Re: Danby seminar -- Thirlwall's Law

[Colin Danby <danbyc@xxxxxxx>]

For those who don't immediately recollect Thirlwall's law here's a
statement of it, which is in fact the abstract of a Paul Davidson JPKE
(13:12) article, "A Post Keynesian Positive Contribution to ?Theory.'"

"Thirlwall's law states that nation A's maximum growth without
an international payments constraint depends on the ratio of
A's import income elasticity vis-a-vis the world's income
elasticity for A's exports, and the world's growth rate. If
LDCs produce low income elasticity raw materials while the
developed  world specializes in high income elasticity
manufactured goods, then LDCs will grow at a slower rate than
the developed world.  Given current population and economic
growth rates of LDCs and the developed world, this implies
that LDCs living standards will fall unless developed
nation's increase their economic growth significantly."

As stated Thirlwall's law is "real," so that the question is essentially
that of relating the argument about monetary structure that I make in
the paper to Thirlwall's argument about a real constraint on growth.  I
don't believe either argument implies the other -- does money matter in
a Thirlwallian world?  Does financial structure matter?  Paul D should
have a better take on this.  (I don't have his article immediately
available here in rural Maryland.)

To Bruce's stimulating questions:

>1) How would we expect countries to sort out in terms of
>facing export demand constraints on growth on the one hand
>and facing challenges due to international liquidity constraints
>on the other? Does either tend to reinforce the other, for
>example?

Following Machlup, I'd prefer not to use the term "international
liquidity constraint" for a whole country.  Individual actors with their
own balance sheets (including the central bank when foreign payments are
at issue) may face liquidity contraints but I don't see how the term has
meaning for a financial system, because any number greater than one of
actors can create liquidity among themselves.  (Am I quibbling on an
uninteresting definitional point?  I *think* this is an important
distinction for theory and tried to so argue in the paper.)

Just to push my claims a bit, I might argue about the constraint on
growth as follws: that LDC monetary openness may create a fragile and
weak financial structure which cripples the *real* economy -- e.g. weak
bond markets, relatively little private capital investment in large
projects, and a political economy characterized by bailouts and state
guarantees.  This creates some of the effects described by Thirlwall,
but for different reasons.

>2) Given that most developing countries are under
>an export demand constraint on growth in the longer term,
>especially after adopting neoliberal trade policies, does
>the bias in favor of companies with access to international
>liquidity imply an increased income elasticity of imports
>in these countries?

Yes.   And there are several ways that currently-popular policies of
financial liberalization may make this much worse.

>3) Given that under a neoliberal trade regime, a
>developing country's best hope of climbing into a middle
>income status is to develop exports with high income
>elasticity, is there an interaction between the increased
>financial fragility that is pointed out in Danby's
>paper and an increased exposure to risk in a global
>downturn due to reliance on income elastic exports? Or
>is the successful climber one that succeeds in protecting
>itself against periodic setbacks in its export performance?

In the case I know most about, Mexico actually has done very well in
coming up with income-elastic exports, e.g. car parts, tourism, and
drugs.  Mexico is not mainly a primary-product exporter. I'd also note
that the current S.E. Asian financial crises are occurring with
countries regarded as relative success stories in export
diversification.  So at least for argument's sake I'd prefer a more
financialist view to a Thirlwallian view.

This is only a partial answer and I'll think about this a bit more.

Thanks, Colin