ABSTRACT
The purpose of this chapter is to examine the determination of the long-termgrowth of the advanced countries and especially to consider how the growth of one country (or group of countries) may deleteriously affect the growth of another through the balance of payments constraint. The approach is Keynesian in nature since it is argued that the key to the understanding of the trend rate of income growth is the rate of expansion of effective demand. A necessary assumption for this approach is that the rate of growth of factor supplies, especially labor, has not been the autonomous determinant of the growth of output, as in the neoclassical approach. (See Kindleberger, 1967; Cornwall, 1977; Kaldor, 1978a; and Van der Wee, 1987, for evidence in support of this contention.) It will be shown, following the seminal work of Beckerman (1962), Kaldor (1970), Cripps (1978), and Thirlwall (1979), that the growth of an advanced country is primarily determined by its performance in overseas markets. In other words, growth is ultimately export-led. (A detailed discussion of thiswhole approach can be found inMcCombie andThirlwall, 1994.) We begin with a consideration of Thirlwall’s “law of economic growth” which
states that the rate of growth of a country’s income is determined, in the long run, by the ratio of its export growth to its income elasticity of demand for imports. This law reflects the operation, in a dynamic context, of the Harrod foreign trade multiplier or Hicks’s supermultiplier (Kaldor, 1970, 1978a; Thirlwall, 1979; Thirlwall and Hussain, 1982). This approach provides an elaboration of the rationale for the export-led growth theory and also confirms the applicability of Keynesian principles to long-term economic growth. Nevertheless, it is essentially a partial equilibrium approach in that it argues that the fundamental determinant of the growth of any particular country lies in the growth of its exports and this, in turn, is determined primarily by the exogenously given growth of world income. (The model has been extended to allow for capital flows and changes in relative prices, but it is argued that, empirically, these are of secondary importance.) In this chapter, we generalize Thirlwall’s approach using the truism that one
country’s exports are the imports of another. Explicit allowance is made for trade interlinkages and it is shown how the economic performance of one group of
countries may, through the workings of the balance of payments, constrain the growth of other nations and limit the degree of control the latter have over their economies. Of particular importance, especially since 1973, is the “deflationary bias” that
the asymmetry in the balance of payments adjustment process imparts into the international economy. This asymmetry results from the fact that a country is able to run a balance of payments surplus almost indefinitely, while there are strong pressures on a country to correct a deficit, normally through deflationary measures to reduce the growth of output and, hence, the growth of imports. The severe deflationary pressures that were introduced in the 1970s, putatively to reduce the rate of inflation generated by the commodity boom and oil price rises of 1973/74 and 1979, led to global recessions fromwhich it became difficult for any one country to escape through the use of domestic demandmanagement policies. It will be shown that whenwe consider the interlinkages between the advanced countries, the implications of the export-led growth theory have to be extended. Attempts by any one country to relax its balance of payments constraint by expenditure-switching policies (if, indeed, this is possible) may well lead to competitive growth, that is, an increase in output that is at the expense of another country’s production. This is a situation that may eventually lead to a reciprocal devaluation and other protectionist measures to control trade that render such initial expenditure-switching policies ultimately self-defeating. An implication is that the most effective way to increase growth and reduce unemployment is to generate complementary growth, which involves the politically more difficult problem of coordinated reflation. Only by acting in concert in a manner analogous to a closed economy (which obviates the balance of payments constraint) can a faster rate of growth be generated. To begin with, however, we shall first outline Thirlwall’s explanation of “why
growth rates differ.”
