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The Evolving International Economy.

Analyzing the main issues

The Evolving International Economy. By Garciela Chichilnisky and Geoffrey Heal. Cambridge, MA, Cambridge University Press, 1986. 156 pp.

In this book, resulting from both theoretical and empirical research, Graciela Chichilnisky and Geoffrey Heal present a number of policy suggestions affecting the structure and aims of international trade in a solid, theoretical fashion. Such an approach is essential because some of the suggestions conflict with mainstream economic thinking. While these theoretical arguments are persuasive, the authors do not offer empirical support for their positions. As a result, the policy ideas may gain interest but are not sufficient to convince policymakers.

The book covers two areas. The first deals with the effects of structural changes in the industrial economies on their domestic and international economies. The second considers the conditions needed in the less-developed countries to support development . A separate segment contains theoretical arguments in support of the earlier sections. Worthwhile arguments are developed in both areas.

The discussion of the structural changes in industrial economies centers on the growing importance of economies of scale and increasing returns to scale on the industrial economies. Of course, this leads to continually decreasing costs as scale increases. However, it also leads to a breakdown of the equilibrium-seeking and self-correcting mechanisms in the market. The results of this are such phenomena as stagflation, where lagging production leads to inflation as well as increasing unemployment.

The authors suggest pursuing selective expansionary policies for those segments of the economy subject to increasing returns to scale. This will decrease inflationary pressures, increase employment, and support competitiveness in world markets. Suggested target industries include the usual technology-based industries such as chemicals, automobile production, and electronics.

The second section covers the essential ingredient needed for less-developed countries to grow and the effect of current debt problems and trade patterns on development. Chichilnisky and Heal argue that the underdeveloped countries must have "indigenous engines" for domestic growth prior to the growth of foreign trade activities. Export-driven expansion of the economy affects export prices, domestic demand, and the supply of labor of the less-developed countries and frequently delays their efforts toward development. Thus, factors such as the relative poverty of the population cannot be used to the countries' competitive advantage in foreign markets. These countries must pursue domestic expansion and development, work to raise the domestic wage standard, and then pursue balanced export expansion to obtain greater domestic welfare.

Because the structure of domestic markets affects the outcome of international trade policies of the less-developed countries, Chichilnisky and Heal suggest that both industrialized and less-developed countries focus on common needs in trade to find cooperative bands" of pricing where both groups benefit from price movement. Policies of "managed trade" must be constructed for both developing countries and industrial countries which support these areas of mutual benefit. The authors suggest that the debt load of the less-developed countries also shows the need for better international monetary management tools for both the less-developed countries and the industrialized countries. The development of the less-developed countries, the authors suggest, is an area of mutual benefit to both groups.

Chichilnisky and Heal's theoretical arguments and examples certainly work to extend neoclassical international trade theory. However, while theoretical arguments supporting these policy suggestions are well constructed, there is virtually no empirical evidence presented to support their contentions. For example, there is no evidence that the U.S. economy or any other industrial economy is sufficiently dominated by increasing-returns industries that the policies suggested are appropriate to correcting the perceived problems. Nor are there any rigorous arguments to support the theoretical explanations of the use of indigenous engines as the best means of producing growth of less-developed countries. There are certainly examples of each situation offered, but these examples are too weak to support the substantial policy recommendations.

The stated aim of this book is to discuss and develop policies which lead to development in the Third World and to sustained expansion in industrial countries. The authors certainly did this. Their policy suggestions are far-reaching and supported by good theoretical arguments. However, in order to persuade their readers, they need more concrete examples to support their contentions.
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Author:Suchman, Stanley W.
Publication:Monthly Labor Review
Article Type:Book Review
Date:May 1, 1990
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