Catching up and global
(asymmetric) interdependence
ECLAC Summer School 2013
Objectives 1
• To discuss the interrelations
between technological learning,
structural change and growth
Objectives 2
• Extend the canonical Keynesian growth
model in three directions:
• 1. The role of the technology gap in
North-South Keynesian growth models
• 2. The articulation between industrial
and fiscal policies
• 3. Policy implications for global trade
cooperation
The interplay between the technology gap
and the income elasticities of demand
• In the BOP-constrained growth model the
rate of growth depends on the income
elasticity of the demand for exports
and imports
• y/z = e/p (convergence if e/p > 1)
• Schumpeterian flavor: elasticities
depend on leads and lags in
technological innovation and imitation
(along with bad or good luck in the
commodity lottery)
A two-country North-South model
• BOP-constrained growth with two
countries, based on McCombie and
Thirlwall (MT model) plus the
technology gap defining income
elasticities (modified MT model)
• For simplicity, the income elasticity
of exports is constant and only p
varies
• There is a technological asymmetry
(basis of centre-periphery or NorthSouth models)
The two-country MT model: basic
equations
(5) y1  1a1  1p 2 y2
(6) y2   2 a2   2p 1 y1
pj *
y 
yj
pi
*
i
Growth in canonical model
• Economic growth is a function of the
rate of growth of total autonomous
expenditure and of exports to the other
country
• Exports from the centre (periphery) are
imports of the periphery (centre)
• Exports depends on growth and the
income elasticity of demand (we assume
price elasticity pessimism)
The MT model: different scenarios
of international coordination
y1
BB3
BB2
BB1
CC2
CC1
AA2
AA1
q
z
s
v
y2
Some simple (and hopefully useful)
dynamics: the technology gap
• Income elasticities are a function of
the technology gap: the higher the
technology gap, the higher will be the
income elasticity of the demand for
imports in the periphery (for
simplicity the income elasticity of
the demand for exports is constant)
• Leads and lags in innovation and
learning defines international
competitiveness
(10) p 1  G
The evolution of the technology gap
(linear, an irresistible temptation)
• A simple linear equation: the technology gap
as an opportunity to imitate (Fagerberg,
1988)…other (more realistic) specifications
are possible, to be seen later
• Parameter v depends on the technological
policy of the periphery
(12) Gˆ  u  vG
Some simple (and hopefully useful)
dynamics: fiscal policy
• Implicit reciprocity (excludes
mercantilism): when effective growth is
lower than the rate of growth
consistent with current account
equilibrium, autonomous expenditure in
the periphery increases
The evolution of autonomous
expenditure
 p 2   2 a 2   1 a1  1p 2 2 a 2 
 
(16) a1    

 G  1  p 2  2  1  1  2Gp 2 
Technological policy in the
periphery (increase in v)
G
G*
A
G1 = u/v1
G2 = u/v2
B
a1  0
a1*
a1
Fiscal policy and industrial
policy
• The evolution of the technology gap and
the growth of autonomous expenditure
forms a 2x2 dynamic system with a
stable solution
• From this it is clear that there is a
relation between the long run
sustainable rate of growth of
autonomous expenditure and
technological capabilities (and income
elasticities) in the periphery
Equilibrium growth rates in centre and
periphery
(17) y1* 
p 2 2 a2
 (u v )(1   2p 2 )
(18) y 2* 
 2 a2
1   2p 2
Conclusions – Growth in the
periphery
• 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 rate of
innovation in the centre.
• These equilibrium values are based on
the assumption that a1 is an endogenous
variable that always fills the gap
between effective growth and BOPconstrained growth in the periphery.
Conclusions – Domestic and external
markets
• The role of the increase in the growth
of exports (and hence structural
change) is to open space for a steady
rise in domestic demand.
• Exports and domestic demand are
complementary in the sense that
competitiveness and expenditure
policies should go hand by hand: their
positive effect on global growth would
only occur when they are combined
(otherwise the policy is either
unsustainable or pure mercantilism).
Conclusions – Asymmetries in
degrees of freedom in the system
• 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 BOPconstrained).
• 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,
• In this specific sense, as Prebisch argued,
the Periphery is a reflex economy (“economía
refleja”)
Conclusions – Global growth and
learning in the periphery
• Active industrial policies in the
periphery may contribute both to increase
global growth and improve income
distribution across countries (without
affecting the North).
• The relative rate of growth of the
periphery in equilibrium is given by:
y1*
p2
(19) * 
y 2  (u v )
A few (crucial) caveats 1
• The model suggests that
international cooperation should
combine Keynesian and
Schumpeterian policies
• Still, the two poles are not
homogeneous: some developing
countries do accumulate reserves
and some developed economies are
BOP-constrained
A few (crucial) caveats 2
• 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 (despite promises during the crisis)
• Different timing of the fiscal and
industrial policies may generate sharp
fluctuations in GDP and trade disequilibria