Schweickert, Rainer

English

Research Papers in Economics

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Schweickert, Rainer
Book Review
[Book Review of] Capital controls, exchange rates, and monetary
policy in the world economy, Sebastian Edwards (ed.) : Cambridge :
Cambridge Univ. Press, 1995
Weltwirtschaftliches Archiv
Provided in cooperation with:
Institut für Weltwirtschaft (IfW)
Suggested citation: Schweickert, Rainer (1999) : [Book Review of] Capital controls, exchange
rates, and monetary policy in the world economy, Sebastian Edwards (ed.) : Cambridge :
Cambridge Univ. Press, 1995, Weltwirtschaftliches Archiv, ISSN 0043-2636, Vol. 135, Iss. 1, pp.
181-183, http://hdl.handle.net/10419/2256Rezensionen - Book Reviews 181
- in contrast to the 1940s and 1950s - in the inner core ofthe profession. But, and this
is an even more important message ofmost parts ofthe book, endogenous growth the-
ory with its rich microeconomic structure (including the ability to deal with increasing
returns to scale and imperfect competition) provides a very promising source to tackle
many of the most pressing issues in development theory. The final message is that in
many areas this task still waits to be undertaken.
Therefore, for all readers interested in the field, the books presents a wide range of
very interesting contributions which shed important light on the link between (new)
growth theory and development economics.
Uwe Walz
Edwards, Sebastian (ed.), Capital Controls, Exchange Rates, and Monetary Policy in
the World Economy. Cambridge 1995. Cambridge University Press. VIII, 436 pp.
The title as weIl as the contents ofthis book seem to announce a highly timely pub-
lication. After aseries ofexchange rate crises in the 1990s which started with the EMS
crisis in 1992/93, proceeded with the tequila crisis in Mexico and its fallout in Latin
America in 1994/95, and ended for the present in the Asian crisis in 1997/98 and the
Russian crisis in 1998, exchange rate regimes and capital flows are hotly debated in
political and academic circles. Moreover, the structureofthe bookseems to offera sum-
mary and a discussion ofall these events given by outspoken experts in the field.
The book starts by three articles on general issues written by Robert Mundell (Sta-
bilization and Liberalization in Semi-Open Economies), Jeffrey A. Frankel (Monetary
Regime Choice for a Semi-Open Country), and Manuel Guitian (Capital Account Lib-
eralization: BringingPolicy in Line with Reality). This introduction is followed by three
parts with a regional focus on
• Europe with contributions from Patrick Minford (The Lessons of European Mone-
tary and Exchange Rate Experience), Jeffrey R. Shafer (Experience with Controls on
International Capital Movements in OECD Countries: Solution or Problem for Mon-
etary Policy?), Alberto Giovannini (Real Exchange Rates and Capital Flows: EMS
Experiences), and Wilhelm Nölling (Monetary Policy after German Unification);
• the Asia-Pacific region with papers by Yung Chul Park and Won-Am Park (Capital
Movements, Real Asset Speculation, and Macroeconomic Adjustment in Korea),
Shin-ichi Fukuda (Tbe Determinants ofCapital Controls and TheirEffects on Trade
Balance During the Period ofCapital Market Liberalization in Japan), Michael Doo-
ley (CapitalMobility andEconomicPolicy), and VictorArgy(Monetary andExchange
.Rate Policies 1973-1991: the Australian and New Zealand Experience); and
• LatinAmericawith articles from Sebastian Edwards (ExchangeRates, Inflation, and
Disinflation: Latin American Experiences), Guillermo A. Calvo, Leonardo Leider-
man, and Carmen M. Reinhart (Capital Inflows to Latin America with Reference to
the Asian Experience), and James A. Hanson (Opening the Capital Account: Costs,
Benefits, and Sequencing).
However, the book cannot live up to what the contents promises because the time
schedule of its publication was just one step behind the developments in international
capital markets. Tbe papers on which the essays are based were originally presented at
a conference on Monetary Policy in Semi-Open Economies, held at the Korean Insti-
tute ofEconomic Research in November 1992 when the EMS crisis hadjust started. As
a consequence, this crisis is only mentioned in a postscripturn by Manuel Guitian and
in the introduction by Patrick Minford. The book was then published in 1995 shortly
after the Mexican tequila crisis and reprinted in 1997 when the Asian currency crisis182 Weltwirtschaftliches Archiv 1999, Vol. 135 (1)
was just about to develop. Therefore, the book is not a timely publication because no
work has been done to include these important events in the analysis.
The book is nevertheless ofsome interest because one may check what economists
have thought in 1992 when only the EMS crisis was known of. Did they mention the
policy mistakes and exogenous events which havebeenblamedto havecausedthe Latin
American and Asian crises in more recent publications? The answer to this question is
not a clear-cut one. The arguments put forward in the essays contain the basic message
about macroeconomic disequilibrium, real exchange rate overvaluation, and the chanc-
es and risks relatedto capitalinflows. However, with the benefitofhindsightthe empha-
sis ofthe argumentation would be different. Two examples may illustrate this point.
With capital just starting to pour into emerging markets, Manuel Guitian, Jeffrey A.
Shafer, and James A. Hanson stress rather the benefits of foreign capital financing
domesticdevelopmentratherthan the risks relatedto the instabilityofsuchcapitalflows.
Manuel Guitian even goes so far to argue that "...(n)either should the opening of the
capital account wait until all desirable conditions are in place, because such a point in
time is unlikely to be reached..." (p. 85). Moreover, the possibility ofcontrolling cap-
ital flows is rated rather low while in the meantime the Chilean example demonstrates
that at least the structure ofcapital inflows could be influenced by a consistent policy
package whichincludes regulations for short-termcapital. To befair, there are two state-
ments which sound as being written in 1998. On p. 30 Robert Mundell remarks that
"...(i)t may be better for Korea to rely less on capital imports even if it would mean
reducing the share of investment in GDP to 35 percent..." and Yung Chul Park and
Won-Am Park claim that "...one cannot be overcautious about the opening of capital
account, especially when the Korean domestic economic conditions are not stable, char-
acterized, for example, by real asset speculation and a massive deficit in the current
account..." (p. 225).
In the same vein, the role offinancial intermediation in determining the extent ofa
currency crisis is hardly discussed in the book. It is only discussed by Guillermo A.
Calvo, Leonardo Leiderman, and Carmen M. Reinhart who write that "...attempting
to insulate the banking systemfrom short-termcapital flows is an attractive goal incases
where most of the inflows take the form of increased short-term bank deposits..."
and "...marginal reserve requirements could be sharply raised such that they become
higher as the maturity of deposits shortens..." (p. 379). Also, James A. Hanson con-
cludes on the basis of the experiences of Southern Cone Countries in the early 1980s
that countries are likely to end up nationalizing private external debt if"...a large per-
centage ofthe debts that were assumed reflected externalliabilities...offinancial inter-
mediaries thatwereintennediateddomestically..." andthat"...thereappearto be anum-
ber of policies within the financial sector to limit the intermediation offoreign funds,
ifthe political will exists to limit the boom..." (p. 417). Obviously, the lessons neces-
sary to avoid exchange rate cum financial crises of the Asian type have already been
learnt the hard way by Latin American countries already in the 1980s but were judged
to be ofless importance for otherthan Latin American countries at the beginning ofthe
1990s.
Taking the shortcomings into consideration which result from the timing ofthe pub-
lication, the structuringoftheconferenceproceedings accordingto the region with which
the papers deal in the first piace does not make much sense. Fortunately, the editor of
the book offers a helpinghand. In his excellent introduction Sebastian Edwards give an
outline ofthe issues at hand by summarizing his own thoughts and including individu-
al papers in his discussion. He names the following four topics to which he relates the
contributions to the book (by author):
• Capital account liberalization (Jeffrey Shafer and Manuel Guititin)
• Measuring the degree ofcapital mobility (Michael Dooley and Shin-ichi Fukuda)Rezensionen - Book Reviews 183
• Nominal exchange rate regimes, monetary policy, and capital controls (Patrick
Minford, Jeffrey A. Frenkel, Victor Argy, Wilhelm Nölling, and Sebastian Edwards)
• Real exchange rates and capital flows: the sequencing issue (Yung Chul Park
and Won-Am Park, Guillermo A. Calvo et al., James A. Hanson, and Alberto
Giovannini).
Whether or not the introduction increases the incentives to read the book is an open
question. More reasonably, it promotes the idea to read about all relevant issues in the
editor's own publications. This seems to be a reasonable strategy for those who want to
be introduced to the topic ofexchange rate policy in emerging market economies. They
may referto the book as an additional sourcefor alternative opinions and for someempir-
ical exercises. Apart from that, the book is a historical document which summarizes the
state ofthe art at the beginningofthe 1990s, Le., before the major currency crises ofthis
decade demonstrated the risks related to capital flowing in from globalizing capital mar-
kets.
Rainer Schweickert
Giersch, Herbert (ed.) for the Egon-Sohmen-Foundation, Reforming the Welfare
State. Berlin, Heidelberg, New York 1997. Springer-Verlag. X, 331 pp.
This book comes timely although the conference, in which the papers have been
given, took place already in the summer of 1995. It is not too difficult to be timely in
this field as the issue ofhow to reform ourwelfare states is a difficult, controversial and
thus slowly moving process.
The book features an interesting cast ofcharacters: economists, historians, political
scientists and a philosopher. This gives the book breadth and adds to the international
perspective represented by authors from both sides ofthe Atlantic. As always in social
policy issues, Asia is suspiciously absent. Is there a lesson to be learnt?
The book, and by implication, the conference, has a clear-cut agenda. Itis set out in
Herbert Giersch's briefpreface as a set of(almost rhetorical) questions: Does the wel-
fare state have harmful side effects (in essence, moral hazard effects), and have these
negative incentive effects evolved over time such that only after two or three decades
of generous social policy we are feeling their impact. These questions are almost rhe-
torical as the book leaves no doubt that the answers are affirmative. This is not partic-
ularlY unexpected as it concerns the first question. An important insight that is under-
appreciated is the second point: it takes society a while to learn how the welfare state
works, and only over time will the negative incentive effects bear out their full force.
This historical path dependency is importantbecause itrefutes the empiricallineofrea-
soning that under the same policy the same behavior has to follow; more importantly,
onecannotconclude thatacertainpolicycannotbethe causeofobservednegativeincen-
tive effects now which were not observable in the paste
The book is, a little arbitrarily, divided in five parts. The first two parts are more
philosophical and discuss history, fundamental mechanisms and future scope ofthewel-
fare state. The third part provides three case studies: Sweden, Germany, and the Unit-
ed Kingdom representing extreme points in the wide specter of how welfare states
evolved overtime. The fourth partinvestigates in greater depth specific branches ofthe
welfare state: old-age pensions, health care and unemployment insurance. Somewhat
awkwardly, the fifth part contains a single paper that would have nicely fit into the first
part as it describes a fundamental mechanism: the "self-serving altruism" which might
explain the growth ofthe welfare state.
The historian Peter Baldwin sets the stage with juxtaposing the Beveridgian social
citizenship philosophy with the Bismarckian social insurance philosophy of setting up

[Book Review of] Capital controls, exchange rates, and monetary policy in the world economy, Sebastian Edwards (ed.) : Cambridge : Cambridge Univ. Press, 1995.

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[Book Review of] Capital controls, exchange rates, and monetary policy in the world economy, Sebastian Edwards (ed.) : Cambridge : Cambridge Univ. Press, 1995.

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