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

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  • Perez Caldentey, Esteban
  • Ali, Anesa

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20056.

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Date of creation: Apr 2010
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Handle: RePEc:pra:mprapa:20056

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Keywords: Kaldor effect; Thirlwall effect; convergence/divergence; balance-of-payments constraint;

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  1. Abdelhak Senhadji, 1998. "Time-Series Estimation of Structural Import Demand Equations: A Cross-Country Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 45(2), pages 236-268, June.
  2. Peter Blair Henry, 2006. "Capital account liberalization: theory, evidence, and speculation," Working Paper Series 2007-32, Federal Reserve Bank of San Francisco.
  3. Anthony Philip Thirlwall, 1979. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 32(128), pages 45-53.
  4. Mark Rogers, 2004. "Absorptive capability and economic growth: how do countries catch-up?," Cambridge Journal of Economics, Oxford University Press, vol. 28(4), pages 577-596, July.
  5. Dixon, R & Thirlwall, A P, 1975. "A Model of Regional Growth-Rate Differences on Kaldorian Lines," Oxford Economic Papers, Oxford University Press, vol. 27(2), pages 201-14, July.
  6. Grossman, Gene & Helpman, Elhanan, 1995. "Technology and Trade," CEPR Discussion Papers 1134, C.E.P.R. Discussion Papers.
  7. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
  8. Paola Criscuolo & Rajneesh Narula, 2008. "A novel approach to national technological accumulation and absorptive capacity: aggregating Cohen and Levinthal," European Journal of Development Research, Taylor and Francis Journals, vol. 20(1), pages 56-73.
  9. Bart Los & Bart Verspagen, 2006. "The Evolution Of Productivity Gaps And Specialization Patterns," Metroeconomica, Wiley Blackwell, vol. 57(4), pages 464-493, November.
  10. Arvind Panagariya, 2000. "Preferential Trade Liberalization: The Traditional Theory and New Developments," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 287-331, June.
  11. Ramesh Chandra & Roger J. Sandilands, 2005. "Does modern endogenous growth theory adequately represent Allyn Young?," Cambridge Journal of Economics, Oxford University Press, vol. 29(3), pages 463-473, May.
  12. Fagerberg, Jan & Verspagen, Bart, 2002. "Technology-gaps, innovation-diffusion and transformation: an evolutionary interpretation," Research Policy, Elsevier, vol. 31(8-9), pages 1291-1304, December.
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