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Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1982
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Alan Peacock and Francesco Forte (editors)

The Political Economy of Taxation

Basil Blackwell, Oxford, U.K., 1981, xi + 211 pp.

These 12 conference papers prove more interesting than many such collections, though the publication lacks a strong unifying theme. If a common characteristic had to be identified, it would be that all the authors deal with their subjects in a fairly no-nonsense applied policy manner; theory is strongly related to policy, and what theory there is tends to be nonmathematical. Little empirical data are offered.

Part I emphasizes the restricted policy usefulness of the academically fashionable optimal tax theory. As A. K. Sen has shown, a “liberal” workable social welfare function is difficult, if not impossible, to define; this, combined with the practical difficulties of getting taxpayers or voters to “forgo courses of action plainly in line with maximizing their utility,” persuades Forte and Peacock that tax reform lies more with constitutional provisions to place upper limits on marginal rates of taxation and on the growth of government revenue and expenditure. Rickets (in a paper with some mathematics) argues strongly that the ethical underpinnings of optimal tax theory are weak and that the theory “is totally devoid of administrative and political contact.”

Having disposed of the unworldly academics, the rest of the book is concerned with taxation in the real world. Bondonio discusses ways to mitigate the effects of inflation on the income tax; Alworth considers the possibilities of corporate tax reform (and favors cash-flow types); Watson reviews the complex problems of inflation accounting; and Wilson considers the problems of financing social welfare and strongly recommends reducing employers’ contributions, “a tax on employment.” Dosser recounts the disadvantages of the value-added tax (VAT) compared to a retail or wholesale single stage tax and concludes that VAT’s popularity arises from its enormous potential for raising revenue, but ends by saying (wildly optimistically in this reviewer’s opinion) that VAT’s historic phase as the major contributor to taxable capacity may be ending. This conclusion is based on the direct link between increased VAT rates and inflation, but the suggested alternatives (higher excises) usually have as great an impact on final prices and are likely to be even more regressive.

Interesting parallel pieces on the compliance cost of VAT by Sandford and the practical problems of assessing and collecting VAT by Strachan round out the practical problems of this tax—though relying on taxpayers’ own calculations of their compliance costs in response to a questionnaire may raise more questions than it answers. These papers, along with those by Greenaway on taxes on international transactions and economic development, Shaw on the economic problems of tax policy in developing countries, and Muten on the administrative problems of taxation in developing countries, will be of particular interest to those responsible for tax reform in developing countries. Greenaway, in one of the few papers reporting empirical results, argues that trade taxes will diminish in importance but that their distortions will be replaced by nontariff barriers to trade. Shaw discusses the possibility of Keynesian fiscal policies in the context of the budget constraint, and how this is qualitatively different in a developing country from its more advanced counterpart. (Basically, the developing country’s increased tax revenue need not ease the budgetary constraint if the need is for foreign exchange earnings to import capital equipment and foreign expertise.)

Overall, this book is easy to read and easy to understand. It should provide provocative and interesting reading for a wide audience.

Alan A. Tait

David M.G. Newbery and Joseph E. Stiglitz

The Theory of Commodity Price Stabilization:

A Study in the Economics of Risk

Oxford University Press, New York, U.S.A., 1981, xv + 462 pp., $49.95 (cloth), $19.95 (paper).

The work included in the book had its genesis in the worldwide interest in commodity price stabilization fostered by the initiation of the United Nations Conference on Trade and Development (UNCTAD) Integrated Program for Commodities in 1976. The authors’ research was supported by the World Bank, the U.S. Agency for International Development, and the U.S. National Science Foundation.

People who have read extensively in the theoretical area of price stabilization will know that it is a complex subject, with firm conclusions being in exceedingly short supply. The authors have, however, tried to write for the policy analyst as well as for the theoretician, and the design of the book serves these purposes well. The authors freely admit to the lack of well-established conclusions in many parts of the analysis but, with these caveats in mind, attempt to draw out whatever implications may be of use to the policy analyst.

The authors see a major benefit from their work in terms of the careful assessment of the question and the methodology that developed in their analysis. I agree. The study is a model for both theoretical and empirical economists on how to approach a complex question such as this. The most refreshing aspect of the book is the breadth of treatment of the topic. The issues covered include partial versus general equilibrium results, incidence of the benefits and losses from intervention, and the interrelationships between all of these issues.

Readers who, like myself, believe there is no justification for government price stabilization of markets will take issue with the authors on this point. The authors fall into the error, pointed out years ago by Demsetz, of making a comparison between how well the market actually performs (based on imperfect information, imperfect risk markets, and so on) and the results from the intervention of a perfectly informed, efficient bureaucracy. The proper comparison is, of course, a “warts and all” basis for both. One of the important “costs” of public crowding out of private stabilization, or any other market activity, is the loss of the innovations that the profit incentive would otherwise promote.

It is interesting that when the results are in, the authors conclude that the benefits from public intervention to stabilize prices do not seem to be large when account is taken of the various kinds of private stabilization activities that exist. They conclude that the gains for developing countries from various kinds of buffer-stock price stabilization schemes are likely to be small, or even negative. They go on to point to the potential for private risk-reduction in developing countries from such market activities as futures markets and credit markets, especially the former.

For those interested in applied agricultural economics, there is an extensive treatment of the effect of risk on production, which has important implications for the specification and estimation of supply responses. The authors show that the specification of both demand and supply affects the distribution of the benefits and losses of price stabilization. In fact, certain specifications predetermine the answer. Readers familiar with the literature on the economics of research will see the parallel between the development of the theory in both these fields on this topic as well as on many other points.

The economic theorist should find several areas that are of widespread applicability. Of particular interest for cost-benefit analysts is the development of methods for incorporating changing degrees of risk as a result of policy intervention. Another area that is extensively treated, and that is widely ignored by both theorists and policymakers, is the analysis of the ramifications of any form of government intervention not only for the sector where it is applied but also for the rest of the economy. Extending the analysis in this way can lead to changes in the conclusions about the direction of response. Risk analysis is also extended to the analysis of trade, and some surprising results emerge.

This is the best book I have read on the subject of commodity price stabilization; I say this not because I agree with all of its conclusions—those economists who judge the benefits of government intervention to be outweighed by its costs will find many things to disagree with—but because of its scope and the depth of its treatment of the subject. The style of analysis is one that could be usefully copied, and many of its insights could well be carried over to the analysis of other complex issues.

R. C. Duncan

Other books received

Pascal Salin

L’ordre monetaire mondial

Presses Universitaires de France, Paris, France, 1982, 252 pp., FF125.

Michel Courcier

L’Economie Mondiale en Trois Dimensions

Calmann-Levy, Paris, France, 1982, 260 pp., FF79.

Salah Al-Shaikhly (editor)

Development Financing:

A Framework for International Financial Co-operation

Westview Press, Boulder, U.S.A., 1982, xv+183 pp., $25.

Three books on the international monetary system, each of which emphasizes an entirely different aspect. The book by Salin concentrates on the role of monetary officials, and examines inflation, exchange rates (floating and fixed), European monetary unification, the crisis of 1971, and the system in the 1970s to show how its troubles were born of “incoherent” official policies. Courcier takes a broader view; his analysis of the global economic system, based on regional change, identifies the current epoch as a period of transition, and, to improve economic analysis, focuses on the need to add a third dimension of a better statistical system to the classical haunts of time and space. The need for change in the decision-making processes of international financial institutions provides the motivation for Al-Shaikhly’s collection of essays, which discusses the relationship between the developing countries and sources of international finance.

Bruce F. Johnston and William C. Clark

Redesigning Rural Development:

A Strategic Perspective

The Johns Hopkins Press, Baltimore, U.S.A., 1982, xvi - 311 pp., $22.50 (cloth), $9.50 (paperback).

Gyorgy Enyedi and Ivan Vblgyes (editors)

The Effects of Modern Agriculture on Rural Development

Pergamon Press, New York, U.S.A., 1982, xiv + 330 pp., $32.50.

Rural development is a topic that rather awkwardly straddles a number of fields. The Johnston and Clark book divides rural development programs into three groups: production programs in the areas of employment and agriculture; consumption-oriented ones dealing with health, nutrition, and family planning; and organization efforts that focus upon institutional structures and managerial procedures. The authors describe the experience with such programs in developing countries, highlight the complementarities and trade-offs between them, and discuss both the importance of considering these interrelationships when devising a unified program and the difficulty of achieving a satisfactory result.

The papers contained in the volume edited by Enyedi and Volgyes have a different, and a more limited, perspective. By reviewing the experience of the United States, Eastern and Western Europe, Japan, and Israel during the past few decades, they attempt to show how changes in agriculture have affected social conditions, settlement patterns, rural industrialization, and the integration of agriculture with industry. Although the papers are of mixed quality, they do offer a number of useful hints as to how the experience of the industrial nations might be harnessed by those developing countries where the process of modernization is quite advanced.

Richard B. Freeman and David A. Wise

The Youth Labor Market Problem:

Its Nature, Causes and Consequences

University of Chicago Press, Chicago, U.S.A., 1982, ix + 555 pp., $45.

This volume contains 14 papers covering various aspects of youth unemployment in the United States together with an overview by the editors. Sponsored by the National Bureau of Economic Research, the individual contributions are technically of a high standard and are able to advance a number of significant empirical findings. This book is essential reading for the economist concerned about the structure of unemployment and its conclusions should be valuable for policymakers.

James Tobin

Essays in Economics:

Theory and Policy

The MIT Press, Cambridge, MA, U.S.A., 1982, x+685 pp., $45.

This compendium of Professor Tobin’s papers is the third volume of his collected papers (the earlier volumes were subtitled Macroeconomics and Consumption and Econometrics, respectively). The breadth of Tobin’s contribution to the discipline of economics is as impressive as its depth, lucidity, and integrity. Shunning the obviously fashionable, the papers in this volume address some of the major issues of monetary, fiscal, international, and welfare economics. The final chapter, comprising portraits of six eminent economists, is pure joy to read: Tobin’s combination of elegance, generosity, and keen perception are perhaps unmatched in the discipline today.

Victor R. Fuchs (editor)

Economic Aspects of Health

The University of Chicago Press, Chicago, IL, U.S.A., 1982, ix+333 pp., $32.

The arguments for greater expenditure on health have tended to be more moral than economic in the past. This book, a conference report produced by the National Bureau of Economic Research, narrows the gap between health practitioners and economists by presenting economic studies of the determinants of health, the effects of sickness, and the issues facing policymakers. Although based on research on different income groups in the United States, it offers a number of theoretical tools for formulating health policy in less developed countries.

Gwyn E. Jones and Maurice Rolls (editors)

Progress in Rural Extension and Community Development, Vol. 1:

Extension and Relative Advantage in Rural Development

John Wiley & Sons, Inc.. Somerset, NJ, U.S.A., 1982, x+ 336 pp., $45.

Based on reviews of experience at the global as well as national level, this book attempts to explain how extension and community development work can help to minimize the effects of social and economic inequalities in rural economies.

Kenneth W. Dam, The Rules of the Game: Reform and Evolution in the International Monetary System, The University of Chicago Press, Chicago, U.S.A., 1982, xviii + 382 pp., $27.

Thomas M. Humphrey and Robert E. Keleher, The Monetary Approach to the Balance of Payments, Exchange Rates, and World Inflation, Praeger, New York, U.S.A., 1982, xvi + 413 pp., $37.95.

Margaret Hardiman and James Midgley, The Social Dimensions of Development: Social Policy and Planning in the Third World, John Wiley & Sons, New York, U.S.A., 1982, vii + 317 pp., $41.95.

F. Gerard Adams and Jere R. Behrman, Commodity Exports and Economic Development, 0. C. Heath & Co., Lexington, MA, U.S.A., 1982, xv + 328 pp., $25.95.

José Maria Bergillos and Manuel García Nieto, Evaluación Empresarial de Proyectos Agrarios, Imprenta San Pablo, Cordoba, Spain, 1982, 410 pp., $15.

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