Fiscal and Monetary Policies and Problems in Developing Countries PDF
Preview Fiscal and Monetary Policies and Problems in Developing Countries
MODERN CAMBRIDGE ECONOMICS FISCAL AND MONETARY POLICIES AND PROBLEMS IN DEVELOPING COUNTRIES MODERN CAMBRIDGE ECONOMICS Editors Phyllis Deane Gautam Mathur Joan Robinson Also in the series Phyllis Deane The Evolution of Economic Ideas Michael Ellman Socialist Planning Joan Robinson Aspects ef Development and Underdevelopment Amiya Kumar Bagchi The Political Economy of Underdevelopment FISCAL AND MONETARY POLICIES AND PROBLEMS IN DEVELOPING COUNTRIES Eprime Eshag Senior &search Officer, Oxford Univmiry Institute of Economics and Statistics, and Fellow of Wadham College, Oxford HCAMBRIDGE V UNIVERSITY PRESS CAMBRIDGE UNIVERSITY PRESS Cambridge,Y oNrekMw,e lbourMnaed,r iCda,p eTo wnS,i ngapore, SaoP aulDoe,l hi, DTuobkayioM,,e xicCoi ty CambridUgnei verPsriteys s The EdinburBguhi ldiCnagm,b ridCgBe2 8 RU,U K Publisihnet dh eU nited SotfAa mteersi bcya Cambridge UniPvreersNssei,wt Y yo rk ww.w cambridge.org Informatitohni tsoi ntww le:.w cambridg9e7.8o0r5g2/I 270496 CambridUgnei versPirteys s I983 © Thisp ublicatiinoc no piysr iSguhbtj.e tcost t atuteoxrcye ption andt ot hep rovisoifor nesl evcaonltl ecltiicveen saignrge ements, no reproduocfat niypo anr mta yt akpel acwei thotuhtew ritten permissoifCo anm bridge UniPvreersssi.t y Firpsutb lisIh9e8d3 ReprinIt9e8d5I ,9 92 catalogue recordfa r this publication is available .from the British Library A Library of Congress catalogue card number: 82-I783I ISBN 978-o-52I-2H4a9r0d0b-a3c k ISBN 978-o-52I-2P7a0p4e9r-b6a ck Cambridge UniPvreershssai snt oyr esponsifboitrlh iept eyr sistoern ce accuroafcUyR Lsf oerx teronrat lh ird-pianrtteyr wneebts irteefse rtroei dn thipsu blicaatinoddn o,e nso t guartahnataten eyc onteonnts ucwhe bsiitse,s orw ilrle maianc,c uroarta ep propriIantfeo.r matrieogna rdpirnigc tersa,v el tmietablaensdo, t hefra ctiunaflo rmation tghiiwvsoe rnk icinos r reactt thet ime ofifr sptr intbiuntg CambrUindigvee rPsritedys ose nso tg uarantee thea ccuroafcs yu cihn formatthieorne after. To students who care about the underprivileged and unemployed CONTENTS List of tables and chart xi Series preface Xlll Preface xv List of abbreviations XXJ Symbols and terminology used XXll THE MEANING AND THE STRATEGY OF ECONOMIC DEVELOPMENT The meaning and measurement of economic development The process of growth 3 Economic welfare index 5 Essential and inessential investment and consumer goods 8 Lop-sided development JO Strategy of development JO Raison d'etre for government intervention II Lower efficacy of the market mechanism I. II 2. Unequal distribution ef income 12 Divergence between private and social costs and benefits 15 3. Long-term dynamic considerations 16 4. Shadow pricing 20 The key role of socio-political factors in development 23 Quality of the administration 24 2 THE SCOPE AND ROLE OF FISCAL AND MONETARY 28 POLICIES Background to the modern approach 29 The management of demand and production 32 Keynesian model of income determination 36 Fiscal and monetary measures 41 The elfect of changes in the supply of money on private demand and on prices 42 Monetary policy and private consumption 44 VII vm Contents Monetary policy and private investment 47 Monetary policy and the price level 49 The counter-revolution against Keynes 50 Financing of economic development 53 Kalecki's model 54 Formal model 57 Foreign trade and capital 60 The role of fiscal and monetary policies in development 63 Appendix 2A. The neo-monetarist approach 65 The key propositions of monetarism 65 Excess money balances 68 Changes in the supply of money 70 Laissez-faire aspect of neo-monetarism 73 Policy prescriptions 74 3 FINANCING ECONOMIC DEVELOPMENT (I) DOMESTIC SAVINGS 77 Public consumption 78 Expenditure on defence, education and health 81 Fiscal policy and private consumption 88 Taxation target and potential 89 Tax ratios 92 Organisation of Petroleum Exporting Countries (OPEC) 97 Guidelines on taxation 100 Essential characteristics of a taxation system 100 Taxation measures 103 Indirect taxes 103 Direct taxes outside agriculture 106 Direct agricultural laxes 109 Land reform and farm co-operatives 118 Wealth, gift and inheritance taxes 120 Conclusion 12:2 (2) 4 FINANCING ECONOMIC DEVELOPMENT FOREIG:-1 CAPITAL 124 The dual function of foreign capital in development 125 Absorptive capacity for foreign capital 130 Major types of capital flow 131 Economic aid and its cost to donors 132 Volume, composition and distribution of capital flows 136 Composition and distribution of capital 141 Development potential of different categories of external capital 145 Grants and concessional loans (ODA) 145 Contents 1x Tied 146 aid Non-concessional loans 149 Direct investment 151 Drawbacks, compared with wans 153 Special advantages 156 Evaluation of the actual contribution of foreign capital to development 159 Appendix lnteT1t11Jional aid and capital flow targets 162 ¥. Recommendations 163 Compliance with recommendations 165 Appendix 4B· Growth in external debt of developing countries 1 67 5 THE PATTERN INVESTMENT OF Investment in the public sector Guidelines on the choice of public investment projects Pricing policies in the public sector Private investment Fiscal measures Tariffs and quotas Tax concessions Subsidies Multiple exchange rates Monetary instruments Industrial development banks Sources off unds Investment policies Agricultural credit institutions Development potential Distribution of institutional credit Subsidised credit Conclusion 6 INTERNAL AND EXTERNAL EQ.UILIBRIUM 2 II The meaning and significance of equilibrium 2 II Internal equilibrium 211 External equilibrium 213 Causes of disequilibrium 216 The structure of production 218 Supply off ood 218 Production bottlenecks and sectoral demand pressures 221 Si�e of harvests 222 The structure of foreign trade 222 Diagnosis of imbalances 227 Analysis of demand conditions 228 Contents x Inflationary pressures 231 External imbalances 234 Remedies for imbalances 236 Direct controls and selective measures 237 Global deflationary measures 239 Foreign loans 241 The IMF monetary approach to the balance of payments 243 The basic propositions of monetarism 244 I MF eclecticism 247 The organisation, resources and credit facilities of the IMF 252 The organisation and resources of the IMF 253 Quotaasn dS DRs 253 The I MF regular credit facilities 256 Conditioonfat lhieJt My F credfiatc ilities 257 IMF stabilisation policies 259 260 Restriction of effective demand Promotion of the market mechanism 262 Foreiegxnc hanagnedds e valuation 263 Concluding note 267 Appendix IMF special facilities 269 6A. Compensatory Financing Facility (CFF) 270 The Buffer Stock Financing Facility 272 The Oil Facility 272 Extended Fund Facility (EFF) 273 Supplementary Financing Facility (SFF) 273 The Trust Fund 275 General Arrangements to Borrow (GAB) 275 Index 276
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