Surveys of Applied Economics: Volume 2 Surveys I–V PDF
Preview Surveys of Applied Economics: Volume 2 Surveys I–V
SURVEYS OF APPLIED ECONOMICS Volume 2 CONTRIBUTORS A. D. Bain, Professor of Economics, University of Warwick I. B. Kravis, Professor of Economics, University of Pennsylvania, Philadelphia David Laidler, Professor of Economics, University of Western Ontario David Morawetz, Professor of Economics, Hebrew University of Jerusalem J. M. Parkin, Professor of Economics, University of Western Ontario John Williamson, Professor of Economics, University of Warwick SURVEYS OF APPLIED ECONOMICS THE ROYAL ECONOMIC SOCIETY THE SOCIAL SCIENCE RESEARCH COUNCIL VOLUME 2 SURVEYS I-V PA LGRA VE MACMILLAN Copyright © 1977 The Royal Economic Society and the Social Science Research Council Softcover reprint of the hardcover 1s t edition 1977 All rights reserved. For information, write: St. Martin's Press, Inc., 175 Fifth Avenue, New York, N.Y. IOOIO Library of Congress Catalog Card Number: 2-73-82638 First published in the United States of America in 1977 ISBN 978-1-349-01865-9 ISBN 978-1-349-01863-5 (eBook) DOI 10.1007/978-1-349-01863-5 CONTENTS Foreword VI I INTERNATIONAL LIQUIDITY 1 JOHN WILLIAMSON II FLOW OF FUNDS ANALYSIS 73 A. D. BAIN III EMPLOYMENT IMPLICATIONS OF INDUSTRIAL- ISATION IN DEVELOPING COUNTRIES: A SURVEY 115 DAVID MORAWETZ IV INFLATION: A SURVEY 169 D. E. W. LAIDLER and J. M. PARKIN V A SURVEY OF INTERNATIONAL COMPARISONS OF PRODUCTIVITY 239 I. B. KRAVIS FOREWORD THE articles which appear in this volume are the second in a series of Surveys specially commissioned by the Social Science Research Council and the Royal Economic Society and originally published in the Economic Journal. Each of the articles is designed to provide a comprehensive review of research in a major area of applied economics, including reference, where appropriate, to relevant theoretical work. Each is written by a specialist but aimed at the general economist rather than other specialists in the field covered. The first of the articles reprinted here, " International Liquidity" by John Williamson, was originally published in the September 1973 issue of the Economic Journal, but has been brought up to date (December 1975) for this volume. The next article, " Flow of Funds Analysis" by Andrew Bain, appeared in the December 1973 issue of the Economic Journal and has like wise been brought up to date (January 1976). David Morawetz's article " Employment Implications of Industrialisation in Developing Countries" appeared in the September 1974 issue, and was updated in December 1975. The last two articles, " Inflation" by David Laidler and Michael Parkin and "International Comparisons of Productivity" by Irving Kravis, appeared in the December 1975 and March 1976 issues respectively, and have, therefore, been modified in minor detail only. This volume, together with its predecessor, which appeared in 1973, represents a continuation into the field of applied economics of Surveys of Economic Theory, Volumes I-III, 1965-6, published by Macmillan and St Martin's Press for the Royal Economic Society and the American Economic Association. DONALD WINCH May 1976 I INTERNATIONAL LIQUIDITY1,2 JOHN WILLIAMSON 1. INTRODUCTION II. POSITIVE THEORY 1. The Demand for Reserves 2. The Composition of Reserves 3. The Supply of Reserves 4. Reserves and Adjustment III. NORMATIVE THEORY 1. Alternative Proposals for Increasing Liquidity 2. Desirable Characteristics of Reserve Assets (a) The Confidence Problem (b) Stabilisation (c) The Social Saving and Seigniorage 3. The Aid Link 4. The Normative Theory of Reserve Supply 5. The Adequacy of Reserves IV. CONCLUSION 1. INTRODUCTION IT has long been customary to contrast the aesthetic rigour of the pure theory of international trade with the superior journalism of international monetary economics. No doubt such a contrast still exists, but in recent 1 This is the fifth of a series sponsored jointly by the Social Science Research Council and the Royal Economic Society. 2 The views expressed in tltis paper are those of the author and do not necessarily reflect those held in the International Monetary Fund. The same caveat is, of course, applicable to the large number of economists who provided valuable comments on a previous draft, of whom special mention should be made of R. N. Cooper,]. M. Fleming,]. A. Frenkel, H. G. Grubel, H. R. Heller, F. G. Hirsch, P. M. Oppenheimer and].]. Polak. 2 SURVEYS OF APPLIED ECONOMICS: 2 years the latter field has increasingly followed the trend that has been evident in economics for some two centuries, and a serious technical litera ture has emerged alongside the profuse writings of a more traditional character. This development has affected both balance-of-payments theory and international-liquidity theory, where the latter is conceived of as that part of international monetary economics that is not confined to establishing what does (or should) determine an individual country's balance-of-pay ments position (or policy). The primary aim of this article is to provide a guide to this technical literature, hopefully by casting it into a coherent theoretical framework. The subject is a part of applied economics, not in the spurious sense of spurning theory, but in the sense that the work done is closely related to the evolving problems of the system that is being studied. It would be impos sible to divorce the literature from its historical context, because the litera ture has in large measure been prompted by concern for the particular policy questions that have arisen. In the period since 1959 there have been three major questions: (a) Is there a need for additional liquidity? (b) What are the desirable characteristics of reserves? In particu lar, how should one design a fiduciary reserve asset? (c) In what quantity should reserves be provided? This survey concentrates on the period since 1959. The system under went something of a transformation at the end of 1958: restoration of convertibility of the European currencies and termination of the European Payments Union marked a watershed between the problems of dollar shortage and post-war reconstruction and those of dollar glut and manage ment of a growing, interdependent international economy. This change in the facts of the situation rapidly provoked a response from economists, in particular in the form of Triffin's two modest articles (1959) which subse quently formed the core of Gold and the Dollar Crisis (1960). Since the breakdown of the gold standard in 1914, there had been no real theory of how the contemporary international monetary system operated. Triffin provided one: it claimed that the demand for reserves was growing faster than the supply could do unless the United States ran a deficit that would progressively undermine confidence in the dollar, so that the world was faced with a dilemma between a growing liquidity shortage that would threaten the expansion of the international economy and a collapse reminis cent of 1931. The subject of international-liquidity theory grew up around this thesis. It is obligatory to preface a survey on international liquidity by a clarification of the terms being used. "Reserves" are virtually always defined in terms similar to " those assets of [a country's] monetary authori ties that can be used, directly or through assured convertibility into other WILLIAMSON: INTERNATIONAL LIQUIDITY 3 assets, to support its rate of exchange when its external payments are in deficit" (Group of Ten (1965), p. 21). At present, therefore, reserves consist of gold, convertible foreign exchange, Reserve Positions in the International Monetary Fund (LM.F.), and Special Drawing Rights (S.D.R.s). Foreign exchange is counted gross; i.e., no deduction is made on account of liabilities, even if these constitute reserves to some other country. The assets included are restricted to those held by the monetary authorities. The term" international money" has recently been adopted by a number of authors to include private, as well as official, holdings of internationally-liquid assets (Heller (1968), McKinnon (1969)). The term (unconditional) "international liquidity" is most often used as a synonym for reserves, and this usage was endorsed by that invaluable clarification and classification of the issues that emerged from the first meetings of the Bellagio group (Machlup and Malkiel (1964), p. 31). In addition, conditional liquidity consists of the possibility of borrowing re serves through inter-central bank swap agreements or from the credit tranches at the LM.F. It should be noted that the distinction between owned and borrowed reserves differs from that between unconditional and conditional liquidity in two respects: by the proportion of reserves tied up in " backing" the domestic money supply, and by automatic borrowing rights (LM.F. (1964), p. 26). There is a persistent undercurrent ofthought which seeks to go much further than this in adopting a "functional" definition ofintcrnationalliquidity (Arndt (1948), Brown (1955), Woodfine (1958), Clement (1963), Williamson (1963), Kane (1965)). The basic idea is that liquidity-or a country's" liquidity position," as Arndt termed it should provide a measure of a country's ability to finance a payments deficit without resorting to adjustment measures. It has therefore been argued that a country's reserve holdings should be supplemented by its reserve-borrowing possibilities (Arndt, Williamson); part of the foreign exchange holdings of its commercial banks (Arndt, Brown, Clement); inventories of foreign-trade goods (Woodfine); the extent to which its own currency would be held by foreigners in the event of a deficit material ising (Brown, \Voodfine, Clement, Williamson); and the extent to which " innocuous" interest-rate manipulations would attract a capital inflow 1 (Arndt, Brown, Woodfine, Williamson). But liquidity is reduced by the existence of cover requirements (Nurkse (1944), Arndt, Clement) and some deduction needs to be made for the existence of foreign liquid liabilities, either by deducting a percentage of them (Arndt, Clement) or by postu lating that the minimum reserve level needed to maintain confidence is dependent on their size (Williamson). The most promising approach to integrating these diverse factors into a single measure has been suggested by Kane (1965), who proposed defining a country's international liquidity as 1 A major problem with this approach is bound to be the difficulty of drawing the line between adjustmf"nt measures and the mobilisation of liquidity.
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