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Finance & Development
A quarterly magazine of the IMF
September 2001, Volume 38, Number 3

Book reviews and notes

Jagdish Bhagwati

The Wind of the Hundred Days
How Washington Mismanaged Globalization

Cambridge, Massachusetts, MIT Press, 2000, xxiv + 383 pp., $32.95 (cloth).

Professor Bhagwati's innovative and wide-ranging contributions to trade theory and development economics have, in Paul Samuelson's words, ushered in "the Age of Bhagwati." Bhagwati has now become a passionate advocate for righting wrongs in the economic policies of both industrial and developing countries, writing extensively on this subject in the popular press. Like Bhagwati's earlier work of the same genre, the present volume is addressed to nonspecialist readers. Presented with clarity, humor, and a light touch, the essays educate readers about complex economic issues and the significance of economic policies that affect their well-being.

Bhagwati deals with several themes, but his central conception is that "the best economy and better society . . . combined both markets and democracy." This implies free trade and freedom of choice in economics and politics and less state interference in economic activity.

By far the most novel theme, and one with far-reaching implications in today's integrated world, is the "asymmetry between the case for free trade and the case for free capital mobility." Bhagwati points out that liberalizing trade and freeing up capital, particularly short-term capital, are distinct activities and that economists and policymakers have erred in treating them as identical. While restrictions on trade in goods will yield efficiency losses, the same cannot be said of capital mobility, because capital flows are often characterized by what economic historian Charles Kindleberger called "panics" and "manias." Bhagwati refers to a voluminous body of evidence showing that while free trade has led to immense efficiency gains across countries, capital mobility does not benefit developing countries unless their financial systems are well developed and their regulatory mechanisms well honed. He is critical of the U.S. administration for its role in influencing the IMF to press for rapid capital account convertibility in emerging and other developing countries. Bhagwati's critique presumably resulted in the IMF's softening of its stance on capital account convertibility over the past two years.

Choosing from a plethora of explanations of the East Asian "miracle," Bhagwati convincingly demonstrates that this phenomenon could be attributed to these countries' pursuit of an export promotion strategy, which led to a sharp rise in investment. He gives short shrift to other, facile theories—for example, that East Asia's growth was purely the consequence of capital accumulation and not technical change (Paul Krugman) or that its explanation lies in the industrial policy of "getting prices wrong" (Alice Amsden and Robert Wade). Bhagwati's analysis challenges the theory that the 1997 East Asian financial crisis was caused by cronyism and, at the same time, makes a meaningful distinction between "rent-creating corruption" and "profit-sharing corruption." The latter, he says, together with the outward orientation of economic policies, propelled East Asia's rapid and sustained growth.

Bhagwati discusses the "reversal of roles," which refers to the way policymakers, politicians, and the so-called spokespeople of civil society often change their positions in policy debates about globalization. During the 1950s and 1960s in industrial countries, such groups publicly sang the praises of open economies, free trade, and a liberal international economic order. In the 1990s, however, they denounced free trade with equal aplomb, arguing that trade with poor countries would produce more poor at home. Bhagwati demolishes this "pauperization" bogey, which he says was spread by the Clinton administration and U.S. politicians. In contrast, during the 1950s and 1960s, intellectuals and politicians in developing countries subscribed to the "malign neglect and malign intent views of trade and investment interactions with the world economy." By the 1990s, their earlier fears about free trade had dissipated, partly because of the perceived successes of the East Asian economies and partly because of the policy conditions attached to financial assistance from the IMF and the World Bank, which encouraged borrowing countries to open their economies and liberalize trade.

This volume shows to advantage Bhagwati's rapier-like wit, amazing command of language (reminiscent of John Maynard Keynes), insight into the innards of social and political processes, and abiding concern for human welfare. The book also testifies to the validity of his statement that "economics is literature with immediacy of experience." He seems to be asking myopic politicians and fear-mongering nongovernmental organizations the world over to shape up, echoing the main character in Philip Roth's Sabbath's Theater: "You can be young once but you can be immature forever." Bhagwati clearly enjoyed writing this book, and readers will certainly take pleasure in reading it.

Deena Khatkhate

Michael Edwards

Future Positive
International Co-operation in the 21st Century

Earthscan Publishers, London, 1999 (repr. 2001, Stylus Publishing, Sterling, Virginia), xii + 292 pp., £20/$29 (cloth).

"Ownership" has "been a buzzword in development for some time now, the idea being that development strategies and programs should not be imposed by outsiders, but rather should be fully supported by the developing countries themselves. The Heavily Indebted Poor Countries (HIPC) Initiative to reduce the debts of the world's poorest countries—spearheaded by the World Bank and the IMF with broad support from the international community—contains elements that reflect this thinking. One important requirement is that civil society be involved in the preparation of development and poverty reduction strategies. To promote ownership, the key HIPC strategy document must also be drafted entirely by the developing country authorities, and not by the international organizations or outside consultants—a big change from past practice.

Michael Edwards carries the idea of cooperation much further than these recent efforts, arguing that cooperation is the basis for successful development and, ultimately, a peaceful and prosperous world. In this generally very sensible book, he contends not only that market mechanisms are necessary for the free flow of economic signals in a modern economy and, thus, for growth and development, but also that effective governments are needed to ensure that social and environmental objectives are not forgotten. Edwards's thinking on this topic draws from, and builds on, the large and growing literature on communitarianism, social capital, and the need to guide capitalism and globalization to achieve social and environmental ends.

Edwards contrasts the interventionist mentality of most development and humanitarian assistance with a cooperative spirit characterized by humility on the part of donors and an inclusive, broad-based decision-making process in the developing countries. He suggests that the condescending attitudes of many citizens of rich countries toward developing countries, and the donor-recipient framework of most aid programs, must be replaced with relationships based on equality. Edwards emphasizes that good governance must welcome diversity, both within countries and between them. In contrast to those, like Harvard political scientist Samuel Huntington, who see fundamental differences between peoples and the "clash of civilizations," Edwards believes that a broad consensus is emerging in the world on the core values that can form the basis for true cooperation.

Edwards, with twenty years of experience working for Oxfam, Save the Children, the World Bank, and the Ford Foundation, is most convincing when discussing development programs and projects and the role of nongovernmental organizations (NGOs). He draws on a rich store of examples to support his thesis that programs and projects imposed from the outside often fail to have useful results, while homegrown projects can make a big difference.

When he discusses such topics as humanizing capitalism and the future of global governance, however, Edwards's arguments are less focused and convincing. For example, he emphasizes the importance of "an equal voice for everyone" in decision making but gives little indication of how this might be achieved. In many parts of the world, building true, functioning democracies can be extremely challenging. The reality is that international organizations such as the IMF and the World Bank, as well as many donors, must deal with existing governments, many of which are far from perfect in representing the interests of all their citizens.

Published in 1999, this book argues for changes in international institutions, some of which have since been accepted and are being implemented. For example, Edwards must surely approve of these institutions' current push to increase transparency and publish more information, which can substantially improve the environment for meaningful participation by civil society within developing countries.

It is interesting that the IMF is founded on one of the principles of cooperation Edwards espouses—the importance of outside help in giving developing countries more "room for maneuver" to find their own best solutions to their problems. The IMF makes financial resources temporarily available to member countries facing balance of payments difficulties in order to give them more breathing space while they find ways to restore balance to their economies.

Gregory Dahl

William Easterly

The Elusive Quest for Growth
Economists' Adventures and Misadventures in the Tropics

MIT Press, Cambridge, Massachusetts, 2001, 342 pp., $29.95 (cloth).

For the past fifty years, economists have tried to determine how poor countries in the tropics can attain standards of living approaching those of Europe and North America. This quest has been motivated by the striking and often pitiful contrast between the sufferings of the poor and the comforts of the rich. A range of remedies have been advanced or attempted—including foreign aid, investment in machinery, education, birth control, and debt forgiveness—but none has delivered as promised. The poor countries have simply failed to grow as expected. Indeed, the region where poverty was treated most intensively, sub-Saharan Africa, has failed to grow at all, while growth in other regions of the world has been affected by erratic development and sudden crises.

In this stimulating and lively book, Easterly, a senior advisor at the World Bank and former advisor to Finance & Development, argues that the root problem is not a failure of economics but a failure to apply economic principles to practical policy work. Too often, he writes, economists have peddled formulas that violate the basic principle of economics: that private businesses, government officials, and individuals—even aid donors—respond to incentives. If we ensure that all involved have the right incentives, he argues, then development will follow.

Easterly notes the widespread disappointment with the lack of progress that has led disaffected protesters in the West to call for abandoning the quest altogether. This is not acceptable, he stresses: "As long as there are poor nations suffering from pestilence, oppression, and hunger . . . and as long as human intellectual efforts can devise ways to make them richer, the quest must go on."

Written for the general reader, the book will fill an important niche in enlarging public understanding of a vital issue. One of its most attractive features is what Easterly calls his "intermezzos": snapshots of daily life in the Third World, based on his own experience, that are inserted between chapters. These serve to remind us that "behind the quest for growth are the sufferings and joys of real people, and it is for them we go on the quest for growth."

Ian S. McDonald

Henk van Gemert (editor)

Financial Reform in China
Bridging the Gap between Plan and Market

Shaker Publishing, Maastricht, Netherlands, 2001, 247 pp., 79 Dutch guilders/36 euros (cloth).

After more than 20 years of gradual reform, China should now accelerate its reforms to prepare for the new global, competitive environment. This volume, a joint project of 10 Chinese experts brought together by an experienced China hand, addresses the key issues facing this country's financial system on the eve of its entry into the World Trade Organization.

Subramanian Sivaraman Sriram

The Demand for Money in Malaysia
A Study of M2

Southern Economist, Bangalore, India, 2000, xxiv + 471 pp., Rs750/$40 (cloth).

The demand for money plays a major role in macroeconomic analysis. In this book, the author, an economist at the IMF, reviews the theoretical and empirical literature as well as the issues of modeling and estimating money demand. He then systematically builds models to estimate the demand for broad money (M2) in Malaysia during August 1973-December 1995 under a cointegration and error-correction modeling framework. The book will be a useful reference source for researchers, policymakers, and graduate students.

Jeffrey C. Hooke

Emerging Markets
A Practical Guide for Corporations, Lenders, and Investors

John Wiley and Sons, New York, 2001, xv + 283 pp., $79.95 (cloth).

The turbulence of the late 1990s in emerging markets has tempered the enthusiasm of many Western investors. In this new climate, it is more important than ever for developing countries to attract foreign investment to achieve economic advancement and poverty reduction.

In this book, Jeffrey Hooke, a former investment officer with the International Finance Corporation who now heads his own investment banking firm, provides both Western investors and development professionals with a comprehensive guide to the various opportunities and pitfalls associated with that they can encounter in dealing with emerging markets. He defines what emerging markets are (and what they are not) and discusses why multinational firms should invest in them, reviewing some of the obstacles to investment, including hidden barriers to entry, capricious government actions, sudden setbacks in a country's economic performance, devaluations, and the lack of information. His account is illustrated by descriptions from his own experiences and those of other investors in Africa, Asia, Eastern Europe, and Latin America.

Edward Nemecek

The International Monetary System
An Issue of Convertibility, Stability, and Liquidity

Karolinum Press, Charles University, Prague, 2000, 240 pp., $50.00 (cloth).

Published to coincide with the Annual Meetings of the IMF and the World Bank, held in Prague in September 2000, this book, written by the head of the Public Finance and Banking Department of Charles University, is a historical study of the development of the international monetary system. In his analysis, N�eme�cek studies three issues every economic system faces in framing monetary policy: currency convertibility, purchasing power stability, and liquidity. The book is illustrated by numerous charts and tables.