Demand-led industrialisation policy in a dual-sector small balance of payments constrained economy
Önder Nomaler, Danilo Spinola & Bart Verspagen
This article models the process of structural transformation and
catching-up in a demand-led Southern economy constrained by its balance
of payments. Starting from the Sraffian Supermultiplier Model, we model
a dual-sector small open economy divided between traditional and modern
sectors that interacts with a technologically advanced Northern economy.
We propose two (alternative) autonomous elements that define the growth
rate of this demand-led economy: government spending and exports.
Autonomous government spending plays a central role in stimulating
demand, and thus is a source of growth of the modern sector.
Productivity adjusts to the growth rate of output, given by the growth
rate of autonomous expenditure. Drawing from the Structuralist
literature, the technologically laggard Southern economy catches up by
absorbing technology from the Northern economy, potentially closing the
technology gap. The gap affects the income elasticity of exports,
bringing a supply-side mediation to the growth rates in line with the
Balance of Payments Constrained Model. We observe that a demand-led
government policy plays a central role in structural change, pushing the
modern sector to a take-off. Also, the economy is stable in terms of
capacity utilisation and modern sector employment.
Keywords: Industrialisation, Catching-up, Balance of Payments, Sraffian Supermultiplier
JEL: O41, E12, E61