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divided on the IMF conditions, and for a time sought to involve the U.S.
authorities so as to avoid dealing with the IMF. The author recognizes the
IMF conditions as ultimately therapeutic. In its 1974 crisis, Italy turned to
swaps, to an EEC credit, and to a gold-collateralized loan from the
Bundesbank - none of which presumably involved letters of intent with
promises of behavior amounting to conditions - but finally was obliged to
arrange an IMF drawing. A second line of credit arranged with the IMF in
April 1977 was not drawn.
In his brief panel presentation, Jeffrey Sachs makes much of the point that
the Fund is better as a rating agency (bestowing the Good Housekeeping
seal of approval on a country), than in providing funds, citing some lines of
credit such as that of 1977 for Italy which was not drawn. Of course. In a
pure liquidity crisis based on runs on banks or on foreign-exchange reserves,
a convincing demonstration that cash or foreign exchange is available in
abundance often means that it ceases to be wanted. When balance of
payments disequilibria are structural, however, even the best policies will
leave a transitional deficit to be financed, and in liquidity crises, history
shows that rationing help increases the rush for liquidity. The Sachs point is
a dangerous one if it were to lead economists to think that the Fund does
not need resources on a big and convincing scale.
The United States under Reagan is said in these pages to lean in the
direction to tighter conditionality, holding IMF rescue operations to be too
large, the conditions too lenient, and lacking specificity (Gwin on India,
p. 529). Is it consistent of this country to take this line while resisting its
summit partners pressure for tighter U.S. fiscal looser monetary policy so as
to reduce interest rates and the upward pressure on the dollar? One could
argue that we are not asking the rest of the world for help with our balance
of payments deficit. But we are taking such help.

Charles P. Kindleberger
Massachusetts Institute of Technology, Cambridge, MA

Lance Taylor, Structuralist Macroeconomics: Applicable Models for the

Third World (Basic Books, New York, 1983) pp. ix + 227.

Recently, Arnold Harberger counseled against resurrecting the

structuralist-monetarist debate until the structuralists could produce some
scientific counterpart to the money demand equation. Some may, justifiably,
doubt whether there is not at least as much scientific content in early
structuralist writings as in most money demand equations; but, in any event,
in the past several years Lance Taylor and his students at MIT have
developed a substantial, formal body of structuralist analysis capable of
Book reoiews 215

meeting Harberger’s challenge. Much of this work is contained in Taylor’s

new book, Structural& Macroeconomics.
The structuralist approach is expounded in the first two chapters. In
marked contrast to the direction taken by developed country macro-
economics in the last decade, approaches based on maximizing behavior are
emphatically rejected. Without the anchor provided by maximizing behavior,
it is necessary to make a judgment from outside the model as to which
critical variables adjust to ensure that the economy attains macroeconomic
balance. Taylor’s preferred analytical framework entails what are by now
certain trademarks of his work: markup pricing and excess capacity, fixed
coefficient production functions, constant savings propensities which differ
across classes, etc. Many readers will feel uneasy with this type of theorizing
and in a section entitled ‘A Neoclassical Digression’ Taylor strives to allay
doubts by arguing that in most cases of interest more orthodox behavioral
assumptions would not alter the results (p. 32): ‘The main thing to recognize
is that a neoclassical formulation of production relationships is not funda-
mentally different from a story involving excess capacity and markups unless
full employment is also assumed.’ This is a very strong claim which, if valid,
means that macroeconomic phenomena are determined primarily by struc-
tural factors, differences in behavioral relationships being a matter of slight
consequences. To evaluate the merits of such a ‘pure structuralist’ view, it
will be necessary to examine in detail how Taylor obtains his many
provocative results.
The main result developed in Chapter 2 is that an improvement in the
distribution of income may well raise the growth rate. The mechanism
producing this result is the following: there is a fixed coetlicients production
and investment is assumed to depend upon the average profit rate and the
degree of capacity utilization; a decrease in the markup rate lowers prices
and raises the real wage, which tends to raise aggregate demand since the
marginal propensity to save out of wage income is less than out of profit
income; if, on balance, the demand effect is favorable, investment (and hence
growth) can increase despite a decrease in the profit rate; in fact, if the
increase in demand is sufficiently strong, the profit rate may even rise. Later,
in Chapter 9, a more complex two-sector model involving luxury and wage
goods is constructed and it is shown that this same mechanism can raise the
growth rate and that the outcome depends, remarkably, simply on whether
the wage good sector capital stock is initially larger or smaller than the
capital stock in the luxury good sector.
From a neoclassical perspective, these striking results appear to be
generated by a misspecified investment function. Neoclassical theory con-
tends that investment depends on the profitability of acquiring a new
machine. An increase in the real wage definitely lowers the marginal profit
rate and therefore would be expected to lower investment; changes in the
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degree of excess capacity and the average profit rate affect the return on past
investments, but are otherwise irrelevant variables. It is possible to reconcile
the two approaches by arguing that the average profit rate and the degree of
excess capacity serve as proxies for expected future profits, but this seems
dubious when the focus is on long-run growth effects.
Chapter 3 explores the consequences of sectoral interaction in a pair of
fixprice-flexprice models. Agriculture is the flexprice sector and industry the
quantity adjusting sector in the first model. A simple but important point
which emerges is that orthodox policies may have unexpected contractionary
effects if the income elasticity of demand for food is low enough to make
agricultural and industrial goods gross complements. Policies that raise the
price of agricultural goods, such as reductions in food subsidies and export
promotion schemes, then have adverse repercussions by contracting the
demand for industrial output.
In the second model, there are a quantity adjusting manufacturing sector
and two flexprice sectors producing mineral exports and “non-traded univer-
sal intermediates’. Again, it is shown that export promotion may be harmful.
With manufacturing prices set as a fixed markup over variable costs, an
increase in mineral exports shifts out the demand curve but also leads to an
upward movement along it by forcing up the price of universal intermediates.
This result, unlike that of the first model, is not structuralist but instead
reflects the workings of the ad hoc, markup pricing rule firms are assumed to
obey. As an economist more sympathetic to the neoclassical approach, I
would opt for a fixed-price disequilibrium model along the lines of those
developed by Clower, Leijonhufvud and Malinvaud. With this type of model,
one comes to the opposite concousion that an export boom is highly
beneficial. Following the boom, both scale and substitution effects would
serve to increase manufacturing sector employment, the rise in effective
demand permitting a larger level of output and the higher price of universal
intermediates inducing substitution along a given isoquant (assuming the
normal case of factors that are Allen substitutes).
In Chapter 4 short-run policies are examined in an empirical, computable
general equilibrium (CGE) model based on a social accounting matrix of the
Indian economy. The underlying theoretical structure is the fixprice-flexprice
models of Chapter 3, but a great deal more is included: food stock
speculators; a wage-price spiral; the food subsidy and procurement policies
of the Indian government; export subsidies endogenously determined so as to
equate domestic and border prices; non-uniform, variable markup rates; and
demand patterns that vary with the sectoral source of income. Professor
Behrman has discussed the merits and shortcomings of this particular brand
of empirical economics in his review of Taylor’s previous book. In my view,
something can be learned from these exercises. It is illuminating, for example,
to see just how inflationary certain policies can be when low supply and
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demand elasticities characterize the agricultural sector. Some results, how-

ever, make one wonder about what is going on inside the CGE black box.
For instance, the structuralist assertion that devaluation is likely to be
contractionary receives. little support: even with an elasticity of import
demand of zero, devaluation becomes strongly expansionary once the export
elasticity approaches a value of 0.5.
The next two chapters extend previous work done by Taylor on models
where the cost of working capital is an important variable. The main new
twist is the explicit modeling of the curb market, which plays a pivotal role
as the marginal supplier of working capital finance. Curiously though, there
is no working capital cost-push mechanism at work in the newer models
developed in these chapters. Aggregate supply is fixed in the short run by a
constant capital-output ratio and the price of domestic output varies to clear
the goods market. An increase in the interest rate lowers the profit rate,
redistributing income from capitalists to financial lenders. As the latter group
consumes all of its income, the redistributive effect is demand expansionary
and may more than offset the reduction in investment spending brought on
by a lower spread between the rates of profit and interest. Contrary to what
Taylor seems to think, when the price level rises it does not reflect the
dominance of working capital cost-push pressures, but rather the fact that in
this model contractionary monetary policy is demand expansionary. Taylor
has a predilection and talent for demonstrating that orthodox policies can
operate perversely in LDCs, but in this case I do not think he obtained the
result he was aiming for.
Fortunately, this inexactitude in no way diminishes a very important result
that is demonstrated in this chapter; namely, that financial liberalization as
advocated by McKinnon and Shaw may fail, contracting the total volume of
credit in the economy and thus driving up the critical curb market interest
rate. With a positive reserve ratio, as the public shifts funds from the curb
market to bank deposits, aggregate loan supply declines by the amount of
additional accumulation of bank reserves. If, therefore, an increase in the
time deposit rate attracts funds into the commercial banking system mostly
at the expense of the curb market instead of eliciting substitution away from
‘unproductive’ assets (labeled ‘gold’), financial liberalization will prove to be
credit contractionary. To be fair to McKinnon and Shaw, it should be added
that such models do not capture many other arguments they have advanced
in favor of financial liberalization. They do, however, make the point that
any benefits from financial liberalization will have to be weighed against the
costs of financial crowding-out in the curb market.
A question that immediately comes to mind is whether, if contractionary
monetary policy is stagflationary, it follows that expansionary monetary
policy should be adopted as a deflationary device. Taylor answers in Chapter
6 that, yes, there are circumstances under which a higher growth rate of the
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money supply will transport the economy to a new steady state wherein the
growth rate and the real wage are higher and the inflation rate is lower. But
before we start advising the Argentinians and Chileans to raise the growth
rate of the money supply, it would be wise to reflect on how the economy is
supposed to operate if this is to be the proper policy prescription. Whereas
in Chapter 5 the price level fluctuated to clear the goods market, in
Chapter 6 the price level is fixed in the short run and instead the inflation
rate varies to clear the goods market, rising when there is excess supply and
falling in response to excess demand. This odd pricing behavior is justified by
appeal to rational expectations. Now, think what one may of rational
expectations, it certainly does not give license to postulate bizarre behavioral
equations of this sort. Rational expectations merely hypothesizes that agents
expectations will be the mathematical expectations forthcoming from the
relevant model. I find it exceedingly hard to believe that any economy would
behave as in Taylor’s model. Consider what happens: an increase in the
growth rate of the money supply initially leads to an increase in the real
money supply and a decrease in the real interest rate; the decrease in the real
interest rate raises investment and thus the growth rate but, in the case
where the ‘working capital cost-push effect’ is dominant (as noted earlier, this
is actually the case where expansionary monetary policy is demand contrac-
tionary), incipient excess supply appears in the goods market and is
eliminated by an increase in the inflation rate; with periodic adjustment of
the real wage to its target value, the increase in the inflation rate lowers the
average ‘institutionally warranted real wage’ relative to the actual real wage,
creating ‘tightness’ (how?) in the labor market; as the real wage rises over
time, incipient excess demand appears in the goods market, which lowers the
inflation rate; the economy is now on a path where the growth rate is higher
than initially and the inflation rate is falling; eventually the inflation rate falls
below its earlier value and the economy arrives at a new steady state in
which the inflation rate is lower and both the growth rate and the real wage
are higher than at the old steady state. The reader may judge for himself
whether this is a convincing demonstration that expansionary monetary
policy can be growth augmenting and price deflationary across steady states.
Chapter 7 deals with trade balance complications in the context of two-
gap models. The first half of the chapter discusses various adjustment
mechanisms which can restore macroeconomic balance by eliminating the
‘gap between the gaps’ and the last half extends the traditional two-gap
analysis to incorporate the effects of debt service. The latter analysis, based
on elegant recent work of Bacha, contains a number of new and interesting
results, such as that under certain circumstances foreign borrowing may
result in an economy always being foreign exchange constrained - the slope
of the external balance schedule becomes flatter than that of the internal
balance schedule in the well known McKinnon diagram. I found the section
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on adjustment mechanisms, however, less satisfactory and one result in

particular highly objectionable. One mechanism examined by Taylor has
output varying to clear the goods market and the exchange rate fluctuating
to preserve payments equilibrium. An increase in foreign aid permits the
economy to run a larger trade deficit and it is asserted that this will be
strongly contractionary: at a given level of income, the increase in the trade
deficit directly subtracts from the demand for domestic output; moreover, to
induce the larger trade deficit required by a higher level of foreign aid, the
authorities appreciate the exchange rate, contracting demand still further
(assuming that net capital inflow initially exceeds capital goods imports).
This is certainly far removed from the spirit of the two-gap model. An
increase in the trade deficit is contractionary only if it reflects a switch in
demand away from domestic output toward foreign goods. Taylor’s analysis
implicitly assumes not only that such an adverse shift in expenditure patterns
accompanies the increase in foreign aid, but also that the authorites do not
recognize the shift and feel compelled to appreciate the exchange rate so as
to induce the larger trade deficit needed to absorb the extra aid. Clearly,
foreign aid should not be blamed for this unhappy outcome, but Taylor
nonetheless proclaims (p. 137): ‘Gifts from the gods of politically determined
foreign aid or bounteous exports are not without their sting.’
A more conventional two-gap model would give the usual conclusion that
increased foreign aid is beneficial. The essence of the two-gap story is that
the ex ante, desired level of investment cannot be realized due to lack of
foreign exchange to pay for imported capital goods. Should more foreign
exchange become available through aid, the government would not appre-
ciate the exchange rate but simply allow imports of capital goods to increase.
This would raise the demand for domestic output since production of an
aggregate capital good requires use of domestic and imported components in
fixed proportions.
Chapter 8 is devoted to developing models capable of explaining the
difficulties numerous countries have encountered as they have attempted to
disinflate by preannouncing a lower rate of crawl of the domestic currency.
The financial framework of Chapters 5 and 6 is eschewed here in favor of a
more traditional one in which the asset menu consists of demand deposits,
domestic loans, gold and foreign bonds. It is found that when ‘existing
financial customs’ require a fixed fraction of gold purchases to be financed by
taking out bank loans, a lower rate of crawl may raise the domestic loan
rate. Suppose, for example, that as the return on foreign bonds falls the
public wishes to increase its holdings of demand deposits by 50 pesos and its
holdings of net gold by 20 pesos. If the required reserve ratio is 0.4 and 60%
of gold purchases are financed via bank loans, then both loan supply and
loan demand rise by 30 pesos. With a higher reserve ratio, a larger increase
in demand for net gold or a larger fraction of gold purchases financed out of
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bank loans, the lower rate of crawl could create excess demand for credit and
thus drive up the bank loan rate. It is suggested that this may explain the
behavior of real interest rates in Chile in recent years.
This is a most intriguing result, but the ad hoc specification of asset
demands leaves one feeling uneasy. If the public desires an additional 20
pesos of net gold, why does not the demand for gold increase directly by 20
pesos? What exactly is meant by the assumption that ‘existing financial
customs’ constrain a fixed fraction of gold purchases to be financed by bank
loans? As for this being a possible explanation of the puzzling behavior of
real interest rates in Chile, I find it hard to believe that those massive,
persistent capital inflows led to recurrent credit shortages.
Whatever may be true of the Chilean case, the notion of capital inflows
bringing on credit shortages does not square well with the experiences of
other countries, most notably that of Argentina and Uruguay, and in the
remainder of Chapter 8 Taylor assumes that lowering the crawl leads to
incipient excess supply in the loan market. To the basic financial structure
just outlined, there is appended a real side model in which output adjusts to
clear the goods market and the price of the domestic good varies to clear the
loan market. The odd pricing equation is made necessary by the assumption
of a fixed interest rate and is motivated by invoking closed economy
monetarism. With this specification, the capital inflow following a lower rate
of crawl creates an excess supply of loans and thereby lowers the real
exchange rate and the demand for domestic output.
As in Chapter 6, I was mystified by the modeling of price determination.
In a certain class of models, excess supply in financial markets always
mirrors excess demand in the goods market, but that is not the case here.
The reader may verify that in Taylor’s model a decrease in investment
spending (treated as exogenous) leads to excess supply in both loan and
goods markets. Accordingly, if firms, not bankers, set prices it is hard to see
why prices should rise when there is an excess supply of loans. A strange
hybrid results from crossing an open economy Keynesian model with a
closed economy monetarist pricing equation. I would have thought that with
the interest rate fixed, quantity adjustments should characterize both goods
and financial markets. Following a capital inflow that creates excess loan
supply, all that happens is that banks accumulate excess reserves. Surely
firms constrained by deficient effective demand will not raise prices to relieve
bankers of their unwanted vault cash.
The penultimate chapter contributes to a growing literature which
addresses the question of whether, due to asymmetries between the North
and the South, the world economy functions in a manner inimical to the
South. Taylor departs from the previous literature on this subject by devising
a three-country, North-South-OPEC model. Markup pricing prevails in the
North while in the South prices are determined by market clearing. Output
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is demand determined in both the North and OPEC, but in the South
aggregate supply is fixed in the short run. The North is a net importer from
OPEC and a net exporter to the South. Net exports to the South are
independent of prices, being fixed exogenously by the politically determined
level of net capital exports. All OPEC consumption is supplied by imports
from the North. The North’s net imports from OPEC are thus also totally
price inelastic, being determined by the North’s level of output, the fixed
input-output coefficient for oil, and OPEC’s propensity to save.
In this model, Taylor finds that Southern growth prospects are exceedingly
bleak. An increase in labor productivity in either the North or the South
lowers the South’s growth rate. A lower labor-output ratio in the North
translates through markup pricing into a lower price for the Northern good
and since, by assumption, the trade balance is completely price inelastic, the
terms of trade loss worsens the trade deficit and output contracts. As output
in the North declines, demand for South exports falls, shifting the terms of
trade against the South and lowering Southern growth. When the productiv-
ity increase comes in the South, a different mechanism produces harmful
effects. With a fixed level of output, a decrease in the labor-output ratio
redistributes income from capitalists to workers. Since capitalists consume
only imports and workers consume only the domestic good, this redistri-
bution of income creates excess supply of the Southern good which must be
eliminated by a deterioration in the terms of trade. As Northern import
demand is price inelastic, the terms of trade deteriorate so severely that real
profit income and savings measured in terms of imported capital goods
(supplied by the North) fall and thus the growth rate decreases. Taylor
attributes this result to the North’s Engel elasticity for the Southern good
being below unity, but in fact it is the price inelastic demand that is critical.
In the simple linear expenditure functions that are used to specify consump-
tion demand, an Engel elasticity less than unity implies price inelastic
These are classic structuralist results based on low price elasticities and I
would like to stress one last time that a neoclassical specification yields quite
different answers. Findlay has analyzed North-South interactions in a two-
country setting where the North’s output is determined according to a Solow
growth model and, as in Taylor’s model, surplus labor conditions obtain in
the South. In sharp contrast to Taylor’s results, in this type of model: (1) an
increase in Northern productivity raises income in the North and in the
South proportionately; and (2) an increase in Southern productivity is not
necessarily immiserizing for the South; in fact, if trade elasticities are
sufficiently high, the South’s share in world income rises.
Now that we at last have a major, formal work on structuralist macro-
economics, where do we stand? My own view is that Taylor has performed
an invaluable service in laying the groundwork for a structuralist theory, but
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that much, much more needs to be done before an adequate, serviceable

theory will be with us. In particular, I believe it is of utmost importance that
we reline and extend Taylor’s work by embedding structuralist analysis in
models with more rigorously derived microeconomic foundations. What
makes much of Structuralist Macroeconomics * compelling reading is the
careful attention paid to economic structure: it is gratifying to see macro-
economic models in which sectoral interactions are important, intermediate
inputs and capital goods bulk large in the import bill, there are differences in
class savings propensities, curb markets are a major source of finance, etc.
But the undeniable significance of economic structure does not mean that
behavioral relationships may be treated lightly. Some of the results obtained
in this book derive largely from the structuralist features of the economies
being modeled, but many others are heavily dependent upon the non-
neoclassical behavioral relationships that are postulated: as I have tried to
show, frequently it will matter a great deal whether choice of technique
exists, whether savings propensities are fixed or variable, whether prices and
investment are determined by ad hoc specifications or derived to be
consistent with maximizing behavior, and so on. More firmly established
microeconomic underpinnings would, in my opinion, greatly improve the
quality of structuralist analysis and thereby earn structuralist insights the
respect they have long deserved.
Edward Buffie
University of Pennsylvania, Philadelphia, PA

Arne Bigsten, Income Distribution and Development: Theory, Evidence, and

Policy (Heinemann, London, 1983) pp. viii+ 192.

The author attempts in this book to provide a survey of the field of

income distribution analysis in Less Developed Countries (LDCs). This is an
ambitious task because of the size of the literature and its lack of cohesion.
Several branches of this field coexist, each with a large literature that has
relatively little to do with the others. These branches include microeconomic
analysis of the determinants of the size distribution of income, often
emphasizing human capital factors; macroeconomic and general equilibrium
analysis of the effects of a variety of possible redistributive policy measures;
studies of measurement issues such as the relationships among alternative
inequality measures and their theoretical rationales; and descriptive studies of
income distribution trends and policies in various countries.
Bigsten discusses each of these branches of income distribution analysis
but does not attempt to provide a unified treatment of the whole field.
Perhaps this is inevitable, given the fragmented nature of the field, but it
makes the book itself seem somewhat fragmented. This is exacerbated by the