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Books

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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Robert Z. Lawrence and Charles L. Schultze (editors)

An American Trade Strategy

Options for the 1990s

The Brookings Institution, Washington, DC, USA, 1990, vii + 234 pp., $128.95.

Jagdish Bhagwati

The World Trading System at Risk

Princeton University Press, Princeton, NJ, USA, 1991, viii + 156 pp., $16.95.

Alan Oxley

The Challenge of Free Trade

St. Martin’s Press, New York, NY, USA, 1990, xi + 254 pp., $35.

Peter Morici (editor)

Making Free Trade Work

The Canada-US Agreement

Council on Foreign Relations Press, New York, NY, USA, 1990, vii + 182 pp., $17.95.

Trade issues might not fire the imaginations of the public at large, but they manage to provoke lively debate among writers on the subject. These books try to define an appropriate set of trade relations in a rapidly changing world. The broad post-war commitment to multilateralism, inspired largely by US leadership, is increasingly being called into question. As economic relations among countries become more complex, reaching far further than transborder flows of goods, regional integration efforts are now the focus of attention.

But the shift of emphasis away from multilateralism is not just geographical. It has also taken on a sectoral hue, and bi-laterally based arrangements in such sectors as textiles, clothing, automobiles, electronics, steel, and agriculture have become important in defining trade relations between particular countries. The trade policy dialogue among academics is short on consensus, offering governments an unhelpful and bewildering array of choices. At the heart of all this discord is the tension between regionalism and multilateralism, between sectorally based market sharing and a rule-based trading system, between discrimination and nondiscrimination, and between managed trade and bureaucratic non-interference. The books reviewed here address these issues, offering a broad range of frequently competing views and prescriptions. These works are strong on advocacy, if not always on the analytical and factual underpinnings of their arguments.

The Lawrence and Schultze book, a Brookings conference volume, canvasses the full range of current views about the direction that US trade policy should be taking. The book contains three main papers, together with contributions from six discussants and commentators.

Anne Krueger argues the case for open multilateral trade, both on standard efficiency grounds and in terms of the contribution that free trade can make to the competitive environment faced by firms. She strongly rebuts the alternative prescriptions espoused by the two other principal authors, Rudiger Dornbusch and Laura D’Andrea Tyson, who argue for hands-on trade policy. Krueger’s objections to managed trade rest on a combination of theoretical, informational, and political problems that arise when bureaucrats, at the behest of politicians, attempt to replace markets. Her arguments may not have the attraction of being new and fashionable, but they are sound and hard to challenge.

Dornbusch’s approach is a mixture of bilateralism and aggressive unilateralism. His approach involves active bloc formation by the United States, and even more active pressure tactics against Japan, the latter being characterized by Dornbusch as a “basically closed economy.” In Dornbusch’s world, Japan would face sanctions if it failed to increase its imports from the United States at an average real rate of 15 percent per year for the next ten years. What is most extraordinary about the radicalism and insensitive nationalism of the policies proposed by Dornbusch is that he bills them as measures to arrest and roll back protectionism and to prevent the emergence of restrictive trade blocs. In other words, aggressive actions based on unilaterally defined criteria are supposed to be supportive of an open nondiscriminatory trading system.

Tyson’s case for trade policy intervention is much more industry specific than Dornbusch’s. Tyson targets high technology industries, along the lines of what the United States has already attempted with microchips (antidumping, minimum prices, and a reluctant commitment to an expansion of imports by Japan). The problems with this kind of approach are well known. Whose special case pleading should be accommodated? Which industry is strategic, and what about the domestic users of the output of protected strategic industries (such as computer manufacturers in the microchip case)? More broadly, real doubt exists as to the capacity of the United States to run any kind of systematic industrial policy that, given the US political system, could possibly avoid capture by special interest groups. We are further reminded by Avinash Dixit in his comments as discussant that even if the spillover arguments warranted protection for high technology industries, optimal intervention theory establishes that this is not a justification for trade measures.

Jagdish Bhagwati’s book on the world trading system is in the same vein as his excellent 1988 work on the subject of protectionism. The author once again demonstrates his rare ability to convey complex ideas in a readable and entertaining manner. His book offers a direct and powerful challenge to many of the premises underlying the prescriptions of managed trade advocates.

Bhagwati discusses how “unfair” trade arguments have been used to bolster demands for managed trade and to justify unilateral departures from the multilateral rule-based system by the major trading countries. This analysis provides the backdrop to Bhagwati’s diagnosis of the actual and potential threats facing the General Agreement on Tariffs and Trade (GATT) trading system. An important part of the story is the resurgence of regionalism. His discussion of regional trade agreements is tinged with agnosticism, presumably because whether regionalism proves hostile to multilateralism is essentially an empirical question. Bhagwati does, however, spell out criteria designed to ensure that the GATT system survives the new reigonalism.

Finally, Bhagwati devotes some useful space to exposing the high level of misinformation that abounds about what the GATT actually is and what it does. In the process, he cannot resist mentioning Sir Dennis Robertson’s characterization of a brilliant economist who strayed into the policy arena as “silly-clever”—that is, technically and formally clever, but silly when it comes to ill-informed policy prescriptions.

Alan Oxley’s book is a welcome addition to the literature. It is the best and most readable account currently available of the broad range of issues the GATT is trying to address and how the GATT process actually works. It comes from a trade policy practitioner who, as Australia’s Ambassador to the GATT in Geneva, spent nearly five years at the center of the action in one of the most eventful periods of the GATT’s history. Oxley’s book combines the story of what was actually going on in the preparatory and early stages of the Uruguay Round with a serious substantive analysis of the challenges facing the GATT system and why it is important to meet them.

Oxley’s entertaining narrative does not conceal the frustrations of trying to secure meaningful commitments on a multitude of issues among many (more than 100) countries. If something is missing from this book, it is an analysis of what needs to be done to make the GATT process more workable. Apart from the substance of differences that divide countries, one cannot help asking after reading Oxley’s book whether part of the problem is not a failure of process. A book like this one inevitably suffers from the fact that it deals with fast moving events, but its central message about the risks of policy failure at the multilateral level is strengthened by what has not come to pass (the completion of the Uruguay Round) since the book was published.

The seven essays in Peter Morici’s book examine various aspects of the Canada-US free trade agreement (FTA). Again, the book has been quickly dated by events. The prospect of a North American FTA including Mexico, and President Bush’s Enterprise of the Americas Initiative, confound more than one prediction made in the book. Nevertheless, the work is useful as an introduction to the extraordinarily broad array of is-sues that the FTA seeks to address. One theme that keeps coming through is the incompleteness of the FTA as it currently stands.

Michael Aho, in his foreword to the book, offers a notably strong repudiation of FTAs, from which he is only willing to exempt the “special cases” of a North American FTA (including Mexico) and the European Community. A succession of other FTAs, he argues, would be a recipe for “RIBS—resentment, inefficiency, bureaucracy and silly signals.” The same should be said more generally of protectionist departures from the GATT system of multilateral trade disciplines.

Patrick Low

David Laidler

Taking Money Seriously

The MIT Press, Cambridge, MA, USA, 1990, xiv + 226 pp., $27.50.

David Laidler has set himself a fascinating if daunting task in writing these essays: to explain to a general audience why, in the face of the collapse of monetarism, one should continue to care about money and monetary policy. He does not take the easy path of denying the collapse of a body of thought of which he had once been considered a champion. Rather, he acknowledges at the outset that both of monetarism’s pillars were built on weak foundations. One pillar—the money-demand function—has proved to require more and more reinforcement over time to keep it from crumbling under the weight of financial innovations. The other pillar—the expectations-augmented Phillips curve—seems solid enough, but it supports an odd conclusion, namely that money has only limited real effects. Monetarism thus seems to mean little more than the obvious: that inflation and money growth are statistically related in the long run.

Why, then, should we take money seriously? Throughout the past half dozen years—when most of these essays were written—Laidler has argued that Walrasian economics is incomplete because it omits the central role of money in promoting and organizing exchange. In the real world, there is no auctioneer who conveniently calls out prices until demand matches supply. Instead, exchange takes place on the basis of incomplete and constantly changing information, and individuals hold money in order to take advantage of news as it develops. Without money, exchange would not just be marginally more costly, it would be organized in a fundamentally less efficient manner. Control over the supply of money so as to stabilize the aggregate price level and promote the efficiency of exchange is a critical determinant of macroeconomic performance.

Laidler’s views on the international role of money are rather more controversial, as he takes a strong stand advocating flexible exchange rates: “There seem no circumstances in which, for the point of view of domestic policy, there are any advantages from fixed rates” (p. 167). His context is Canada, but he treats the argument as being generally valid. He envisions a central bank that wishes to gain autonomy in order to pursue an anti-inflationary policy but that is prevented from doing so by the need to maintain a fixed exchange rate against a less stable currency. That, however, has not been the prevailing paradigm of the 1980s. Rather, it has often been the less-disciplined authorities who have fallen back on exchange rate depreciation to compensate for past (or even continuing) excesses, with at best mixed benefits for macroeconomic stability. The argument is nonetheless thought-provoking, clearly presented as are all of Laidler’s ideas, and, well worth taking seriously.

James M. Boughton

Karen A. Mingst

Policies and the African Development Bank

University Press of Kentucky, Lexington, KY, USA, xii + 204 pp., 1990, $26.

At one level, this book is a comprehensive, although sometimes oddly organized, summary of the African Development Bank (ADB)—its origins, history, and structure. The author provides details on membership, voting structure, the internal decision-making process, its organization chart, salaries and fringe benefits of staff, the lending process, and types of lending. At another level, some of this information is related to the “political” aspects of the institution.

The author’s underlying thesis is that while all of the multilateral development banks (MDBs) “have, since their founding embraced the functionalist logic that technical economic questions could be separated from political questions,” these institutions, in fact, are subjected to a multitude of political influences, which are reflected in the behavior of the organizations. Thus, ADB is also a political institution, not the economically neutral institution originally envisioned. But in this respect is ADB merely reflective of the other, more senior MDBs, or is it more or less politicized? On this point the book is not always clear.

In her discussion of politics and the ADB the author deals with a wide range of “political” issues, including internal politics (what might be called bureaucratic infighting or turf-wars); inter-organizational politics (relationships between the ADB and the World Bank, the IMF, the Economic Commission for Africa (ECA), the Organization of African Unity (OAU), and other African and international organizations); attempts by the owners of the Bank to exert influence on its actions and policies (ranging from staffing, procurement under ADB loans, sectoral and country distribution of lending, and quality of the loan evaluation process to attempts to guide the underlying policies and philosophy of the Bank); and, finally, attempts by ADB to influence the development strategies of its borrowers. All of these are taken up in some detail, if not always in sufficient analytical depth. In particular, I would have welcomed more attention to the last theme.

The author points out a number of constraints that have limited the ADB’s effectiveness in working with other organizations and in influencing the policies of its borrowers. These include smaller and weaker staff, transportation and communications problems in Africa, the variety and instability of African regimes (it is not made clear why these latter factors should influence ADB more severely than other institutions working in Africa), and “lack of a clearly enunciated theory of economic development.” On this last point the author argues that ADB has tried to steer a middle course between private sectorled and state-led development, but finds that “it is unclear whether the lack of a specified theory of economic development hinders or facilitates ADB interactions with member states”—hardly a satisfying conclusion! The author, however, does briefly acknowledge the growing emphasis paid to the private sector’s role by President N’Diaye and to ADB’s increasing involvement in structural adjustment lending with the World Bank.

The discussion of ADB’s growing role in policy analysis and dialogue with member states, the increased application of project, sector, and macroeconomic conditionality, and ADB’s contribution to the growing debate on the internal and external economic environment of Africa (trade, aid, debt, domestic economic management, and governance) is the least developed part of the book. I would have wished for more emphasis on the widespread political debate in Africa over structural adjustment, or economic reform in general, as well as political reform and the evolving role of the ADB in these significant “winds of change” now sweeping across Africa. In her effort to deal with every facet of ADB, both political and non-political, the author has provided too diluted and diffuse a picture of the ADB to permit a clear focus on its present and likely future role of Africa.

Stephen O’Brien

Azizur Rahman Khan and Rehman Sobhan (editors)

Trade Planning and Rural Development

St. Martin’s Press, New York, NY, USA, 1990, viii + 236 pp., $49.95.

This book is a collection of 14 papers written in honor of Nurul Islam, a distinguished economist, administrator, and international civil servant from Bangladesh. The contributors include some of the profession’s most widely read trade theorists and development economists. However, the editors have not taken the care to steer these papers in a particular direction or theme. The result is a random compilation of papers that vary greatly in quality—from highly elegant theoretical approaches to very general and descriptive presentations.

The papers in Part 1 greatly enrich our understanding of the utility of, and the limits to, trade and aid policies. Jan Tinbergen demonstrates elegantly the practical utility of a “parabolic welfare function” that encompasses satiation and oversatiation as a criteria for allocation of development assistance for different countries. Adoption of such criteria should obviate the dangers of donor countries influencing recipient country’s national policies. W. Haque’s theoretical piece on trade theory seeks to establish the relationships between tariff rates and the conditions of home and foreign demand. Jagdish Bhagwati analytically separates various forms of rent-seeking from one another, and argues that it is imperative to distinguish policy-influencing DUP (directly unproductive activities) from policy-triggered DUP activities. Paul Streeten’s essay summarizes the considerations why the theory of comparative advantage forms an insufficient basis for either predicting or recommending free trade.

Part II discusses several issues in the area of planning, but in a rather disjointed way. Dharam Ghai’s analysis of participatory approach to development is illustrated with nine interesting grassroots initiatives, but as the author himself notes, most of them have charismatic leadership behind their success. Saburo Okita shows that while Japan was never a planned economy, government intervention, unlike in some developing countries, supplemented rather than supplanted initiatives. A.R. Khan’s argument that social cost-benefit analysis cannot explain the irrationality of investment decisions without a political economic framework is much too general; one could argue that every other analytical tool is also subject to similar limitations.

Finally, Part III touches upon aspects of rural development. Gustav Ranis draws attention to the importance of spatial dimensions in understanding the intersectoral linkages in development. His analysis of public policy options, however, is based exclusively on the now familiar outward-looking East Asian experience. The papers by David Mellor and Mark Leiserson present contrasting views on the role of policy. Mellor, while stressing agricultural trade, presents a very balanced view of the role of technology, human capital, and infrastructural investments in promoting cost-reducing technological change in agriculture, and argues for the need to adopt a broader strategy to deal with the threat of production instability to achieve sustained reduction in poverty. By contrast, Leiserson presents the usual simplistic prescription that the issues surrounding food self-sufficiency need to be addressed in the context of striking a balance between external and domestic sectors so as to ensure a more efficient development path. The last two papers, though specific to Bangladesh, deal with issues crucial to that country—foodgrain pricing policy and education.

K. Subbarao

Robert Z. Lawrence and Charles L. Schultze (editors)

Jagdish Bhagwati

Alan Oxley

Peter Morici (editor)

Patrick Low

David Laidler

James M. Boughton

Karen A. Mingst

Stephen O’Brien

Azizur Rahman Khan and Rehman Sobhan (editors)

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