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Regional models of trade and development
Journal
of Internatlonal
Economics
9 (1979) 589--595. 0 North-Holland
BOOK
B.S.M. Berendsen, Regional Leiden, 1978) pp. ix+245
Publishing
Company
REViEWS
Models of Trade and Development
(Nijhoff.
This book is concerned with the effects of integration and coordination policies within regional groupings of less developed countries on the structure of their intra- and extra-regional trade, and the impact of this trade on their development prospects. The study is made with special reference to ASEAN - the Association of South East Asian Nations - formed in 1967 by Singapore, Malaysia, Thailand. the Philippines and Indonesia. The first part of the study considers explanations of existing trade between less developed countries and the benefits from regionalization. Standard textbook trade theories are applied to show why such trade has grown slowly, and inhibitions resulting from historical links with rich countries and the lack of information about neighbouring market conditions are also mentioned. Regional groupings are seen as ;I means of overcoming the information problem, of coordinating investment policies and of combining external protection with the larger local market resulting from regional trade liberalization. Some totally obvious comments are added on the need for political will to accept the limitations on national sovereignty involved in the process, and there is a very brief survey of existing regional groupings. In Berendsen’s view, however, regiollal integration does not generate its benefits primarily through reso:lrce reallocation, and the core of his approach is that integration reduces the problems associated with trade and savings ‘gaps’. After a straightforward prtsentation of the two-gap approach (which, like his earlier theoretical discllssion, would be useful for undcrgraduates), a regional two-gap model is st t out. Foreign capital in assumed to flow in to cover whichever is the larger r>fa country’s two gaps. A ca\,ingsconstrained country will need to expand imports to adjust to the inflow. thus potentially easing the trade gap of a regional partner, An essential fcaturc of beneficial regionalization, therefore, is that members should be in JIWc*rlt stages of development in this sense, but a serious problem arises in identifying ex post which dominant gap a country has been suffering from. Perhaps as a result of this difficulty the two-gap approach is sdpplemelltcd
590
Book reviews
hi the export-maxi,mum. import-minimum idea pioneered by Linder, where certain extra-regional irnp~~t’tsare essential, first, to full-capacity utilization and secondly to capacity gro\vth. Countries with extra-regional surpluses can use these to increase intra-rqional imports which not only reduces the trade constraints on their partner\. but allows themselves to grow faster as regional input imports supplemcrnl local factor inputs. These theories are then used, after a survey of some existing literatLlre, to develop a disaggregated, macroeconomic model, in which commodity outputs are considered according to their uses for consumption, for new or replacement investment, and for jtrade. Extra-regional exports are determined by GDP levels outside the regir,n as well as by relative prices, and in principle the effects of exchange rate changes and of changes in export taxes and import duties on intra- and extra-regional flows could be examined within the model. In practice, us e of the model on ASEAN trade has to be confined to a simpler, numerical exercise owing to lack of data, a problem also likely to exist for other regional groupings. On the bitsis of a variety of simplifying assumptions, changes in intra-ASEAN trade flows are projected in the absence of policy changes. A statistical analysis of ASEAN trade is conducted for the 1962-68 period and some measures of revealed comparative advantages are constructed. The ASEAN countries are sufficiently diverse to fit well into Berendsen’s theoretical scheme. Malaysia and Singapore have strong l:xtra-regional surpluses, while Thailand and Indonesia have had acute extra-regional deficits, and growth in the Philippines is thought to be constrained by a dominant savings gap. Thailand and Indonesia run surpluses within ASEAN but only Singapore uses its large extra-regional surplus to run an ASEAN deficit. Thailand’s intra-ASEAN import share is projected to rise, however, and Malaysia’s large export share to increase still further. In any case, intra-ASEAN trade in the late 1960s was less than 20 percent of the members’ total trade, and had fallen over the decade. Much care is necessary in interpreting the results. Not only are the estimates for the relevant macro-variables ‘more or less fictitious’ (p. 214), but some of the comparative advantage estimates obscure more than they reveal. Thus, much is made of Malaysia’s comparative advantage in chemical fertilizers without mentioning that this industry is subject to extremely high effective rates of protection and its exporting to neighbouring countries has strong elements of dumping. More important, a df.ticiency is the naivity of the underlying theory. Foreign capital does not always flow obligingly to fill savings and trade gaps. Direct investment may be directed to countries where nti such gaps exist and these host countries may choose to raise their growth targets. Regionalization could then result in a concentration of benefits in the more advanced partners (such as Malaysia) as foreign investment improves their regional export potential. Berendsen’s easy conclusions about the mechanisms through which the benefits of regionalization
accrue thus should be treated with caution. and. even with improved data. these limitations also lessen his mod :1’s value for projection purposes. John Thoburn University of Sussex University of East Anglia
The International Monetary Fund. 1966-1971: The System Under Stress. Volume I: Narrative, by Margaret de Vries; Volume II: Documents. edited b:l Margaret de Vries (International Monetary Fund, Washington. D.C., 1976) pp. xxii+699; viii+339. $15 the set: vol. I. $11.00: vol. Il. $6.00. This is the second installment of the official history of the International Monetary Fund. The first installment, The I:~ternnrional Monernry Fml 2945-1965, Twenty Years of‘ Zrtternational Monetary Cooperation, by J.K. Horsefield and others, was published by the Fund in 1969. The arrangement of the two works is somewhat different. The earlier one was divided in three volumes: Vol. I, a lengthy Chronicle of events written by Mr. Horsefield (663 pages), Vol. II, Andysis of individual topics (621 pages) written by different authors (a very large part by the author of the present history). and Vol. 111. Documents (549 pages). The present work combines the chronology of events and the analysis of individual topics in the firr,t colume for which the title ‘Narrative’ is much too modest; there is a good deal of analysis in it. After a short ‘Chronology of Principal Events 1966-71’, the material is orgamzed in six parts. Parts One and Two, ‘The Birth of SDRs‘ and ‘Allocation and First Use of SDRs’ (250 pages), deal largely with liquidity. Part Three, ‘General Resources, New Challenges and Responses’ (150 pages), deals with miscellaneous problems - the buffer stock facility, compensatory financing. quota enlargements, standby arrangements, and related matters. Part Four. ‘Gold’ (30 pages), is devoted to the gold problems that arose during the period (abolition of the gold pool, twc-tier gold market, etc.). Part F‘ive. ‘Exchange Rates in Crisis’ (140 pages), describes the disintegration of the par value system from the devaluation of sterling in 1967 to the Smithsonian Agreement in December 1971. Part Six, ‘The Fund as an Jnstitution’ (50 technical assistance on pages), reports on various activitic p oi’ the Fund different matters (such as central b,.nking, fiscal affairs ad statistics) to loss developed countries, the relations oi the Fund with the U.N.. GATT. OECD and other organizations, and administrative problems. Mrs. de Vries, the Fund’s official historian, has done an outstandmg job: the sheer magnitude of the book, 700 pages of crown quarto size. is most impressive and the text interestin, 0 throughout. The book is an indispensible
of Internatlonal
Economics
9 (1979) 589--595. 0 North-Holland
BOOK
B.S.M. Berendsen, Regional Leiden, 1978) pp. ix+245
Publishing
Company
REViEWS
Models of Trade and Development
(Nijhoff.
This book is concerned with the effects of integration and coordination policies within regional groupings of less developed countries on the structure of their intra- and extra-regional trade, and the impact of this trade on their development prospects. The study is made with special reference to ASEAN - the Association of South East Asian Nations - formed in 1967 by Singapore, Malaysia, Thailand. the Philippines and Indonesia. The first part of the study considers explanations of existing trade between less developed countries and the benefits from regionalization. Standard textbook trade theories are applied to show why such trade has grown slowly, and inhibitions resulting from historical links with rich countries and the lack of information about neighbouring market conditions are also mentioned. Regional groupings are seen as ;I means of overcoming the information problem, of coordinating investment policies and of combining external protection with the larger local market resulting from regional trade liberalization. Some totally obvious comments are added on the need for political will to accept the limitations on national sovereignty involved in the process, and there is a very brief survey of existing regional groupings. In Berendsen’s view, however, regiollal integration does not generate its benefits primarily through reso:lrce reallocation, and the core of his approach is that integration reduces the problems associated with trade and savings ‘gaps’. After a straightforward prtsentation of the two-gap approach (which, like his earlier theoretical discllssion, would be useful for undcrgraduates), a regional two-gap model is st t out. Foreign capital in assumed to flow in to cover whichever is the larger r>fa country’s two gaps. A ca\,ingsconstrained country will need to expand imports to adjust to the inflow. thus potentially easing the trade gap of a regional partner, An essential fcaturc of beneficial regionalization, therefore, is that members should be in JIWc*rlt stages of development in this sense, but a serious problem arises in identifying ex post which dominant gap a country has been suffering from. Perhaps as a result of this difficulty the two-gap approach is sdpplemelltcd
590
Book reviews
hi the export-maxi,mum. import-minimum idea pioneered by Linder, where certain extra-regional irnp~~t’tsare essential, first, to full-capacity utilization and secondly to capacity gro\vth. Countries with extra-regional surpluses can use these to increase intra-rqional imports which not only reduces the trade constraints on their partner\. but allows themselves to grow faster as regional input imports supplemcrnl local factor inputs. These theories are then used, after a survey of some existing literatLlre, to develop a disaggregated, macroeconomic model, in which commodity outputs are considered according to their uses for consumption, for new or replacement investment, and for jtrade. Extra-regional exports are determined by GDP levels outside the regir,n as well as by relative prices, and in principle the effects of exchange rate changes and of changes in export taxes and import duties on intra- and extra-regional flows could be examined within the model. In practice, us e of the model on ASEAN trade has to be confined to a simpler, numerical exercise owing to lack of data, a problem also likely to exist for other regional groupings. On the bitsis of a variety of simplifying assumptions, changes in intra-ASEAN trade flows are projected in the absence of policy changes. A statistical analysis of ASEAN trade is conducted for the 1962-68 period and some measures of revealed comparative advantages are constructed. The ASEAN countries are sufficiently diverse to fit well into Berendsen’s theoretical scheme. Malaysia and Singapore have strong l:xtra-regional surpluses, while Thailand and Indonesia have had acute extra-regional deficits, and growth in the Philippines is thought to be constrained by a dominant savings gap. Thailand and Indonesia run surpluses within ASEAN but only Singapore uses its large extra-regional surplus to run an ASEAN deficit. Thailand’s intra-ASEAN import share is projected to rise, however, and Malaysia’s large export share to increase still further. In any case, intra-ASEAN trade in the late 1960s was less than 20 percent of the members’ total trade, and had fallen over the decade. Much care is necessary in interpreting the results. Not only are the estimates for the relevant macro-variables ‘more or less fictitious’ (p. 214), but some of the comparative advantage estimates obscure more than they reveal. Thus, much is made of Malaysia’s comparative advantage in chemical fertilizers without mentioning that this industry is subject to extremely high effective rates of protection and its exporting to neighbouring countries has strong elements of dumping. More important, a df.ticiency is the naivity of the underlying theory. Foreign capital does not always flow obligingly to fill savings and trade gaps. Direct investment may be directed to countries where nti such gaps exist and these host countries may choose to raise their growth targets. Regionalization could then result in a concentration of benefits in the more advanced partners (such as Malaysia) as foreign investment improves their regional export potential. Berendsen’s easy conclusions about the mechanisms through which the benefits of regionalization
accrue thus should be treated with caution. and. even with improved data. these limitations also lessen his mod :1’s value for projection purposes. John Thoburn University of Sussex University of East Anglia
The International Monetary Fund. 1966-1971: The System Under Stress. Volume I: Narrative, by Margaret de Vries; Volume II: Documents. edited b:l Margaret de Vries (International Monetary Fund, Washington. D.C., 1976) pp. xxii+699; viii+339. $15 the set: vol. I. $11.00: vol. Il. $6.00. This is the second installment of the official history of the International Monetary Fund. The first installment, The I:~ternnrional Monernry Fml 2945-1965, Twenty Years of‘ Zrtternational Monetary Cooperation, by J.K. Horsefield and others, was published by the Fund in 1969. The arrangement of the two works is somewhat different. The earlier one was divided in three volumes: Vol. I, a lengthy Chronicle of events written by Mr. Horsefield (663 pages), Vol. II, Andysis of individual topics (621 pages) written by different authors (a very large part by the author of the present history). and Vol. 111. Documents (549 pages). The present work combines the chronology of events and the analysis of individual topics in the firr,t colume for which the title ‘Narrative’ is much too modest; there is a good deal of analysis in it. After a short ‘Chronology of Principal Events 1966-71’, the material is orgamzed in six parts. Parts One and Two, ‘The Birth of SDRs‘ and ‘Allocation and First Use of SDRs’ (250 pages), deal largely with liquidity. Part Three, ‘General Resources, New Challenges and Responses’ (150 pages), deals with miscellaneous problems - the buffer stock facility, compensatory financing. quota enlargements, standby arrangements, and related matters. Part Four. ‘Gold’ (30 pages), is devoted to the gold problems that arose during the period (abolition of the gold pool, twc-tier gold market, etc.). Part F‘ive. ‘Exchange Rates in Crisis’ (140 pages), describes the disintegration of the par value system from the devaluation of sterling in 1967 to the Smithsonian Agreement in December 1971. Part Six, ‘The Fund as an Jnstitution’ (50 technical assistance on pages), reports on various activitic p oi’ the Fund different matters (such as central b,.nking, fiscal affairs ad statistics) to loss developed countries, the relations oi the Fund with the U.N.. GATT. OECD and other organizations, and administrative problems. Mrs. de Vries, the Fund’s official historian, has done an outstandmg job: the sheer magnitude of the book, 700 pages of crown quarto size. is most impressive and the text interestin, 0 throughout. The book is an indispensible