Journal Issue

Books in brief

International Monetary Fund. External Relations Dept.
Published Date:
January 1989
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Herbert Stain

Governing the $5 Trillion Economy

Oxford University Press, New York, NY, USA, 1989, viii + 145 pp., $17.95.

Herbert Stein’s essay provides a welcome perspective to the current debate concerning the United States federal fiscal deficit. He argues persuasively that focusing exclusively on balancing the federal budget deficit is inappropriate. Not only does the “correct” definition of the deficit depend on the purpose to which the measure is being applied and the magnitude, but also to the structure of federal expenditures and revenues. Hence, the author argues for budgeting the GNP, which may or may not involve balancing the federal budget. In particular, he emphasizes the need to improve federal decisionmaking by enhancing the quality of information used in the decisionmaking process. He finds the current situation to be one of serious misallocation of resources that could endanger national security and the future quality of life in America. Professor Stein sets the ongoing process of budget reform against this background and suggests changes to budgetary procedures with a view to improving decisionmaking. Specifically, he recommends employing a four-year budget framework within which the deficit would be treated as a variable like any other. The value of this essay may lie less in the specific recommendations that the author advances than in the insights he can offer into the budgetary process.

Paul Krugman

Exchange-Rate Instability

The MIT Press, Cambridge, MA, USA, 1989, ix + 117 pp., 17.50.

This slim volume is a publication of the Lionel Robbins Lectures given at the London School of Economics by Krugman, and presents an exposition of his views on the exchange rate instability of major currencies in the 1980s. As always, Krugman’s views are provocative and well presented. His theme is a familiar one, emphasizing the role of imperfect goods and capital markets integration as a cause and effect of exchange rate instability. More surprising—in view of his earlier works on the need for further US dollar adjustment—is his advocacy for an eventual return to an adjustable-peg system. His argument is based upon the ineffectiveness of exchange rate volatility in affecting trade and the inefficiency of foreign exchange markets. However, proponents of fixed exchange rates and target zones are likely to be disappointed by his belief that an international monetary reform should be delayed until exchange rates have stabilized.

Georg Koopmann, Klaus Matthies, and Beate Reszat

Oil and the International Economy:

Lessons from Two Price Shocks

Transaction Books, New Brunswick, New Jersey, USA, 1989, 451 pp., $24.95.

This book is based on a report by the HWWA-lnstitut fur Wirtschaftsforschung, Hamburg, on the economic policy consequences of rising oil prices, with references especially to the Federal Republic of Germany. The study touches upon a wide range of issues, including oil price prospects, domestic and external stabilization policies under rising oil prices, the Fund’s role in that adjustment process, and the impact of oil price increases on the trade patterns of oil exporting and oil importing countries. The authors also discuss the recycling of oil exporters’ surpluses after 1973 and propose safeguards for international financial markets in the future through measures such as improved bank supervision. The concerns that initiated the report have been somewhat overtaken by the oil price developments of the 1980s. Nonetheless, the study remains a welcome vade mecum for policies to avoid a repetition of the adjustment traumas that followed the price shocks of 1973–74 and 1979–81. The authors believe that a need to deal again with substantial real oil price increases may emerge in the 1990s.

United Nations

Foreign Direct Investment and Transnational Corporations in Services

United Nations Publications, New York, NY, USA, 1989, xii + 229 pp., $26.

The substantial increase in the volume and significance of foreign direct investment in services since the 1970s has elevated their study and discussion to the global level. Trade in services is now being discussed in the Uruguay Round. The growth of services, from 25 percent of global FDI in the early 1970s to 40 percent of world stock by the mid-1980s, has been particularly evident in developed economies. This report, taken from a larger study of transnational corporations (published separately by the United Nations), notes that the growth of FDI in services has been brought about by industrial firms, as well as those active in finance and trade. It presents a wealth of data on the nature and flows of FDI in services and information on the regulatory and policy framework in which they operate.

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