Global Growth, Structural Change and Implicit Reciprocity Escuela de verano 5 de agosto de 2014

Main points of the presentation  Model in the tradition of Kalecki— Harrod—Keynesian literature on the foreign trade multiplier  The paper extends the two-country Keynesian growth model in two directions:  Prebisch´s hypothesis of implicit reciprocity  A Schumpeterian flavor: North-South technological asymmetries defining international competitiveness

Keynesian growth model  Two Kaldorian equations plus equilibrium in the trade balance:  Growth is a function of the rate of growth of autonomous expenditure and exports  Exports from the North/centre are imports of the South / periphery and vice-versa

The two-country Keynesian model: basic equations

Coordinated expansion in the Keynesian model

Structural change as a form of avoiding stop and go growth

Technological asymmetries and growth  Patterns of specialization (and income elasticities) depend on the dynamics of technical change  International competitiveness is driven by technological leads and lags in innovation and diffusion in centre and periphery  The hiogher G = Tn/Ts, the lower the dynamic foreign trade multiplier

Technology and elasticities  Income elasticities are a function of the technology gap   1 function of G;  2 exogenous constant

The evolution of the technology gap  A simple linear equation: the technology gap as an opportunity to imitate (Fagerberg, 1988)  Other (more realistic) specifications are possible, but not explored in the paper(Verspagen 1993; Narula, 2004)  Parameter v depends on the technological policy of the periphery

Implicit reciprocity  Implicit reciprocity: when effective growth is lower than the rate of growth consistent with current account equilibrium, then autonomous expenditure in the periphery increases

Why is this a plausible assumption?  Prebisch: the need to speed up growth and absorb the underemployed implies that all the foreign exchange the periphery gets from exports is transformed into additional imports of capital and high- tech goods from the centre.

The evolution of autonomous expenditure

Technological policy in the periphery (increase in v)

Equilibrium growth rates in centre and periphery

Implications 1  The rate of growth of the periphery depends on the growth of autonomous expenditure of the centre and on its own efforts for technological catching up as compared with the innovation rate of the centre.

Implications - 2  The role of exports (and structural change) is to open up space for a steady rise in domestic demand.  They are complementary in the sense that the competitiveness and expenditure policies should go band by hand and their positive effect on global growth would only occur when they are combined.

Implications - 3  The rate of growth of the centre solely depends on its own autonomous expenditure. This is a crucial asymmetry between the two poles of the system (centre will not be BOP- constrained).  In this specific sense, the centre can choose its rate of growth according to its domestic objectives – for instance, full employment or a certain inflation target – while the periphery depends on the rate of growth of the centre

Implications - 4  A reduction of the technology gap produces higher growth in the periphery without affecting growth in the centre. Active industrial policies in the periphery may contribute both to increase global growth and improve income distribution across countries.  The relative rate of growth of the periphery in equilibrium is given by:

The case in which autonomous expenditure affects the technology gap

Monetary policy (and the RER) under the trilemma

A few (crucial) caveats  There is room for a win-win situation combining Keynesian and Schumpeterian policies —more growth, better international income distribution  Still, poles are not homogeneous: some developing countries do accumulate reserves and some developed economies are BOP-constrained

More caveats…  Structural change in the periphery has different effects across sectors, giving rise to localized protectionist demands  Financial flows and exchange rate instability make international coordination far more difficult—a still unsolved problem  Different timing of the fiscal and industrial policies may generate fluctuations