Stabilization and Growth in Developing Countries

A Structuralist Approach

L. Taylor

• Publisher: Taylor & Francis
• Year: 2013
• eBook ISBN: 9781136461934
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

Lance Taylor uses structuralist models to examine the issues of short-term fluctuations and long-term growth in developing economies.

Stabilization and Growth in Developing Countries: A Structuralist Approach

LANCE TAYLOR

Massachusetts Institute of Technology

A basic model for macro policy analysis is set out, incorporating an inflation theory based on distributional conflict, output and current account adjustment mechanisms, and the money market. Classical structuralist results about contractionary devaluation and stagflationary monetary restriction are derived. Alternative closures of the model are considered—monetarism and external strangulation (or foreign exchange bonanzas)—and it is extended to deal with interest rate reform. Short-term stabilization issues are considered—monetary and fiscal policy, import quotas and export subsidies as opposed to devaluation, financial market complications, food subsidies and public sector pricing, and orthodox and heterodox anti-inflationary programs. Medium-term processes of inflation, distribution, growth, and shifts in the macroeconomic regime are discussed. Finally, how the analysis can be extended to several sectors is briefly sketched.

1. INTRODUCTION

There has been an explosion of work on stabilization and growth problems in developing countries since the late 1970’s—the only boon from economic hardship is this outbrust of thought. Before 1980, the consensus among economists trained around the North Atlantic about how to stabilize and grow followed monetarist lines in the short run and neoclassical price-fixing in the long. The center of gravity has shifted toward structuralism since then. This monograph can be read as an attempt to summarize structuralist views as of the mid–1980’s, with an emphasis on how practical policy may be designed. A frankly partisan stance regarding the merits of different approaches to developing country macroeconomics is adopted. Orthodox/IMF policies have been amply tested over the past decades in the Third World, and found wanting. Tests of structuralist packages are underway or in the offing. It is high time for concrete policy models to be laid out, if structuralism is to fare better in current practice than mainstream economics has done in the past.

Structuralist analysis is summarized here in a single accounting frame-work or macroeconomic model, extended to deal with specific topics as they arise. The discussion is analytical; except where it is essential, institutional detail has been suppressed. A more institutionally oriented and policy-focused presentation of structuralist ideas appears in Taylor [44].

Three comments should be made about the spirit of the argument. First, algebra is set up in terms of accounting identities observed in all countries, and can easily be recast in numerical terms to give projections of the effects of exogenous changes or policy shifts. All the theoretical results could easily be quantified on a microcomputer.

Second, the model itself can be viewed as a Mundell-Fleming system with explicit treatment of income distribution and inflation dynamics added on. Or, from another angle, it is basically Kalecki’s macro scheme, augmented to deal with finance and the external account. Either way, the conclusions are well founded in traditional macroeconomics.

Third, and most important, results are highly dependent on assumptions about the roles of different economic actors, the presence or absence of certain markets, and so on. There is no single macro model for all developing countries. But the argument here is that applicable models can be generated from consistent reasoning based on accounting identities and respect for institutional facts. Many of the problems that made-in-the-North economists create when they come South stem from ignoring these simple precepts.

In what follows, the basic analytical structure is presented in chapter 2, where it is argued that to capture adequately the characteristics of a developing economy open to trade one needs four key relationships—an inflation theory, equations for internal and external balance, and a description of the financial market(s). The details will depend on institutional characteristics of the economy at hand. However, typically there will be an element of cost determination in prices, with components of cost (the wage and exchange rate, principally) responding to past inflation and social conflict. Non-standard effects such as inflation taxes, contractionary devaluation and cost-push from interest rate increases affect macro balance in the Third World, and are spelled out in detail. Financial adjustment under asset indexation is also described.

Chapter 3 develops variations around a theme of macroeconomic causality—directions of effects of policy changes are shown to depend strongly on the “closure” of the system that one adopts. Monetarism is interpreted as a closure in which an assumption of full utilization of capacity is imposed on the internal balance relationship. Reduction of inflation through monetary restraint and wage repression is discussed in this context; on its own assumptions the policy is effective. The operational question is whether the assumptions apply. The same general query is relevant when external balance is constrained—by scarce external resources under “external strangulation” or plentiful ones when there is a dollar bonanza. Macro adjustment difficulties under these two sets of circumstances are considered. Finally, financial market closure is explored in terms of an interest rate reform. Raising deposit rates in an attempt to improve financial performance is shown to be unproductive.

Chapter 4 takes up policy matters that have been at the forefront of discussion the past few years—export subsidies or import quotas (the verdict on their effectiveness is positive), food subsidies and food price inflation (both tricky issues), public enterprise pricing (complex effects), orthodox anti-inflation shocks (generally, they produce bad results) and the heterodox shocks that have recently been attempted in Latin America.

Chapter 5 is a review of factors affecting income distribution and growth in the long run. The key adjusting variables are the real wage and real exchange rate, and their dynamics is considered under various closures. Regime shifts between adjustment and forced saving/inflation tax adjustment are next taken up. The chapter closes with a sketch of how its results can be extended to deal with multiple sectors and economic classes.

Finally, a word should be added about how the models set out here relate to other literature. The structuralist tradition in macroeconomics is an old one—Kindleberger [23] traces it back at least 300 years. Its latest flowering near the North Atlantic was stimulated by Kalecki and Keynes. A Latin American school which explicitly adopted the structuralist label took off soon after, partly in response to their work.

Arndt’s [2a] capsule history traces lineages between North Atlantic and Latin thought. Similar ideas flourished in India and the Caribbean which Arndt does not discuss. The main themes in all this literature are that institutions and available technology strongly constrain change in an economy at any point in time. In particular, these limitations (unless changed consciously by political action and economic policy or unconsciously by historical forces) may rule out a rapid, equitable development path. Unfavorable outcomes could include inflation based on distributional conflict provoked by lagging agricultural supply as discussed by Noyola Vasquez [33], external imbalances of the type later formalized in the two-gap model of Chenery and Bruno [9], and adverse trends in the terms of trade for countries exporting primary products in an increasingly unfavourable world market.

The analysis here draws upon all developing economy structuralists as well as the economists (Robinson, Kaldor, and disciples) at the University of Cambridge who followed Keynes. Over the past 20 years, a “neostructuralist” school has appeared. For short run stabilization problems, its work emphasizes that developing economies may respond to standard policies in unexpected ways—devaluation may cause output contraction, tight money may lead to price increases due to higher interest costs, inflation is likely to have its own “inertial” dynamics, public investment may crowd private capital formation in instead of out. Stabilization programs are unlikely to succeed if their constituent policies are not designed taking such responses into account.

In the longer run, the recent authors emphasize the importance of the income distribution in conditioning the growth process. Like their predecessors, they tend to be sceptical about the benefits of market liberalization and unfettered external capital flows and trade. They often propose models of unstable macroeconomic dynamic processes that liberalization can provoke.

This monograph pulls together many of the neostructuralists’s ideas, including the examples just pointed out. The younger authors have gone much further than their predecessors in formalizing and tracing through the logical implications of the macro adjustment processes they invoke. The models herein elaborate the tricks developed by these economists in their trade, but leave out the historical and institutional richness of their way of looking at the world. For that, the reader will have to turn to their cited work.

2. THE BASIC MODEL

The modelling strategy follows Kalecki [21] in dealing with wage and profit recipients (or “workers” and “capitalists”) and the state as the main economic actors. Extensions toward agricultural and non-agricultural groups as well as the ubiquitous “foreigners” on the other side of the balance of payments are brought in from time to time. This class analysis is rudimentary, but has the advantage of fitting with available functional income distribution data. It can and should be extended in specific country contexts, especially since behavioral differences across classes (and conflicts among them) are key explanatory factors for much macroeconomics in the Third World.

For simpler mathematics, we work with continuous time, even though in concrete numerical simulation, discrete time periods (a quarter or a year) make more sense. Stability analysis refers either to a “short run” (a quarter or so) during which output levels and some prices can change, or to a “long run” as conventionally represented by growth in a steady state. By and large, we work with only one producing sector and keep asset and liability categories to a feasible minimum. Financial dealings largely take place between the “public” or “capitalists” and firms, unrealistically omitting transactions among the latter. Asset markets are assumed to clear by changes in prices or interest rates, even though quantity clearing under controls is characteristic in the Third World. Analytical ease is the justification, with the caveat that interest rate increases in a model can always be read as “credit tightness” in real markets.

There are four basic macro equations and corresponding accounts—the decomposition of the unit price of output into costs, the balance between output and sources of demand, balances between demands and supplies of financial assets (with an emphasis on money), and the external payments accounts. Flows-of-funds further link excesses (or shortfalls) of savings over investment flows from the real side of the economy to accumulation of assets (or liabilities) in its financial sphere.

2.1. Price formation and inflation rates

Firms’ costs decompose into purchases of intermediate inputs (both imported and nationally produced), the wage bill, profits and paid-out earnings, and interest charges. Since we are working with one sector, national intermediate costs can in principle be reduced to primary and imported inputs through the input-output system, and we further assume that some interest pay...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• Introduction to the series
• 1. Introduction
• 2. The Basic Model
• 3. Alternative Macroeconomic Closures
• 4. Macro Adjustment in the Short Run
• 5. Distribution, Growth and Inflation in the Medium Run
• References
• Appendix
• Index