Growth and convergence/divergence in productivity under balance-of-payments constraint

Perez Caldentey, Esteban and Ali, Anesa (2010): Growth and convergence/divergence in productivity under balance-of-payments constraint.

Abstract

This paper presents a model of convergence/divergence in productivity for two economies of different size and development building on Kaldor’s cumulative causation and the technological gap approaches to growth. Both operate within the logic provided by a balance-of-payments constraint framework. The more developed and larger economy, the leader, is technologically more advanced with higher levels of productivity and issues the international reserve currency. The developing economy, the follower, is closely linked to the leader economy and is balance-of-payments-constrained (BPC). The paper argues that the growth of the leader has at the same time divergent and convergent effects on the productivity gap between both economies. The divergent effect (the Kaldor effect) works through a process of induced productivity and cumulative causation. The convergent effect (Thirlwall’s Law) works through the BPC constraint. The model states that growth with convergence in productivity requires that the ratio of export to import income elasticities of the follower economy exceeds the ratio of the induced productivity of the leader economy to that of the follower economy. The paper then highlights the difficulty of achieving convergence under a BPC constraint and provides policy implications.

• Item Type: MPRA Paper
• Language: English
• Keywords: Kaldor effect; Thirlwall effect; convergence/divergence; balance-of-payments constraint
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O54 - Latin America ; Caribbean; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R11 - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

References

Abramovitz, M. (1979): Rapid growth potential and its realisation: the experience of capitalist economies in the postwar period, in E. Malinvaud (ed.), Economic Growth and Resources: The Major Issues, London, Macmillan.

__________ (1986): Catching up, forging ahead, and falling behind, Journal of Economic History, vol. 46, No. 2, New York, Cambridge University Press, June.

__________ (1995): The elements of social capability, in D.H. Perkins and B.H. Koo (eds.), Social Capability and Long-Term Growth, Basingstoke, Macmillan Press.

Bairam, E.I. (1997): Levels of economic development and appropriate specification of the Harrod foreign-trade multiplier, Journal of Post Keynesian Economics, vol. 19, No. 3, New York, M.E. Sharpe..

Castellacci, F. (2001): A “technology-gap approach to cumulative growth”: toward an integrated model. Empirical evidence for Spain, 1960-1997, document presented at the Druid Academy Winter Conference (Copenhagen, 18-20 January).

Chandra, R. and R.J. Sandilands (2005): Does modern endogenous growth theory adequately represent Allyn Young?, Cambridge Journal of Economics, vol. 29, No. 3, Oxford, Oxford University Press, May.

Criscuolo, P. and R. Narula (2002): A Novel Approach to National Technological Accumulation and Absorptive Capacity: Aggregating Cohen and Levinthal, Research Memoranda, No. 18, Maastricht, Maastricht Economic Research Institute on Innovation and Technology.

Dahlman, C. and R. Nelson (1995): Social absorption capability, national innovation systems and economic development, in D.H. Perkins and B.H. Koo (eds.), Social Capability and Long-Term Growth, Basingstoke, Macmillan Press.

Davidson, P. (1992): International Money and the Real World, New York, St. Martin’s Press.

__________ (1994): Post Keynesian Macroeconomic Theory, Northampton, Edward Elgar.

__________ (2000): Commitment to full employment in a global economy, in A.W. Warner, in M. Forstater and S.M. Rosen (eds.), The Economics and Social Policy of Williams S. Vickrey, New York, M.E. Sharpe.

__________ (2002): Financial Markets, Money and the Real World, Northampton, Edward Elgar.

Dixon, R.J. and A.P. Thirlwall (1975): A model of regional growth rate differences on Kaldorian lines, Oxford Economic Papers, vol. 27, Oxford, Oxford University Press. Fagerberg, J. and B. Verspagen (2001): Technology-Gaps, Innovation-Diffusion and Transformation: An Evolutionary Interpretation, TIK Working Paper, No. 11/01, Oslo, Centre for Technology, Innovation and Culture (TIK).

Grossman, G.M. and E. Helpman (1994): Technology and Trade, NBER Working Paper, No. 4926, Cambridge, Massachusetts, National Bureau of Economic Research.

Helpman, E. (2004): The Mystery of Economic Growth, Cambridge, The Belknap Press of Harvard University Press.

Henry, P.B. (2007) Capital Account Liberalization: Theory, Evidence and Speculation. Journal of Economic Literature. Vol XLV, No.4.pp.887-935.

Kaldor, N. (1966): Causes of the Slow Rate of Economic Growth of the United Kingdom. An Inaugural Lecture, Cambridge, Cambridge University Press.

León-Ledesma, M.A. (2002): Accumulation, innovation and catching-up: an extended cumulative growth model, Cambridge Journal of Economics, vol. 26, No. 2, Oxford, Oxford University Press.

Lipsey R.G. & Lancaster, K. (1956-1957) The General Theory of Second Best, The Review of Economic Studies, Vol. 24, No. 1. , pp. 11-32

McCombie, J.S.L., M. Pugno and B. Soro (2002): Productivity Growth and Economic Performance. Essays on Verdoorn’s Law, New York, Palgrave Macmillan.

McCombie, J.S.L. and A.P. Thirlwall (1994): Economic Growth and the Balance-of-Payments Constraint, New York, St. Martin’s Press.

__________ (1999): Growth in an international context: a post Keynesian view, in J. Deprez and J.T. Harvey (eds.), Foundations of International Economics. Post Keynesian Perspectives, New York, Routledge.

Moreno, J.C. and E. Pérez Caldentey (2003): Trade liberalization and economic growth in Central America, CEPAL Review, No. 81, LC/G.2216-P, Santiago, Chile, December.

Nelson, R.R. and E.S. Phelps (1966): Investment in humans, technological diffusion and economic growth, American Economic Review, vol. 56, No. 2, Nashville, Tennessee, American Economic Association.

Panagariya, A. (2000): Preferential trade liberalization: the traditional theory and new developments, Journal of Economic Literature, vol. 38, No. 2, Nashville, Tennessee, American Economic Association.

Pacheco López, P. (2009) Efectos de la liberación comercial en el crecimiento económico y la balanza de pagos en América Latina. Investigación Económica. Vol. LXVIII, 267, pp.13-49.

Pérez Caldentey, E. (2009b/) Can balance-of-payments constrained economies pursue inflation targeting? A look at the case of Chile. Investigación Económica. Forthcoming.

Pérez Caldentey, E. (2009c/) An analysis of the movement in international financial flows. A discussion along Keynes’s views. Mimeo.

Pérez Caldentey, E. and Ali, A. (2007) The comparative advantage fallacy and a rule for convergence. ECLAC Review 93.

Pérez C. and Moreno-Brid, J.C. Terms of Trade, exports and economic growth in Central America: a long-term view. Banca Nazionale del Lavoro Quarterly Review. No.211.LII.pp.431-449.

Perraton, J., “Balance of payments constrained growth and developing countries: an examination of Thirlwall’s hypothesis”, International Review of Applied Economics, vol. 17, núm. 1, 2003, pp. 1-22.

Rogers, M. (2004): Absorptive capability and economic growth: how do countries catch-up?, Cambridge Journal of Economics, vol. 28, No. 4, Oxford, Oxford University Press. Senhadji, A., “Time-Series estimation of structural import demand Equations: a cross-country analysis”, International Monetary Fund (IMF) Staff Papers, vol. 45, núm. 2, 1998, pp. 236-268.

Soro, B. (2002): Fattori che regolano lo sviluppo della produttività del lavoro: fifty years on, in J. McCombie, M. Pugno and B. Soro (eds.), Productivity Growth and Economic Performance. Essays on Verdoorn’s Law, New York, Palgrave Macmillan.

Targetti, F. and A. Foti (1997): Growth and productivity: a model of cumulative growth and catching-up, Cambridge Journal of Economics, vol. 21, No. 1, Oxford, Oxford University Press.

Thirlwall, A.P. (1979): The Balance-of-Payments Constraint as an Explanation of International Growth Rate Differences, Banca Nazionale del Lavoro Quarterly Review, vol. 32, Rome, Banca Nazionale del Lavoro.

Thirlwall, T. and J.S.L. McCombie (2004): Essays on Balance of Payments Constrained Growth: Theory and Evidence, London, Routledge.

Verdoorn, P.J. (1949): Fattori che regolano lo sviluppo della produttivita del lavoro, L’industria, vol. 1. Translated by A.P. Thirlwall in D. Ironmonger, J. Perkins and T. Hoa (eds.), National Income and Economic Progress: Essays in Honour of Colin Clark, London, Macmillan, 1988.

Verspagen, B. and B. Los (2002): The Evolution of Productivity Gaps and Specialization Patterns, unpublished.

Young, A. (1928): Increasing returns and economic progress, Economic Journal, vol. 38, No. 152, Oxford, Royal Economic Society.

__________ (1990): Nicholas Kaldor’s notes on Allyn Young’s LSE lectures 1927-29, Journal of Economic Studies, vol. 17, No. 3/4, Bradford, United Kingdom, Emerald.