ABSTRACT
Post Keynesian growth theory argues that, far from being constrained by the exogenous increase of factors of production, growth is demand determined. In the model developed by Thirlwall (1979) and Thirlwall and Hussain (1982), and debated in McGregor and Swales (1985, 1986, 1991), Thirlwall (1986), and McCombie (1989, 1992), the growth of demand is limited by the current (or basic) balance of payments deficit. The expenditure of a country or region cannot indefinitely grow faster than income since, sooner or later, the external deficits generated must be corrected through a reduction of economic growth because there is a limit to capital inflows (and government transfers in the case of regions). The existence of a balance of payments constraint at different rates of expenditure growth between countries will determine differences in growth rates in the long run. Only exports, as an autonomous component of aggregate demand, are capable of increasing an economy’s expenditure without generating external disequilibrium. Hence, the growth rate of modern open economies is fundamentally determined by export growth (given the propensity to import).1
