Long-run convergence in a neo-Kaleckian open-economy model with autonomous export growth

ABSTRACT

This study combines a neo-Kaleckian growth and distribution model with a sort of Sraffian supermultiplier mechanism in which autonomous demand is driven by foreign exports. Short-, medium- and long-run equilibria are considered. In the long-run case, the expectations of sales growth governing investment change adaptively, and this, combined with the autonomous growth rate of exports, produces convergence of the actual rate of capacity utilization to its normal rate. It is demonstrated that some aspects of the main Kaleckian results can be preserved not only in the short or medium run but also in the long run, in the sense that both (1) a decrease in the propensity to save, and (2) a change in income distribution favoring labor, bring about higher average rates of production growth and capital accumulation. However, the impact of a change in the profit share is shown to be subjected to the condition that the responsiveness of the real exchange rate with respect to the profit share has to be bounded from above, confirming that the scope for wage-led demand or wage-led growth can be limited by open-economy considerations, even within the supermultiplier context.

KEYWORDS:

• Autonomous expenditures
• capacity utilization
• exports
• growth
• neo-Kaleckian
• profit share

JEL CLASSIFICATIONS:

• E11
• F41
• O41

Notes

¹This should not be a problem as long as the interest rate on external debt does not rise.

²This is obviously a simplification, although Coutts and Norman (2013) argue from past empirical studies that while finished goods are subjected to a partial pass-through in advanced economies, intermediate products, which are considered by firms as a cost, are usually subjected to a full pass-through.

³Alternatively we could say that output net of intermediate imports has to equal consumption plus investment and exports.

⁴This view was later developed in a slightly different direction through the balance-of-payment-constrained models of Thirwall (1979) and McCombie and Thirlwall (1994).

⁵In Figure 1, we define σ_{i, j} ≡ s_piπu − tb(x_j). In the upper panel, the slopes of the g curve and that of the σ curve are γ_u and (s_pπ + ϕ_u), respectively. The values of the intercepts on the vertical axis are (γ − γ_uu_n) and  − (x + ϕ_ee_R), respectively.

⁶It is sometimes argued that small open economies are more likely to be in a profit-led demand regime, and hence that since we assume the presence of a small open economy that has no feedback effect on world aggregate demand, we should describe the profit-led regime. But the results obtained by Onaran and Galanis (2012) seem to indicate that this is not necessarily the case, and that profit-led countries are sometimes countries that are specialized in exporting commodities, such as Canada, Australia, and South Africa.

⁷In Figure 2, we define σ_{i, j} ≡ s_pπ_iu − tb(π_i, x_j). All the values of slopes and intercepts are the same as in Figure 1.

⁸The empirical argument is that the rate of utilization exhibits stationarity, although some authors argue instead that the normal rate shows historical trends (Duménil and Lévy 2014, p. 1289). Besides the fact that the rate of capacity utilization series seems to exhibit a break around 1980, a number of authors (e.g., Nikiforos 2016) argue that the series stationarity is an artifact, due to the way in which the rate is being measured by central banks or statistical agencies.

⁹In fact, this is because the instability inherent to the Harrodian mechanism becomes more than offset by the exogenous growth of effective demand. The argument can be made more elaborate by replacing in Equation (17) u** by the value of $$u^{\ast }$$ as found in Equation (5). One then obtains a system of two differential equations with $$\hat{x}$$ and $$\hat{}\gamma$$. The mathematical and graphical stability analysis of this system, as well as the impact of an increase in the growth rate of autonomous exports, can be found in the Appendix of the working-paper version of the present study (Nah and Lavoie 2016).

¹⁰Thus $${\overline{g}}_x$$ can neither be too large nor too small. This is recognized in Lavoie (2017).

¹¹Thus, we can claim from the model that a decrease in the propensity to save out of profits or in the profit margin will lead to an increase in the long-run trade deficit ratio, and obviously, that an increase in the autonomous growth rate of exports $${\overline{g}}_x$$ will lead to a fall in this trade deficit ratio.

Additional information

Notes on contributors

Won Jun Nah

Won Jun Nah is an associate professor in the School of Economics and Trade, Kyungpook National University, Daegu, Korea.

Marc Lavoie

Marc Lavoie is emeritus professor at the University of Ottawa (Canada), and professor at the University of Paris 13 (CEPN), University of Sorbonne Paris Cité.