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trade objectives of such a regional currency union cannot be met without a restrictive system of licensing imports from outside the region. Moreover, the West would be called upon to finance union imbalances at the same time that they are discriminated against in trade. These restrictions would be costly on efficiency grounds, require strong centralized control, and lead to a delay in the introduction of a system of rational prices. Finally, such a union would represent a step backwards for the countries that already have established effective trade‘patterns with the convertible currency area, such as Poland and Czechoslovakia. John Williamson concludes the volume with an encapsulating chapter and a proposal. The proposal is an elaboration of what he terms a ‘minimum bang’ concept, rather than a big bang, where minimum bang is defined as the smallest package of measures that is needed to make the fundamental transition from a planned to a market economy without running into second-best problems that might jeopardize the success of reform. While the concept is indisputably reasonable, in practice it is not obvious that a minimum bang will be less audible than a big bang: both call for the simultaneous liberalization of prices, the hardening of enterprise budget contstraints, and the introduction of commodity convertibility (at least initially). Williamson’s plan for reform includes pegged exchange rates on current account transactions and restricted household access to offtcial foreign-exchange markets. Households would deal with floating exchange rates on tolerated parallel-currency markets. In Eastern Europe and the former Soviet Union, announcements of achievements sometimes seem to outpace the discussions about when and how these achievements should take place. A volume such as this, which pays careful attention to the true extent of reform efforts (through April 1991), reminds us that announcements often differ from implemented policy changes. As such, there remains an important place for intelligent and wellreasoned arguments on the paths to be taken in the reform process, such as the ones contained within this volume. Linda S. Goldberg New York University

Daniel Cohen, Private Lending to Sovereign States: A Theoretical Autopsy (MIT Press, Cambridge, Massachusetts and London, England, 1991) pp. xi + 182, $27.50. Cohen’s book is a substantial effort to organize thinking about the most recent LDC debt crisis, and about sovereign debt more generally. The literature associated with this field has blossomed in the last decade and

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Cohen himself has been an important contributor to it. This book, however, is not a survey of this literature (although had it been, it would be very welcome), but instead seeks to examine in a unified framework many of the issues associated with sovereign debt. This is both its greatest virtue and its chief weakness. On the one hand, for those who have avoided soverign debt because of the belief that this area raises even nastier game-theoretic questions in international economics than had previously been posed either by imperfect competition or by international policy coordination, Cohen’s approach permits a sigh of relief. By and large, it is not unfair to characterize Cohen’s approach as reducing the strategic interactions involved in soverign debt to those that can be represented by appending to a standard two- or threeperiod growth model an additional incentive-compatibility constraint - that the country prefer to repay the debt than to repudiate it. The form that Cohen consistently elects for this incentive constraint to take is that of a constant proportional loss of output in each period and the inability for the country to return to the international financial market in case of default. On the other hand, for those who were interested in such problems raised by sovereign debt that were not tractable in the old open economy models those having to do with the nature of the threats and counterthreats that could be posed by the debtors, creditors and assorted third parties, the importance of bargaining, reputational concerns, and the necessity of coming to grips with strategic issues that could only be understood in a strategic model with an infinite (or an uncertain finite) horizon - Cohen’s approach seems to miss many of the insights that have been gleaned from having been forced to confront these problems. Neither of the constraints used by Cohen is particularly realistic. While much is gained this way in terms of simplicity, Cohen never addresses the extent to which his conclusions depend on the specific forms of these constraints. Had Cohen explicitly argued that the vast majority of the problems could be understood within his framework, thus making a richer game-theoretic approach unnecessary, this would have been a welcome debate to conduct. It is not, however, a debate that Cohen enters. Instead, except for a passing reference or two to some of the better known explicitly strategic papers, he mainly ignores this literature. Despite the reservations expressed above, it is a service to readers who do not work directly in this area that Cohen attempts to grapple with many of the questions raised by the sovereign debt literature within a framework that is familiar to a large portion of its potential audience (discrete time neoclassical growth model plus an incentive-compatibility constraint) and with a terminology that most will find more congenial to that favored by game theorists (e.g. time inconsistency instead of subgame perfection). The book is organized as follows. Part I sets up the intertemporal budget constraints for all agents of a world economy and demonstrates how some

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conclusions regarding the (national) optimality of free international capital markets do not hold in an overlapping generations economy in which a country’s growth rate is greater than the world interest rate. Part II enters into the territory of sovereign debt proper by dropping the assumption that agents will repay their debt given sufficient resources. The two chapters in this part constitute the analytical backbone of the book. Using the incentive-compatibility constraint mentioned previously, Cohen shows that it is possible to decentralize the macroeconomic constraint that effectively faces the country by the use of an appropriate external consumer borrowing tax and an external firm borrowing tax. Cohen nicely shows that the marginal cost of borrowing is not the same for firms as it is for consumers since any additional investment by firms increases the amount of lending that can be done by the country, loosening the constraint. He then gives a clear discussion of how this previous calculation depended upon the rather artifical assumption that bankers are able to control the use of borrowed funds, i.e. funds borrowed for investment purposes are actually invested, and of the time-inconsistency problem that arises when this assumption is dropped. In light of this Cohen argues that since the country is better off when its investments can be monitored, one of the roles played by the IMF and the World Bank is to link the supply of lending to the pursuit of given investment projects. Part II also includes a discussion of bond versus credit markets. Cohen assumes that the two differ solely with respect to their ability to renegotiate. That is, whereas credit markets are able to extract the value of the penalty threat from the country (supposedly by renegotiating the value of the debt down to that level), bond markets are committed to imposing the penalty unless they receive full payment. While this difference between the two markets does not matter when there is complete certainty, in the presence of uncertainty this is no longer the case. Whether the credit market is then superior to the bond market depends more generally on the bargaining strength of both parties which, in the Nash bargaining equilibrium used by Cohen, is captured by the degree of risk aversion of the country. I found this a rather strange view of the difference between the bond and the credit market which I would say depends more on their ability to impose penalties and the type of penalties at their command and not primarily on their ability to renegotiate. Also puzzling is Cohen’s assumption that banks are paid the same fraction of a country’s total repayment irrespective of the amount each lent, since most loans are syndicated and repayment to each of its members is stipulated to be pro rata, i.e. in proportion to the amount lent. This is not really essential to his discussion of bank panics, in any case, since what matters is that some debt cannot be made senior to other debt. Chapter 4 introduces a third period into the analysis which allows the discussion of new loans and. debt rescheduling. Decentralized private lending

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is shown to be inefficient when the price of the marginal debt is smaller than that of average debt and junior lenders obtain the same (proportional) repayment of debt as senior lenders. There is then a time-inconsistency problem that arises owing to countries’ inability to commit themselves to a restricted borrowing path which does not dilute the value of the first-period debt. This part also leads to a discussion on intervention in secondary debt markets which relies on the distinction between average and marginal debt. The argument developed here and in Chapter 10, however, is less clear than that in Bulow and Rogoff. Part III seeks to put to use some of the criteria developed in the earlier chapters by constructing a solvency index and using it evaluate the experiences of Brazil and Mexico in the 1980s. It also takes into account the fact that the government may not have an unlimited claim on the wealth of its private citizens but must resort to taxation and the issuance of domestic debt. This raises the important distinction often ignored in the debt literature that while a country may be solvent, its government may very well not be. These are important topics. I found some of the discussion in this part rather confusing, however, and wished, for example, that Cohen had proved his statement as to the inability of the threat of financial autarky to provide a sufficient deterrent against default. Part IV examines several of the implications of the debt crisis for growth. Cohen is the first author to my knowledge to place debt in a model of endogenous growth. Unfortunately, the results are hard to understand. This part would have benefited from showing more explicitly the reasoning behind the statements made in the propositions instead of relegating the proofs to an appendix. Some of the terminology is also rather confusing and the sense in which debt repayment ‘crowds in’ investment was not very clear. Whereas Chapter 8 assumes that lenders act efficiently, Chapter 9 modifies this assumption by assuming instead that lenders operate on a period-by-period basis. This is a rather odd assumption since in fact lenders can achieve some commitment by rescheduling future as well as current debt. Cohen implicitly acknowledges this afterwards in examining multiyear rescheduling agreements. Nonetheless, the conclusions and purposes of this part remained rather murky. Chapter 10 concludes by examining very briefly the Baker and Brady plans in view of the insights of the preceding chapters. On the whole this book is an ambitious attempt to put together many of the issues that have arisen in the soverign debt literature in a coherent framework. While the effort does not entirely succeed, this book should nonetheless prove useful to many practitioners in the field. Raquel Fernandez Boston University