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For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.


For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

Michael Bordo (editor)

Money, History, and International Finance:

Essays in Honor of Anna J. Schwartz

The University of Chicago Press, Chicago, IL, USA, 1989, xi + 272pp., $35.

This volume was published by the National Bureau of Economic Research to honor one of its best known Research Associates. In addition to Anna Schwartz’s bibliography and a brief biography, the volume consists of five papers together with comments and the discussion that accompanied the presentation of the papers at a 1987 NBER conference in New York.

The first two papers emphasize Schwartz’s contribution to economic history. Bordo’s essay begins with an interesting chart that shows a growing increase in citations to Schwartz’s main work, A Monetary History of the United States, 1867–1960—something remarkable for any scholarly work, but almost unheard of for an empirical study. Bordo argues—and it is hard to take issue with him—that much of what passes for conventional wisdom in monetary economics today was not always well accepted, and that much of it can be traced directly to A Monetary History or the research stimulated by it. He carefully chronicles the work and the controversies spawned by the study and argues that if some of the conclusions have not held up (after all, scholars today have more data and improved statistical techniques), the questions asked were always the right ones. Indeed, with the benefit of hindsight, it is surprising how many of the conclusions do hold up; the book is a testament to the ability of sharp intellects to extract sound insights from limited data.

Forest Capie and Geoffrey Wood describe Schwartz’s contributions to British economic history. The fact that her work on British economic history, much of it empirical, and some of it over fifty years old, has stood up and continues to be the standard by which other work is judged is testament to its value.

A paper by Philip Cagan underlines the importance of Schwartz’s contributions to monetary economics. In a critical review of money-income causality since the publication of A Monetary History, he provides an excellent, thoughtful description and critique of her empirical techniques for the nonspecialist.

The final two papers stress Schwartz’s contributions to international finance. Allan Meltzer and Saranna Robinson’s essay is particularly appropriate given Schwartz’s long standing interest in the issue, most recently as staff director of the United States Gold Commission. The essay is readable to anyone with interest in the subject, although it is technically sophisticated. The study is detailed and carefully done. The authors conclude that there is no evidence that the gold standard led to long-term price stability. The study, however, does not take into account changes in fiscal policy and other exogenous changes, something the authors clearly acknowledge.

Michael Darby and James Lothian derive some simple, testable hypotheses from a basic monetarist model. One of these relates to exchange rate regimes and the independence of monetary policy; they conclude, not surprisingly, that exchange rate flexibility has tended to increase monetary independence. They also find evidence of increased interdependence of capital markets. Most interesting, and perhaps controversial, is their finding of short-run independence of monetary policy under fixed rate regimes.

The volume concludes with two short readable essays, the first by the late Karl Brunner and the second by Milton Friedman. All in all, the volume is a fitting tribute to one of the profession’s most valued members.

Richard Haas

Joseph Gold

Exchange Rates in International Law and Organization

American Bar Association, Section of International Law and Practice, Washington, DC, USA, 1988, xvi + 593 pp., $50 for full-time Government, Central Bank and International Organization employees, $85 for Section of International Law and Practice members, $95 for others.

This is a thought-provoking book on the history of exchange rates in international law and the International Monetary Fund since the Bretton Woods Conference of 1944. It provides a detailed and comprehensive description and analysis of its subject, as well as a wealth of source materials.

What makes the book particularly valuable is that it provokes further thinking on this theme. Instead of providing dry and abstract descriptions of developments or events in a definitive manner, it stimulates the reader by revealing foundations and structures and growth processes, and thus demonstrates the importance of a “developmental” treatment of exchange rates in international law. The book shows that exchange rates are an essential element of the international monetary system, which far from being static is continuously in the process of adapting to a changing environment.

This characteristic of the system poses some very interesting and difficult questions for the international lawyer. Sir Joseph quite rightly points to the need for a legal order with respect to exchange rates, as they are considered matters of international concern. The manipulation or mismanagement of exchange rates in the absence of legal constraint can provoke international disorder and conflict (p. 548). The question, then, is: What is the extent of legal constraint that is acceptable to the international community? Obviously, this cannot be determined a priori; it would reveal itself only when the limits are tested. The book traces the struggles of the Fund and its members in dealing with these limits.

The principal development that brought these issues to the fore was, of course, the breakdown of the par value system. The international treaty obligations flowing from the Fund’s Articles of Agreement proved too restrictive to contain the forces that caused the system’s demise. An amendment of these obligations was called for. Meanwhile, however, pending such an amendment, the Fund and its members were faced with an increasingly difficult situation. The disappearance of an effective “official” gold value and the absence of a reasonable free market price of gold threatened, inter alia, the use of the Special Drawing Right, whose value was defined by the Articles in terms of a quantity of gold. Notwithstanding this charter definition, the Fund decided to value the SDR in terms of a basket of 16 currencies, pending the Second Amendment of its Articles. The solution provides a significant example of a situation where an international organization is compelled by events outside its control to take protective measures that are not specifically authorized by its charter.

This episode taught the Fund that, at least at this stage of its development, the international monetary system should not be subject to the unsustainable confines of firm treaty obligations that cannot be altered except by way of amendment. The Second Amendment reflected this consideration. It recognized that appropriate exchange rates for the currencies of members depend on their pursuit of sound domestic policies. It recognized that the firm treaty obligations supporting the par value system had to be replaced by the softer rules of law set forth in Article IV, Section 1 of the Articles. This relaxation of the obligations of members was counterbalanced by requiring the Fund to exercise firm surveillance over the exchange rate policies of members, and to adopt specific principles for the guidance of all members with respect to those policies (Article IV, Section 3(b)).

Although such principles have been adopted, the code of conduct for exchange rate policies, which was expected to emerge from the insights gained from the Fund’s surveillance over these policies, has unfortunately not (yet) been established. Such a code of conduct is essential, as the author convincingly argues, to improve legal certainty and to ensure equitable treatment by the Fund of less developed countries, as well as its industrialized members.

Tobias Asser

W.W. Bartley III (editor)

The Fatal Conceit: The Errors of Socialism

The Collected Works of F.A. Hayek: Volume I

The University of Chicago Press, Chicago, IL, USA, 1989, xiii + 180 pp., $24.95.

The great intellectual debates in economics are reminiscent of the theological schisms of the Middle Ages, except that fewer people get killed. From the skirmishes and battles of the 1920s and the 1930s, the post-war planning-cum-government intervention factions emerged triumphant: the state could, and indeed should, Intervene in economic affairs in order to effect a more rational allocation of resources, provide welfare, keep unemployment low, improve income distribution, and so on. In the case of the newly independent developing countries, a major state role was considered all but axiomatic, beyond discussion (an attitude that led to untold wastage and corruption).

Things began to change about 20 years ago, as the gap between the promises and reality of state enterprise widened. The market-zealots have progressively taken the initiative: the market mechanism, private enterprise, the price system, and the elimination of state regulation are now seen as the road to economic salvation. These influences are evident not only in industrial countries, but certified socialist countries the world over are scrambling to scrap or modify discredited and antiquated economic systems. If there is any conceit now, it is on the part of the market-zealots.

Hayek is one of the champions of private enterprise and the market economy and, by any measure, one of the giants of 20th century economic thought. A representative of the Austrian school, veteran of the celebrated 1930s debate with Keynes, winner of the Nobel Prize for economics in 1974, he must, at 90 years of age, feel a great deal of satisfaction that the “errors of socialism” are finally being exposed.

The main lines of Hayek’s “system” are well known: economics is really a coordination problem; prices are essentially a communication network; economic phenomena are seen as a spontaneous order, the result of action and not design. His contributions to capital theory, monetary theory, and trade cycle theory are well known, as is his unremitting criticism of Keynes, who in the present volume is blamed for the worldwide inflation of the third quarter of the 20th century and the severe unemployment that followed it.

In this slim volume, Hayek shows his protean intellectual prowess, stradling various disciplines—evolution, biology, epistemology, ontology, theory of culture, as well as economics—with an ease that at times leaves one breathless. The problem with socialism, as he sees it, is that it is wrong about facts, its central fallacy being its aim to redesign traditional morals on the basis of rational justification.

Socialists, of whatever brand, will not like this book. Even those who favor a liberal economic system, with some role for the state—be it in the provision of welfare or in some guidance of the “invisible hand”—may find it a bit too strong. But there is no denying Hayek’s forceful and perceptive analysis, and his contribution to the intellectual debate.

Bahram Nowzad

D.R. Pendse

Black Money and Budgets

Allied Publishers Private Limited, Madras, New Delhi, 1989, xiv + 201 pp., Rs. 110.

In this slender, well-written, and entertaining book, the author, an Indian economist, addresses three topics: black money, fiscal policy, and budgets. These topics are discussed within the Indian context. The book is divided into roughly three equal parts, each dealing with one of these topics. Whether the reader shares the author’s views or not, which are in particular cases somewhat unfashionable, or even radical, he or she is bound to find these chapters highly entertaining and full of useful information. Dr. Pendse is a gifted writer, capable of entertaining and of informing at the same time. I certainly found this book delightful to read.

Chapter 1 discusses the anatomy of black money, the underlying causes, and the remedies that so far seem to have been unsuccessful. The chapter proposes a five-point plan of action for India, which ranges from the appointment of a high- powered commission and the deregulation of the economy, to the reduction of high marginal tax rates, and the effective enforcement of penalties. I found myself in agreement with much of what the author was saying. The remaining chapters in Part I dealt with specific aspects of the “black economy.” One of them dealt with an article that I had written for Finance & Development a few years ago and in which I had, somewhat uncritically, reported a very high estimate of the black economy for India. This estimate had mistakenly been attributed to the Fund when, in fact, it had been made by Indian economists. Another interesting chapter summarizes the findings of the 1985 report of the Black Money Committee. This report deserves to be read by anybody interested in the topic. Some of the other chapters argue that there are links between black money, presumed leakages from public expenditures, and presumed kickbacks on government contracts.

The second part of the book deals with what the author calls the “fiscal mess.” The author castigates ideological policies, frequent changes in policies, and high fiscal deficits. These, in his view, have led to a deterioration of the Indian fiscal situation. I particularly liked Chapter 9, in which the author reports on an airport conversation (which was fortunately extended by a two-hour delay in the plane’s departure) with Professor Nicholas Kaldor. A lot of wisdom transpires in this chapter. I was particularly intrigued with the argument that there has been a high correlation between the level of wages of tax inspectors and tax evasion in India. It was also interesting to see the argument presented by Kaldor in favor of a tax on property. He argued that rent-seeking (that is, the opportunity of deriving personal advantage from certain government policies) has made some people rich. Therefore, property tax can be seen as a tax on accumulated rents. Chapters 10 and 11 deal with two specific fiscal proposals: a marginal employment subsidy for India, and a case for the abolition of the individual income tax. In both cases, the author presents solid arguments, but this reviewer was still left somewhat unconvinced by these proposals.

The final section deals specifically with Indian budgets. To one who is not from India, this part is perhaps less interesting, although as a case study of a country’s evolving fiscal policy, it certainly deserves attention.

Vito Tanzi

Simon Commander (editor)

Structural Adjustment and Agriculture:

Theory and Practice in Africa and Latin America

Overseas Development Institute, London, England, 1989, xiv + 250pp., £11.95.

This series of 14 papers represents the first book-length effort to assess critically the design and impact of adjustment programs in agriculture. Such programs are difficult to design and implement because they require a combination of pricing and public investment reforms, and a willingness on the part of governments to sustain the adjustment effort over several years. As a result, as the book shows, the track record of agricultural adjustment policies during the 1980s has been mixed.

A growing body of evidence now available on government intervention in developing countries proves that the agricultural sector has been taxed by price and investment policies, both at the sectoral and at the macroeconomic level. The “urban bias” implicit in policies affecting agriculture is responsible for the poor performance of the sector. The main objectives of adjustment programs are to correct this bias, by shifting resources into tradable agriculture, and to reduce poverty in rural areas where the vast majority of the poor are concentrated.

The interaction of price and investment policies, which is at the heart of adjustment programs, is brilliantly analyzed in a paper by Ajay Chhibber. The message is that “getting prices right” is a necessary, but by no means sufficient, condition for agricultural growth. Adjustment programs must therefore, until the improved policy environment yields long-run benefits, include measures to compensate specific farmers for short-term losses of incomes stemming from higher input prices and higher food prices.

Achieving multiple objectives and simultaneously redefining the instruments of government intervention is the challenge of these agricultural adjustment programs. Simon Commander argues convincingly in his review of the African experience that the mixed results obtained by these programs are due to the fact that donors have mostly concentrated on reforming price and trade policies—which were heavily distorted—but that they have failed to address the more complex economic and political issues of sequencing of reforms and underplayed the role of investment.

The book is equally divided into articles by distinguished economists (such as Omotunde Johnson, Paul Streeten, and Per Pinstrup-Andersen) reviewing the main theoretical and empirical issues and country studies (Ghana, Zambia, Senegal, Morocco, Colombia, and Brazil). One regret is that the Asian agricultural adjustment experience is not reviewed. Its coverage would have enabled the reader to compare the performance of agriculture in Sub-Saharan Africa and Latin America with that of a continent where rapid technological change and outward-oriented trade policies have induced major structural changes in the recent past. Aside from that omission, this book provides a thorough and balanced discussion of complex issues. It is strongly recommended to all scholars and practitioners of agricultural development.

Jean-Jacques Dethier