Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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Bill Emmott

The Sun Also Sets: The Limits to Japan’s Economic Power

Times Books, New York, NY, USA, 1989, xii + 292 pp., $19.95.

Edward J. Lincoln

Japan’s Unequal Trade

The Brookings Institution, Washington, DC, USA, 1990, xiii + 223 pp., $26.95 (paper $9.95).

As the influence of Japan in world economic affairs has increased over recent decades, its trade behavior has come to be perceived as a major problem for Japan’s trading partners. According to Dutch journalist Karel G. van Wolferen, who coined the expression “the Japan problem” in his 1987 Foreign Affairs article, the problem is multidimensional, but “is generally summed up by record-breaking trade surpluses....” Indeed, Japan has been running large trade surpluses for more than two decades now.

The books by Emmott and Lincoln—who are recognized authorities on Japanese economic issues—are notable recent additions to the literature on this subject. The author of The Sun Also Sets is very “optimistic”, as he sees a number of limiting factors on the future growth of Japan’s economic power, while the author of Japan’s Unequal Trade is more cautious as he expects a long and tedious process ahead in eradicating the perceived problem. Surprisingly, however, neither of these authors tackle the critical issue of Japan’s technical progress and productivity.

Emmott’s book, which is highly entertaining and filled with interesting anectodes, addresses a much wider audience and has a broader, if sketchier, view of the Japanese economy than that of Lincoln’s. “When and how Japan will begin to flex its muscles (now that Japan is rich)? Will Japan buy up the world? Will it take on more international responsibilities? How long will its strength last? How will wealth change Japan? Will it take over leadership from a declining America? Will it become a military force once again?” These are the questions Emmott attempts to answer.

A positive answer to all these questions would require Japan’s sizable current account surplus to continue for many years to come. For this to happen, Japan’s saving would need to remain larger than the sum of private sector investment and any fiscal deficit. However, Emmott expects Japan’s saving as a ratio to GNP to decline quickly for two reasons. First, today’s young generation is a new breed of consumers, characterized as DINKs (double income, no kids) and “pleasure seekers.” This is reflected in the booming consumer credit business. Second, there is the graying of the population. Japan’s percentage of the aged is expected to overtake that of the United States soon and may even pass West Germany’s around 2010. As a result of this demographic change, Japan’s total social security costs are expected to rise to levels similar to those of the United States and Canada, though still below the percentages for France and West Germany. Thus, Emmott predicts that Japan’s saving rate would fall from 16 percent of disposable income today to 8 percent or so in the mid-1990s and possibly 3-5 percent in 2010, or equivalent to the range of the United States today.

While Emmott expects Japan’s economic growth to slow and Japan’s current account surplus to disappear in 5-10 years (partly vindicated by the sharp fall in trade surplus since his book’s publication), he is very optimistic about the future growth of the US economy. However, he explains his optimism for the United States only in such intuitive terms as: “If the savings rate can fall so rapidly and mysteriously, then it can rise again, if not to Japanese levels of 16 percent, to more normal American levels of 7-9 percent.” (p. 250) Emmott believes that the United States will remain number one and that Japan will become the leader of a yen bloc in Asia and the Pacific, as Germany is in Europe.

Lincoln’s book, which contains much more serious economic analysis, focuses explicitly on Japan’s import behavior and does so from the perspective of the United States. In his view, Japan’s ratio of manufactured imports to GNP has been unusually low, as has Japan’s participation in intra-industry trade. Lincoln argues that the unusually low ratio, instead of indicating Japanese consumers’ dislike of foreign-made goods, mainly reflects Japan’s barriers against import penetration. Although Lincoln is not the first to point out the above characteristics of Japanese trade, his contributions lie in his sober review of Japanese academic and official literature, which minimizes the existence of import access problems, and his analysis of Japan’s intra-industry trade, which goes a step beyond previous studies.

The fundamental reason for Japan’s import behavior, Lincoln concludes, lies in “the catch-up mentality caused by Japan’s position as an industrial latecomer, in which the desire to produce virtually all manufactured products at home was very strong.” (p. 7) In his judgment, successful industrialization by a latecomer must necessarily involve the substitution of domestic production for imports, but “in Japan’s case the process has been pushed too far and for too long.” (p. 7) The catch-up mentality, which lasted a century, tilted not only the government’s attitudes but also private sector institutions and business practices toward restricting foreign access to Japan’s domestic market.

Can one say that Japanese import behavior has changed, in view of the recent “revolutionary” increases in Japan’s manufactured imports? Lincoln attributes a large part of the import increases to the price effect of the yen appreciation, but he also recognizes some genuine changes occurring in Japanese attitudes. He is cautiously optimistic about the prospect of Japanese import behavior moving closer to that of other industrial countries: “If the talk is translated into action, the results could be quite striking.” (p. 95) In view of the historical experience that no radical change in Japan’s social and economic orientation has been effected without foreign pressure, Lincoln argues convincingly that ensuring a change in Japanese attitudes would require countries to continue their pressure on Japan.

Kenji Takeuchi

Jean Drèze and Amartya Sen

Hunger and Public Action

Oxford University Press, New York, NY, USA, 1989, xv + 369 pp., $45.

If you are interested in antihunger policy in developing countries, then you should read this book. It is a scholarly yet accessible contribution with a clear message. The early part of the book is largely about definitions and concepts, such as the meaning of “hunger” and the objectives of “public action.” The view of what constitutes adequate nutritional capability is broad and goes a long way beyond the arithmetic of calorie intakes. Variability in nutrient needs is emphasized, as is the importance of complementary inputs, such as primary health care, basic education, clean drinking water, and adequate sanitation.

An important goal of the middle third of the book is to show how famines can be prevented by public action. The key is to avoid contractions in the command of vulnerable individuals over food and other essential goods and services. The importance of understanding the way food markets work during famines is emphasized. A number of specific policy issues are examined.

The one that will probably attract the most attention concerns the use of cash transfers in famine relief, as an alternative to direct food delivery. The authors point out that there is a potential gain from separating the twin functions of direct food delivery, namely raising aggregate food availability and raising the real incomes of vulnerable groups. Selling food aid in the market and using the proceeds to reach the needy may well be more effective in reducing mortality than direct food delivery. Cash transfers can also help even if aggregate food availability cannot be increased, provided that the transfers reach those in need. This can be achieved through a combination of self-targeted employment provision and transfer payments to those unable to work.

A possible objection to cash transfers is that they may lead to higher food prices. But, the authors argue, that is fine—provided that the higher prices are the result of a well-targeted cash transfer policy; those in need will still be better off. An effective system of famine relief should be ready to go into action as soon as required, which will typically be well before external food aid can arrive.

The latter part of the book is concerned with the prevention of chronic hunger. Here, the longer-term issues are addressed, such as agriculture versus industry, and cash-crops versus food crops. Principles for action are well thought out. That is important, since some of the principles that have been proposed in the recent past, such as “food self-sufficiency,” can be misguided. This is not to say that food production and pricing are unimportant; it is their usefulness as guiding principles for action that is being questioned here. Messrs. Dreze and Sen demonstrate that greater clarity of thought in distinguishing “ends” from “means” can enhance the prospects for effective public action against hunger.

The authors are critical of the use of GNP per head as an indicator of long-run progress in raising nutritional and related capabilities. The essence of their argument is valid; a high average income can allow great scope for widespread well-being, including avoiding hunger, but it does not guarantee it. At times, the authors seem to go further, attaching little importance to raising incomes independently of the enhanced scope for public service provision. That is more contentious. Aggregate output is one of the relevant parameters in the long-run progress against hunger. Its importance relative to other factors will depend crucially on country-specific circumstances, particularly the past record of growth, redistribution, and public service provision.

The book examines the experiences of a number of successful developing countries, as indicated by their rate of improvement in social indicators, particularly under-five mortality. The almost exclusive reliance on a few aggregate social indicators is questionable. These measures sometimes reveal little more than progress in controlling certain infectious and parasitic diseases; while that is an achievement, we also need to know about progress in alleviating other dimensions of poverty and hunger.

In characterizing these success stories, a distinction is made between “growth-mediated security” and “support-led security”; the former relies on growth to finance public support, while the latter does not. Expanding on earlier work by Sen, the authors argue that countries such as China, Costa Rica, Sri Lanka, Chile, and Cuba have successfully used direct intervention in public provision to achieve the social indicators typical of richer countries. Little attention is given to growth-mediated security, or to the costs of support-led security, and how they are influenced by the (important) details of policy design and financing. Nonetheless, this book provides an erudite and persuasive assessment of the positive role that public action can play in eliminating hunger. It is highly recommended.

Martin Ravallion

Ezra F. Vogel

One Step Ahead in China: Guangdong Under Reform

Harvard University Press, Cambridge, MA, USA, 1989, viii + 510 pp., $29.95.

Robert Kleinberg

China’s “Opening” to the Outside World

The Experiment with Foreign Capitalism

Westview Press, Boulder, CO, USA, 1990, xiv + 227 pp., $36.50.

Deborah Davis and Ezra F. Vogel (editors)

Chinese Society on the Eve of Tiananmen

The Impact of Reform

Harvard University Press, Cambridge, MA, USA, 1990, 401 pp., $16.

Within the space of little more than ten years, China’s merchandise exports increased fourfold, exceeding $52 billion in 1989. Manufactures accounted for much of the growth, and by end of the 1980s, their share had risen to 70 percent from under 50 percent at the start of the decade. Even by East Asia’s high standards, such performance, which has pushed China’s share of world trade to 1.7 percent, is noteworthy. Once an autarkic planned economy, China has now emerged as one of the developing world’s foremost trading nations, dominating the international markets for textiles, clothing, toys, sporting goods, and light consumer electronics.

China’s export successes are in no small part the outcome of a fruitful symbiosis between the economies of Guangdong (the leading exporter among China’s provinces) and Hong Kong, together with the creation of four Special Economic Zones in Guangdong province and in neighboring Fujian. Both of these developments can be traced to China’s efforts at reform that commenced in the late 1970s. But the southeastern part of the country benefited the most because links with Hong Kong had been germinating at least since the mid-1970s; there was strong complementarity between the two economies; and the web of social relationships permitted Hong Kong businessmen to exploit Guangdong’s industrial potential, once the province was granted greater autonomy and pro-trade policies responsive to direct foreign investment gained in favor.

While China’s achievements in the productive and social sectors have received much scholarly attention, studies of trade strategy are few in number as are monographs on provincial development. Vogel’s book is welcome on both counts. It traces the progress of reform in Guangdong province from the early beginnings in the 1970s, and it does so with admirable attention to historical detail, as well as to institutional nuance. He chronicles Guangdong’s ascent from relative economic backwardness to the front ranks of China’s dynamic eastern provinces, paying special attention to those aspects of modernization related to the emergence of export-oriented industries. The chapters on the influence of Hong Kong, the SEZs including Hainan, entrepreneurship, and trade reforms are particularly useful.

For those whose interest is mainly in China’s trade strategy, the volume by Kleinberg offers a more compact and focused account. Covering the period from the late 1970s through 1987, he explores the significance of the Special Economic Zones, direct foreign investment in southern China, the presence of Hong Kong, economic decentralization, the foreign trade corporations, and exchange rate policies. All of these contributed to the successful development of light assembly industries and the export of their products. Kleinberg’s account is pieced together from information on policies and their consequences, drawn from Chinese as well as western sources. This book is a useful and critical guide to China’s “open door” policies, though it fails to provide the sustained analytical attention that these policies deserve.

The volume, edited by Davis and Vogel, is a creature of a very different stripe. It is a heterogeneous collection of articles touching on certain implications of reform in several sectors. Among them, the ones that describe the contrasting rural response to economic decentralization in different parts of China are the most interesting because they shed light on individual, as well as corporatist, attempts at grasping new opportunities and the evolution of the politico-bureaucratic apparatus at the county level in the reform era. These papers also provide an interesting counterpoint to Vogel’s description of the events in rural Guangdong.

All three books have solid merits, but One Step Ahead in China is the one that is likely to contribute most to our understanding of change in China.

Shahid Yusuf

Mary O. Furner and Barry Supple (editors)

The State and Economic Knowledge: The American and British Experiences

Cambridge University Press, New York, NY, USA, 1990, xvi + 477 pp., $44.50.

With increased specialization, “tresspassing” from one social science to the other is rare. When it occurs, the outcome is often awkward, a lowest common denominator of the participating disciplines. Not so here. This collection of papers, prepared for a Woodrow Wilson International Center for Scholars symposium, explores the relations between government and the development of knowledge. A deliberate focus on the institutional history and political economy of Great Britain and the United States ensures an insightful treatment of the interplay between economic knowledge, policy development and execution, and the emergence of new organizational forms in modernizing societies.

Especially interesting is Donald Winch’s examination of the role of economists—ranging from Adam Smith, Malthus, and Ricardo to the economic advisers of the Thatcher era—in shaping the public policy debate in Britain. An equally rich and complex mixture of politics and economics shines through John Lauritz Larson’s paper on the intellectual antecedents of the American Republic. This essay relates how John Quincy Adams’s vision of strong federal leadership and national economic development faltered against the values of personal liberty, unbridled enterprise, and State prerogatives articulated by Adams’s political enemies—just as “Americans who utterly depended on the management of a welfare economy embraced Ronald Reagan’s neoclassical Gilded Age rhetoric as the pure milk of the founders’ intent.”

William Barber provides a spirited account of the major impact that “academic scribblers” had on the New Deal as hundreds of economists joined the public service “where the action was,” even as FDR announced: “I know nothing of economics and nobody else does.” This is followed by Robert M. Collins’ perceptive treatment of the evolving influence of policy practice on theory, as the economics of scarcity spawned by the Depression gave way to the economics of abundance and the emergence of economic “growthman-ship” in the 1940s. In his essay about the development of British economic policy between the wars, Peter Clark concludes that governments learn “the hard way” rather than through “classic texts” written by “great thinkers,” a theme amplified by George C. Peden who confirms that the British Treasury used theory during the 1940s and 1950s in a most “eclectic way.”

Such pragmatic assessments of the role of economic theory in government are timely reminders of the limits of the profession in an age when Harvard professors and Chicago boys jet from one international trouble spot to another carrying instant policy remedies in their briefcases. Valuable too are the reminders about the contributions that public institutions have made to economics and statistics, directly challenging the notion, sometimes attributed to Keynes, that governments and their agents are passive consumers of the ideas of “defunct economists.”

In brief, the case studies assembled in this book (ranging from the formation of taxation to the design of population and welfare policies) reveal an active role of government in the development of economic knowledge involving multiple and gradual interactions between the state, the economics profession, and private interest groups. Indeed, the British and United States experience competently covered in this book suggests that the construction of domestic economic policy capacities in developing countries (and the transforming economies of Eastern Europe) must be viewed as long-term, tailor-made ventures requiring a wide range of sustained interventions in the public as well as the private sector.

Robert Picciotto

Anne Krueger

Perspectives on Trade and Development

University of Chicago Press, Chicago, IL, USA, 1990, vi + 385 pp., $49.95.

Anne Krueger’s views on trade policy and development are widely known. This well organized volume of her work over the past two decades is a testimony to the scholarship behind those views.

Ms. Krueger is a free-trader—espousing free trade under any circumstances. She strongly advocates that a country is better off moving toward free trade, even if its trading partners are moving in the opposite direction. This is the conclusion of the last chapter of her book, “The Role of Developing Countries in the International Economy.”

This belief is both a strength as well as a weakness of her work. Ms. Krueger is clearly on strong ground when she is analyzing and demonstrating the costs of protectionist policies. The chapters on the “Rent-Seeking Society” (Chapter 7), “Economic Costs of Exchange Control” (Chapter 10), and “Test of the Infant Industry Argument” (Chapter 11) are well researched and convincing. Her analyses in these chapters would apply very appropriately to explain the slow strangulation of the economies in Eastern Europe, as well as the economic and political crisis faced by the Union of Soviet Socialist Republics.

Ms. Krueger is on less firm ground, however, when she attributes rapid growth, almost solely, to outward trade orientation. The comparison between the Republic of Korea and Turkey (Chapter 12) focuses exclusively on trade orientation, neglecting other important factors such as human capital investments. This omission is surprising since the chapter on “Factor Endowments and Per Capita Income Differences Among Countries” (Chapter 4) convincingly demonstrates that differences in human capital stock explain, to a large extent, differences in per capita income.

The outward trade orientation that has been shown to be successful in the Republic of Korea and other East Asian newly industrializing countries also bears scrutiny and should be distinguished from free trade. The success has come from—and some would say, despite—very carefully managed interventionist policies; conscious export promotion combined with import protection; and judicious use of credit and export subsidies. The real unanswered question is why this approach has not worked elsewhere. Some would say the answers lie beyond economics. Ms. Krueger’s analysis does not shed light on this question.

Ms. Krueger’s views have changed somewhat over the years. In the chapter written in 1988 jointly with Vernon Ruttan, “Development Thought and Development Assistance,” the important role of infrastructure and human capital is acknowledged. It is heartening to see, and hope, that her tenure at the Bank, which ended in 1987, may have had a lasting effect on her views on development and the role of trade policy in it.

Ajay Chhibber

Julian L. Simon

The Economic Consequences of Immigration

Basil Blackwell (published in association with the Cato Institute), Cambridge, MA, USA, 1989, 402 pp., $39.95.

This book does an admirable job of summarizing the existing theoretical and empirical literature on the economic impact of immigration. It also presents a substantial amount of data from a number of countries on immigration and the characteristics of immigrants, and critically evaluates the policy debate on immigration in the United States. As such, the book will be welcomed by economists and other social scientists, as well as by the informed public and policymakers.

The author persuasively argues the case for immigration. The key to their economic contribution is the age composition of immigrants: immigrants tend to arrive during the prime of their working lives, have desirable economic behavior characteristics—such as high saving rates and productivity—and make net contributions to the public Treasury. As a result, both immigrants’ and natives’ incomes are better off compared to what they would have been in the absence of immigration.

There are, of course, costs associated with immigration, particularly illegal immigration that is geographically concentrated. The author argues that these are largely short-run costs that, eventually, are clearly outweighed by the benefits of immigration. Although the majority of readers may accept this, a more balanced presentation would have included a fuller discussion of the short-run costs of immigration to receiving communities.

The author also takes issue with many popular misconceptions about immigrants: immigration to the United States is now low by historical standards; immigrants have about as much education as natives; and immigrants do not have a higher propensity to commit crime, to be unemployed, or to propagate. In addition, there is no evidence that aggregate unemployment is caused by immigrants. Simon clearly relishes debunking what often passes for conventional wisdom in the public debate. This is apparent in the argumentative tone of some chapters, which contrasts with the academic presentation in most of the book.

The effects of immigration on the source countries is discussed in one chapter. Many readers, particularly those from outside the United States, will find this treatment of the economic consequences of emigration somewhat cursory. At the theoretical level, it would have been interesting to consider the dynamics of large-scale emigration—what are the mechanisms that, over time, lead to the reduction of emigration to sustainable levels? Similarly, a discussion on the experience of specific source countries would have added balance to a book that, in the end, largely focuses on the United States.

David Coe

Pamela S. Falk (editor)

Inflation: Are We Next?

Hyperinflation and Solutions in Argentina, Brazil, and Israel

Lynne Rienner Publishers, Boulder, CO, USA, 1990 ix + 166 pp., $22.

This book contains six essays on the experience of Argentina, Brazil, and Israel with their heterodox anti-inflation programs of the mid- to late-1980s, as well as a study of the factors affecting inflation performance in the United States in the 1980s. The contributors have wide experience in government service, international finance, and academia, and include Luiz Bresser Pereira, Minister of Finance in Brazil in 1987, Emanuel Sharon, former Director General of the Ministry of Finance in Israel, and Santiago O. del Puerto, former Argentine finance representative to the United States and Canada.

The essays on Argentina, Brazil, and Israel provide historical background and political insight to the anti-inflation programs of these countries and update the assessment of these programs presented in earlier studies (for example, those included in “inflation Stabilization—The Experience of Israel, Argentina, Brazil, Bolivia, and Mexico,” reviewed in Finance & Development, June 1990). The paper on the US experience offers a comprehensive explanation of why the fiscal problem in the United States has not yet produced the kind of inflation experienced in many countries of Latin America and Israel; at the same time, it warns of the potential problems that may arise if the fiscal problem is not addressed and the world continues to accumulate ever-increasing amounts of US debt.

However, the book represents a somewhat loose collection of essays that does not really draw on the distinctive institutional features and inflation history of Latin American countries and Israel in addressing the question in the book’s title “Are We Next” (where the “We” refers to the United States). The essays are convincing in arguing that a major and lasting improvement in the fiscal situation in Argentina, Brazil, and Israel was a necessary condition for achieving success in the battle against inflation (and that failure in this area was ultimately responsible for the failure of the heterodox programs in Argentina and Brazil). But the essays are less incisive in discussing whether in the absence of competitive factor and goods markets in these countries, success on the fiscal front may not have been a sufficient condition for a lasting reduction in inflation.

One of the essays on Israel attributes inflation in part to the struggle over the distribution of income, and Luiz Bresser Pereira argues that a key factor in the failure of the Brazilian program was the absence of the kind of political and social pact the Israelis were able to secure. This leaves unexplained why many countries are able to contain inflation with indirect macroeconomic controls without the need for social or political pacts to decide the distribution of income.

Brian Stuart

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