Trade shocks in developing countries. Volume 1: Africa; Volume 2: Asia and Latin America, edited by Paul Collier and Jan Gunning (Oxford: Oxford University Press, 1999, Volume 1 pp. 491, £60 h/b; Volume 2, pp. 360, £50 h/b)

✍ Scribed by Simon Appleton

• Publisher: John Wiley and Sons
• Year: 2002
• Tongue: English
• Weight: 32 KB
• Volume: 14
• Category: Article
• ISSN: 0954-1748
• DOI: 10.1002/jid.853

✦ Synopsis

When asked what was the most difficult part of governing a country, Harold Macmillan famously answered 'Events, dear boy, events'. For small developing countries, trade shocks are often regarded as among the most troublesome economic events. Globally, the oil price shocks of the 1970s had profound economic and political effects-leading to stagflation in the industrialized world and the strange deaths of first Keynesianism and then Monetarism. Developing countries were subject to these oil shocks, but also experienced sharp fluctuations in the price of other commodities upon which they relied heavily for export earnings. These fluctuations often took the form of temporary booms, but mismanagement of these booms is frequently blamed for subsequent economic problems. For example, no analysis of the end of the Ivorian economic 'miracle' could omit the cocoa and coffee boom that immediately preceded it, bringing a windfall estimated at 92 per cent; of 1975 GDP but sparking a public spending spree that precipitated over a decade of economic crisis. Given the importance of trade shocks to developing countries, it is curious that they have not been subject to a sustained treatment as a research topic.

These two volumes rectify that shortcoming of the literature. They are the final and rather belated output of a large international research project. Most of the work for the project was done in the early 1990s and consequently focuses on trade shocks in the previous two decades. There is no consideration of the financial crises that characterised the 1990s, such as that in East Asia in 1997-98. The first volume opens with a strong synthesis chapter but the rest of the work is a collection of country case studies (Volume 1 covers Africa; volume 2 covers Asia and Latin America). Unlike most other such collections, the individual studies share the same theoretical framework and apply a common core methodology, laid out in the 'template' second chapter study of the Kenyan coffee boom by the editors and David Bevan.

The theoretical framework of the study extends the Dutch disease model to analyse temporary trade shocks. The Permanent Income Hypothesis is combined with a Keynes-type emphasis on the endogeneity of the price of (non-traded) capital goods to generate a 'theory of construction booms'. The analysis is generally informal but rigorous with much of the interest of the book being in considering the implications of the different control regimes in place in the countries being studied. In this respect, the volumes are something of a continuation from the editors' earlier work, Controlled Open Economies, although with a much wider geographical coverage and narrower thematic focus.

The empirical methods of the case studies centre on the interpretation of a common set of key statistics and the construction of counterfactuals for the absence of the shock. Neither econometric nor CGE models are used in most of the studies. With the absence of formal theorising or econometrics, this work is rather unfashionable and the case studies would be hard to publish today in the 'top' economic journals (although an abridged version of the synthesis chapter did appear in the European Economic Review). Nonetheless, the wealth of evidence provided in the volumes is arguably more robust and convincing than would be provided by a study relying only on the more formal methods currently in vogue. At one level, the absence of formality makes the book accessible to the non-specialist. However, this surface accessibility masks highly sophisticated reasoning and the application of complicated empirical accounting exercises. At times, the verbal arguments and computations are so dense and complex that readers from the present generation of economic students may wish for a small formal model or single econometric equation to simplify the exposition.