Demand-led industrialisation policy in a dual-sector small balance of payments constrained economy

This article models the process of structural transformation and catching-up in a demand-led Southern economy constrained by its balance of payments. Starting from the Sraffian Supermultiplier Model, we model a dual-sector small open economy divided between traditional and modern sectors that interacts with a technologically advanced Northern economy. We propose two (alternative) autonomous elements that define the growth rate of this demand-led economy: government spending and exports. Autonomous government spending plays a central role in stimulating demand, and thus is a source of growth of the modern sector. Productivity adjusts to the growth rate of output, given by the growth rate of autonomous expenditure. Drawing from the Structuralist literature, the technologically laggard Southern economy catches up by absorbing technology from the Northern economy, potentially closing the technology gap. The gap affects the income elasticity of exports, bringing a supply-side mediation to the growth rates in line with the Balance of Payments Constrained Model. We observe that a demand-led government policy plays a central role in structural change, pushing the modern sector to a take-off. Also, the economy is stable in terms of capacity utilisation and modern sector employment.