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«ÁREA 6 ÁREA 6 3ª EDIÇÃO PREMIO MINISTÉRIO DA FAZENDA DE ECONOMIA Conciliating Prebisch-Singer and Thirlwall: An assessment of the dynamics of ...»

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1º LUGAR - ÁREA 6

ÁREA 6

3ª EDIÇÃO PREMIO

MINISTÉRIO DA FAZENDA

DE ECONOMIA

Conciliating Prebisch-Singer

and Thirlwall: An assessment of

the dynamics of terms-of-trade in

a BOPC growth model

Conciliating Prebisch-Singer and Thirlwall: An assessment of

the dynamics of terms-of-trade in a BOPC growth model

Adriana Amado and Marwil Dávila-Fernández*

Resumo

Os modelos de crescimento balance of payments constrained podem ser utilizados para capturar importantes insights tanto da tradição keynesiana quanto estruturalista do pensamento econômico. Sugerimos que a Lei de Thirlwall corresponde a uma derivação matemática da regra de Prebisch. Dada sua similaridade, nos perguntamos por que a tese Prebisch-Singer da deterioração dos termos de troca não é incluída no modelo.

Dessa forma, este trabalho se propõe a estreitar a relação entre a Lei de Thirlwall e o pensamento cepalino através de uma tentativa de acrescentar na primeira um componente que capte a hipótese de Prebisch-Singer, empregando para tal uma definição de taxa de câmbio real alternativa. Propomos-nos ainda a endogeneizar a taxa de crescimento do produto e da produtividade a partir da combinação de nossa versão da lei de Thirlwall com a lei de Kaldor-Verdoorn.

Palavras chave: Crescimento econômico, Lei de Thirlwall, Hipótese Prebisch-Singer, Cepal, Economia pós-keynesiana Abstract The balance-of-payments-constrained growth models can be used to capture key economic insights of both the Keynesian and structuralist tradition. We suggest that Thirlwall's law corresponds to a mathematical derivation from Prebisch’s rule. Given their similarity, we wonder why the Prebisch-Singer hypothesis of deterioration of the terms-of-trade is not included in the model. Thus, this study aims to develop the relationship between Thirlwall's Law and ECLAC’s thought adding to the first a component that captures the Prebisch-Singer hypothesis. For such it is employed an alternative definition for the real exchange rate. We call the final expression the Prebisch-Thirlwall rule. Further, we endogenize the output and productivity rate of growth through the combination of our version of Thirlwall's law with the KaldorVerdoorn’s law.

Key words: Economic Growth, Thirlwall’s Law, Prebisch-Singer Hypothesis, ECLAC, Post-Keynesian economics JEL: O11, O41, O47 Área 6 - Crescimento, Desenvolvimento Econômico e Instituições * Department of Economics, University of Brasília (AA) and Department of Economics, Federal University of Minas Gerais (MDF); both authors are CNPq researchers, Brazil. We are grateful to Professors Amitava Dutt, Thomas Palley, Joanílio Teixeira, Mauro Boianovsky, Mario Dávila and also to Elisabet Dávila for their valuable comments. We are also grateful to FAPEMIG for funding support.

Usualdisclaimers apply.

1. Introduction The idea that in the long-term economic growth is limited by the emergence of trade imbalances has a strong tradition in Latin America (Porcile, Curado and Cruz, 2012).

The work of the Economic Commission for Latin America and the Caribbean (ECLAC) and especially the argentine economist Raúl Prebisch already indicated the low dynamism of the export sector and the high propensity to import as the main limiting to growth in peripheral economies. The ECLAC’s school of economic thought shows in its documents, especially from the 50s, a major concern with the relationship between income elasticity associated with foreign trade, the diffusion of technical progress and economic development in peripheral economies (Prebisch, 1959; Rodríguez, 2009 [2006]).

In turn, the post-Keynesian literature developed a series of growth models demandside among which stand the out so-called balance-of-payments-constrained (BOPC), notably represented by the Thirlwall’ law. Its central proposition is that, for most countries, the major constraint to the product’s growth rate is in the balance of payments because it determines the limit to demand’s growth rate that supply can adapt (Thirlwall, 1979; Alonso and Garcimartín, 1999; Thirlwall, 2011).

Although apparently he built his model independently, Thirlwall (1983) mentions the similarities between his formulation and the Prebisch’s one. We suggest that Thirlwall's law can be understood as a mathematical formalization of ECLAC’s thinking derived from Prebisch rule. Given their similarity, we wonder why the Prebisch-Singer thesis of deterioration of the terms-of-trade for primary products relative to manufactured goods is not explicitly included in the model. Thus, this study aims to develop the relationship between the Thirlwall’s law and ECLAC’s thought adding to the first a component that captures the Prebisch-Singer hypothesis.

Since its initial formulation, BOPC models have evolved to incorporate the other components of the balance of payments. Therefore, this is not the first attempt to incorporate the dynamics of prices to the BOPC framework (Dutt, 2003; Blecker, 2009;

Ros, 2013). However, our proposal is unique in introducing the Prebisch-Singer hypothesis from an alternative definition for the real exchange rate. Thus, our contribution aims to give greater strength to the theoretical framework in question.





There seems to have been an initial fear of incorporating the terms-of-trade in the model since the balance of payments adjustment through prices could lead to an adjustment not via income, disqualifying the Thirlwall’s law. However, contrary to this neoclassical assumption, we consider that it is the deterioration of terms-of-trade of primary products in relation to manufactured goods that can reduce the compatible growth rate with equilibrium in the balance of payments. The empirical evidence does not support the neoclassical view, as shown by Alonso e Garcimartin (1999).

The post-Keynesian analytical models assume that the long-term growth is essentially endogenous to the operation of the economic system. This means that the growth of output and labor productivity cannot be treated as exogenous variables in growth models (Oreiro, 2011). Further, we endogenize the output and productivity growth rate through the combination of our version of Thirlwall's law with the KaldorVerdoorn’s law. The possibility of including cumulative causation in the BOPC growth models has been recently explored by authors like Blecker (2009), Amitrano (2013) and Araújo (2013). However, our modeling exercise differs from previous initiatives since the relation between BOPC and Kaldor-Verdoorn is not obtained through prices but through the foreign trade elasticities, as we will show further.

This work is divided into four sections besides this introduction. In section 2 we review the main concepts behind the ECLAC’s thinking of economic growth with particular emphasis on the ideas developed by Prebisch and the Prebisch-Singer hypothesis of deterioration of the terms-of-trade. The next section presents the main versions of Thirlwall's law relating it to the ECLAC’s thinking. In Section 4 we present our proposal of adding a component that captures the Prebisch-Singer thesis of deterioration in terms-of-trade, employing an alternative definition for the real exchange rate. We call the final expression obtained the Prebisch-Thirlwall rule. Finally, in section 5, we endogenize the output and productivity’s growth rate by combining our version of Thirlwall's law with the Kaldor-Verdoorn’s law. The last section contains the concluding remarks.

2. Latin-American structuralism and the external trade restrictions The idea that in the long-term economic growth is limited by the emergence of trade imbalances has a strong tradition in Latin America (Porcile, Curado and Cruz, 2012).

Within the ECLAC’s school of economic thought, the names of Raúl Prebisch, Juan Noyola and Celso Furtado stand for working with the implications of the external constraint on growth. Although there are important differences between their formulations, a common element is that both share the structuralist approach to development (Boianovsky and Solis, 2014). In this section we will try to summarize the main elements of the structuralist approach and the considerations made by Prebisch regarding restrictions on foreign trade.

2.1.1 The latin american structuralism The studies included under the common name of "structuralists" share certain methodological positions that operate as essential basis of their analytical contributions (Rodríguez 2009 [2006]). Its method takes particular account of the real characteristics of the analyzed situations and their dependence on structural factors historically determined (Bielschowsky, 2009). The starting point of our analysis and that guide the description of this school of thought lies in its understanding of the process of economic development.

Development is understood, from a strictly economic perspective, as the continued and sustained output’s growth and capital endowment per worker expressed in the increase of the material well-fare. This process in turn is driven by technical progress and must necessarily be accompanied by changes in the production and demand structure (Furtado, 2009 [1961]; Rodríguez, 2009 [2006]). We can represent the

above definition as follows. The average productivity of the economy is given by:

–  –  –

= + (2.2) The expression above captures the two key components of the structuralist approach. The first puts variations of the average productivity as a result of changes in sectoral productivities. Changes in lead to changes in for a constant . The second component however shows that changes in the sectoral composition ( ) also lead to changes in average productivity ( ). The transfer of workers from low productivity sectors to high productivity sectors can increase ceteris paribus the average productivity of the economy. Thus, the multi-sectoral structural component has great importance in contrast to the neoclassical models with only 1 sector.

Underdevelopment, in turn, is seen as a specific way of being for certain economies which cannot be studied as a single stage of the development process. It is considered that both correspond to different aspects of the same historical process connected to the creation and diffusion of technology in post-industrial revolution (Furtado, 2009 [1961]; Rodríguez, 2009 [2006]). It is characterized by a profound structural heterogeneity in production and distribution. Thus, in countries in this condition is observed the combination of a very unequal distribution of income and the coexistence of high and low productivity sectors.

The definitions above allow us to introduce a last element of vital importance in structuralist thought: the center-periphery system. According to Cimoli and Porcile (2013), the ECLAC’s thinking is based on the perception that the international system is formed by two poles, the center (north) and the periphery (south), whose economies are structurally different. Although authors such as Celso Furtado prefer to avoid this terminology its clear the contrast between the developed countries, situated as central, and underdeveloped, occupying a peripheral position. The centers identify themselves as possessing the most advanced production techniques thereby achieving higher levels of labor productivity and greater homogenization of its production and demand structure. The periphery on the other hand is formed by economies technologically and organizationally backward beyond a deep structural heterogeneity.

2.1 The external trade restrictions and the Prebisch-Singer hypothesis Prebisch's initial interest in studying the dynamics of Latin American foreign trade was to explain the mechanism behind the economic cycles in those economies (Boianovsky and Solis, 2014). Indeed, the concept of Harrod trade multiplier is used to distinguish their effects in the center and the periphery. However, his analysis is not limited to business cycles and he also studied the impact of international trade on the long-term growth and price behavior (Rodríguez 2009 [2006]).



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