Uneven development and the balance of payments constrained model: Terms of trade, economic cycles, and productivity catching-up

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    Abstract

    This paper addresses (I) the transition dynamics incompatibility between the BPCM and the Prebisch-Singer hypothesis (PSH) (II) the causes of cyclical volatility in developing countries. In order to discuss these issues, we expand the Dutt (2002) model adding: (a) a productivity gap dynamics in which the south has a catching-up element; (b) a labor market dynamics, by including a wage curve in the relationship between employment rate and economic activity; and (c) a labor supply dynamics that considers the labor transfer issue between traditional and modern sectors. The result is a four dimensional dynamic model that represents a lagged developing economy constrained by its balance of payments. We find that our model converges and generates damped cycles. Fragile economies show an oscillatory decline in terms of trade, reinforcing an uneven development pattern between north and south. Industrialization and higher learning capabilities, however, can change the adjustment to a catching-up scenario.
    Original languageEnglish
    Pages (from-to)220-232
    Number of pages13
    JournalStructural Change and Economic Dynamics
    Volume54
    DOIs
    Publication statusPublished (VoR) - Sept 2020

    Funding

    I would like to acknowledge Bart Verspagen for the helpful comments and interesting debates during the development of this article. I thank UNU-Merit and the CatChain project for the institutional and financial support. I also thank to two anonymous referees for the very relevant inputs that very much improved this manuscript, and the participants of the 22nd FMM conference (October 2018), in Berlin for the relevant discussions. I bear full responsibility for any eventual errors.

    FundersFunder number
    UNU-Merit
    Horizon 2020 Framework Programme778398

      Keywords

      • Balance of payments constraints
      • Economic cycles
      • Latin American structuralism
      • Terms of trade

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