid and a regime of controls, the 1966 devaluation of the rupee, and the nationalization of the major banks in 1969. Apart from the fascinating specifics that the author relates about each of these events, the story within the story is one of a liberal economist’s mounting disenchantment with the general development of Indian policymaking.

In the early years of independence, the young economists in Delhi were inspired by a spirit of commitment and teamwork. Gradually, under the influence of spreading controls, licensing, and government operation of industry, this atmosphere yielded to one of systemic corruption, politicization of economic life and institutions, and, in the case of the Reserve Bank, continuous attempts by politicians to chisel away its independence. One of the reasons Patel singles out for the slow growth of the economy is bilateral tied foreign aid to supply capital equipment to inefficient state enterprises operating in fields where India had little, if any, comparative advantage.

One of Patel’s stories throws an interesting light on how IMF business was sometimes conducted in days gone by. From 1958 to 1961, Patel was the Alternate Executive Director for India in the IMF, and he held the position of Executive Director for a few weeks starting in the second half of June 1961. As soon as Patel took charge, he concluded that the continued decline in India’s reserves required immediate borrowing from the IMF, got agreement from Delhi to apply for a loan, was invited to make his case to the Managing Director (Per Jacobsson) at Sunday lunch just before the latter’s departure for Europe, and achieved Executive Board approval for a drawing of $250 million (a sum larger than India’s reserves at the time) on July 14.

J.J. Polak

A former Director of the IMF’s Research Department

Maury Klein

Rainbow’s End

The Crash of 1929

Oxford University Press, New York/Oxford, England, 2001, xx + 345 pp. $27.50/£22.95 (cloth).

WHEN Maury Klein acknowledges from the very outset that his account of the Great Stock Market Crash of 1929 will probably satisfy neither historians nor economists, he immediately claims our attention. Is he putting us on notice that his book differs from its two predecessors: Galbraith (The Great Crash, 1929, 1954) and Wigmore (The Crash and Its Aftermath, 1986)? Or that his approach is novel and does not fit into the traditional mold? What he does have clearly in mind is that he will neither rehearse nor compare and contrast the host of rival interpretations, making it troublesome for historians and economists to locate his specific contribution.

He asks the traditional questions: What caused the crash? What was its relationship to the Great Depression? Were stocks overpriced? He considers the answers to be still an unsolved puzzle, but he remains silent as to why. He makes no effort to answer the second and third questions. His main task is to explain the speculative mania that gripped the stock market in 1928 and 1929.

Klein does not see the problem from a narrow analytical point of view—that is, rival hypotheses and supporting evidence. He has something much more grandiose in mind—a portrait of an age, a New Era. And it is the characteristics of this New Era that are supposed to shed light on the origins and pace of stock market speculation in 1928 and 1929.

Speculation in the stock market is not its only feature. According to Klein, World War I ushered in a new age. The economy was unalterably changed, and the nation was slow to grasp the significance of the changes. He offers concrete examples of what those changes were. An economy of “work and save” was transformed into one of “spend and enjoy”—catchy phrases but without statistical content. Does Klein really believe that labor worked and saved less? Did labor spend more? Money, he asserts, became a necessity but not in any literal sense.

The common theme of this New Era was the importance of “mood” and the power of illusion to influence behavior. What kind of evidence it would take to confirm Klein’s conjecture is not clear. He recognized the difficulties of giving any specific meaning to “mood” and the factors responsible for changing it, but he attempted nevertheless to convey a sense of the interplay between the shifting mood of Americans during those years and the key events that influenced it, a subject closer to the concerns of sociologists and social psychologists than historians and economists.

Klein has written a social history of the Great Crash, a task for some unknown reason hitherto neglected. He is primarily interested in viewing this event from the vantage point of key players who reflected the changing mood of the time. The narrative is sprinkled liberally with short biographical sketches of those who best illustrated the characteristics of the New Era: Albert Wiggin, President of Chase National Bank; Charley Mitchell, President of National City Bank, who took the marketing of securities to new highs; Thomas Lamont, a J.P. Morgan partner; William “Billy” Stewart, promoter and former president of General Motors; and Jesse Livermore, a professional speculator. Also included are sketches of U.S. Presidents Harding, Coolidge, and Hoover. The tapestry of the Great Crash that Klein attempts to weave is impressionistic, yet in some ways compelling. People and events are juxtaposed in no formal logical pattern; there is a certain plausibility in the outcome, which owes more to sociology and social psychology than to economics.

There is no point in faulting the author for not writing a different book—one that he told us in the beginning he had no intention of writing. The questions he left unanswered, he left unanswered deliberately. For the reader who wants to capture the “mood” of the era without bothering with technical analysis, Klein’s book makes interesting reading.

Elmus Wicker

Professor Emeritus of Economics

Indiana University

Nicholas R. Lardy

Integrating China into the Global Economy

Brookings Institution Press, Washington, 2002, vii + 244 pp., $48.95 (cloth), $19.95 (paper).

NICHOLAS LARDY presents an excellent analysis of China’s recent entry into the World Trade Organization (WTO)—a landmark event for both China and the international trading system, as China is poised to become the fourth largest economy within several years. Skeptics argue that WTO membership could hurt China’s economy and lead to great social unrest. Lardy makes the opposite argument: membership is a natural step in China’s quest to integrate fully its economy with the rest of the world and should benefit all.

The author claims that China began integrating with the global economy long before its accession to the WTO by steadily reducing trade protection, which makes China probably one of the least protected of all developing countries. He supports his claim with convincing arguments, detailed illustrations at the sector level, and data that span the last 20 years. He highlights the agriculture sector as a notable exception, but, even there, observes the ongoing positive changes—in particular, moving away from land-intensive products like grain to labor-intensive products like fruits and vegetables, where China holds a comparative advantage—in anticipation of the adjustments required in this sector.

The WTO accession should, on the whole, bring further impressive changes to the economy that will lead to large efficiency gains and strong growth, Lardy maintains. The detailed sector-level analysis of the accession agreement and its implication for the domestic markets is impressive and convincing. However, in some areas, more in-depth analysis—including a discussion of the potential new foreign markets opening up for China and, particularly, the social impact of the accession—would have been helpful. For example, one wonders why the expected reduction in rural employment mentioned in the book is considerably less than the OECD estimates of rural hidden unemployment.

The author rightfully notes that China and its trading partners must continue to apply appropriate policies if they are to reap the potential benefits of the accession. For China, these include structural reforms in the enterprise and financial sectors, which the author clearly links to efficiency gains. As for China’s trading partners, the author shows how damaging it could be if they engaged in protectionist policies against China by invoking the unique safeguards and antidumping rules, which he claims are so onerous that they violate fundamental WTO principles. On the likelihood of compliance with the WTO agreement, Lardy reviews China’s record in a balanced way and recognizes that the jury is still out.

This well-written book is a must for all students of the Chinese economy. It is the most comprehensive book of its kind, and its subject is timely. The level of analysis is deep, supported with insightful sector-specific details, and balanced, providing facts and depicting contrary arguments. Policymakers, academics, and businesspeople alike should benefit from it.

Tarhan Feyzioglu

Senior Economist

IMF Asia and Pacific Department

Carol Graham and Stefano Pettinato

Happiness and Hardship

Opportunity and Insecurity in New Market Economies

Brookings Institution Press, Washington, D.C., 2002, ix + 208 pp., $42.95/£31.95 (cloth), $17.95/£13.25 (paper).

IN Happiness and Hardship, Carol Graham and Stefano Pettinato shed penetrating light on a highly topical question: does one’s overall level of subjective satisfaction—“happiness”—determine popular support for economic reform? In effect, they move the subject of happiness from the psychological to the economic realm by putting forward a conceptual framework for analyzing the relationship between subjective well-being and the political sustainability of market-oriented economic growth in 17 Latin American countries and Russia. The answer to the above question—a clear, if nuanced, yes.

A key focus throughout the book is whether, and how, market reforms affect the mobility and opportunity of people of different ages, income levels, and educational achievements. This focus is reflected in the authors’ discussion of how, if at all, market volatility accompanying economic reform inevitably predisposes the poor to oppose such policies. The authors argue that, to a “remarkable degree,” such volatility has, in fact, opened up new opportunities for social advancement that were previously denied to low-income groups—and, according to their data, these groups strongly support such changes. On a broader canvas, Graham and Pettinato’s findings show that both inflation and unemployment have negative effects on individuals’ reported happiness.

How might an individual’s actual position on the income ladder mediate perceptions of relative income differences and well-being? The authors’ discussion of “frustrated achievers” provides us with some answers to this question. Frustrated achievers, they explain, are individuals who, while succeeding according to such conventional criteria as income and social status, are nevertheless dissatisfied with their social position. Why?

Focusing on Peru and Russia, Graham and Pettinato offer a tentative two-part answer. First, relative income and social status matter more to this group than absolute differences along these two dimensions. No matter what the objective evidence is, frustrated achievers tend to view themselves as disadvantaged, if not endangered, by groups just above them on the economic hierarchy. Second, the authors report that a majority of these upwardly mobile individuals—those frustrated achievers—in their country samples “tended to underestimate their own economic progress in assessing their current economic situations” compared with richer and poorer counterparts.

John Starrels

Senior Public Affairs Officer

IMF External Relations Department

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