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The Economics of Demand-Led Growth

Challenging the Supply-side Vision of the Long Run

Edited by Mark Setterfield

The Economics of Demand-Led Growth is a collection of specially written essays that develop and apply the theory of demand-led growth. Long-run growth is usually portrayed as a supply-determined process. The contributions to this volume, however, are rooted in the theory of demand-led growth. In addition to general discussions of the role of demand in the long-run, the volume contains essays in the Kaldorian and Kaleckian traditions, and a section on the relationship between demand-led growth and structural change. The conclusion reached is that current neglect of the role of demand in analyses of long-run growth is unwarranted.
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Chapter 6: The Role of the Balance of Payments in Economic Growth

Challenging the Supply-side Vision of the Long Run

J.S.L. McCombie and Mark Roberts


J.S.L. McCombie and M. Roberts INTRODUCTION KaldorÕs long insistence on the importance of both static and dynamic increasing returns to scale (broadly defined to include induced technical progress) in understanding the growth process has been largely vindicated by recent developments in neoclassical ÔendogenousÕ growth theory. This theory assumes that there are no diminishing returns to capital (see Kaldor, 1977, where he is one of the first to make this assumption). KaldorÕs argument that it is equally (or even more) important to consider the role of demand, as opposed to the supply side, in economic growth has, however, been largely ignored by the orthodoxy. The purpose of this chapter is to present an interpretative survey of some of the work that has taken forward the Kaldorian view. In particular, the role of the balance of payments in limiting economic growth below the maximum potential determined by supply-side considerations is discussed. This was implicit in KaldorÕs earlier writings (see Thirlwall, 1987, pp. 284Ð5). It was the influential paper by Thirlwall (1979) that both formalized and popularized this approach (see Thirlwall, 1997), and it was endorsed by Kaldor (1981). KaldorÕs views on the importance of the growth of demand did not originate fully developed, but evolved over the years. Nevertheless, it is possible in his writings to distinguish between two categories of demand that play different roles in the economic growth process. The first, which applies to a largely closed economy, is the role of the growth of...

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