Uneven development and the balance of payments constrained model: Terms of trade, economic cycles, and productivity catching-up

https://doi.org/10.1016/j.strueco.2020.05.007Get rights and content
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Highlights

  • The expansion model converges to the steady state, maintaining, in the long-run, the price neutrality argument.

  • In an addition to the monotonic convergence of the Dutt (2002) model, the expansion model reproduces damped cycles, with terms of trade and economic growth cyclically converging in the long-run.

  • From the model baseline and scenarios, increases in industrialization and learning efforts generate a pattern with higher growth, increases in the terms of trade, and reduction in the technology gap.

  • A virtuous catching-up strategy raises volatility when compared to a stagnated economy, this rise in volatility is also present when observed the case of a falling behind scenario.

  • Growth reduces or increases in the long run depending on the functional income distribution and on the terms of trade, both depending also on technology catching-up and on the employment rate.

  • We suggest an intermediary medium-run in which the decline of the terms of trade is valid, even if it converges in the long-run, and at the same time the price effects are not neutral to the medium-run equilibrium growth rate. Then it is possible for both the PSH and the BPCM arguments to hold.

Abstract

This paper addresses (I) the transition dynamics incompatibility between the BPCM and the Prebisch-Singer hypothesis (PSH) (II) the causes of cyclical volatility in developing countries. In order to discuss these issues, we expand the Dutt (2002) model adding: (a) a productivity gap dynamics in which the south has a catching-up element; (b) a labor market dynamics, by including a wage curve in the relationship between employment rate and economic activity; and (c) a labor supply dynamics that considers the labor transfer issue between traditional and modern sectors. The result is a four dimensional dynamic model that represents a lagged developing economy constrained by its balance of payments. We find that our model converges and generates damped cycles. Fragile economies show an oscillatory decline in terms of trade, reinforcing an uneven development pattern between north and south. Industrialization and higher learning capabilities, however, can change the adjustment to a catching-up scenario.

JEL

E22
E32
O41

Keywords

Balance of payments constraints
Terms of trade
Economic cycles
Latin American structuralism

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