Economic Growth in an Open Developing Economy

Economic Growth in an Open Developing Economy

The Role of Structure and Demand

A. P. Thirlwall

This concise yet insightful sequel to the highly acclaimed The Nature of Economic Growth provides a comprehensive critique of both old and new growth theory, highlighting the importance of economic growth for reducing poverty.

Chapter 4: The endogeneity of the natural rate of growth and constraints on demand

A. P. Thirlwall

Subjects: development studies, development economics, economics and finance, development economics, post-keynesian economics

Extract

One of the criticisms made of old and ‘new’ growth theory in the previous chapter is that the models are completely supply oriented. The demand for output and factors of production never enters the picture. Factor supplies, labour and capital, are exogenously given; and the so-called ‘natural rate of growth’ is also exogenously given. The argument of this chapter will be that there is no such thing as a fixed full employment growth rate exogenously given which is independent of demand. In other words, there is nothing natural about the natural rate of growth – just as there is nothing natural about the natural rate of unemployment (but that is another story!). I shall illustrate with reference to studies conducted on the endogeneity of the natural rate of growth for OECD countries (Léon-Ledesma and Thirlwall, 2002); Latin American countries (Libanio, 2009; Vogel, 2009); NAFTA countries (Perrotini and Tlatelpa, 2003), and South East Asian countries (Dray and Thirlwall, 2011). This is an important topic both theoretically and empirically.

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