A song of ice and fire: Competitiveness in an export-led growing economy

Dávila-Fernández, Marwil and Oreiro, José (2021): A song of ice and fire: Competitiveness in an export-led growing economy.

Abstract

The role of the real exchange rate in explaining long-run processes of catching-up and falling-behind continues to be a question of central importance among alternative theories of growth and distribution. Existing empirical evidence suggests a positive association between exchange rates in levels and growth, especially in developing countries, though a currency depreciation has adverse effects. While these two elements have been separately incorporated into demand-led growth theories, a comprehensive assessment of the dynamic interaction between them is still missing. This article attempts to fill such a gap in the literature by developing an export-led growth model in which price and non-price competitiveness respond to the level and variation of the real exchange rate. In equilibrium, relative prices and the fundamentals of the productive structure are simultaneously determined. A more depreciated exchange rate and higher non-price competitiveness are associated with a higher rate of growth. It is shown that the interplay between a destabilising force from the goods market, and a stabilising mechanism from the labour market, might give rise to persistent and endogenous long-run cycles of structural change. Furthermore, the introduction of periodic Schumpeterian innovation waves generate irregular fluctuations similar to those observed in real data.

• Item Type: MPRA Paper
• Language: English
• Keywords: Structural change; Demand-led growth; Competitiveness; Real exchange rate
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

References

Allain, O. (2019). Demographic growth, Harrodian (in)stability and the supermultiplier. Cambridge Journal of Economics 43, 85-106.

Andreoni, A., Chang, H. (2019). The political economy of industrial policy: Structural inter-dependencies, policy alignment and conflict management. Structural Change and Economic Dynamics 48, 136-150.

Araújo, R. (2013). Cumulative causation in a structural economic dynamic approach to economic growth and uneven development. Structural Change and Economic Dynamics 24,130-140.

Araújo, R., Lima, G. (2007). A structural economic dynamics approach to balance-of-payments-constrained growth. Cambridge Journal of Economics 31(5), 755-774.

Beckerman, W. (1962). Projecting Europe’s growth. Economic Journal 72, 912-25.

Blecker, R. (2013). Long-run growth in open economies: Export-led cumulative causation or a balance-of-payments constraint? In Harcourt, G. and Krielser, P. (eds.) The Oxford Handbook of Post-Keynesian Economics 1, 390-414. Oxford University Press, Oxford.

Blecker, R. (2021). New advances and controversies in the framework of balance-of-payments-constrained growth. Journal of Economic Surveys. Online first. DOI:10.1111/joes.12463.27

Blecker, R., Setterfield, M. (2019). Heterodox Macroeconomics: Models of Demand, Distribution and Growth. Edward Elgar, Cheltenham.

Boggio, L. (2003). A model of take-off and fast growth in open economies. Metroeconomica 54(2), 301-325.

Boggio, L., Barbieri, L. (2017). International competitiveness in post-Keynesian growth theory: Controversies and empirical evidence. Cambridge Journal of Economics 41, 25-47.

Botta, A. (2009). A structuralist North-South model on structural change, economic growth and catching-up. Structural Change and Economic Dynamics 20(1), 61-73.

Calmfors, L., Driffill, J. (1988). Bargaining structure, corporatism and macroeconomic performance. Economic Policy 3(6): 13-61.

Cimoli, M., Porcile, G. (2014). Technology, structural change and BOP-constrained growth: A structuralist toolbox. Cambridge Journal of Economics 38, 215-237.

Dávila-Fernández, M. (2020). Alternative approaches to technological change in a small open economy. Journal of Evolutionary Economics 30, 279-317.

Dávila-Fernández, M., Sordi, S. (2019). Path dependence, distributive cycles and export capacity in a BoPC growth model. Structural Change and Economic Dynamics50, 258-272.

Demir, F., Razmi, A. (2021). The real exchange rate and development theory, evidence, issues and challenges. Journal of Economic Surveys. Online first. DOI: 10.1111/joes.12418.

Dixon, R., Thirlwall, A. (1975). A model of regional growth-rate differences on Kaldorian lines. Oxford Economic Papers 27(2), 201-214.

Dosi, G., Pereira, M., Roventini, A., Virgillito, M. (2018). Causes and consequences of hysteresis: Aggregate demand, productivity, and employment. Industrial and Corporate Change 27(6), 1015-1044.

Fagerberg, J. (1988). International competitiveness. Economic Journal 98, 355-374.

Felipe, J., Lanzafame, M. (2020). The PRC’s long-run growth through the lens of the export-led growth model. Journal of Comparative Economics 48, 163-181.

Gandolfo, G. (2009). Economic Dynamics. Springer-Verlag, Heildelberg. 4th Edition.

Gechert, S., Havranek, T., Irsova, Z. (2021). Measuring capital-labour substitution: The importance of method choices and publication bias. Review of Economic Dynamics. Online first. DOI: 10.1016j.red.2021.05.003.

Goodwin, R. (1951). The nonlinear accelerator and the persistence of business cycles. Econometrica 19(1), 1-17.

Goodwin, R. (1967). A growth cycle. In: Feinstein, C.H. (ed.) Socialism, Capitalism and Economic Growth, 54-58. Cambridge University Press, Cambridge.

Graselli, M., Maheshwari, A. (2018). Testing a Goodwin model with general capital accumulation rate. Metroeconomica 69(3), 619-643.

Hannan, M., Pólos, L., Carroll, G. (2004). The evolution of inertia. Industrial and Corporate Change 13(1): 213-242.

Hein, E., Tarassow, A. (2010). Distribution, aggregate demand and productivity growth: Theory and empirical results for six OECD countries based on a post-Kaleckian model. Cambridge Journal of Economics 34(4), 727-754.

Kaldor, N. (1971). Conflicts in national economic objectives. Economic Journal 81, 1-16.

Kuznetsov, Y. (2004). Elements of Applied Bifurcation Theory. Springer-Verlag, Heildelberg.3rd Edition.

Magacho, G., McCombie, J. (2020). Structural change and cumulative causation: A Kaldorian approach. Metroeconomica 71(3), 633-660.

Manfredi, P., Fanti, L. (2006). Demography in macroeconomic models: When labour supply matters for economic cycles. Metroeconomica 57(4), 536-563.

McCombie, J., Pugno, M., Soro, B. (eds.) (2002). Productivity Growth and Economic Performance: Essays on Verdoorn’s Law. Palgrave, London.

McCombie, J., Spreafico, M. (2016). Kaldor’s ‘technical progress function’ and Verdoorn’s law revisited. Cambridge Journal of Economics 10(4), 1117-1136.

McMillan, M., Rodrik, D., Verduzco-Gallo, I. (2014). Globalization, structural change, and productivity growth, with an update on Africa. World Development63, 11-32.

Medio, A., Lines, M. (2001). Nonlinear Dynamics: A Primer. Cambridge University Press, Cambridge.

Missio, F., Araújo, R., Jayme Jr, F. (2017). Endogenous elasticities and the impact of the real exchange rate on structural economic dynamics. Structural Change and Economic Dynamics42, 67-75.

Nishi, H. (2019). Balance-of-payments-constrained cyclical growth with distributive class conflicts and productivity dynamics. Metroeconomica 70, 620-640.

Palma, G. (2008). Deindustrialisation, premature deindustrialisation, and the Dutch disease. In Blume, L., Durlauf, S. (eds.) The New Palgrave: A Dictionary of Economics, 401-410.Palgrave Macmillan, Basingstoke. 2nd Edition.

Pagano, U. (2014). The crisis of intellectual monopoly capitalism. Cambridge Journal of Economics 38, 1409–1429.

Perez, C. (2010). Technological revolutions and techno-economic paradigms. Cambridge Journal of Economics 34(1), 185-202.

Pugno, M. (1996). A Kaldorian model of economic growth with labour shortage and major technical changes. Structural Change and Economic Dynamics 7(4), 429-449.

Punzo, L. (2006). Towards a disequilibrium theory of structural dynamics: Goodwin’s con-tribution. Structural Change and Economic Dynamics 17(4), 382-399.

Rapetti, M. (2020). The real exchange rate and economic growth: A survey. Journal of Globalization and Development 11(2), 20190024.

Ribeiro, R., McCombie, J., Lima, G. (2016). Exchange rate, income distribution and technical change in a balance-of-payments constrained growth model. Review of Political Economy 28(4), 545-565.

Ribeiro, R., McCombie, J., Lima, G. (2017). A reconciliation proposal of demand-driven growth models in open economies. Journal of Economic Studies 44(2), 226-244.

Rodrik, D. (2008). The real exchange rate and economic growth. Brookings Papers on Economic Activity 39(2), 365-439.

Rodrik, D. (2016). Premature deindustrialization. Journal of Economic Growth 21, 1-33.

Romero, J. (2019). A Kaldor–Schumpeter model of cumulative growth. Cambridge Journal of Economics 43, 1597-1621.

Romero, J., Britto, G. (2017). Increasing returns to scale, technological catch-up and research intensity: Endogenising the Verdoorn coefficient. Cambridge Journal of Economics 41(2), 391-412.

Romero, J., McCombie, J. (2016). The multi-sectoral Thirlwall’s law: Evidence from 14 developed European countries using product level data. International Review of Applied Economics 30(3), 301-325.

Sasaki, H. (2021). Thirlwall’s law, uneven development, and income distribution. Metroeconomica 72, 592-611.

Sordi, S., Vercelli, A. (2014). Unemployment, income distribution and debt-financed investment in a growth cycle model. Journal of Economic Dynamics & Control48, 325-348.

Setterfield, M. (2011). The remarkable durability of Thirlwall’s Law. PSL Quarterly Review 64, 393-427.

Tavani, D., Zamparelli, L. (2017). Endogenous technical change in alternative theories of growth and distribution. Journal of Economic Surveys 31(5), 1272-1303.

Thirlwall, A. (1979). The balance of payments constraint as an explanation of international growth rate differences. BNL Quarterly Review32, 45-53.

Thirlwall, A. (2002). The Nature of Economic Growth. Edward Elgar, Aldershot.

Velupillai, V. (2006). A disequilibrium macrodynamic model of fluctuations. Journal of Macroeconomics 28, 752-767.

Zambelli, S. (2018). The aggregate production function is NOT neoclassical. Cambridge Journal of Economics 42(2), 383-42.