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inputs who confront possibly large written down discounted present values on human and non-human capital but will nevertheless remain in the industry. A danger then is that the carrot part of the program will become a costly bureaucracy tailoring made-to-measure adjustment schemes for indus- tries while protectionist pressure is little reduced. And, depending on the wisdom at the time of the USITC and USTR in dispensing with their assignments, we could get some incentive restructuring for the worse, not the better. Nonetheless, the proposal has many positive aspects such as dis- couraging capital accumulation in declining industries by eliminating ‘rein- vestment’ solutions.

In the end, some readers may prefer to forgo the carrot for the simulta- neously proposed stick - presidential resolve and statutory changes that make it less attractive to seek relief through unfair trade laws and discretion- ary statutes. Other readers, noting the authors observe that the ‘United States could certainly do worse than its present approach to special protection’ and startled by the last section entitled ‘Danger of Misdirected Action’ may want to leave bad enough alone. All of which makes clear that every economist and policy-maker interested in adjustment for trade will want to read these volumes and sort out the merits of the proposal. The case studies are invaluable. The proposal is important and well focused. Whatever the verdict, the authors and the Institute have once again done economic policy discussion a service.

James H. Cassing University of Pittsburgh

Deepak Lal, The Poverty of Development Economics (Harvard University Press, Cambridge, MA, 1985) pp. 153, $17.50 (cloth), $6.95 (paper).

The object of this book is to present a characterisation and a critique of what the author calls the ‘Dirigiste Dogma’ in development economics. This dogma is seen as having four essential elements. First, ‘the belief that the price mechanism, or the working of a market economy, needs to be supplanted (and not merely supplemented) by various forms of direct government control’. Second, and complementary to the first, is that relation- ships between macro-economic aggregates are of primary importance relative to micro-economic resource allocation issues. Third, ‘is the belief that the classical 19th-century liberal case for free trade is invalid for developing countries, and thus government restriction of international trade and pay- ments is necessary for development’. Fourth, that poverty alleviation and redressal of inequality requires ‘massive and continuing government interven-

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tion’. The author wishes to argue against these four elements on the basis of theoretical analysis and empirical evidence. In conducting this critique he accepts the basic objective of making ‘an appreciable dent, as quickly as possible, in poverty in the Third World’.

Consider first of all the price mechanism versus government intervention. The author is at pains to point out that he is not arguing for full blooded laissez-faire. The ‘real issue’, he says, ‘is the form and extent of government intervention, not its complete absence’. The author’s position is clear on both the extent of government intervention (there should be much less of it) and on its form (there should be fewer quantitative controls). Although there is no reference in the book to the more modern literature on the choice between prices and quantity intervention in a second best environment (e.g. Weitzman, in the Review of Economic Studies, 1974), the author argues that traditional second-best analysis is what provides the basis for rational intervention. The author interprets the canons of modern welfare economics as saying that, ‘no general rule of second-best welfare economics permits the deduction that, in a necessarily imperfect market economy, particular dirigiste policies will increase welfare. They may not, and they may even be worse than laissez-faire’. But of course he is well aware of the alternative interpretation: there is no presumption that removing some government intervention from a distorted economy will improve welfare. Thus, there is no guarantee that getting some prices ‘right’ - for example, moving some domestic prices to their world levels - will increase welfare. It may not; and the outcome may be even worse than the pre-reform situation.

Welfare economics is thus agnostic on intervention per se - ‘intervene when intervention works’ seems to be its motto. Although we can in principle derive theoretical formulae for the costs and benefits of intervention, these can rarely be estimated with certainty. Those worried about the downside risks of intervention would prefer not to intervene unless the evidence was overwhelmingly favourable. Those worried about the downside risks of removing intervention would prefer not to remove existing interven- tion unless the evidence was overwhelmingly favourable. At the theoretical level, we seem to have reached a stalemate. But, according to Lal,

The burden of the case against the Dirigiste Dogma in its application to developing countries is that, though in many instances some forms of dirigisme may have been beneficial had they been feasible, the dirigiste policies actually adopted (either because they were considered the only feasible ones, or else because the relative costs and benefits of alternative policies were never examined) have often led to outcomes which, by the canons of second-best welfare economics, may have been worse than laissez-faire.

The burden of the argument, then, is empirical. Not only that, it is

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counterfactual in nature. What would have happened in a country like India had it followed a more laissez-faire strategy? In Chapter 2, by far the longest chapter in the book and the one most likely to interest readers of this journal, a distinction is made between laissez-faire and free trade. The distinction is necessary because many of the countries that are posed as ‘success stories’, for example Korea, appear to have and have had quite interventionist governments. La1 argues that while interventionist in the domestic sector, Korean policies have come closer to the free trade ideal in the external sector. It is the free trade lesson that India should learn from Korea. In any case, and here the counterfactual is posed in its clearest form, Korean success ‘has been achieved despite intervention’. Had no interven- tions been present, growth would have been even higher. Cross-country comparison is a hazardous exercise at the best of times, but particularly so when used to support counterfactual hypotheses. If Korea shows what free trade can achieve, does not Japan show what intervention in trade can do? Indeed, does not Japan show what intervention in the external and internal sectors can achieve? To claim the counterfactual that Japan’s phenomenal success would have been even greater without intervention seems to indicate unreasonable faith in the invisible hand. Similarly, to argue (as La1 does) that Korea’s shift from an import substitution to an export promotion strategy was simply one intervention neutralising the other, and that Korea’s perfor- mance would have been even better with free trade right from the start, is to neglect the very canons of second-best welfare economics on which La1 bases his assault on dirigisme. An equally plausible argument is that the Korean experience represents the triumph of the right interventions at the right time (which second-best welfare economics does not outlaw).

In each of the other areas La1 considers in the main text, a similar stalemate can be shown. In an appendix to the book, La1 considers the debt crisis and the required adjustment in developing countries. The appendix is surprisingly and refreshingly Keynesian in nature, even arguing that ‘one of the most important consequences of import reductions by developing coun- tries is their recessionary impact on the world economy as a whole’. Lal also briefly considers how the crisis could arise at all, arguing that it all depends on ‘what determines the lenders’ faith in the ability or willingness of debtors to service debt out of their own income (rather than out of additional borrowing), if necessary’. As with all questions concerning expectations, the tools of mainstream economics crumble in our hands as we try to apply them. And when they are applied,. the modern literature suggests multiple and inefficient equilibria, which in turn suggests a role for intervention. If international capita1 markets, arguably markets which come closest of any to the ideal posited in welfare economics, can get into a bootstrapped equilib- rium, what does this suggest about other markets? But then, La1 would say, we should do standard second-best welfare economics - intervene when it is

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right to intervene - and we come full circle. Some would argue that the failure of international capital markets establishes a presumption in favour of an interventionist stance. La1 would, I think, want to argue that the problem is caused by the intervention that already exists in these markets. And so on.

If you scratch an economist, underneath you will find someone who is instinctively either an interventionist or a free-market wallah. Who would deny the logical validity of the canons of second-best welfare economics? Nobody. Who would support intervention if intervention was demonstrably bad? Nobody. The problem is that the cannons of second-best welfare economics, on which Lal puts so much emphasis, are as much open to interpretation as their counterparts in other areas. Strictly speaking they are agnostic about an interventionist ‘stance’; the actual rules depend on factors about which there is much uncertainty and argument, and the empirical evidence is inconclusive. It is because of this that most economists are instinctively either interventionist or the opposite - willing to be convinced, but with strong priors, La1 leaves us in no doubt as to his priors. But reading the arguments and the evidence in this book leaves my priors where they were.

Ravi Kanbur University of Essex and Princeton University

J.L. Ford and S. Sen, Protectionism, Exchange Rates and the Macroeconomy (Basil Blackwell, Oxford, 1985) pp. x+230, $45.00 (cloth).

Galbraith has noted that ‘Although the truth rarely overtakes falsehood, it has winged feet as compared with a qualification in pursuit of a bold proposition’. Never has the race between qualification and bold proposition been so unevenly matched as it is in the case under review. Mundell’s assertion that restrictive commercial policy tends to be deflationary takes less than one journal page to make. Ford and Sen’s insistence that really anything can happen tills a book of 230 pages.

It is hard to see why any qualification to Mundell’s result is necessary. He provides an important caveat in a footnote at the end of his article, noting that

The validity of this conclusion depends on the argument due to Laursen-Metzler and Harberger, that saving is a positive function of the terms of trade, an argument to which I would subscribe. If the reader prefers to assume that saving is independent of the terms of trade, the conclusions of the present paper would not be undermined, for its