Abstract
Finance & Development, June 2019, The IMF at 75
A New Global System
THIS USEFUL COLLECTION of basic documents and essays marks the 75th anniversary of the Bretton Woods Agreement of July 20, 1944. The Bretton Woods system is chiefly identified with the monetary agreement that set up the International Monetary Fund (IMF) to help countries maintain fixed exchange rates. In fact, the IMF was part of an interlocking set of institutions, including the International Bank for Reconstruction and Development (IBRD), progenitor of the World Bank, and—three years later—the General Agreement on Tariffs and Trade, forerunner of the much later World Trade Organization.
Naomi Lamoreaux and Ian Shapiro, eds.
The Bretton Woods Agreements
Yale University Press, New Haven and London, 2019, 504 pp., $29.50
Technically, these institutions were subordinate parts of the United Nations. The whole ensemble was viewed by the imaginative as an embryonic world government, reflecting the revulsion against laissez-faire capitalism and uncontrolled politics, which had seemingly led to the Great Depression of 1929–32, the currency and trade wars of the 1930s, and ultimately to the Second World War.
On the monetary side, the editors, Naomi Lamoreaux and Ian Shapiro, and Jeffrey Frieden argue that the pre-1914 gold standard worked because of wage and price flexibility. This ignores Charles Kindleberger’s well-known thesis that its success was due to its being a British-managed standard. Barry Eichengreen’s contribution is as accomplished as one would expect—but is it really true that the fixed, but adjustable, peg system set up in 1944 was brought down in 1971 by the US dollar’s link to gold? Any reserve currency has to maintain the confidence of its holders: modern inflation targeting is as much a commitment to sound money as is gold convertibility. The “original sin,” rather, is human nature, which wants tomorrow to come too quickly, and Michael Bordo is surely right to say that it was not the gold link but US inflation from the late 1960s that broke the camel’s back.
Harold James’s elegant essay is the most thought-provoking in the book. The Bretton Woods agreement, he writes, was possible because it insulated the monetary settlement from interminable trade disputes, which held of trade wars for 70 years.
A particular strength of this volume is the space it gives to the idea of the Global South. Selwyn Cornish and Kurt Schuler show that Australia tried but failed to make full employment a central concern of the IMF, but Eric Helleiner documents how pressure from countries like China, some in Latin America, and India—starting with a Sun Yat-sen paper in 1920 proposing an “International Development Organization”—led to the setting up of the IBRD as a “new kind of multilateral framework for development.”
The section “Paths Taken and Not Taken” includes Keynes’s International Clearing Union plan (which hardly gets discussed) and various proposals for flexible exchange rates (Douglas Irwin). It would have been worth mentioning that opponents of flexible rates, including Keynes, argued that exchange rate depreciation could lead away from balance of payments equilibrium, depending on the price elasticities of exports and imports.
Disappointingly, little thought is given to how the world might escape the looming confrontation between market-led globalization and economic and political nationalism. FD
LORD SKIDELSKY is a British economic historian, emeritus professor of political economy at Warwick University, and author of a three-volume biography of John Maynard Keynes.
In Transition
WITH HIS PREVIOUS WORKS, Richard Pomfret has already established himself as one of the leading scholars of the five central Asian economies: Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. His new book, The Central Asian Economies in the Twenty-First Century: Paving a New Silk Road, is very timely given the increased interest by policymakers, investors, and scholars in the region since the transition of power in Uzbekistan in 2016 following the death of the country’s long-serving president. The size, location, and recent political and economic reforms in Uzbekistan have had an impact on the rest of central Asia, boosting regional cooperation, cross-border trade, and greater connectivity. Global political dynamics and the growing economic influence of China in this part of the world have also stimulated interest in Pomfret’s book.
Pomfret takes the reader through the economic transitions of these five former Soviet republics— from centrally planned economies to independent states—with different degrees of market systems and openness to trade and investment. He outlines three major economic shocks faced by all central Asian countries starting in 1991: dissolution of the Soviet Union, transition from central planning, and hyperinflation. The book describes the diverse strategies used by these countries in dealing with these shocks, from the open market approach of the Kyrgyz Republic to the slow reform policies of Uzbekistan (until 2017) and the closed economy of Turkmenistan. Pomfret also analyzes the role of natural resources in the economic development of central Asia, with Kazakhstan being the major beneficiary of the oil development of the past two decades.
The book provides a detailed description of the evolution of the political economy of these five countries. Pomfret demonstrates deep knowledge of the economic models and government policies of each country since its independence. The book also analyzes the impact of different external forces on central Asian countries, with particular emphasis on the Russia-led Eurasian Economic Union and the impact of trade and investment ties with China.
A particular focus of the book is the challenges and opportunities of regional cooperation in central Asia. Unfriendly and sometimes tense relations between some countries have restricted opportunities for intraregional trade and infrastructure development. With the significant investments in infrastructure by these countries’ governments and international financial institutions as well as by foreign investors, conditions are favorable to increase regional integration, maximize the transit potential of the region, and restore the historic role of central Asia as the crossroads of the silk roads connecting Asia and Europe. Pomfret expands on this potential in the last chapter of his book, expressing cautious optimism for central Asia to restore its historic influence.
Richard Pomfret
The Central Asian Economies in the Twenty-First Century: Paving a New Silk Road
Princeton University Press, Princeton, NJ, 2019, 328 pp., $45.00
Pomfret’s book would have been stronger if it had focused more on the private sector’s perspective on national and regional economic development models and on the links between foreign direct investment, employment, and hard and soft infrastructure development for better connectivity and trade.
Overall, the book makes a significant contribution to the study of the evolution of the economies of central Asia and to evaluating the potential of these countries to meet the challenges and opportunities of the 21st century. FD
MAMUKA TSERETELI, senior fellow, Central Asia-Caucasus Institute at the American Foreign Policy Council
Back to the Future
Back to the Future
PEER-TO-PEER LENDING, information networks, collateralized loans, and shadow banking sound like financial innovations that fourished only on the heels of the digital revolution. But Philip T. Hofman, Gilles Postel-Vinay, and Jean-Laurent Rosenthal show that, contrary to traditional economic thinking, peer-to-peer lending (or banking without banks) dominated credit markets in 17th century France. One-third of French households used this type of credit in 1740. By 1840, peer-to-peer-originated mortgage credit in France was as large as mortgage credit in America in 1950 as a share of GDP.
Philip T. Hofman, Gilles Postel-Vinay and Jean-Laurent Rosenthal
Dark Matter Credit: The Development of Peer-to-Peer Lending and Banking in France
Princeton University Press, Princeton, NJ, 2019, 320 pp., $39.95
This book, based on a new data set of French regional notarial archives spanning centuries, shows how credit originated long before bank networks had a meaningful presence outside of Paris and other large cities. While banks focused on financing high-wealth individuals and merchant activities in cities, public notaries in France were the backbone of development of peer-to-peer lending. Owing to regulations dating back to the Middle Ages and the population’s low literacy level, public notaries in France drew up most marriage contracts, certified land sales, and served as fiscal agents in a variety of private transactions. Notaries were able to collect large amounts of information on the wealth of their customers. This insight into potential borrowers’ and lenders’ financial health supported an active loan brokering role among individuals that dominated credit in the mortgage market. It is only when the French government in the second half of the 19th century decided to boost mortgage lending by granting state guarantees to a nationwide institution (named Crédit Foncier) that peer-to-peer mortgage lending started to recede as a share of total lending.
This original and enlightening book questions the connection between bank networks and economic growth. While banks play a unique role in pooling and managing risk, they can price and supply loans properly only if adequate information on debtors’ creditworthiness is readily available. The paucity of public information on creditworthiness is one reason for repeated bank failures throughout the 19th century, and for notaries’ edge in matching lenders and borrowers well into 20th century France.
The book also offers interesting policy takeaways for contemporary observers of financial markets. History shows that a diversified credit ecosystem is one way to ensure the resilience of credit in the face of large shocks. The book demonstrates in particular that the uncertainty and hyperinflation that bankrupted most financial intermediaries in the first years of the French Revolution were somewhat mitigated by the existence of this “paleo shadow banking system” and explains why lending resumed quickly in the first years of the Napoleonic regime.
The authors also have an important message for anyone interested in financial development or other similar topics: focusing on new, alternative data sources may uncover visions of future finance in past events. FD
ALEXANDRE CHAILLOUX, assistant to the director, IMF Statistics Department
Operating Manual for Economists
UST AS MEDICAL students must be seasoned as interns, the IMF teaches its new economists how to transition from a theoretical, model-driven view of an economy to an understanding of how a real country’s economy actually behaves. Like the human body, a country’s economy reflects the composite operation of many specialized “macro” organs—the real economy, the fiscal sector, and the monetary and financial sectors—that interact with one another and with the rest of the world. Understanding the nitty-gritty of how these different organs function, and whether they are per-forming well, is as much art as science.
The IMF’s approach to such an education relies in part on an apprenticeship model and in part on short bursts of training from its teaching and capacity development unit. This wise book, Macroeconomics for Professionals—the collaboration of two former senior IMF stafers—distills the essence of the basic analytical framework the IMF uses to understand a country’s economic reality.
Leslie Lipschitz and Susan Schadler provide a superb road map for assessing a country’s policies. It is relevant not only for new IMF economists but also for analysts in investment banks, rating agencies, finance ministries, and central banks, as well as for economic journalists seeking to bridge the gap between theory and real-world practice. Indeed, this book would enhance economics training in graduate schools of public policy.
Separate chapters elucidate the analytical and statistical frameworks that underlie the macroeconomic sectors, the data measures that explain their operation, and the role of normative diagnostic indicators pertinent to sectoral assessments. The authors highlight the challenges of determining the direction of causality in the movement of key economic variables. Historical case studies and exercises in both the book and the online workbook highlight the limitations of policy guidance, gleaned from the frameworks. Effectively, the book allows the reader to consider the challenges policymakers face when making critical decisions, using all available tools and data to help narrow the scope of inevitable uncertainties.
Leslie Lipschitz and Susan Schadler
Macroeconomics for Professionals: A Guide for Analysts and Those Who Need to Understand Them
Cambridge University Press, Cambridge, UK, 2019, 308 pp., $39.99
Finally, the book implicitly provides the necessary cautionary perspective that high-level officials and policy analysts in government are too often “fighting the last war.” We are now in a century where the combination of rapid technological change and (still not fully understood) environmental forces may soon give rise to unexpected and substantial systemic or country-specific shocks. The economic verities of 2050, let alone those of 2100, threaten to be very different from those of today. Policymakers will be challenged to innovate responses—most likely untested— quickly to limit economic and social damage. The framework of global economic policy coordination cannot be so easily analyzed in a book of this kind. Yet the need for effective coordinated policy responses is both important and urgent. FD
PETER HELLER, visiting professor of economics at Williams College in Williamstown, Massachusetts, and former deputy director, IMF Fiscal Affairs Department
