A New View of Economic Growth
Maurice Fitzgerald Scott
Oxford University Press, New York, NY, USA, 1989, xxix + 592 pp., $96.
This comprehensive book comes at a time when there is a revival of interest in long-term growth theory—a subject which had fallen out of favor for some time. Given the generally disappointing growth performance of developing countries in the 1980s, the renewed scholarly interest in the subject, as manifested by this volume and a number of recent articles, is indeed a welcome and potentially important development.
Modern growth theory received its impetus from the linear output-capital model of Harrod and Domar and the neoclassical model of Solow. In the Solow model, the steady state rate of per capita growth is unaffected by capital accumulation; it depends only on exogenous technological progress. Numerous empirical estimates relying on the Solow model and using growth accounting techniques tend to show that the contribution of technical progress to the growth of per capita output far exceeds that of capital accumulation. Denison’s most recent study of the United States finds that advances of knowledge (technical progress narrowly defined) swamped the contribution of capital to growth by a factor of almost three to one (Trends in American Economic Growth, 1929-82, 1985).
It is difficult to do justice to this encyclopaedic book in this brief space. The core argument of the book is that economic growth can be fully explained by relating it to investment (in gross terms) and the growth of quality-adjusted employment. The rate of growth of capital stock is measured by the ratio of gross investment to the net capital stock. It, therefore, follows that the rate of growth of capital stock is higher than conventionally measured. Thus, the contribution of investment to growth would be larger than what is indicated in previous empirical studies. And it is this underestimation of investment that has given rise to the “residual,” which is attributed to technical progress.
The basic premise of the model developed in this book is that investment by itself creates and reveals further investment opportunities through change and learning. Thus, exogenous technical progress is abandoned. A simple linear equation relating growth to investment, growth of labor force, and a “catch-up” term provides a close fit to long-term data on nonresidential business sector for the United States, the United Kingdom, Japan, France, Germany, and some of the smaller European countries. The contribution of investment averages slightly more than that of employment growth, though it varies significantly over time and across countries. The role of technical progress was not found to be statistically significant.
The author also uses the model and the data to address a number of other themes, including the determinants of the shares of labor and capital in total income, comparisons of growth rates of output, employment and productivity in similar industries across countries, growth rates of different industries within one country and one time period, and taxation and growth. While these applications provide useful insights, by and large, no unequivocal or “new” explanations of major significance emerge.
The book also takes up the question of the optimum rate of investment and growth.
Based on data for the United States and the United Kingdom nonresidential business sectors in the years following World War II and up to 1973, the author finds that the marginal social return to investment is substantially greater than the marginal private return. Hence, prima facie, both investment and growth are suboptimal. Part of the gap between the social and private returns can, of course, be explained by taxation. But the author puts forward two other possible explanations: a “learning” externality to investment (similar to Arrow’s learning-by-doing thesis) and a “demand” externality arising from market imperfections (essentially a “locomotive effect” among firms).
This book makes an important contribution to the new literature on the determinants of long-term growth and provides useful references to previous studies on the subject. Solow, in his 1987 Nobel lecture, cites recent work by N. Wolff which, using long-term data on seven large countries, finds a “very strong” positive correlation between the rate of technical progress and the speed of investment. Partly based on this work, Solow observes that it is possible “for a reasonable person to believe that the stimulation of investment will favor faster intermediate-run growth through its effect on the transfer of technology from laboratory to factory” (AER, June 1988, p. 315). This book and other new studies in this field reinforce the view long held in the development community—that investment does matter for growth and it does so in a major way. The investment externality argument provides a powerful case for favoring policy measures that increase both the quality and quantity of investment.
A European Central Bank?
Marcello de Cecco, Alberto Giovannini (editors)
Perspectives on Monetary Unification After Ten Years of the EMS
Cambridge University Press, New York, NY, USA, 1989, xvii + 371 pp., $49.50 (hardback); $17.95 (paper).
This volume contains the papers and proceedings of a 1988 conference held in Castelgandolfo, Italy, where academics and policymakers gathered to discuss the subject of monetary regimes and institutions in Europe. The collection of essays covers a broad range of subjects: a discussion of the advantages and disadvantages of monetary unification; an historical background on past episodes of monetary unification; and views on various institutional issues that arise in the context of a European Central Bank.
The contents of the book can be classified into four main sections. The first section focuses on the cost and benefits of common currencies. Drazen and Grilli examine the issues that arise for European countries from a move toward a common monetary rule from a public finance perspective, stressing in particular the loss of the inflation tax related seigniorage. Drazen discusses the implications for the tax structure of inflation convergence and increasingly open capital markets. Grilli studies empirical evidence on resort to the inflation tax in European countries and shows asymmetries in the use of seignior-age. Bertola examines the determinants of international factor mobility and integrates the analysis of factor movements with exchange rate behavior and stabilization theory. In the process, he makes an incisive argument that uncertainty about prospective exchange rate movements can hamper efficient factor mobility. From this line of reasoning, Bertola infers that there may be positive returns to exchange rate stabilization.
The second section concentrates on problems of monetary policy coordination. Casella and Feinstein examine central bank policy in the context of different exchange rate and monetary regimes; they trace the difficulty in establishing a common currency to the pervasiveness of free rider problems. Carraro, in turn, draws inferences from time series data on inflation, growth, and relative trade balances of the importance attached by European policymakers to these three main target variables. He finds that there is a broad concurrence with regard to the ranking of targets, but also that central bankers tend to have too short horizons for purposes of policy coordination.
Lessons from history are drawn from past experience with monetary unification: in Germany, examined by Holtfrerich; Italy, analyzed by Sannucci; and the United States, described by Miron. The evidence provided in these papers suggests possible ways to overcome institutional obstacles arising from conflicting national interests.
Finally, institutional issues arising in the context of the establishment of a European Central Bank are examined in a paper by Cohen and in a discussion in a panel consisting of Masera, Rieke, Russo, and Thygessen. The paper and the panel discussion offer a spectrum of interesting views on prospects for a European Central Bank and set out a number of pragmatic proposals on how to proceed toward the establishment of a European monetary authority.
In conclusion, this collection of essays represents a substantive addition to the growing body of research on European monetary policy issues. It would have been interesting to see, however, some papers explicitly devoted to an analysis of the implications of monetary unification for national budgetary policies, a subject that has attracted considerable interest since the issuance of the Delors Committee report on economic and monetary union in the European Community. Readers will find more than enough to challenge them in this volume—the papers are of high quality and will strengthen the reader’s grasp of many issues currently under discussion in Europe.
Vingt Ans d’Institutions Monetaires Quest-Africaines 1955-1975
Editions L’Harmattan, Paris, France, 1988,482 pp., F 260.
During the twenty years ended in 1975, major political and economic changes occurred in Africa, especially in West Africa. Many countries gained independence and took steps to consolidate their sovereignty. In the sovereign domain of currency issuance and monetary policy, some countries such as Ghana opted for a national currency, whereas others—such as the former French colonies in the region—decided to form a monetary union with French guarantee of convertibility of their common currency, the CFA franc.
Not surprisingly, monetary cooperation in West Africa—before and after independence—also changed considerably over those twenty years. The colonial Currency Agency was transformed into a full-fledged central bank (the Banque Centrale des Etats de I’Afrique de I’Ouest, or BCEAO), shifting its headquarters from Paris to Dakar along with a shift in personnel, from colonial administrators to an “Africanized” staff. The highest level of authority over the West African Monetary Union, or WAMU, became the Conference of Heads of States instead of the Council of Ministers. And the union branched out into new ventures, including a union-wide development bank (the Banque Ouest-Africaine de Developpement, or BOAD), which was financed in part by BCEAO profits.
This book documents these changes and the people and institutions responsible for them. The author, a Frenchman who was head of the BCEAO during these twenty years, makes it clear from the beginning that his account is not a treatise on economic or monetary policy. And indeed, one should not look to this book for an analysis of the merits or drawbacks of such a monetary union—nor for any detailed evaluation of the relationship between monetary and credit policy as exercised by the BCEAO and the achievement of macroeconomic objectives of the member countries, either individually or collectively.
Instead, the author offers his readers a chronicle, in the truest sense of the word—”a detailed historical account of events, arranged in order of time without analysis or interpretation.” In this chronicle of monetary cooperation between France and the young WAMU, readers will find a litany of names of African and French ministers and senior civil servants, a litany that is brought to life by the author’s observations and characterization of these policymakers with whom he was in close contact for two decades. Readers will also recognize how multilateral decisions can fall victim to the hostility between ministers of the same government, between the head of state and the head of government, and between heads of state or ministers from different member countries.
The chronicle will also reveal some differences in approach to problems of economic development, with some countries favoring free enterprise, as exemplified by the strong push for the creation of a union-wide business bank and/or a financial market, and others inclining toward some form of cooperative-based development policies. Differences at the macroeconomic level are also delineated, with some members opting for some form of regional harmonization of development plans and their implementation, in contrast with others, which tended to see economic development in a fairly strict national perspective.
Finally, this chronicle offers some 20-year-old stories whose relevance, far from diminishing, has grown over the years—notably the account of the far-sighted Executive Director for francophone Africa at the Fund. In 1969, he suggested that the Presidents of the BCEAO countries commission a study on the implications of the union and the CFA franc for the monetary integration of France into the European Economic Community. This proposal was greeted with skepticism at the time.
In sum, Mr. Julienne has acquitted himself well in his stated intention to recount—sometimes anecdotally, sometimes reflectively—the events during the initial years of monetary cooperation in francophone West Africa.
Trade Policy in a Changing World
Robert E. Baldwin
University of Chicago Press, Chicago, IL, USA, 1989, xi + 273 pp., $59.95.
This collection of essays, written over the past several years, is a timely contribution for those seeking to understand current trade policy in the United States and its approach to the ongoing Uruguay Round of multilateral trade negotiations.
Three of the essays provide an excellent review of US trade policy since World War II. They illustrate (1) the shift in the use of trade policy to promote, to a greater extent, broad international, political, and national security goals; (2) the continuing efforts by Congress to modify the power of the President in this field; (3) changes in the positions of the Republican and Democratic parties; (4) shifts in the attitudes of business, labor, and farmers; and (5) the increased use of nontariff measures at the same time as tariffs are reduced. In an interesting perspective on the Reagan Administration, the author concludes that a series of events produced policies that only imperfectly reflected the initial objectives of the Administration. A sobering thought for economists is that their arguments had little effect on the actual direction of trade policy even when liberalizing actions occurred.
Five essays look at the theoretical basis for policies actually adopted. These include a useful survey of pioneering contributions to welfare economies by Bergson, Samuelson, and Arrow, and the development of related theory of public choice. A fascinating analysis is provided of the economics of the GATT, which the author claims “mainly [protects] the interests of the more politically effective producers rather than of consumers.” The author debunks arguments normally advanced to defend infant-industry protection. In his view, trade policy is an ineffective policy tool to achieve social welfare objectives and quite often produces effects opposite to those desired.
Two chapters examine employment effects and negotiating techniques of multilateral trade negotiations. The author’s comments on the need for effective negotiating strategies to deal with “unfair” trade practices are of particular interest, given the current preoccupation of the United States with this issue and charges by other countries that the United States is undermining the multilateral trading system by adopting unilateral and bilateral approaches to trade.
The final chapters on current policy issues and trade strategies are instructive to those who fear that the “new protectionism” is threatening the international trading regime, and that the GATT procedures are inadequate to deal with current problems in the multilateral trading system. These chapters also provide useful insights on the current debate on multilateral versus bilateral and regional approaches to liberalization, and on the relative contribution that changes in trade rules and in US macroeconomic policies can make to resolve current dissatisfaction in the United States with international trade.
Security and Economy in the Third World
Princeton University Press, Princeton, NJ, USA, 1988, xxvii + 432 pp., $39.50.
Third-World Military Expenditure and Arms Production
Robert E. Looney
St. Martin’s Press, New York, NY, USA, 1988, xxxi + 242 pp., $55.
Third World Military Expenditure Determinants and Implications
Pinter Publishers, New York, NY, USA, 1989,154 pp., $25.
With increasing talk among the major powers about the need to cut military establishments and outlays, attention has shifted to the relatively large military expenditures of developing countries. Facing difficult economic circumstances, most LDCs have large and unmet demands for social services and development. Yet, in the past three decades, their military expenditures have risen twice as fast as their per capita income. But increasing outlays on the military do not appear to have bought more security—even today, some 17 conflicts continue around the globe. Most of these are “low-tech” conflicts without direct superpower involvement.
Economic dichotomies abound: for example, there is today one soldier for every 240 persons in the developing world, while only one physician is available for every 1,950 persons. At a time when scarce national resources and dwindling supplies of foreign assistance have forced governments in the poorest countries to cut back on social sector expenditures and on new investments, military spending has shown a remarkable resilience.
Against this background a new crop of studies has emerged in recent years, concentrating on the interaction of military expenditures and economic issues. In addition, much work has been done recently on assessing data on such expenditures and in providing a better data base for economic and political analysis. Among others, the IMF, through its annual Government Finance Statistics, the US Arms Control and Disarmament Agency’s regular compilation of World Military Expenditures and Arms Transfer (latest edition, 1989), and Ruth Leger Sivard’s superbly presented World Military and Social Expenditures (latest edition, 1989), provide authoritative sources of information for both scholars and policymakers.
Admirably bridging the gap between these two tribes, Nicole Ball has produced the most comprehensive and clearly written book on this subject in recent years. Harking back to her earlier important work on this subject, she offers a lucid discussion of issues relating to the measurement of such expenditures. Her work is not a diatribe against the military, nor a technical thicket of computer printouts and regression coefficients. She makes the case for understanding military expenditures against the need for countries to help their citizens improve their lives. In this context, she dissects the relationship between such outlays and development, and reviews the role of foreign aid in the process. Often, major aid donors are also major arms suppliers, and increasing proportions of external debt servicing of a number of large developing countries is for military debt.
Ball recognizes that many countries primarily employ the military for internal security duties and that much of the expenditure is on operating costs rather than imports. Hence, reduction of the arms trade and conflicts between nations may not help in curbing military expenditure to any significant extent; it is the basic insecurity within countries that bedevils their efforts to rein such costs. This leads her to end on a less-than-hopeful note: “… unless domestic inequalities can also be greatly reduced and strong domestic political systems controlled by civilians and responsive to the need of all groups within society are established, sustained reductions in Third World security expenditures are unlikely.”
Looney’s book is a sharp contrast to Ball’s, relying (as he does in earlier books) in large part on the computer to spew out pages of data, and mapping association between variables in staccato fashion. The computer analysis of issues such as the budgetary impact of arms production in the Third World is preceded by a cryptic introduction and commentary on earlier studies. It is followed by an equally brief conclusion in each case. A number of case studies are undertaken in the second part of the book, concentrating on Iran, Saudi Arabia, Latin America, and Argentina. An intriguing result of his regressions is that “Military expenditures in the Saudi context have (in addition to their security value) a number of significant impacts on the private sector, not all of which are negative.” But this, like most other findings, is not adequately explored or explained.
A much better mix of computer-assisted analysis and commentary is provided by McKinlay. Unlike Looney, McKinlay walks the reader through his analysis, critically examining his hypotheses and results, and putting appropriate weights on different methods of analyses. He sets military expenditures against the management of budgets to provide support for the view (also found in a 1989 IMF study) that “military expenditure has a life largely independent of central financial constraints.” But, he also sees the military as a “multifaceted phenomenon,” playing a role in the domestic arena as well as in interstate conflict. He posits the military as “a pressure group, albeit a pressure group with a privileged access to government” since it constitutes “one of the main bureaucracies of government.” Surprisingly, McKinlay’s regressions indicate that “militarization” does not necessarily translate to higher expenditures on the military in comparison with earlier civilian regimes in the same countries. He does not take account of the “crowding out” effect. He finds a positive relationship between interstate conflicts and military spending, and that there is “a propensity for military expenditure to remain higher even after actual hostilities have ceased.”
With over one trillion dollars being spent each year on the military by all countries of the world, there has been increasing emphasis on the rationale for these expenditures and on their alternative uses. This examination is of particular relevance in the developing world, which accounts for some 20 percent of the world’s military spending, and where such outlays often exceed expenditures on health and education. These books, as well as the recent Sivard and ACDA reports, illuminate the political and economic context of these expenditures.