Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
September 1985
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Isher Judge Ahluwalia

Industrial Growth in India

Stagnation since the Mid-Sixties

New Delhi, Oxford University Press, 1985, xxii + 235 pp., Rs 120.

This very substantial and path-breaking book focuses on one of the major problems of present-day India—what went wrong with industrialization over the past three decades and what should be done to make industry more efficient. The author spares us from yet another set of algebraic equations that show ideal resource allocation in an ideal environment. She also does not attempt to justify what went wrong, be it by a low level of development, poor resource endowment, import protection by India’s potential trading partners, or their unwillingness to share industrial technology. In preparing her book, she has combined the refinement and scrupulousness of a researcher, honesty, passion, and a thorough knowledge of sources of information and of ideas on Indian industry. The result is truly impressive.

India’s manufacturing sector entered the post-Independence era with large promises. It could count on demand generated by a huge domestic market and could tap the vast domestic resources of cheap labor at all skill levels. Its private sector was led by business dynasties that had gained recognition and experience in the world of trade and technology. Its managers did not have to cope with linguistic barriers and could benefit from well-established contacts in major foreign industrial centers.

Yet the results of the succeeding decades were far from impressive. Growth rates in the industrial sector gradually declined from annual rates of 8 percent in the late 1950s to middle 1960s, to less than 6 percent during the 1970s, and to around 2 percent in the first years of the current decade. To determine the sources of this lackluster performance, reflected not only in declining growth rates but also in quality, design, productivity, and a relatively feeble contribution to exports, the author reviews critically most of the hypotheses that attempted to explain this slowdown as well as those that sought to quantify the negative aspects of Indian industrialization.

The author shows that the distribution of income in India has not worsened over time and cannot be held responsible for the slowdown. Furthermore, lagging agricultural output—translated into a suspected decline in agricultural incomes—has never, in fact, taken place and could not have had any effect on demand for industrial goods, especially considering that the slowdown of industrial growth occurred mainly in heavy industries.

She points instead to four factors that contributed to industrial stagnation in the last two decades: (1) slow growth of agricultural incomes in general, and therefore an absence of expanding—but not shrinking—demand for industrial goods in rural areas; (2) a slowdown in public investment, starting from the mid-1960s particularly in infrastructural investment; (3) poor management of infrastructure leading to severe infrastructural—mainly power and transport—constraints; and (4) the industrial policy framework, including both domestic industrial policies and trade policies, and their effect in creating a high-cost industrial production.

Interspersed within the author’s analysis is a wealth of information, not only on Indian industry but also on some basic problems regarding industrial performance in LDCs, including the flaws in highly aggregated central planning and the insufficient attention given to forecasting market demand or to design specification, in particular in capital goods industries.

On the whole, the administrative limitations of the policy framework in Indian industry created strong incentives for “rent seeking.” The system discouraged entrepreneurial innovation and induced speculation and maximization of short-term objectives. The industrial policy framework became more and more regulatory and less and less developmental, thus belying the original promise of “channeling” growth in desired directions. This leads the author to suggest that a review and overhaul of the industrial policy framework is in order.

It is worth noting, in fact, that this study appeared on the eve of important policy decisions by the new Government that are meant to free India from excessive reliance on bureaucratic controls.

Alexander Nowicki

Richard W. Edwards, Jr.

International Monetary Collaboration

Transnational Publishers, New York, 1985, xxiv + 822 pp., $85.

Postwar international monetary cooperation, conceived during the dark days of World War II and against the backdrop of the monetary chaos of the 1930s, made a remarkable contribution to world economic recovery and the expansion of international trade, in conditions of relative stability. The principal forum for collaboration was the IMF, and its cornerstone the par value system of exchange rates. The latter is no longer with us, overwhelmed by events long ago, but international economic cooperation is very much alive, and a crucial need in current circumstances.

This magnum opus provides a detailed, and highly readable, description of the framework, arrangements, procedures, provisions, instrumentalities, forums, and organization for international monetary collaboration. It is buttressed by a good deal of negotiating and legislative history and provides a comprehensive and informed account of international monetary law. It treats monetary cooperation in the widest possible context, covering virtually every form of cross-border financial relationship. “International” is not used only in the sense of universal or global; regional arrangements are also included.

This book, some dozen years in the making, is written primarily from the standpoint of an international lawyer who is interested in the legal and institutional framework of the international monetary system within which the political economist must work. As such, it should be of immense benefit to anyone interested in international monetary relations—bankers, academics, journalists, and so on. It has been meticulously researched and the author has had access to much heretofore unpublished material. The result is a reliable, solid, and authoritative work of reference on this important topic.

While comprehensive on the framework and arrangements of international monetary collaboration, it does not attempt, in any deep analytical sense, to link the collaborative corpus to underlying economic issues or developments. Also, this reader missed an overall, analytical, summing up. International monetary collaboration is not an end in itself, but is intended to promote a better environment for international trade, an efficient allocation of resources, enhanced economic development, and, more generally, higher living standards all round. Against these criteria, how has the international monetary system performed?

In his preface, the author states that this book is “meant to be read from cover to cover”—presumably all 850 pages of it. Most readers are unlikely to do this, but will use it as a work of reference. Professor Edwards is to be congratulated for giving us this massive compendium. It is to be hoped that he will revise it periodically.

Bahram Nowzad

Centre d’Etudes Prospectives et d’lnformations Internationales

Economie Mondiale 1980–1990

La Fracture?

Economica, Paris, 1984, x + 402 pp., F 150.

According to the Paris-based Centre d’Etudes Prospectives et d’lnformations Internationales (CEPII), the world economy, or some of its regions, could face a severe new crisis. Seven potential disruptions (“fractures”) receive particular attention: (1) the large public sector deficits in most industrial countries; (2) the high and often rising share of social transfers, which thwarts the process of adjustment policies; (3) the difficult changes in the structure of industries—required by shifts in relative prices and demand; (4) “the worrisome arithmetic of employment” when overall growth prospects are insufficient; (5) the low growth in real disposable income in socialist countries, where management of the economy remains principally a means of power (except to some extent in China); (6) the likely long-lasting reversal of past trends in energy markets, with developed countries—unlike most LDCs—having learned the lessons of two oil shocks; and (7) international indebtedness, complicated by restrictive monetary policies in most creditor countries. The concluding chapter argues that a monetary and financial knot binds all these problems together and disentanglement would require new and more effective answers than have been offered thus far.

Two compound fractures, as it were, receive special weight: unemployment in OECD countries, especially in Europe, and excessive indebtedness in a large number of developing countries. On both scores, the tone is rather pessimistic. With regard to the very high debt-service burden in LDCs, the CEPII stresses the strong balance of payments constraint on growth (the elasticity of manufactured goods imports is about 1.5 on average), concluding that the path of adjustment is both grim and narrow.

On the whole, CEPII’s well-documented analyses are more convincing than its somewhat cautious projections, which are based mainly on model simulations. The IMF’s World Economic Outlook (April 1985) presents a less gloomy picture but was, admittedly, published after the 1984 recovery in the United States. More fundamentally, however, I would ascribe CEPII’s caution to the rather static reasoning used in the report. Adjustment policies should be construed not only in financial terms but also in terms of structural changes. Given a set of structural parameters, unemployment in Europe may decrease as growth speeds up, or as work-sharing schemes compress the effective labor force; however, it may also decline as a result of more flexible labor markets or through the development of labor-intensive sectors. Likewise, external imbalances can be reduced by slowing down the rate of growth or by containing imports, freeing resources to service external debts. However, a shift in policies, especially pricing policies, can result in export promotion and real import substitution (without heavier protection) and this may be a more efficient route.

Despite CEPII’s somewhat backward looking econometrics, the book is truly worthwhile and stimulating in its examination of current and prospective problems in the world economy, and should be of great help for anyone studying economic fluctuations.

Philippe Beaugrand

John Whalley

Trade Liberalization Among Major World Trading Areas

The MIT Press, Cambridge, MA, USA, 1985, vii + 311 pp., $30.

Professor Whalley’s book represents a much-needed attempt to apply theoretical precepts of trade policy to concrete policy questions. Which regions, for example, have gained most from the GATT-negotiated reductions in trade barriers and what are the prospects for further multilateral trade liberalization compared with the possibility of increasing fragmentation into bilateral arrangements? The answers depend upon the workings of a complex political decision-making process that, as Professor Whalley emphasizes, no model can adequately capture. Nevertheless, the significant contribution of this book is that it suggests a useful analytical framework for examining policy issues.

The author uses two numerical general-equilbrium models of the Heckscher-Ohlin type. The models serve to analyze and quantify the effects on different regions of changes in their own or their partners’ protection policies—and to evaluate the potential worldwide gains from alternative trade liberalization initiatives.

Terms-of-trade effects are critical to the approach and the results obtained. A unilateral abolition of US tariffs, for example, produces a net welfare loss for the United States, since the terms-of-trade loss more than offsets the domestic welfare gain resulting from the liberalization. Tokyo Round tariff cuts are estimated to result in gains for the main industrial trading partners and losses for the rest of the world. These results, and other simulations in the book, run counter to suggestions that unilateral trade liberalization is generally desirable in both developed and developing countries.

The author’s results hinge on four main points of methodology. The most important is the emphasis on terms-of-trade effects. The other points are import-price elasticity estimates that are lower than some estimates elsewhere, an assumption of constant returns to scale in production, and a reliance on a comparative-static mode of analysis that precludes an estimation of benefits from trade liberalization that might derive from, for example, higher growth rates and increased economic efficiency.

In his concluding section Whalley rightly emphasizes the dangers of trade policy retaliation and stresses the positive role of the GATT as an accommodation-preserving process. His characterization, however, of the GATT as a “regional trade arrangement” that involves the developed North but all but excludes the South appears to be unjustified. A particular feature of the GATT is the principle of most-favored-nation treatment, which helps to protect the trade interests of smaller nations. The partial breakdown of this principle in the textiles and clothing sectors, and the proliferation of voluntary export restraints, have been at the expense of the developing countries. Although the author recognizes that, in these sectors, protection causes a terms-of-trade loss to developing countries, the models developed here do not fully take account of the bilateral, sector-specific nature of much of the “new protectionism.”

S. J. Anjaria

C. H. Kirkpatrick, N. Lee, and F.I. Nixson

Industrial Structure and Policy in Less Developed Countries

Allen & Unwin, Winchester, MA, USA, 1984, xii + 263 pp., $29 (cloth), $11.95 (paper).

This well written and useful overview of industrial policy issues in developing countries ranges from topics of market structure and business organization to trade policies and policies toward multinational corporations. The book describes the literature and some of the experience gathered over the last two or three decades.

On most policy issues, such as the role of the public sector, the role of the multinationals, and export promotion versus import substitution, the authors take a middle-of-the-road position, organizing the pros and cons and giving a balanced economic analysis of the evidence. While this balanced, moderate approach is on the whole welcome, at times the reader longs for firmer conclusions; those expecting concrete policy recommendations may be quite disappointed. To take a somewhat extreme example, the section on “Finance for Industrial Development” concludes that “generalizations should not be made on the basis of such limited data. It is nevertheless worth pointing out that the dependence of individual firms on alternative sources of finance will vary between countries and over time, being influenced by the availability of funds from alternative sources, by government policy—both with respect to its attitudes toward private enterprise (domestic and foreign) and with respect to the provision of finance, and by the degree of political stability (or instability) in any country at any one time.”

Because the argumentation is left quite open-ended and because the analysis does not get down to practical issues of policy design (for example, how to design a workable duty-drawback system for exporters), the book is more useful for those seeking a good survey of industrial development issues than for practitioners looking for concrete advice on how to conduct their business.

Kemal Dervis

Brian Griffiths and Geoffrey E. Wood (editors)

Monetarism in the United Kingdom

St. Martin’s Press, New York, 1984, vi + 305 pp., $27.95.

This volume, published in 1984 but consisting of six discussion papers presented in a 1981 conference, is dated. In 1981, macroeconomic debate in the United Kingdom proceeded along traditional monetarist/Keynesian lines; reality since then has been more complex. The monetarist prophecy that the unemployment cost of disinflation would be short-lived has not been verified. Equally, the Keynesian prediction, that recovery could not commence without a policy U-turn, has not been borne out either. Structural factors in the labor market, especially the behavior of real wages, now receive more attention than three years ago—but the present volume has little to say on this.

The paper by T. Sargent and N. Wallace establishes that under certain conditions (in particular, when the real rate of interest exceeds the rate of growth), fiscal deficits may “cause” inflation. Specifically, a sustained fiscal deficit may ultimately force monetary authorities to resort to monetary financing, for beyond a certain point the public will be unwilling to hold additional bonds.

A. Budd et. al. argue that “monetarism fits the facts” in the United Kingdom, in the sense that the demand for money is stable, and changes in the quantity of money (sterling M3) have been an independent source of changes in prices. While their paper contains much valuable information, the exposition is confusing; the criteria used in sifting the evidence are by no means clear, and the approach to causation is fuzzy.

R. Batchelor’s paper seeks to explain high levels of unemployment in the United Kingdom in a “natural rate” context. Unfortunately, the explanation is flawed—one major determinant of the natural rate of unemployment in this paper is a dummy variable, equal to zero before the current Government and one thereafter. This appears to “explain” about 2 percentage points of the increase in unemployment.

J. Kay’s work covers familiar territory in its look at the effect of North Sea oil in a tradable/nontradable model, while Aliber sheds little light on how much of the real appreciation of sterling up to mid-1981 was a result of tight money and how much caused by North Sea oil.

The final paper, by A. Bade and M. Parkin, asks which monetary aggregate should be targeted. What makes this paper truly astonishing is the contrast between the initial and final versions. At the conference, the authors favored “pursuit of a steadier and smoother growth of the monetary base,” while in the published version, they favored “pursuit of steadier and smoother growth of £M3.” In another 1981 paper by Parkin, apparently M1 was the the preferred aggregate. Had the authorities been following the twists and turns of this advice, their credibility would have been in shreds.

In sum, several of the papers are of poor quality and the publication lag reduces the relevance and timeliness of the others. Recommended only for those with large book budgets.

Owen Evans

Dale W. Adams, Douglas H. Graham, J.D. Von Pischke (editors)

Undermining Rural Development with Cheap Credit

Westview Press, Boulder, CO, USA, 1984, xi + 318 pp., $25.

The results of agricultural credit programs have come under increasing scrutiny in recent years. A group based at Ohio State University has been in the forefront of studies on the subject and this collection of papers has been edited by two of its members, Dale Adams and Douglas Graham, and by J.D. Von Pischke of the World Bank.

The study’s principal concern is that many agricultural credit programs have not benefited agriculture and the smaller farmers in developing countries as expected. Their primary thesis is that the provision of cheap credit is the principal reason for the poor results. Governments have often tried to assist small farmers by providing low interest rate loans and they have done so to promote equity, to reduce the costs of producing local food or export crops, and to build political goodwill.

Various authors examine specific country experiences, but the general consensus is that low interest rates prompt larger farmers to capture most of the credit at the expense of smaller farmers, reduce rural investment from local resources, divert low interest funds to nonrural activities, substitute loans for borrowers’ own funds, and reduce opportunities to mobilize savings. Low interest rates also encourage the establishment of specialized financial institutions, most of which have significant problems with overdue loans, solvency, and effectiveness. The book argues, too, that deposit mobilization is a necessary corollary to effective lending.

This book is written basically for those with an interest in the subject. There is some repetition, a difficult feature to overcome in a collection like this, but the overview articles and the use of conclusions or policy implications at the end of each article make it possible for the more casual reader to skim the material and pick up its main points. Some might criticize the book’s heavy emphasis on Latin America, but this partly reflects the fact that most of the spectacular cases of credit distortions have occurred in this region and the principles cited are generally applicable elsewhere.

The book is a must for all those working with credit, whether rural or industrial, and certainly worth an hour or two for anyone concerned with agriculture. The criticism of the international agencies calls for thought by those concerned with formulating and implementing agricultural and credit programs.

D. Brian Argyle

G.S. Kindra (editor)

Marketing in Developing Countries

Croom Helm, Kent, UK, 1984, xii + 259 pp., £19.95.

This collection of 14 well-written articles provides a useful perspective on the role of marketing in the process of economic development. The book attempts to make a case for the stimulative role that a well-conceived marketing system can play and identifies the factors that should be considered in developing a marketing system that enhances economic and social progress. In combining articles written by authors with diverse social backgrounds and development perspectives, Kindra demonstrates how various elements of marketing interact to stimulate economic growth. By stressing the importance of marketing in the process of economic development, the book attempts to dispel the image of marketing as a parasitic and socially irrelevant economic activity, a notion allegedly held by some development economists, both theorists and planners.

The diverse experience of the authors and the broad definitions adopted for economic development and marketing are also, however, serious weaknesses in the book. Economic development is defined as “something associated with increases in per capita income and social advancements.” Similarly, marketing is “the network through which information can flow among the various actors in an economy to promote interrelated activities necessary to produce the final consumer products to satisfy societies’ needs.” In other words, marketing refers to the entire physical and institutional complex that generates those economic activities that link production and consumption. Given such broad and vague definitions for the two central concepts in the book and the diversity in the sociocultural background of the authors, it is not clear how or if the authors share a common understanding of economic development and marketing.

Nonetheless, the basic theme of the book is of special interest to those involved in the process of economic development. It can serve as a useful book of readings in economic development for students as well as for practitioners in development institutions.

Woldai Futur

Michael Skully (editor)

Financial Institutions and Markets in Southeast Asia

A Study of Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand

St. Martin’s Press, New York, 1984, xviii + 411 pp., $29.95.

This useful introduction to Southeast Asian financial institutions contains a short, but thorough, discussion of the functions of each type of financial intermediary, ranging from commercial banks to pawnshops. Individual firms within sectors are listed, often together with statistics on their assets and liabilities. Unfortunately, owing to the rapid evolution of the markets in these countries, some of the information is already out of date. The usefulness of this book would be enhanced if it could be updated annually.

Arnold C. Harberger (editor)

World Economic Growth

Case Studies of Developed and Developing Nations

Institute for Contemporary Studies Press, San Francisco, 1984, xii + 508 pp., $9.95.

This conference volume attempts to delineate and explain the underlying causes of economic “miracles” in some developing countries and the stagnation and decline in other LDCs and selected developed countries. Experts examine different phases in the economic history of individual countries. The aim is to shed light on the association between economic policy and growth. The developed economies studied include the United Kingdom, Japan, Sweden, Germany, and the United States. Developing economies include Tanzania, Ghana, Indonesia, Jamaica, Taiwan Province of China, Mexico, and Uruguay. Anne O. Krueger presents a broad review of trade liberalization, and Harberger rounds off the book with a summary of the main lessons. While “it must yield to other forces and pressures, successful policy will find ways to minimize the sacrifice or compromise of sound economic objectives. …”

The review of Intergovernmental Finance In Colombia (June 1985) erroneously referred to the book’s authors as Harvard consultants. They are not.

Peter B. Kenan

The International Economy

Prentice-Hall, Inc., Englewood Cliffs, NJ, USA, 1985, viii + 552 pp., $29.95.

This is an excellent textbook for undergraduates. It adopts a straightforward, logical approach to the subject and is written in the clear, lucid prose we have come to expect from Professor Kenan. The presentation is attractive without being fancy; the algebra is kept within bounds while greater use is made of diagrams. In economics, perhaps more so than in other disciplines, textbooks must be up-to-date and reflect the evolution of theory as well as changes in fundamental conditions. Against this test, also, the book succeeds: while covering all the basics of international economics, it has a clear and up-to-date exposition of recent international economic issues (events as late as 1983 are included). To retain its freshness and value, the book will have to be updated every few years.

Bela Kadar

Structural Changes in the World Economy

St. Martin’s Press, New York, 1984, 287 pp., $25.

This book focuses on the acceleration of structural transformation in the world economy that occurred during the 1970s. The author reviews developments in manufacturing industries, international trade, capital exports, the power structure of the world economy, and changes in North-South and East-West relationships, with further consideration given to the implications of the emergence of the oil-producing countries as important actors on the world scene. He also analyzes the policy implications of these changes, seeing the principal tasks of policy makers in the promotion of structural transformation for economic growth and the adaptation of national economies to the exigencies of an interdependent world economy. The book should be of interest to people concerned with international economic policy.

Robert F. Gorman (editor)

Private Voluntary Organizations as Agents of Development

Westview Press, Boulder, CO, USA, 1984, xii + 263 pp., $22.50.

Serious literature on private voluntary organizations and development is very scarce despite the importance of their work in the Third World and the size of their capital transfers to developing countries—$2.3 billion a year in grant form. This collection of articles provides a welcome contribution to a more rigorous and comprehensive understanding of the subject by government agencies, international institutions, and development scholars. Individual nongovernmental organizations may also benefit from an overview of the issues that confront their community as a group. Of particular significance is Larry Minear’s lead article, “Reflection on Development Policy: A View from the Private Sector,” and the discussion of nongovernmental organizations and the basic needs approach to development by the book’s editor.

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