Marcelo Diamand’s contributions to economic theory through the lens of the classical Keynesian approach: a formal representation of unbalanced productive structures

Abstract:

We examine both conceptually and in formal terms the contributions by the structuralist economist Marcelo Diamand, which all revolve around the notion of unbalanced productive structure, and its implications on income distribution, the general price level, and output dynamics in Latin American countries, with a special focus on Argentina. We argue that Diamand’s work provides a very useful framework to understand why institutionally and historically determined real wage and real exchange rates can, on the one hand, explain the relatively low productivity of the industrial sector and, on the other hand, cause devaluations to be both inflationary and contractionary, as has been the case in many Latin American countries that attempted to initiate an industrialization process by import substitution.

keywords::

• exchange rate inflation
• external constraint
• Marcelo Diamand
• stop-and-go cycles
• unbalanced productive structure

JEL classifications::

• B22
• B31
• E2
• E3

Notes

¹The phenomenon of external constraint to growth would later be formalized by Thirlwall (1979) to explain the divergences in growth rates even among developed countries, in what became known as Thirlwall’s law. At any rate, Thirlwall himself has acknowledged the influence of Prebisch in the development of his argument (see McCombie and Thirlwall, 2004, p. 7).

²See Bielschowsky (1998, pp. 26–27). This work is also useful for understanding the evolution of structuralist economic thought within ECLAC.

³See Rapoport (2008, ch. 4 and 5) for a detailed analysis of the Argentine economy during this period.

⁴On the distinctive features of developmentalist thought in Argentina, see Rapoport (2008, pp. 456–462).

⁵This, let us recall, refers to the negative effect of exchange rate appreciation on the competitiveness of the industrial sector; which is, in turn, caused by the discovery of some natural resource, or by any other factor that boosts an extraordinary inflow of foreign currency (see Corden and Neary [1982] for a formal presentation of this idea).

⁶We thank an anonymous referee for this reference, which had escaped our attention.

⁷This section is based on Dvoskin and Feldman (2015).

⁸Quotations have been translated into English by the authors.

⁹Even when real wage is treated as an endogenous variable within the classical approach, these institutional factors manifest themselves, as Sraffa (1960, p. 10) has argued, “in devious ways,” for example, by setting a minimum threshold below which the real wage cannot fall, namely, a level that allows the subsistence of workers under the given historical and social conditions considered.

¹⁰See also Krugman and Taylor (1978) for the negative impact of devaluations on the level of domestic output.

¹¹Exchange rate inflation is a particular case of structural inflation, which is the outcome of the emergence of bottlenecks in the external sector due to the lack of foreign currency. Diamand (1978, p. 23) also uses the term “bottleneck inflation” to refer to this kind of inflation. Note that, as the author himself declares, exchange rate inflation differs from demand-pull inflation, since the former coexists with a recession. It is also a different phenomenon from cost-push inflation because it does not originate in a distributive conflict.

¹²In Diamand’s view, aggregate demand is also reduced for the following reason: higher prices cause “monetary illiquidity” because the Central Bank refuses to passively accommodate the supply of money for the new, higher needs caused by the increased internal prices, but rather allows the rate of interest to increase. However, the mechanism through which this illiquidity causes a fall in the output level is unclear. Diamand is probably thinking of a fall in the level of private investment due to the increase in the rate of interest. The mechanism that links the rate of interest to investment decisions will not be discussed here since it has been shown to be empirically very weak (see Chirinko, 1993) and, moreover, it lacks solid theoretical foundations (see Petri, 2004, ch. 7). In any case, none of the fundamental aspects of Diamand’s framework depend on the existence of an inverse relationship between the rate of interest and private investment.

¹³This is what happens, according to Diamand, when there are supply constraints on agricultural production. In this case, he writes, “If society were prepared to endure indefinitely the sacrifice of a strongly regressive income redistribution imposed on it, primary production and consequently exports could rise.” When exports are limited by world demand, however, “not even in the long run does the sacrifice stimulate exports” (Diamand, 1978, p. 27).

¹⁴As an anonymous reviewer has noted, Diamand also addresses another implication of the fact that “industry was born under the shelter of protection”: some sectors were obliged to employ domestically produced inputs even though the latter could be bought abroad at lower prices. This implied higher production costs for the former, hence a further reason for the low competitiveness of these sectors relative to the rest of the world. The main implication of this consideration is that the value of E_I would increase relative to a situation in which there are no import restrictions on capital goods. We could easily incorporate this feature into the model. For instance, assume that, besides commodity M, each unit of I employs 1 unit of a domestically produced input, N, and that each unit of N is in turn produced by l_n units of labor. N′ s supply price is given by $$p_N^s=w{l}_n(1+r$$), while its demand price is given by $$p_N^d={Ep}_N^{\ast }$$. Then, if local producers were forced to buy commodity N domestically, I’s supply price would be: $$p_I^s=[w{l}_I+bE{p}_M^{\ast }+w{l}_n(1+r)](1+r)$$, whereas had they been allowed to import commodity N, this price would be: $$p_I^s=[w{l}_I+bE{p}_M^{\ast }+{Ep}_N^{\ast }](1+r)$$. We now label $$E_I^1$$ and $$E_I^2$$ as the exchange rates of industry that equalize selling and supply prices when imports of N are, respectively, allowed and banned. By simple algebraic manipulations it can easily be shown that the required exchange rate under import restrictions is higher, hence the competitiveness gap relative to the rest of the world of the industrial sector is higher, if given international prices and the rate of profits, the labor coefficient l_n is sufficiently high: $$E_I^2>E_I^1$$ if and only if: $$\frac{l_n}{l_I}>\frac{p_M^{\ast }}{p_I^{\ast }-\left(1+r\right)\left({bp}_M^{\ast }+p_N^{\ast }\right)}$$. It is also clear that the consideration of this aspect of the problem has only the effect of increasing the difference between E_A and E_I; hence it does not alter the main results, since it is still the case that the fact that the exchange rate is determined by condition (5) implies that only sector A will be internationally competitive.

¹⁵In particular, had the exchange rate been higher, that is, E = E_I, and there is no a priori, general reason why this should not have been the case, production of I for the international market would have been possible.

¹⁶In Diamand (1985), the specific problems raised by free capital mobility, and the possibility of setting capital controls to solve them are discussed. We expect to examine these issues with the same tools used in this paper in a future article.

¹⁷Let us recall that, ceteris paribus, from conditions (3) and (DPC1)–(DPC2) it is clear that there is a one-to-one relationship between the wage expressed in dollars and real wage.

¹⁸A final remark may be worth making: in order to focus on the division of income between workers and capitalists, we have assumed land of homogeneous quality. Hence, we abstract from differential rent. To formalize this kind of rent within our model, we should have considered, for instance, heterogeneous land, say of two different qualities k = 1, 2. We would therefore have two supply prices of A ($$p_{A,k}^s$$), one for each kind of land: $$p_{A,k}^s={wl}_A^k\left(1+r\right),k=1,2$$, with $$l_A^k$$ the amount of labor employed on land k. The implication would be that the equality between supply and demand prices in the agricultural sector established by condition (5) would only hold for land of the “worst” quality, say land of quality k = 2, whereas for land of quality k = 1, precisely a differential rent per unit of output ($${\rho }_A^D$$) would emerge, in this case, determined by the difference in productivity of the two pieces of land within the domestic economy. The condition for differential rent would therefore be $${\rho }_A^D=p_{A,2}^s-p_{A,1}^s$$. For simplicity, we abstract from this issue here without affecting the main results (see, however, below where some implications of this kind of rent are considered). For an explicit treatment of differential rent within Diamand’s thought, see Crespo and Lazzarini (2015). See also Dvoskin and Feldman (2010).

¹⁹An anonymous referee has note that Diamand himself, in a paper with Crovetto (1988), formalizes the behavior of quantities in a UPS (the distributive sphere is not formally discussed). However, that presentation has some drawbacks. In particular, investment there is treated as purely autonomous. A first implication is that when exports rise, investment does not follow, and hence the economy eventually reaches the normal level of capacity utilization where a curious trade-off between investment and exports exists. Another problem is that because exports do not cause investment to rise, in the authors’ model the rate of growth of the economy depends only on the rate of growth of investment. But why would investment, hence output, increase when the economy reaches the normal level of capacity utilization? Furthermore, why would there be any incentive to raise investment demand when capacity is below its normal level? The treatment of investment as a fully autonomous variable might be accepted in the short term, but it is hard to accept in a model which aims to describe more persistent tendencies, as the idea of UPS aims to capture. Finally, the normal level of capacity utilization is, without justification, assumed to be the full-employment level. But in capitalist economies the tendency of capacity utilization to be normally utilized is always at work because it is another aspect of the tendency toward a uniform rate of return on capital, and this does not imply the tendency toward labor full-employment. In our formalization all these shortcomings are avoided, first, by treating investment as fully induced by the accelerator principle and second, by not identifying normal and full capacity utilizations. Hence, our presentation is more general.

²⁰As we have seen, Diamand accepts that internal consumption, both private and public, are relevent components to determine aggregate effective demand.

²¹For a detailed description of the supermultiplier model in a classical perspective, see Serrano (1995) and Bortis (1999, ch. 4).

²²Or some negative value if the economy has a positive level of initial reserves.

²³Cf Diamand (1977, pp. 19–20). From a classical perspective, one could associate the food component of the consumption bundle with the subsistence wage, and the industrial component with the part of the wage that participates in social surplus.

²⁴At any rate, however, even if we accept the rise in industrial exports, the decrease in internal consumption due to the decrease in real wage implies that the total effect on the production of I is a priori undetermined.

²⁵The reason is that in the UPSs, which operate around a full employment level of production, there are powerful labor unions. This institutional context implies that wage resistance is strong under inflationary pressures.

²⁶Note that, given the economy-wide import coefficient, determined by technical conditions, and consumption patterns, and given Diamand’s (1978) reluctance to rely on capital inflows to compensate for current account deficits, the only way to relax the external constraint is to increase export levels. As to capital inflows, in fact, it is Diamand’s view that they only allow postponement of the balance-of-payments crisis and the subsequent recessive adjustment, and, therefore, are unable to provide a definite solution for the problems faced by the UPSs. And, in the long run, they tend to worsen these problems since capital inflow in the form of foreign direct investment, and public or private foreign debt, cause a subsequent outflow of foreign currency in the form of utilities, dividends, and interest payments. This, in turn, requires a further inflow of foreign capital, thus generating an explosive spiral that, sooner or later, becomes unsustainable and forces a crisis (ibid., p. 30). Of course, this is the case as long as these investments are not directed toward export-oriented sectors or sectors capable of substituting imports.

²⁷As Diamand explains: “We would have two basic exchange rates. On one hand, the nominal rate which would be used for financial transactions, industrial exports and, with the corresponding import duties (much lower than in the conventional system); also for imports. On the other hand, we would have the primary exchange rate for exports, determined by the nominal rate less export duties. This reform would bring the nominal exchange rate substantially closer to the structure of industrial costs and would improve the possibility of exporting manufactured goods. Another alternative or complementary procedure is to build up a de facto exchange system for exports with tax reimbursements and other fiscal stimuli” (Diamand, 1978, p. 31).

²⁸Note that the value of E₁ determined by [EPC2] will be lower than E_I, determined by condition EPC2 because the latter takes the value E_I, and not E_A(<E_I), as the former does, to determine the supply price of I.

²⁹Among them, it is worth mentioning subsidies for purchasing inputs needed to increase production, or that allow the incorporation of marginal lands for production. Diamand also suggests the imposition of higher agricultural prices coupled with taxes on the differential rent obtained in the production of foodstuffs and subsidies to their consumption (Diamand, 1972, p. 40; see also 1978, p. 33).

³⁰Of course, one could always examine a particular historical experience and assess whether or not devaluation has been successful in increasing exports, output and employment, and so on. And then, depending on the results, one could label the economy as a BPS or UPS. But to proceed this way would lack the causal explanation Diamand was searching for.

³¹The neodevelopmentalist view has other important theoretical shortcomings that we cannot discuss here (see Crespo and Lazzarini, 2015; Dvoskin and Feldman, forthcoming).

Additional information

Notes on contributors

Ariel Dvoskin

Ariel Dvoskin is a researcher at the National Scientific and Technical Research Council (CONICET) and Faculty of Economic Sciences, University of Buenos Aires (UBA).

Germán David Feldman

Germán David Feldman is a lecturer in Advanced Macroeconomics at the Master in Developing Economics (MDE), Institute of Higher Social Studies, National University of General San Martín (IADES-UNSAM). The authors are especially thankful to Franklin Serrano, Carlo Panico, and two anonymous reviewers for their very useful comments on previous versions of this article. The usual disclaimer applies.