Controlled open economies: A neoclassical approach to structuralism

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Book reviews

particular countries. These are often well typified by certain gross shifts in economic activity that follow upon structural reform, and these in turn may translate fairly simply and reliably to shifts in income distribution. Reform in Hypothetica expands plantation production of tree crops. The profits go abroad with no affect on domestic income distribution. Plantation workers are better paid, or less quantity constrained. They are some of the poorest workers in Hypothetica. An improvement in the personal distribution of income is implied. In this manner the theory is quite applicable in the approximate calculation of changes in income distribution, as the country studies show. With six diverse countries, there are inevitably great differences of data availability and reliability. Yet all studies indicate that the general method is helpful and illuminating. There is satisfying empirical support for one clear implication of the theory - that there is no clear implication, that the effect of more open trade on income distribution is by its nature ambiguous. Thus the implications of more coffee exports varies from country to country according to the distribution of land ownership and other variations. Altogether this is an ambitious study and highly successful within limitations inevitably imposed by data and other problems. It should help development economists to understand that income distribution is a complex of facts subject to a complex of influences, and it will surely serve as a model of how hard theory can help in putting messy facts into shape.

Nuffield

David Bevan, Paul Collier Economies: A Neoclassical Oxford, 1990) pp. 367.

and Jan Approach

College,

Oxford,

Willem Gunning, to Structuralism

C. Bliss OX1 lNF, U.K.

Controlled (Clarendon

Open Press.

This book is a valuable contribution to development economics and also, even though the authors did not intend it, to the economic theory of socialist decline and transition from socialism. They label it a ‘neoclassical approach to structuralism’. It is based on an intensive study of Kenyan and Tanzanian macroeconomic experiences, mostly over the period 1975-1984. During this period Kenya went through the coffee boom and the subsequent crisis, the latter resulting essentially from excessive public spending initiated by the boom. Tanzania went through a ‘gathering macroeconomic debacle of tragic proportions’ caused by ‘an overriding commitment to an unsustainable public expenditure programme’. The book gives a full account of these episodes, and on the bases of these the authors construct quite original models and stylized stories which have much wider applicability.

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Book reviews

Modern macroeconomic theory, based on choice theoretic micro foundations, is dominated by American experience and applicability, while ‘structuralist’ writing about developing countries, which takes into account their specialist institutional and other characteristics, is ad hoc and, in any case, has hardly stood up to experience. There is an obvious gap in modelbuilding which these authors aim to fill. They are, of course, not alone in this aim, as is evident from the literature on the Southern Cone and on Brazil, but not much has come from students of Africa. The one famous exception is the Harris-Todaro model which, like this book, was inspired by a study of Kenya. The authors are concerned with small open economies, and distinguish two kinds, namely, the ‘compatible control regime’ (Kenya) and the ‘incompatible control regime’ (Tanzania). The first is familiar. It is distorted by import controls, and by exchange controls that prevent capital exports. There is no capital market. The exchange rate is fixed and balance-of-payments equilibrium is maintained by variation of import controls, which are thus endogenous. Exchange controls mean that when private agents wish to save, they cannot do so by acquiring foreign assets. But this system can at least achieve a sustainable distorted equilibrium. The specal feature of the ‘incompatible control regime’ is wide-ranging price controls, in addition to import and exchange controls. It is a true disequilibrium system. Money-financed budget deficits do not generate an inflation tax but lead to involuntary accumulation of liquidity, and hence in due course to reduced output as the incentive to earn declines. They present a detailed model with many ingredients, including the possibility of cumulative contraction. This study was researched and written well before 1989, but reads incredibly like a model designed for the Soviet experience, and this chapter should be noted as an early and very useful contribution to the ‘socialist decline and transition’ literature. Their full account leads one to conclude that Tanzania is a microcosm of a much larger debacle. For the ‘compatible control regime’ (i.e., the Kenyan kind) they present a theory of temporary export windfalls which is a development of the Dutch Disease model, but which takes into account dynamic factors, notably expectations and effects on investment. The windfall, resulting from the coffee boom, leads the private sector to save more, and these savings go partly to bank deposits, which increase foreign exchange reserves, and partly to spending on nontradable investment activities, i.e., construction. The construction boom was in Kenya (as also in Nigeria) a major outcome of the export boom of the Seventies, and it actually drew labor out of the export sector. Because of import controls, manufacturing was essentially nontradable, and expanded as a result of the boom. Hence (in terms of the usual Dutch

Book reviews

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Disease model), resources had to be drawn from the export sector as a result of the expansion of nontradables brought about by the spending effect of the boom. It seems thus that, paradoxically, the sector which initially boomed through a rise in income actually became also the ‘lagging sector’. Through the export curve was equilibrium repercussions general supply backward-sloping. The authors stress that the outcome of the boom would have been far more efficient if the construction boom had developed more slowly and private agents had been able to save by acquiring (adequate) interest-bearing foreign assets, directly or indirectly rather than pouring it all quickly into construction. Thus, a considerable cost was imposed by the prohibitions on the private sector’s acquisition of foreign assets. Finally, the authors uncover a striking feature of the Kenyan experience. Private agents saved a large part of the proceeds of the boom: the savings rate must have risen from 20% to over 60%. The government, by contrast, consumed its gains from the higher tax revenue, as well as the temporary increase in foreign exchange reserves (acquired by its role of ‘custodian’ of temporary private savings). The ‘orgy of consumption’ originated ‘not on the shambas of coffee growers but in government ministries’. Peasants don’t squander, governments do. W. Max Corden School of Advanced International Studies, The Johns Hopkins University, 1740, Massachussetts Avenue, N.W., Washington, DC, 20036, U.S.A.