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Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1989
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Price flexibility is no miracle cure

In her article “Economic Reform in a Planned Economy: The Case of Poland” (June 1988), Karen A. Swiderski advocates “firm demand management.” Her theory is that reforms have hitherto foundered because prices were inflexible and did not reach market-clearing levels. This resulted in excess demand. She cites the role of parallel markets, where prices are higher than in the socialist sector, as playing an important role in absorbing the excess demand in Poland. However, the author overlooks the fact that the persons deriving an income from parallel markets also exercise demand on the socialist sector. Thus we are dealing with mere transfer effects and not with the absorption of money. In fact, parallel markets in Poland actually tended to stimulate excess demand.

Several misinterpretations concerning the role of prices, money, and excess demand underlie the author’s theory. Excess demand in planned economies cannot be explained using neoclassical paradigms. This is because a flexible price system and functioning markets is a result of mobilization of resources. In planned economies, resources are static, that is, there are no mobilizable real factors to counter excess demand. Hence price increases can lead initially only to a redistribution of excess demand through the transfer effect. Subsequently, inflationary pressures contribute to an increase in excess demand through the dissolution of voluntary savings. In this respect, even a sufficient increase in interest rates on savings, as suggested by the author, would scarcely lead to a reduction in monetary imbalances. Rather, there would be a risk that the high interest return on surplus money would create even more surplus money. The problem lies in the lack of markets, not in inflexible prices or “soft” financial and monetary policies.

Hubert Gabrisch

Austrian Institute for Economic Research

Vienna, Austria

Ms. Swiderski responds:

A closed economy where official prices are set below market clearing levels is by definition characterized by an excess demand for goods and corresponding excess supply of money. A common response to situations in which officially controlled prices do not allow markets to clear is the development of parallel markets. Dr. Gabrisch, however, appears to argue that such markets only involve transfer effects and thus do not contribute to reducing any excess demand pressures. He, in fact, goes as far as to suggest that parallel markets in Poland actually tended to stimulate excess demand. He ignores the important fact that the higher prices in the parallel markets serve to absorb excess liquidity by reducing the real stock of money balances. Of course, parallel markets may well have other features that are socially undesirable such as their possible impact on income distribution.

Dr. Gabrisch also suggests that increases in interest rates may be destabilizing by further adding to the excess supply of money. This statement is questionable for several reasons. First, the total money supply in the economy (i.e., the liquidity held by both households and enterprises) need not necessarily be affected by an increase in nominal interest rates; the size and direction of any such effects would, among other things, depend on the relative importance of interest-bearing deposits and credits. In Poland, where domestic credits extended are larger than the deposit base, the effect on the total money supply could even be contractionary. Dr. Gabrisch also neglects the very important influence of interest rates on the demand for money.

A shortcoming of resettlement experience

In his excellent article on “Involuntary Resettlement and Development” (September 1988), Michael Cernea raises several significant issues; one in particular deserves special attention.

Engineering bias, or the tendency to concentrate on engineering matters while relegating social planning to someone else, is one of the pitfalls which inevitably produce unsatisfactory results in resettlement efforts. Based on my own experience over the past twelve years as a practicing sociologist and planner, I can certainly confirm this as a problem. Of greater concern, however, is the new trend on the part of engineering consultancy firms to address “the social component” themselves.

In order to improve their market position, engineering consulting firms have tried to integrate the engineering, environmental, and socio-economic aspects of development projects. However, the socio-economic studies that are done tend to be superficial and oriented toward satisfying minimum requirements usually without adding qualified social planning professionals to their staff.

This tendency on the part of engineering consulting firms to take on the social planning task is apparently being reinforced by their clients who are willing to trade-off sound social analysis for the convenience of a “one-stop” service. What they are buying into is the appearance of integrated planning. And, sadly, unless this is recognized, it will be the people who will pay.

Audrey Armour

York University, Canada

Evidence please?

I enjoyed amongst others the article “Educational Development in Sub-Saharan Africa” (March 1988) by Peter R. Moock and Dean T. Jamison. However, having studied in Africa for 17 years, I find the authors’ assertion that there are “high levels of absenteeism of teachers and students and a general lack of order and discipline” unfair. Empirically analyzed data, if at all available, proving this assertion might have convinced me otherwise. Nonetheless, kudos to the authors for this educative and interesting article.

Adewuyi Alabi

Nigeria, Africa

Peter Moock responds:

We have no firm data to back up the assertion regarding absenteeism in African classrooms, although there is plenty of anecdotal evidence that Bank project officers working on education have provided. The problem has been mentioned in sector work and appraisal reports. On the question of “order and discipline,” I regret that the statement in the article was misleading, as it suggested that there is a lack of discipline among students in classrooms, and this is usually not the case in Africa. The statement was intended to refer again to the absenteeism of (poorly managed and often underpaid) teachers.

Cradits: Photographs on pages 11, 16, 20, and 32 by D. Zara pagest 22 and 39 by P. Hughes-Reid; pages 5 and 19 by I. Andrews; and pages 8 and 45 by M. Artinaci. Art on pages 20, 34, 40, and 46, and charts by IMF Graphics Section.

International Monetary Fund announces two Occasional Papers

The Federal Republic of Germany: Adjustment in a Surplus Country

by Leslie Lipschitz, Jeroen Kremers, Thomas Mayer, and Donogh McDonald

Number 64 in the Fund’s Occasional Paper series, this study reviews German economic developments during the 1980s. It focuses on the policies adopted to deal with the country’s two major economic imbalances—high unemployment and large external surpluses—and it assesses the country’s medium-term prospects under various policy scenarios. The study underscores the importance of structural policy measures in dealing with German economic disequilibria.

Available in English, (paper) ix + 104pp. ISBN 1-55775-088-2

The Common Agricultural Policy of the European Community: Principles and Consequences

by Julius Rosenblatt, Thomas Mayer, Kasper Bartholdy, Dimitrios Demekas, Sanjeev Gupta, and Leslie Lipschitz

This study, Occasional Paper Number 62, traces the evolution of the Common Agricultural Policy (CAP) of the European Community. The CAP, which has failed to attain its goals and has incurred costly inefficiencies, has created tensions in international trading relations and come under increasing criticism in recent years. The study assesses the CAP’S effect on EC members and on the rest of the world, and discusses progress toward its reform.

Available in English, (paper) vii + 70pp. ISBN 1-55775-036-X

Price: US$7.50 each.

(US$4.50 each for university libraries, faculty, and students.)

To order, please write or call:

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700 19th Street, N.W.

Washington, D.C. 20431, U.S.A.

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