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Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1994
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Mortgaging the Earth is a provocative critique of development practice in general, and of the World Bank’s role in particular. The book’s themes are vital: the need for more participatory forms of development and greater sensitivity to social concerns, the imperative of incorporating environmental concerns into development policymaking, the importance of openness in decision making in multilateral institutions, the imperative of avoiding past mistakes, and the need for further debt relief (especially in Africa). These deserve urgent and continued attention, and Mr. Rich’s book is a welcome contribution to the debate.

The book’s value, however, is seriously undermined by its one-sidedness. Its approach is to pick the worst examples of country experiences and of World Bank performance and to generalize. This “analysis by vignette” is effective in raising emotions but does injustice to the important and complex issues involved. Chapter 1, for example, devoted to the Thai experience, portrays development in that country as one of a total failure to meet the needs of the poor. The huge gains in the poor’s access to education, basic health care, nutrition, and sanitation in Thailand are ignored.

The book portrays the development record as one of near universal failure—and its recommendations are predicated on this assumption. Unfortunately, by ignoring the dramatic achievements of the past quarter century—including a doubling of food production, a halving of infant mortality, a doubling of secondary school enrollment rates, a doubling of real incomes, and a sharp move toward democracy in developing countries—the book throws the baby out with the bathwater.

The book also suffers from the common methodological flaw of failing to take account of the counterfactual—that is, what would have happened had development programs not been followed. One example (of many) is in its treatment of structural adjustment programs, which, the book concludes, have led to slower growth, cutbacks in health spending, and no growth in exports. In fact, there is ample evidence that countries that failed to adjust to the shocks of the 1970s and early 1980s fared far worse on all those indicators than those that did adjust. To be honest to the issue, it is necessary to remember that only countries in acute difficulties seek support from the World Bank for adjustment programs. Thus, drawing conclusions from simple correlations between countries in crisis and World Bank involvement is analogous to observing the high correlation between sick people and hospitals and concluding that hospitals are bad for your health!

Rich’s portrayal of developing countries as beholden to the dictates of donors is inappropriate. Developing countries rightly take pride in their accomplishments and so too take responsibility for their failures. Countries such as India and Thailand (both highlighted in the book) receive less than 1 percent of their GDP in official development assistance. To assign to this the impact that Rich does is illogical. Of course, the World Bank plays a significant role in assisting its member governments (its owners), but a sense of perspective is warranted. For example, the Bank finances about 3 percent of dams in developing countries and about 2 percent of total investment.

The book also exhibits a rich-country perspective when dealing with issues such as energy. Rich writes from a country where per capita electricity consumption is more than 30 times that of India. Yet he seems to oppose additional power generation, arguing instead that developing countries should make their existing supplies go further. The World Bank needs to do more to help promote energy efficiency but should make no apology for investing in economically efficient and environmentally sound supply.

The book’s prescriptions for developing countries—essentially to slow down their modernization—are in sharp contrast to the expressed desires of the citizens of those countries. The 2 billion who currently have to use sticks and dung for their energy want access to electricity. So, too, the 1 billion without clean water and the 1.7 billion without sanitation want access to these services. And all aspire to higher living standards and better job opportunities. This helps explain why the majority of developing country NGOs continually support funding for IDA, while Rich does not.

The book is removed from current thinking on sustainable development. Mr. Rich regards the Brundtland Commission Report as “endorsement of business as usual” and the Rio Earth Summit (where 178 nations agreed to a program of action) as irrelevant or worse. The book thus misses out on important new insights on the links between development and the environment. Most serious environmental thinkers would now recognize that development is essential if the environment is to be protected. They recognize that, without development (including income and employment growth), there is no chance of protecting natural habitats in developing countries, and without education and higher income levels, Africa’s population will rise sevenfold and its forests won’t have a chance. This kind of thinking is now mainstream and embodied in the phrase “sustainable development.” The book rejects it, remaining fundamentally “antigrowth” and referring to sustainable development as an “oxymoron.” Rather, it falls back on a pre-Brundtland “development versus the environment” paradigm.

These criticisms apart, the book is an interesting read. By carefully documenting (albeit in exaggerated manner) the development mistakes of the 1970s and 1980s, it not only stirs the blood but also rightly points to the urgent need to guard against repeating the same mistakes. The preface claims that the book is “one person’s attempt to understand our world.” It should be read as such.

Andrew Steer

Deputy Director, Environment Department

The World Bank

This highly readable and informative book is based on the author’s 1990 Bertil Ohlin lectures. In writing about the interactions between politics and economics in developing countries, Professor Krueger calls upon a formidable background: professorships at leading universities (currently, Stanford) and five years as the Chief Economist of the World Bank (1982-86). She has written extensively on these issues, and in this book, she attempts to develop a synthesis from which one can reach a broad understanding of why economic policies so often go wrong and of what it will take to generate sustainable growth.

Krueger starts from the premise that bad policy, not bad luck, is to blame for the fundamental problems faced by developing countries. Excessively ambitious and underfinanced spending programs, unrealistic domestic pricing, rigid controls over a wide range of economic activities, unsustainable exchange rates, support for uneconomic industry through long-term protection against import competition … the list is sadly familiar and unassailable. In contrast, the “hign flyers” of East Asia and elsewhere have pursued more economically liberal policies aimed at generating wealth through exports, reducing price distortions, and allowing agents wide latitude in choosing what to produce and what to buy.

In asking why everyone does not adopt the open-economy paradigm, Krueger carefully avoids the easy answers. After all, it is as common for countries to embark on a diet of discipline and liberalism, only to fall prey to the temptations of open or disguised inflation, as it is for us mortals to give up on our New Year’s resolutions by Valentine’s Day. The problem, she argues, is not that the leaders of developing countries are typically weak-willed or misguided but that “there are systematic political-economic interactions at work” (p. 92).

Political support for economic openness has been slow to materialize in developing countries, for which Krueger cites three main causes: anticolonial nationalism, distrust of reliance on primary commodity markets in the wake of the depression of the 1930s (to which one could easily add the commodity depression of the 1980s and 1990s), and (until recently) a desire to emulate the apparent success of the Soviet Union in achieving rapid growth through mandated industrialization. The rise of democracy thus does not lead to economic reform; indeed, Krueger argues that success is as likely to come from an authoritarian but benevolent “social guardian,” such as President Chung Hee Park of Korea or President Suharto of Indonesia (p. 61). But she puts a positive spin on this Myrdalian nexus by arguing that economic success in turn breeds democratization and may create the political support for further reforms. Chile under Pinochet and Aylwin is a textbook example, but Krueger recognizes that in most countries, the links between political and economic reforms are harder to discern.

In spite of her care to tell a balanced story, Krueger occasionally oversimplifies. In emphasizing the dangers of introverted policies, she downplays the role played by adverse external shocks in bringing on the debt crises of the 1980s. In stressing the enervating consequences of trying to rapidly industrialize agricultural economies, she neglects the costs of relying on primary commodity exports for which the world market is highly uncertain. And in acknowledging the necessity of government authority for achieving economic reforms, she may be giving more credit to the beneficial role of government than most analysts would feel comfortable with. Such lapses are not surprising, given the constraints imposed by the lecture-series format, and they should not distract from the central message that Krueger skillfully conveys: economists and politicians ignore each other’s world at their peril, and only when we finally understand the relationship between the two will we understand why sustained development is so hard to achieve.

James Boughton

In contrast to other major revolutions that, among other goals, sought to check the influence of religion, the Iranian Revolution was inspired by the fundamental objective of replacing a secular society by one that, in all its dimensions, would be governed by the precepts of Islam. Enunciated in the rhetoric of revolution and enshrined in legal documents, the regime’s economic design was to reverse the perceived deficiencies and outrages of the system inherited from the Shah, most prominently to reduce dependence on the West (imports, oil export earnings, and a consumerist ethos) and to bring about a just and equitable society, incorporating “rights” to employment, housing, food, and certain basic needs (such as free water and transport).

In this assiduously researched work, Amuzegar traces the course of the Iranian economy in the context of the proclaimed goals of the Islamic Republic. He has produced a valuable and highly informative volume, all the more impressive for the severe data constraints he had to surmount. Economic and social developments are described and examined at the macroeconomic and sectoral levels, often in minute detail; indeed, in some passages the deluge of statistics all but overwhelms the text, blurring the focus on underlying trends. Even if certain segments lack narrative lucidity, the overall analysis emerges clearly, occasionally spiced with droll epithets (Amuzegar characterizes the regime’s ambitious social agenda as a “constitutionally mandated welfare nirvana”).

Amuzegar concludes that the overall performance of the economy during the postrevolutionary period has been “distinctly disappointing.” To cite one stark but key indicator, real GDP in 1990/91 was 6.3 percent below its level on the eve of the revolution; during the same period, per capita GDP fell by 38 percent. In surveying the complex of factors responsible for this performance (including the adoption of a “Soviet-inspired Indian model” of economic development—just as it was being discarded by those countries!), Amuzegar presses home the point that the economy has failed on economic efficiency as well as on equity criteria; the poor are not palpably better off. The author, who was a senior official under the Shah’s regime, buttresses his negative evaluation with references to analogous assessments by current Iranian leaders.

The basic methodological approach of the book—a comparison between promise and performance—is a legitimate one although subject to certain qualifications. It may be objected that the economic goals of the revolution should be viewed as basic ideals to be achieved sine die; after all, even the objectives of the American and the French Revolutions have not been fully realized, much less those of assorted socialist experiments. Others may point to acute exculpatory circumstances, in particular to the lengthy and devastating conflict with Iraq—the “costliest calamity of the century” for Iran. Still others may contend that economic aims were secondary to the principal goal of spiritual transformation—a claim that falls outside the compass of the work under review. Yet, for all these and other qualifications, the somber fact remains that, after more than a decade, the economy is apparently making little headway toward the regime’s declared objectives.

An essential lesson of Amuzegar’s analysis is that economic realities cannot be ignored or subjugated—especially in an increasingly global economy—and that the achievement of social, political, and many other objectives is, to a large extent, contingent upon the promotion of a healthy and expanding economy. It is seemingly a lesson that entrepreneurs of revolutions learn anew each time.

Bahram Nowzad

Poland’s stabilization and reform program (the Balcerowicz plan), launched on January 1, 1990, has been among the most courageous and successful of all post-Communist reform efforts. This experience is of vital importance for countries elsewhere in the region, and so it is important that it be well understood. In this slim and clearly written volume, a slightly updated version of the 1991 Lionel Robbins lectures, Jeffrey Sachs makes a most helpful contribution.

Starting with a description of the Communist legacy, Sachs details the main pillars of the Balcerowicz plan: stabilization, liberalization, privatization, the creation of a social safety net, and Western assistance. He stresses the political considerations underlying the program. Gradualism in subjecting the economy to the forces of the market was not a realistic option, since Solidarity feared that in such an approach it would be outmaneuvered by the old bureaucracy and entrenched enterprise managers. Sachs conveys some of the excitement and satisfaction involved in seeing each day on the streets of Poland’s cities fresh, positive effects of the program.

The favorable results of the program have been many: Poland has experienced the smallest production fall in the region and is the only European country to show steady and substantial growth since the end of 1991, its cities have been transformed, and more than half its economy has been placed in private hands. But has the cost not been excessive? Sachs firmly refutes this. He shows that, while there was some decline in measured real wages from the spike of 1989, consumption of foods showed no measurable dip in 1990 and 1991, while ownership of a wide range of consumer durables rose spectacularly. Even open unemployment, a new phenomenon in Poland, has only reached average West European levels, contrasting with the fears of those who expected massive labor shedding and who did not foresee the absorption of labor by a rapidly growing service and small-scale sector.

What are the lessons that can be drawn from this book? One is the crucial importance of sustained policy implementation with a clear eye on the goal of transformation. As Sachs puts it, “the great political task is to follow the path of reform in the face of inevitable anxieties, vested interests fighting for the status quo, and demagogues ready to seek political power by playing on the public’s fears” (page 3). Another is the need for Western help to bolster the reformers. While the US$1 billion fund to stabilize the zloty played a role in Poland, over the longer run, open West European markets and a willingness to accept Poland as a member of the European Union will be of immeasurably greater importance.

Mark Allen

These two books represent first-rate examples of economic analysis in two traditions, neoclassical (Winters) and public choice (Schuknecht). Contributors to Winters’ volume are interested principally in measuring the trade effects of ‘1992.’ Schuknecht explores the causal relationship between the institutional structure in the European Community (EC) (now European Union) and its trade policy practices, both external and internal.

Schuknecht sets out to explain why the EC has adopted an array of protectionist policies toward the rest of the world while liberalizing trade internally. He argues persuasively that protectionist measures taken in the EC, including voluntary export restraint agreements, national measures under Article 115 of the Treaty of Rome, antidumping actions, and price undertakings, are all highly politicized. At the root of this politicization is the current structure of EC institutions, which includes an excess of bureaucratic discretion combined with an unbalanced role for affected domestic interest groups, exacerbated by a lack of transparency and biased rules.

The value of Schuknecht’s work lies in both the course and the lesson. The course takes us through the institutional twists and turns on the route to trade policy formation in the EC. The lesson is an old one; namely, “the devil is in the detail.” Schuknecht meticulously dissects the legal and institutional structure of the EC to explain why this structure has simultaneously nourished external protectionism while tolerating, perhaps facilitating, progress toward the single market.

Contributors to Winters’ volume evaluate the quantitative effects of ‘1992.’ The volume includes computable general equilibrium (CGE) studies with imperfect competition, designed to evaluate sector-specific production, factor-market adjustment, welfare, and trade effects inside and outside the EC. Two theoretical chapters, one by Jan Haaland and Ian Wootan, the other by Gernot Klepper, suggest that the conventional wisdom regarding the pro-consumer, pro-competitive effects of ‘1992’ may be mistaken. Klepper’s examination of the pharmaceuticals industry, with careful reference to the relevant policy directives, argues that only “slight moves” toward a unified European market will occur. Winters’ chapter on trade policy in the European footwear industry is an excellent case study with some broadly applicable lessons. The Community-wide effects of integration of financial services is examined by Cillian Ryan, and the potential gains are found to be significantly larger than previously suggested. Policymakers and others interested in attempting to anticipate some of the economic consequences of ‘1992’ will find carefully reasoned and prudently qualified answers throughout the Winters volume.

Schuknecht and Winters are distinguished principally by the questions they ask. There is, however, a sense in which these questions should not be separated as a matter of practice. Because of the distributive effects of ‘1992,’ and because of the change in orientation away from national toward Community-wide rulemaking, interest group behavior and the progression of trade-policy measures can also be expected to change. This, in turn, can be expected to affect the longer-term economic consequences of ‘1992.’ Many of the models in the Winters volume offer substantial detail on the possible distributional consequences of ‘1992.’ These models thus contain a large measure of the raw material essential for evaluating, in the manner of Schuknecht, the likely endogenous response of interest groups after’1992.’

Whether these volumes are taken together or separately, anyone with an appetite for international commercial policy analysis will savor a thoroughly nourishing meal.

Michael Leidy

Keynes continues to tower above all other 20th-century economists. So we should expect Keynes and the Role of the State to be a gripping read, especially as the subject should involve social, philosophical, and political ideas as well as economic theory. In his opening remarks for this University of Kent at Canterbury seminar, Alan Peacock points out that Keynes’ “liberal” position on the role of the state ought to be sought in his ideals at least as much as in his experience of the world. Peacock also mentions that some of Keynes’ most pervasive practical influence has occurred indirectly; for instance, it was Keynes’ emphasis on macroeconomic variables that stimulated the taxonomy of national income and the quantification of variables, which today we take for granted and which, for good or ill, has enabled discussions about state interventionism to be informed and pervasive.

Regrettably, not all contributors try to combine scholarly reference to Keynes’ thought with their own contributions. Mica Panic, who writes on “The Future of the State in Eastern Europe,” manages to ignore Keynes (except for an allusion to the general theory). Richard Sakwa, again ignoring Keynes, argues for Western help for post-Communist societies, not through any general type of Marshall Plan, but by offering the opportunity of long-term economic and political integration into the world economy and society through trade, credit, training, joint ventures, and debt rescheduling. Although the papers are perfectly readable and interesting, the editors might have done a more conscientious job of obliging contributors to match their offerings to the actual title of this book. Two major chapters (out of seven) that do not refer to Keynesian thought is not good enough. And surely if Keynes were alive today, he would have plenty to say about the role of the state in economies in transition. For instance, a contribution that does explicitly consider Keynes in the context of Russia and development is that of John Toye, who discussed Keynes’ visits to Russia in 1925, 1928, and 1936 as a sample of analyses that anticipated much current thinking on structural adjustment in developing countries. Keynes’ prescriptions for structural adjustment included “reformed public finances, extra investment in agriculture for export proceeds, and the removal of wage and price distortions.” Similarly, Anand Chandavarkar uses detailed references to Keynes’ work (principally on India) to illustrate Keynes’ prescriptions for developing countries.

The more general macroeconomic papers by John Cornwall, Andrew Henley, and Euclid Tsakalotos suggest that to make Keynesian economics work, new institutions are needed to accommodate distributional conflict and hence a “permanent incomes policy.” We can be fairly sure Keynes would have been horrified by such a solution and would have sought some less interventionist role for the state. Indeed, Keynes might question whether we had exhausted his own prescriptions for our ills. For instance, the current wisdom about European unemployment is that labor immobility is encouraged by generous transfer payments and high costs of both recruiting and firing employees—implying that Keynesian demand management plays little role. Yet we could argue that in the late 1980s, European unemployment fell because aggregate demand increased faster and certainly not because the barriers to labor mobility changed. Similarly, there is little doubt now that Keynesian fiscal stimulus could reduce European unemployment (and is needed because of the limits on using monetary policy). But the Maastricht criteria will continue to deter such fiscal stimulus. We might imagine what Keynes would have made of the Maastricht target for national debt reduction given his evidence to the Colwyn Committee, which was debating ways to reduce the size of the national debt (an issue not mentioned in this book). “I think it is a matter almost of indifference…it looks nice to have a clean balance sheet, and I think it is partly false analogy from private account-keeping; an individual likes to be out of debt. But for a nation as a whole it is merely a bookkeeping transaction.” (The Committee on the National Debt and Taxation, Minutes of Evidence, Vol. II, paras 7589/90.) It is not the stock of debt that matters but the direction and rate of change in its size and composition.

One of the useful functions of such a book is to prompt the reader to look again at what Keynes himself actually said. For instance, Keynes’ attitude toward the role of the state was also reflected in an exchange in that same Colwyn Committee, when Keynes was asked whether he thought the view of those who thought they were overtaxed to pay the interest on the national debt should be disregarded: “I think there is no end to it if you set out in your legislative program not to produce the best results but to get rid of unfounded misapprehensions in the mind of the ignorant.” The Chairman: “But Parliament has to take account of public opinion?” Keynes: “It takes account of nothing else.” (Ibid, paras 7594/98.)

This book is worth reading, but Keynes is better.

Alan A. Tait

This book, a collection of selected papers presented at an OECD conference, will appeal primarily to scholars of technological change and innovation. Nevertheless, the general reader wishing for an introduction to the field can sample what some of its leading practitioners have to offer. The chapters are grouped into four sections, each with its own introduction. The theme of the book, as set out in the general introduction by Dominique Foray, is the tension between two tendencies: the imperative of modern technology for standardization and coordination and the diversity of conditions and objectives of economic agents. The relationship between technology and the wealth of nations is seen as resting on the “entering into coherence of the two mechanisms of technical progress (interdependence… and incentives…)” (p.16). In other words, the editors believe that the wealth of a nation would depend on how national systems provide incentives for innovation and diffusion of technologies.

Given its importance to the main theme, the section on “Institutional and Technical Change: The Importance of Diversity” is disappointing. The best is Susumu Watanabe’s piece on Quality Circles in Japanese firms, which punctures a few myths about the importance of the Confucian culture in explaining the loyalty and devotion of the industrious Japanese worker. Watanabe shows that in over two thirds of the cases, the Quality Circles met during regular working hours and that over 85 percent of the time, the firm paid for such work. Throw in lifetime employment and the egalitarian pay schemes, and one has a mixture of short-term and long-term incentives that would explain a great deal of the loyalty of the Japanese worker. Among other contributors to this section, David Marsden provides a useful discussion of the labor training institutions in France, Germany, and Britain, while Ben Ake Lundval explores the implications of “bounded” rationality for the evolution of cooperative behavior, overseas investment, and even “national systems of innovation.”

Dominique Foray and Christopher Freeman (editors)

Technology and the Wealth of Nations

The Dynamics of Constructed Advantage

Pinter Publishers, New York, NY, USA, 1993, vii + 406 pp., $75.

The section on “Networks and Convergence” is closest to the main theme of the book. Paul David, who, along with Brian Arthur, has made seminal contributions in this area, makes yet another in a chapter that discusses Markov Random Fields, which is spiced with interesting anecdotes and witty prose. David discusses how externalities and coordination problems, characteristic of a number of social processes, including technology diffusion, imply local increasing returns and lead societies to “lock in” to inefficient outcomes.

Modeling technical change and growth is dealt with in ‘The Models Revolution,” which has something to suit all tastes—neoclassical (Philippe Aghion and Peter Howitt), evolutionary (Francesca Chiaramonte and Giovanni Dosi), disequilibrium (Jean Luc Gaffard), and post-Keynesian (Bruno Amable). The first section on “Sources of Localized Learning and the Science-Technology Interface” covers a lot of ground. There are chapters dealing with the interface between science and technology, as well as with the diffusion of numerically controlled machine tools. Keith Pavitt’s chapter on the benefits (to private firms) of basic research is both interesting and brief.

While the book has a great deal to say about technology, there is much less on the wealth of nations. Despite the valiant efforts of the editors and those writing the introductions to the individual sections, the link between technology and the wealth of nations remains obscure. Consequently, Christopher Freeman and Luc Soete have to work hard in the concluding chapter to draw implications for public policy. But this is not meant to be an indictment of a book that deals with a very important, and even more complex topic.

Ashish Arora

Carnegie Mellon University

Pittsburgh, PA

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