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International Monetary Fund. External Relations Dept.
Published Date:
January 1995
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Albert O. Hirschman

Development Projects Observed

Brookings Institution. Washington, DC, published October 1967, reissued with a new preface January 1995, xxviii + 197 pp, $19.95.

Given the prevalent aid fatigue, a book that baldly states that development has “much in common with the highest quests undertaken by mankind” is close to a provocation. But Hirschman has always rebelled against orthodoxy, and the republication of this pioneering work is timely: adjustment lending is in decline, and there is renewed interest in improving the economic performance of developing countries through investment projects.

In a thoughtful new preface, Hirschman discloses the affinities between Development Projects Observed and two prior classics—The Strategy of Economic Development and Journeys Towards Progress. The original, overt purpose was to search for the “micro” equivalents of the “macro” policy themes articulated in the first two volumes of the trilogy. But it now turns out that the last volume was also intended to fulfill an overriding, hidden ambition—”to celebrate, to ‘sing’ the epic adventure of development—its challenge, drama and grandeur.”

Toward these ends, Hirschman embarked on an arduous journey that gave him the opportunity to interact with the “originators, builders, administrators, financiers, and customers” of 11 projects financed by the International Bank for Reconstruction and Development (IBRD), ranging from irrigation in Italy to multipurpose valley development in India; and from highways in Ecuador to telecommunications in Ethiopia. The expedition yielded paradoxical observations about the behavior of projects, those “privileged particles of the development process.” Furthermore, Hirschman’s intensive immersion in the particular produced generalized hypotheses about institutional learning and social change.

Hirschman’s subtle propositions are often criticized as untestable, elusive, and unrepresentative. To be sure, they shun vulgar quantification, cannot be used as standard recipes, and share A Bias for Hope (the title of a Hirschman book). Yet they have shaped the thinking of a whole generation of practitioners; presaged future inquiry into decision theory, imperfect information, and market distortions; and encouraged the new institutionalists to trespass across disciplinary boundaries.

What is arguably the most influential metaphor of institutional economics (Exit, Voice and Loyalty, Hirschman’s later social science masterpiece) was conceived when the author of Development Projects Observed ran across a problematic IBRD-financed railways project in Nigeria and sought to probe its “hidden rationalities.” These and other ideas have become embedded within the discourse of the development profession. In particular, Hirschman’s controversial “hiding hand” has come to symbolize the providential mobilization of scattered energies and hidden resources against unforeseen implementation obstacles.

Similarly, narrow “latitudes” built into the technology of projects have been recognized as discipline-inducing mechanisms, while judicious project-design decisions balancing “trait taking” and “trait making” have helped to adapt learning strategies to the sociopolitical environment. Finally, Hirschman’s insistent reminder about the “centrality of side effects” has been a useful warning against overreliance on “blueprint” thinking.

Development Projects Observed offers no simplistic set of evaluation techniques. Instead, it seeks to inspire reflection, motivation, and invention. According to Hirschman, “all projects are problem-ridden; the only valid distinction appears to be between those that are more or less successful in overcoming their troubles and those that are not.” This view of the development process has induced policy experimentation and organizational learning.

Thus, while it deals with the nuts and bolts of project selection, appraisal, and implementation, this sophisticated and seminal book combines the generous spirit, the innovative genius, and the elegant style that characterize Hirschman’s entire oeuvre. It is as fresh and relevant today as it was when it was written—nearly three decades ago.

Robert Picciotto

Stephen McCarthy

Africa: The challenge of Transformation

I.B. Tauris Ltd., London, 1995, 257 pp., $55.

While this book’s title suggests a discussion of the challenges currently confronting sub-Saharan Africa, it is that and much more: it is well written, comprehensive, and concise, with short, substantive summaries at the beginning of each chapter and about the right dose of tables, charts, and maps.

In measuring Africa’s development, the author succeeds in combining conciseness and depth of vision. McCarthy notes that there has been “little development as a whole for the last 30 years” and, at the same time, “variations in performance between one country and another are striking, with more politically stable countries tending to be more successful.” The author asserts that “by the next century, generalizations about Africa as a whole will be increasingly untenable.” Indeed, as the book illustrates, such generalizations already are unwarranted. Short but perceptive remarks about the cultural aspects of development, around modern concepts and Western values, provide a refreshing dimension that is too often overlooked.

History and political developments occupy one short third of the book, which nevertheless manages to make history more understandable. McCarthy notes how short the colonial period—70 years—was, and how profoundly it marked the continent. He reviews the contrasting approaches of the colonial powers: British indirect rule reinforced tribal society; French direct administration left a legacy of centralizing governments; and religious missions, especially in Eastern and southern Africa, where Christianity has penetrated relatively more deeply, are credited with considerable achievements in education and health. All in all, the “much maligned colonialists” have permitted progress in institutions, technology (including new crops), and in the maintenance of law and order.

With the attainment of independence came the “first African revolution.” Firstgeneration governments, however, used “developmentalism” as the ostensible basis for their legitimacy, whereas their political agenda placed nation-building before development. This created ambiguities, and governments were inherently unstable because of the absence of established rules of succession, excessive authoritarianism, and concentration of power in small kinship groups.

The awakening of democracy, which is still tentative but no doubt strong, marked the “second African revolution.” McCarthy notes that this is “qualitatively different from anything which has gone before in independent Africa,” and that several countries are still quite far from democracy. Nevertheless, he remains optimistic.

Two chapters, one on economic developments and the other on foreign aid, include an excellent summary of the evolution of thinking about development as well as synthetic, but never simplistic, summaries of the development and non-development processes in Africa. The author is particularly critical of public aid, whether bilateral or multilateral, but takes a lucid look at the problems, not a dogmatic one. The critique of structural adjustment—not entirely negative—is refreshing. It is based on a balanced assessment of mistakes made both by donors and by countries, and, as such, is pleasantly different from what one is used to reading on the subject. As the author soberly remarks, against a background of vociferous critics, “the choice is clear: orderly or disorderly adjustment.”

McCarthy does not neglect topics considered important by economists. Among these, which are well treated, are the dramatic decline in the return to investment across the continent since the 1960s; the mismanagement of boom-and-bust episodes and the origins of the debt problem; the excessive support of public entities by donors and the corresponding neglect of private initiative; and the persistence of profound market failures. In contrast, the author is somewhat ambiguous about rapid population growth. His treatment of macroeconomic stabilization, as distinct from structural adjustment, is also a little skimpy.

One of the book’s attractions is McCarthy’s profound attachment to Africa, which permeates the book, as well as his optimism about the continent’s future. He concludes with a vision of Africa’s future and also with strong recommendations on foreign aid. For anyone working on Africa, this book should be required reading—as an introduction to the continent or as a reference.

Luis de Azcarate

Binhadi

Financial Sector Deregulation, Banking Development and Monetary Policy

The Indonesian Experience (1983-1993)

Indonesian Bankers’ Institute, Jakarta, 1995, 530 pp., $28.

The world has much to learn from Indonesia. It is a country that has overcome enormous developmental challenges to make world-class economic progress in the past 25 years. This success has largely been the result of policymakers’ willingness to take bold steps, including opening up much of the economy to the forces of competition after the plunge in oil prices in the early 1980s. Binhadi’s book documents Indonesia’s experience with regard to the financial sector, which, to a large extent, has led the way in deregulating the country’s economy. The author offers a unique perspective on this topic: he lived through this pivotal era, holding key positions at the Central Bank and assisting in the design and implementation of many of these policy measures.

It will be the rare reader who finishes the book, which is essentially a compendium of the background, objectives, contents, and impact of the many deregulation packages implemented by the Indonesian authorities since 1983. The book’s length—approximately 530 pages—reflects the author’s dedication to his task; it will serve well as a valuable reference for anyone interested in the economic development of Indonesia, or in the general topic of successful financial sector deregulation.

The core of the book begins with Chapter III, which covers the many financial reform packages from June 1983 through May 1993, inter alia, interest rate deregulation; reform of the banking sector; phasedown of liquidity credits (a central bank rediscount facility for credits to priority sectors); and development of capital markets and other parts of the nonbank financial sector. Chapter IV turns to the implications for monetary policy of these reforms. Most important among these are the steps taken to move away from the pre-1983 system of targeted credit growth and toward the introduction of indirect monetary control. Of particular interest are descriptions of the various policymaking bodies—the Monetary Council, Bank Indonesia’s system of Managing Directors, and its internal Steering Committee. This section rewards the careful reader with insights into the politics of formulating monetary policy in Indonesia, including the historical lack of independence of the Central Bank. It is followed by a chapter that discusses the development of Indonesia’s money market.

At this point, the focus of the book shifts to issues of great current interest, namely, the banking system and its supervision, and is invaluable for understanding today’s issues in the Indonesian banking system. These include the rapid expansion of banks (and banking services) since 1986; bank secrecy; licensing; Bank Indonesia’s administrative sanctions; and bank supervision. Even those skeptical of the unglamorous occupation of bank supervision should be impressed by Binhadi’s description of Bank Indonesia’s systems and technical means for bank supervision; the calculation of capital adequacy; regulations on banks’ net open position and margin trading; legal lending limit provisions; and the criteria and methodology for appraising the quality of banks’ assets.

An author’s culture influences his writing. To many Western economists, this book will seem to be missing two elements—both reflecting Binhadi and his Javanese values. First, it is rare to find passages in the book that assess specific policies. Instead, the reader is left to draw his own conclusions; for Binhadi to have done otherwise would have been too self-serving, as he had a large role in policy formulation. Second, the book does not look forward to where the Indonesian financial system should be headed.

Today, many years after deregulation, what should be the direction of financial sector policy in Indonesia? Certainly, Chapter VII raises comfort levels regarding bank supervision. But, will Bank Indonesia be able to work fast enough to avert significant problems in a still fragile banking sector? Does the political will exist to make it work? Should parts of the financial system (e.g., chronically weak banks) be allowed to fail to set an example for others? These are controversial issues. On such topics, Binhadi’s book is nearly silent, noting only the increasing importance of bank supervision and describing Bank Indonesia’s recent improvements in this regard. The task of meeting this particular challenge is largely left to the new generation at Bank Indonesia.

Lloyd R. Kenward

William Wallace

Regional Integration

The West European Experience

Brookings Institution, Washington, DC, 1994, 142 pp., $28.95 (cloth), $10.95 (paper).

Economic and political union is a goal that Western European countries have been pursuing for the best part of the past half century. Progress toward this goal has been set in train by a small group of comparatively well-off nation-states bonded together by common democratic ideals as well as by common economic and security interests. But the success of early efforts at integration has augmented the goal’s appeal to the point where membership in the European Union has become a prime objective of practically every government on the continent.

Given this background and the growing interest of countries in other parts of the world in fostering their own regional arrangements, it is natural to ask whether there are any important lessons to be learned from Europe’s experience. In this fascinating book, Wallace sets out to provide an answer to this question. The book begins with a discussion of the historical and political context within which the institutions and structures of the European Union took shape and goes on to identify the specific characteristics that distinguish the West European model from other experiments at cross-national integration. The discussion brings out several notable features, including the extent to which integration has been driven by security and political concerns, rather than purely economic considerations, and the key role that enlightened national and international administrators—as opposed to broad-based political forces—have played in sustaining the momentum toward union.

The remainder of the book deals mainly with the tensions that have arisen within the European Union, partly as a result of its gradual enlargement—which, inevitably, has undermined its cohesiveness—but, more important, as a by-product of deepening integration. In Wallace’s view, such tensions have loosened the ties that held national states together while strengthening popular resistance to further transfers of authority from individual states to community institutions and contributing (together with the ending of the Soviet threat) to the emergence of new divisive issues concerning the Union’s relations with the rest of the world and its role in the global economy.

A striking conclusion that emerges from Wallace’s study—and one that is alluded to time and again in the book—is that there is not all that much that other countries can learn from Europe’s experience, except perhaps to avoid its pitfalls. This conclusion is bound to be controversial, and one cannot help but wonder whether it would not have been heavily qualified if the book had concentrated more on the economic aspects of the European unification process and less on its politics. For example, the book has little to say on issues such as the economic effects of the single market project, the severity and consequences of migration flows fostered by the relaxation of border controls and the integration of European labor markets, or the costs and benefits of monetary integration. Arguably, countries in other parts of the world contemplating “deep” integration could draw more useful lessons from an analysis of such issues than from a full understanding of the particularities of the West European model.

Notwithstanding these omissions, the book is well informed and well argued and offers plenty of food for reflection and debate. It will be of particular value to scholars interested in the analysis of the complex issues posed by economic and political integration, but its lucid, nontechnical presentation makes it accessible to a wider audience, including readers seeking to obtain no more than a broad familiarity with contemporary European history.

Harilaos Vittas

John Williamson (editor)

Estimating Equilibrium Exchange Rates

Institute for International Economics,

Washington, DC, 1994, ix +300 pp., $19.95.

This collection of articles by different authors bears the strong imprint of John Williamson’s interest in target zones. Although the subject of the book is ostensibly positive economics—explaining the equilibrium movements of real exchange rates—policy implications are always in view. The motivation for the book was to get estimates that could be used as intermediate targets in coordinating macro-economic policies. The volume contains a number of theoretical and empirical contributions to the concept and measurement of fundamental equilibrium exchange rates (FEERs), and the last chapter, by Stanley Black, provides a dispassionate assessment of their possible uses.

Williamson’s introduction argues convincingly for the relevance of the topic: the crises of the European Monetary System have shown the dangers of ignoring the issue of exchange rate equilibrium in pegged-rate arrangements. Unfortunately, a consensus as to the appropriate equilibrium exchange rate concept to use does not emerge from the volume, though all concepts proposed are, in principle, based on macroeconomic balance, rather than on purchasing power parity (which the chapter by Janice Boucher Breuer concludes is not supported by the data). For Williamson, calculating FEERs involves making an explicit estimate of a sustainable fiscal policy at full employment and setting a target for the current account. In contrast, according to the article by Tamim Bayoumi et al., the equilibrium exchange rate does not explicitly involve fiscal policy, while for Jerome Stein, achieving external balance does not require setting a target for the current account. In their paper, Sebastian Edwards and Ibrahim Elbadawi pay no attention to full employment in their calculation of FEERs.

In sum, though not a definitive work, this book makes a useful contribution to a relevant issue and belongs on the shelf of every international macroeconomist.

Paul Masson

Ricardo Ffrench-Davis and Stephany Griffith-Jones (editors)

Coping with Capital Surges

The Return of Finance to Latin America

Lynne Rienner Publishers, Boulder, CO, 1995, x + 277 pp., $49.95 (cloth), $29.95 (paper).

With widening trade and capital market liberalization, savers and investors have new choices. The industrial countries’ insurance companies and pension funds have been placing some of their assets in the “emerging markets” and so have individual savers, usually through mutual funds. Developing country governments, state enterprises, and, increasingly, private corporations are making use of these savings. Consequently, flows of “international portfolio investment” (in bonds and shares) soared until the Mexican crisis of 1994 and now seem to have resumed their growth after a pause. These funds supplement more traditional foreign direct investment flows, which are, by their nature, more stable.

These expanded choices may reduce risk for savers as well as investors overall and, hence, benefit the world economy but also may, under certain circumstances, cause serious problems in developing countries. These problems are most acute where savings are low, underlying macroeconomic imbalances exist, and/or foreign funds fail to be channeled into sound investments. The ebb and flow of portfolio investment can move real exchange rates beyond desirable bounds and so undermine export growth.

The book consists of a collection of essays about flows to Latin America. It deals first with reasons for OECD outflows and then turns to the cases of Chile, Argentina, and Mexico. The Chilean authorities have taken the most proactive measures, including taxes, reserve requirements on short-term inflows, and sterilized intervention. These policies, which were part and parcel of a much broader, long-haul effort to increase savings and investment, did help to maintain a realistic exchange rate. In Argentina, under a fixed exchange régime akin to a currency board, the Government’s stance was necessarily passive. Capital inflows helped to remonetize the economy after years of high inflation and scarce credit; they also sped up privatization and increased stock market capitalization, but foreign savings fueled a further rise in consumption. The Mexican chapter was written before the crisis. It recognizes that currency appreciation was largely a result of massive capital inflows but does not touch on the low and falling saving rate as the root cause of vulnerability. The closing chapter presents an overview of policy options. It reaffirms the primal importance of high savings and of channeling inflows into productive investment.

This is a useful book, even though it was written before the Mexican crisis. The problems with which it deals will continue to trouble not only Latin America but all developing and transition countries that, for one reason or another, have become attractive to short-term international investors. If some of the authors show a bias, it is perhaps by underplaying the benefits countries can derive from access to private external capital. Many countries owe their present-day prosperity in large measure to their ability to tap foreign savings. It would, therefore, be a grave mistake to throw the baby out with the bathwater. Rather, once macroeconomic imbalances have been eliminated, capital account liberalization should be an integral part of development policy.

Guy Pfeffermann

Credits: Cover art and art on pages 3, 7, 10, and 12: Mark Robinson. Photographs on pages 39, 40, 42, and 54: Padraic Hughes.

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