Catching up and global (asymmetric) interdependence

1. Catching up and global (asymmetric) interdependence ECLAC Summer School 2013

2. Objectives 1 • To discuss the interrelations between technological learning, structural change and growth

3. 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

4. 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)

5. 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 North-South models)

6. The two-country MT model: basic equations

7. 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)

8. The MT model: different scenarios of international coordination

9. 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. 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

11. 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

12. The evolution of autonomous expenditure

13. Technological policy in the periphery (increase in v)

14. 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

15. Equilibrium growth rates in centre and periphery

16. 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 BOP-constrained growth in the periphery.

17. 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).

18. 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 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, • In this specific sense, as Prebisch argued, the Periphery is a reflex economy (“economía refleja”)

19. 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:

20. 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

21. 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