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

  • Perez Caldentey, Esteban
  • Ali, Anesa

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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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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  1. Grossman, Gene M. & Helpman, Elhanan, 1995. "Technology and trade," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 25, pages 1279-1337 Elsevier.
  2. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
  3. Narula Rajneesh & Criscuolo Paola, 2002. "A novel approach to national technological accumulation and absorptive capacity: Aggregating Cohen and Levinthal," Research Memorandum 018, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
  4. 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.
  5. Henry, Peter B., 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Research Papers 1974, Stanford University, Graduate School of Business.
  6. Jan Fagerberg & Bart Verspagen, 2001. "Technology-Gaps, Innovation-Diffusion And Transformation: An Evolutionary Interpretation," Working Papers 11, Centre for Technology, Innovation and Culture, University of Oslo.
  7. 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.
  8. Anthony P. Thirlwall, 2011. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," PSL Quarterly Review, Economia civile, vol. 64(259), pages 429-438.
  9. 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.
  10. Los, Bart & Verspagen, Bart, 2002. "The evolution of productivity gaps and specialization patterns," CCSO Working Papers 200301, University of Groningen, CCSO Centre for Economic Research.
  11. 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.
  12. 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.
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