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Citation for published version

Thirlwall, A.P. (2017) Nicholas Kaldor’s life and his insights into the applied economics of growth. Acta Oeconomica, 67 (s1). ISSN 0001-6373.

DOI

https://doi.org/10.1556/032.2017.67.S.2

Link to record in KAR

http://kar.kent.ac.uk/60416/

Document Version

Author's Accepted Manuscript

1

NicholasKaldor’sInsightsintotheAppliedEconomicsofGrowth

(orWhyIBecameaKaldorian)1

A.P.Thirlwall

(UniversityofKent)

Introduction

Wearecelebratingtodaythe lifeandworkofNicholasKaldoronthethirtiethanniversaryof

his death on 30th September 1986. Kaldor was one of the most distinguished Hungarian

economistsofthetwentiethcenturywhooughttohavemorerecognition inhisnativecountry,

eventhoughmostofhisacademiclifewasspentintheUnitedKingdom.

IknewKaldorwellinthelastyearsofhislifebetween1979and1986.Inthemid-1970s,Ihad

alreadydecidedthatIwouldwriteanintellectualbiographyofhim–Ifoundhimsuchanoriginal

andinterestingeconomist,anddecidedtherewasaKaldorianeconomicstobewritten.In1979,I

spentasabbaticalterminKing’sCollege,Cambridge.IattendedKaldor’slectures;Italkedtohim,

andfinishedreadingthewholeofhispublishedwork–over250articlesandbooks.Theninthe

academicyear1985-86,IspentawholeyearinCambridge,workinginhishouseinAdamsRoad

to sort out his papers; read his correspondence with other economists, and to interview him

extensivelyabouthis ideasandeventsof longago.Mybiographyofhimwaspublished in1987

(Thirlwall, 1987).2When Kaldor died, undoubtedly economics lost one of itsmost original and

controversialeconomistsofthetwentiethcentury.Weareallmortal,ofcourse,butnotmanylive

the rich intellectual andpolitical life that Kaldor enjoyed.Below, I give somebrief biographical

details,andhighlightsinKaldor’sacademicandpoliticallife.

KaldorleftBudapestin1927tostudyeconomicsattheLondonSchoolofEconomics(LSE).He

graduated with a first class honours degree in 1930. He became the favourite pupil of Lionel

1ThisarticleisbasedonaLecturegivenattheCornivusUniversity,Budapest,on30

thSeptember2016celebratingthe

lifeandworkofNicholasKaldoronthe30thanniversaryofhisdeath.2TherearenowtwomoreintellectualbiographiesofKaldor:Targetti(1992),andKing(2009).

2

Robbins, a young Professor fromOxfordwhowas appointed in 1929 to replace the American,

AllynYoung fromHarvard,whohaddied frompneumonia.YoungwasKaldor’smost influential

teacher,andlaterinlifeKaldorwastouseoverandoveragainYoung’s1928paperon‘Increasing

Returns and Economic Progress’ (Young, 1928) in several attacks on equilibrium theory.3 After

graduation, Kaldor was given a research studentship to study the economic problems of the

DanubianStates,andKaldor’sfirstpublishedpaperinEnglishintheHarvardBusinessReviewwas

onthistopic(Kaldor,1932).

Inthe1930s,Kaldormadeseveralmajortheoreticalcontributionstothetheoryofthefirm

(Kaldor, 1934a, 1934b, 1935); to capital theory (Kaldor, 1937); to welfare economics (Kaldor,

1939); to trade cycle theory (Kaldor, 1940), and to the Keynesian revolution (Kaldor, 1939). In

1985,afterKaldorhaddeliveredtheHicksLectureinOxford(Kaldor,1986),SirJohnHickswrote

toKaldorsaying‘your1939paperon‘SpeculationandEconomicStability’wastheculminationof

theKeynesianrevolutionintheory;yououghttohavehadmorehonourforit.’Kaldorwasoneof

the first converts at the LSE to the Keynesian revolution in 1936, alongwith Abba Lerner and

UrsulaHicks.

Inthe1940s,duringthewar,theLSEwasevacuatedtoCambridge,andKaldorcollaborated

with Keynes on aspects of war finance and national income accounting. He also made major

contributionstothetwoBeveridgeReports;thefirstin1942onsocialinsurance,andthesecond

in1944onFullEmploymentinaFreeSociety.

In 1947 Kaldor resigned from the LSE to become the first Director of the Research and

Planning Division of the newly established Economic Commission for Europe (ECE) based in

GenevaheadedbytheSwedisheconomistandcivilservant,GunnarMyrdal.Kaldorassembleda

veryimpressiveteamofeconomists,includingRobertNeild;EstherBoserup;HelenMakower;Hal

Lary; Tibor Barna, and P.J. Verdoorn. Kaldor was responsible for writing the Annual Reports

outliningtheeconomicconditionsandtrendsintheeconomiesofEasternandWesternEurope.

At the end of 1949 he left the ECE to become a Fellow of King’s College, Cambridge (in the

footstepsofKeyneswhodiedin1946)andaLecturerintheFacultyofEconomics.

3WhilesearchinginKaldor’shouse,IfoundacompletetypedsetoflecturenotesthatKaldorhadtaken

fromYoungin1928.TheyareinterestingbecauseYoungwasEdwardChamberlin’sPhDsupervisorin

Harvard,andYoungwasteachingmonopolisticcompetitiontheoryattheLSElongbeforeChamberlin’s

bookonmonopolisticcompetitionwaspublishedin1933.ThelecturesarepublishedintheJournalof

EconomicStudies1990editedbyRogerSandilands.

3

In1951,hewasinvitedtobecomeamemberoftheRoyalCommissionontheTaxationof

ProfitsandIncome.Asaresultofthisexperience, immersinghimself intaxmatters,hebecame

one of the world’s leading tax experts. It led directly to his classic book An Expenditure Tax

(Kaldor,1955),andinvitationsfromseveraldevelopingcountriestobeataxadviser,startingwith

Indiain1956andfollowedbyCeylon(nowSriLanka)(1958);Mexico(1960);Ghana(1961);British

Guiana (nowGuyana) (1961); Turkey (1962); Iran (1966), andVenezuela (1976).His tax reform

proposalsoftenledtoviolentprotests,butKaldorwasunapologetic:‘Progressivetaxationis, in

theend,theonlyalternativetocompleteexpropriationthroughviolentrevolution’.

Inthemid-1950s,Kaldorbecameoneofthejointarchitectsoftheso-calledpost-Keynesian

growthanddistributionschool,alongwithJoanRobinson,RichardKahnandLuigiPasinetti. Ina

seriesofpath-breakingpapers,Kaldor (1955,1956,1961)attemptedtoextendKeynesian ideas

and insights to the long run, and at the same time to challenge neoclassical growth and

distribution theory emanating from the Massachusetts Institute of Technology in Cambridge

MassachusettspioneeredbyRobertSolow,PaulSamuelsonandFrancoMogdigliani.Throughout

the late1950sand into the1960s therewere fiercedebatesbetweenCambridge, Englandand

Cambridge, Massachusetts with no obvious ‘winner’, but they set the economics profession

alight.

Inthe1960s,Kaldorturnedawayfromthepuretheoryofgrowthtotheappliedeconomics

ofgrowthwithhis famous Inaugural Lecture inCambridgeentitled Causesof theSlowRateof

Economic Growth of the United Kingdom (Kaldor, 1966) where he lays out a series of growth

‘laws’thatwillbediscussedbelow.Hisinterestintheappliedeconomicsofgrowthwaspartially

inspiredbyhisappointmentin1964asSpecialAdvisertotheChancelloroftheExchequer,James

Callaghan,intheLabourgovernmentofHaroldWilsonfrom1964-70.Hewasconcerned,asmany

were, with the slow rate of growth of the UK economy compared to the UK’s European

neighbours.Many explanations were proffered, but Kaldor’s explanation was the slow rate of

growthof themanufacturing sector, and theexcessivegrowthof the service sectorwith lower

productivity.HecarriedonasSpecialAdvisertotheChancelloroftheExchequeratthebeginning

of the second Labour government in 1974, but resigned in 1976, disillusioned with economic

policy-making at the time. He had been given a peerage in 1974 and was able, therefore, to

commentoncontemporaryeconomicaffairsfromthebenchesoftheHouseofLords.Hedidso

4

veryvigorouslyandveryeffectivelyduringtheConservativeadministrationofMrsThatcherfrom

1979.4

Inthe1970s,heledworld-widetheintellectualassaultonthedoctrineofmonetarismthat

hadspreadwiththevirulenceofaplaguefromtheUnitedStatesunderthe influenceofMilton

Friedman(seeKaldor,1970,1982).Helostthebattle,butwonthewarbecauseMonetarismMark

1(Friedmanmonetarism)isdead,andMonetarismMark2(thenewclassicalmacroeconomics)is

alsodead.

In the1980s, itwasthechallengetoequilibriumtheorythatmostlypreoccupiedhim.He

hadalready launchedanattack in1975withhispaper ‘What isWrongwithEconomicTheory?’

(Kaldor,1975),andthiswasfollowedby‘EquilibriumTheoryandGrowthTheory’(Kaldor,1979);

‘The Role of Increasing Returns, Technical Progress and Cumulative Causation in the Theory of

InternationalTradeandEconomicGrowth’(Kaldor,1981),andhispowerfulOkunLecturesatYale

Universityin1985EconomicsWithoutEquilibrium(Kaldor,1985).

In 1969, the first year of the Nobel Prize in Economics, the Financial Times (8th August)

reported that Kaldor was on a short-list of ten candidates for the honour, including Milton

Friedman,PaulSamuelson,JamesMeade,FrancoisPerrouxandtheRussianLeonidKantorovich,

buthewasnevertoreceiveit.TheEconomistnewspaper(20thJanuary1979)oncedescribedhim,

however,asthebestknowneconomistintheworldnottohavereceivedtheNobelPrize;andI

thinkthereissometruthinthis.

StructureandDemandMatterforEconomicGrowth

NowIwilldescribehowIbecameaKaldorian,asapreludetodiscussingKaldor’s insights

intotheappliedeconomicsofgrowth inwhichthestructureofproductionanddemandmatter

for the long run growth of economies, in contrast to orthodox neoclassical theorywhich deals

withaone-goodeconomyinwhichstructureanddemanddon’tmatter,andinwhichsuppliesof

factorsofproductionandtechnicalprogressareexogenouslygiven.

WhatattractedmetoKaldorfirstofallwasnothisgrowthanddistributionmodelsofthe

1950s, whichwere purely theoretical, but his Inaugural Lecture in Cambridge in 1966 entitled

CausesoftheSlowRateofEconomicGrowthoftheUnitedKingdom(Kaldor,1966),followedby

4SeehisEconomicConsequencesofMrsThatcher(Kaldor,1983).

5

his Frank Pierce Memorial Lectures at Cornell University, also in 1966, published as Strategic

Factors in Economic Development (Kaldor, 1967). In these lectures he gives a structural

explanationofwhygrowthratesdifferbetweencountries,singlingoutmanufacturingindustryas

‘theengineofgrowth’.IntheUnitedKingdom’scase,heattributedslowgrowthtowhathecalled

‘prematurematurity’bywhichhemeanttheexhaustionofthesuppliesoflabourfromagriculture

toprovide labour formanufacturing industrybeforeahigh levelofproductivity in industryhad

beenreached–incontrasttootherEuropeancountries.AsayoungLecturerattheUniversityof

Kentlookingforanintellectualhome,theselecturesstruckachord,andIincorporatedtheideas

intomyownlecturenotesongrowthanddevelopmenttheory.Inowhadacounterweighttothe

unsatisfactory assumptions of neoclassical growth theory. I believed him to bewrong that the

UK’s fundamental growth problem was a shortage of labour for manufacturing industry (and

Kaldorsoonchangedhismindonthis),butnotonhisemphasisonthefactthattheproduction

(and demand) characteristics of industry are different from those of land-based activities and

services–namely thatmanufacturing industry is characterisedby increasing returns (staticand

dynamicreturnstoscale)whilemostactivitiesoutsideofmanufacturingaresubjecttoconstant

or diminishing returns. Kaldor’s view, which he never changed, was that it isn’t possible to

understand growth rate differences between countries, or differences in the levels of

development between countries, without making this fundamental distinction between what

typesofactivitiescountriesspecialisein.

Outofthese1966lecturescamethreegrowthlaws.Firstly,manufacturingistheengineof

growthinacausalsense–notsimplybecausemanufacturingoutputisapartoftotaloutput.i.e.

ggdp=f1(gm) f1’>0 (1)

whereggdpisthegrowthofGDPandgmisthegrowthofmanufacturingoutput.Thisistestable.

The reasonmanufacturing is the engine of growth is that it induces productivity growth both

withinmanufacturingitself,andalsooutsidethemanufacturingsector.This leadstothesecond

andthirdlaws.

The second law is thatmanufacturing output growth induces labour productivity growth

withinmanufacturingbecauseof staticanddynamic returns to scale. Staticeconomies refer to

economies of scale, and dynamic economies refer mainly to learning by doing and embodied

technicalprogressasmorecapitalisaccumulatedintheprocessofgrowth.i.e.

6

pm=f2(gm) f2‘>0 (2)

where pm is productivity growth in manufacturing. This second law is often referred to as

Verdoorn’sLawafterapaperpublishedbyP.J.VerdoornintheItalianjournalL’Industriain1949

(Verdoorn,1949) showing this relationshipacrossa sampleofEuropeancountriesbetween the

twoWorldWars. Interestingly,VerdoornwasoneofKaldor’sstaff intheResearchandPlanning

DivisionoftheECEinthelate1940s,butnofurtherresearchwasdoneonthe‘law’forseventeen

yearsuntilKaldorrevivedit,andonlyonereferencewasmadetoitbyArrowinhisclassicpaper

on the economics of learning by doing (Arrow, 1962). Since 1966 there has been a mass of

researchonVerdoorn’sLaw–allsupportive–althoughsomestudiesalsofindaVerdoorneffect

insomeactivitiesintheservicesector.5

The third law states that manufacturing growth induces productivity growth outside of

manufacturingbecause if therearediminishing returns to labour,with themarginalproductof

labourlessthantheaverageproduct,areductioninlabourwillraisetheaverageproduct.i.e.

pnm=f3(gm) f3’>0 (3)

wherepnmisthegrowthofproductivityinnon-manufacturing.

All three laws have been extensively tested and have strong empirical support across

developedcountries;developingcountries,andacrossregionswithincountries.Forexample,see

HansenandZhang (1996) forastudyacross theregionsofChina;seeNecmi (1999) forapanel

datastudyacrossseveraldevelopingcountries;seeLibanio(2010)forastudyacrossthecountries

of Latin America, and Wells and Thirlwall (2003) for a study across the countries of Africa.

Structuremattersforeconomicperformance.

Theseresults,ofcourse,havepolicyimplicationsparticularlyforpoorcountrieswhichwant

toaccelerateeconomicdevelopmentforthereductioninpoverty.WhatistheroleoftheStatein

promoting manufacturing industry?What is the role of industrial policies? Is there a case for

protection?Ifso,shoulditbebytariffs,subsidies,orselectedcredittonewindustries?Thelate

developmenteconomist,Ajit Singh, once said tome that as a studentof Kaldor, Kaldor taught

him three things: first, developing economies must industrialise; second, they can only

industrialisebyprotection,andthird,ifanyonesaysotherwise,theyarebeingdishonest.

5In1999therewasaconferenceinGenoacelebratingthe50

thanniversaryofVerdoorn’spaper,outof

whichcameabook:J.McCombie,M.PugnoandB.Soro(2003),ProductivityGrowthandEconomic

Performance:EssaysonVerdoorn’sLaw(London:Palgrave-Macmillan).

7

Butwhatdrivesmanufacturingoutputgrowth in the firstplace? InKaldor’s thinking, it is

agricultural growth in the early stages of development and export growth in the later stages.

These are the two fundamental sources of autonomous demand for manufacturing output to

offset leakages of income from the manufacturing sector for the purchase of food from

agricultureandimportedinputsintoindustry.Thisthinkingisthebasisofhistwo-sectormodelof

industryandagricultureinwhichthetermsoftradeplayacrucialrole.Iftheindustrialtermsof

tradeare‘toohigh’,thegrowthofindustryisdemandconstrainedbecausetheagriculturalsector

lacksthepurchasingpowertobuymanufacturedgoods. Iftheindustrial termsoftradeare‘too

low’,industrialgrowthissupplyconstrainedbecauseindustrydoesn’thavetheprofitstoinvest.

Kaldor lectured on this model for many years in Cambridge, and it formed paprt of his Hicks

Lecture(Kaldor,1986)andhis1986MattioliLectures(Kaldor,1996).Thirlwall(1987)andTargetti

(1985)attempttogiveamoreformalstructure.

RegionalExport-LedGrowth

Thesecondpaperwhichstruckan intellectualchordwasKaldor’saddress to theScottish

Economic Society in 1970 entitled ‘The Case for Regional Policies’ (Kaldor, 1970). Here, at the

regionallevel,heswitchesfocusfromthestructureofproductioninaclosedeconomytotherole

of exports in anopen regional context inwhich the growthof exports is considered themajor

componentofautonomousdemand(towhichothercomponentsofdemandadapt)whichsetsup

avirtuouscircleofgrowthworkingthroughtheVerdoorneffect–similarincharactertoGunnar

Myrdal’stheoryofcircularandcumulativecausationinwhichsuccessbreedssuccessandfailure

breedsfailure(Myrdal,1957).This isoneofhischallengestoequilibriumtheorythatfreetrade

and the freemobility of factors of production will necessarily equalise economic performance

across regions or countries. Structure stillmatters, but it is now the demand characteristics of

goods thatmattermost, not the supply characteristics of production. Itmakes a difference to

economic performance of regions or countries whether they produce and export cabbages or

computers.ThemodelKaldorputforwardwasapurelyverbalone,butDixonandIformalisedit

in a paper in 1975 entitled ‘AModel of RegionalGrowthRateDifferences on Kaldorian Lines’

(DixonandThirlwall,1975).Themodelhasfourequationsthatcanbesolvedfortheequilibrium

growthrate.Thefirstmakesoutputgrowthafunctionofexportgrowth(andthemorespecialised

8

regionsare, thegreater the importanceofexports).Thesecondequationmakesexportgrowth

depend largelyona region’schangingpricecompetitivenessand thegrowthof incomeoutside

the region. The third equation gives the rate of change of a region’s prices as the difference

between wage growth and productivity growth. Lastly, labour productivity growth is partly

determined by the growth of output itself through static and dynamic increasing returns,

capturedbyVerdoorn’sLaw. Inequationform,thepropositionsmaybespecifiedas(t isatime

subscript):

gt=ϒ(xt) (4)

wheregtisthegrowthofregionaloutput,andxtisthegrowthofexports.

xt=η(pdt–pft)+ε(zt) (5)

where pdt is the growth of domestic prices; pft is the growth of foreign prices measured in a

commoncurrency;ztisthegrowthofincomeoutsidetheregion;η(<0)isthepriceelasticityof

demandforexports,andε(>0)istheincomeelasticityofdemandforexports.

pdt=wt-rt (6)

wherewtisthegrowthofwages,andrtisthegrowthoflabourproductivity.

rt=rat+λ(gt) (7)

whereratisautonomousproductivitygrowthandλistheVerdoorncoefficient.

Substitutionofequation(7)into(6)andtheresultinto(5)and(4)givestheequilibriumgrowthof

regionaloutputas:

gt=!ϒ!! !!!!!∀!!!∀ !!! !! !

!!!ϒ!∀ (8)

Rememberingthatη<0,growth isshowntobenegativelyrelatedtodomesticwage increases,

butpositivelyrelatedtoforeignpriceincreasesandautonomousproductivitygrowth.Growthis

alsopositivelyrelatedtothegrowthofexternaldemandandthesizeoftheVerdoorncoefficient.

It is the Verdoorn coefficient (λ) that makes the model ‘circular’; but whether growth is

‘cumulative’(i.e.departsfurtherandfurtherawayfromequilibrium)dependsonthebehaviourof

themodeloutofequilibrium.Tomakethemodeldynamic,andtoassesswhetheritisstableor

not,itissufficienttoputaone-periodtimelagintoanyoftheequations.DixonandIchosetoput

a one-period lag in the export growth equation giving xt = η(pdt-1 – pft-1) + ε(zt-1). Successive

9

substitutionasbeforegivesafirstorderdifferenceequation,ofwhichthegeneralsolutiontothe

homogenouspartis:

gt=A(-ϒηλ)t (9)

whereAistheinitialcondition.Whetherthemodelisstableornotoutofequilibriumdependson

the value of (-ϒηλ). If exports grow twice as fast as output, ϒ = 0.5. A typical value for the

Verdoorncoefficient (λ) is0.5. In this case thepriceelasticityofdemand forexports (η)would

have to exceedminus 4 for (-ϒηλ) >1, and for there to be ‘explosive’ growth. It is rare to find

aggregate price elasticities of demand for exports as high as that, but in any case we don’t

observe in practice regional growth rates diverging – only levels of per capita income. This

suggeststhatregionalgrowthratedifferencesthatareobservedareassociatedwithdifferences

inregions’equilibriumgrowthrateslargelydeterminedbydifferencesintheincomeelasticitiesof

demand forexports (ε) associatedwith regionaldifferences in thestructureofproductionand

trade:whetherregionsspecialiseinprimaryproductionormanufacturedgoodsandsophisticated

services.

In fact, if theVerdoorneffect is ignored,and it isassumed that regional competitiveness

staysconstant,equation(8)becomes:

`gt=ε(zt) (10)

Regionalgrowth isdeterminedbythegrowthof incomeoutsidetheregionandbythetypesof

goodsexportedreflectedintheincomeelasticityofdemandforexports.

It is a weakness of the original Kaldor model, however, that there is no balance of

paymentsconstraint.Inpractice,thegrowthrateinequation(10)maycauseimportgrowthtobe

faster than export growth which is unsustainable in the long run. A balance of payments

constraint is easily incorporated, however (see Thirlwall and Dixon, 1979). The export growth

equation(5)canbemodifiedtoincludetherateofchangeoftheexchangerate(e):

xt=η(pdt-pft-et)+ε(zt) (11)

Wecanthenaddanequationfortherateofgrowthofimports(m):

mt=ψ(pft-pdt+et)+π(gt) (12)

whereψ(<0) is thepriceelasticityofdemandfor importsandπ (>0) is the incomeelasticityof

demandforimports.

10

Settingequation(11)equalto(12),andsubstitutingequations(6)and(7)into(11)gives

thebalanceofpaymentsequilibriumgrowthrateof:

!! !!!!!! !!!!!∀!!!∀!!! !!!!

!!!! !!!!! (13)

IfthereisnoVerdoorneffect(λ=0),andrelativepricesmeasuredinacommoncurrencyremain

unchanged,equation(13)collapsesto:

gt=εzt/π (14)

Equation(14) is theclassiccentre-peripherymodelofPrebisch(1959)wherethegrowthofone

regionorcountryrelativetoothers(gt/zt)isequi-proportionaltotheratiooftheincomeelasticity

of demand for exports and imports (ε/π).Equation (14) can also be shown to be the dynamic

analogueofthestaticHarrodtrademultiplier,Y=X/m,whereY isthe levelofoutput ;X isthe

level of exports, and m is the marginal propensity to import (Harrod, 1933 ; Thirlwall, 1982).

Kaldor first revived theHarrod trademultiplier in a letter toThe Times newspaper 15thMarch

1977,andarguedthatitismoreimportantthanKeynes’sinvestmentmultiplierforunderstanding

the pace and rhythm of economic growth in an open economy (Kaldor, 1981). Or, to put it

anotherway,itismoredifficultforacountrytorectifyanimport-exportgapthanitistorectifya

savings-investmentgap.

Ofcourse,regionswithincountriesdon’texperienceclassicbalanceofpaymentsproblems

in thesense thatanexchangeratecomesunderpressure,but if importgrowthexceedsexport

growth and capital transfers (domestic and international) do not finance the difference, the

balanceofpaymentsconstraintwillshowupinslowgrowthandrisingunemployment.Regional

problems are balance of payments problems (Thirlwall, 1980) as we witness in the peripheral

countriesoftheEurozonetoday.Alargepartofthesovereigndebtandprivatebankingcrisis in

theEurozonestemsfromtheheavyborrowingbythedeficitcountriesofGreece,Spain,Portugal

andItalyfromthesurpluscountriesofGermany,theNetherlandsandAustria(seePriewe,2012).

Thefreemovementofcapitalfacilitatesthefinancingofdeficits,butexposescountriestoadverse

internalandexternalmacroeconomicshocksiftheflowsaredebt-creating.

AnAlternativeExplanationofKaldor’sFirstLawofGrowth

Fromthe twocanonicalmodelsofKaldoroutlinedabove, itmightbesaid that there isan

uneasyconnectionbetweentheclosedeconomymodelofgrowthratedifferencesbasedonthe

11

structure of production, and the open economy model in which export growth is the driving

force. There is anuneasy connection,but it is easy to see thatmanufacturingas theengineof

growthisalsoareducedformofexport-ledgrowthinwhichGDPgrowthisafunctionofexport

growth,butexportgrowthisafunctionofmanufacturingoutputgrowth.Inotherwords:

ggdp=a1+b1(x) (15)

x=a2+b2(gm) (16)

andsubstituting(16)into(15)gives:

ggdp=(a1+b1a2)+(b1b2)gm (17)

Kaldor’s first lawof growth is a reduced formof two structural equations anddependson the

elasticityofGDPgrowthwithrespect toexportgrowth (b1),andtheelasticityofexportgrowth

with respect to manufacturing output growth (b2). A colleague and I have tested these

relationships across a sample of 89 developing countries over the period 1990-2011 (Pacheco-

Lopez and Thirlwall, 2015).6 Figure 1 shows the relationship between GDP growth and

manufacturingoutputgrowth(Kaldor’sfirstlaw).

Figure1.AssociationbetweenGDPgrowthandmanufacturinggrowth,1990-2011

Theestimatedequationis(t-valuesinbrackets):

ggdp=2.16+0.43gm :r2=0.50

(9.07)(9.43)

6Thedatawasalsodisaggregatedbetweenlowincome,lower-middleincome,andupper-middleincome

countriesandalsobetweenthecontinentsofAfrica,AsiaandLatinAmerica,butonlytheaggregateresultsare

presentedhere.

-50

51

0

-5 0 5 10 15Manufacturing growth (%)

Fitted values gdp

GD

P g

row

th (

%)

12

Figure2showstherelationbetweenmanufacturingoutputgrowthandexportgrowth.

Figure2.Associationbetweenexportgrowthandmanufacturinggrowth,1990-2011

Theestimatedequationis:

x=3.59+0.75gm:r2=0.30

(5.7)(6.19)

Thestrongpositiverelationshouldoccasionnosurprise.Foranygivengrowthofworldincome,

the growth of exportswill depend on the structure of production and the income elasticity of

demand for different products. Export growth is endogenous in this sense and is likely to be

related to the growthofmanufacturing output since allmanufactures are potentially tradable.

Primary products are also potentially tradable, but they do not have the sameproduction and

demand characteristics. Their demandgrowth in international trade is low (Engel’s Law). Some

servicesaretradable,butmanyarenot,andtheirincomeelasticityinworldmarketsisnotlikely

tobeashighasformedium-andhigh-technologymanufacturedgoods.

-50

51

01

52

0

Expo

rt g

row

th (

%)

-5 0 5 10 15Manufacturing growth (%)

Fitted values x

13

Figure3showsthelinkbetweenexportgrowthandGDPgrowth.

Figure3.AssociationbetweenGDPgrowthandexportgrowth,1990-2011

Theestimatedequationbytwo-stageleastsquaresis:

ggdp=0.09+0.57x: r2=0.50

(0.21)(9.43)

TherearethreemajorreasonsforexpectingaprioriacloselinkbetweenexportgrowthandGDP

growth. First, there is the neoclassical supply-side argument which focuses on the static and

dynamic gains from trade and the externalities that the export sector can confer on the non-

exportsectorandtherestoftheeconomy(Feder,1983).Exportsalsoallowtheimportofinputs

andinvestmentgoodsthatmaybemoreproductivethandomesticresources,thusincreasingthe

supply capacity of the economy. Secondly, if domestic demand is constrainedby a shortageof

foreignexchange,fasterexportgrowthwillhelprelaxthatconstraint.Allcomponentsofdemand

have an import contentwhich need to be paid for, and only exports can do so. Exports are a

uniquecomponentofdemandinthatrespect(McCombie,1985).Thirdly,exportgrowthmayset-

offavirtuouscircleofgrowth,asoutlinedearlier.

Theresultsofthisresearchacrossawidesampleofdevelopingcountriessupportthework

of Hausmann, Hwang and Rodrik (2007) on ‘What You Export Matters’ which shows a close

associationbetweenwhattheycallEXPYandgrowthratedifferencesacrosscountries.EXPYisa

-50

51

0

GD

P g

row

th (

%)

-5 0 5 10 15 20Export growth (%)

Fitted values gdp

14

weighted average of what they call PRODY which measures the income level that each good

produced is associated with. If a low income country (like China) produces high-tech goods

associatedwithhighincomecountries, itwillhaveahighPRODYandahighEXPYandwillgrow

fast–asChinahasdone.WhatthiscloseassociationbetweenEXPYandGDPgrowthispickingup

isthehigherincomeelasticityofdemandforhightechnologymanufacturedgoods.

Conclusion

Kaldorwas one of themost original, inspiring and controversial economists of his

day;auniquefigureintwentiethcenturyeconomics.Hismanycontributionstoeconomic

theoryandappliedanalysiswillensurehisplaceinthehistoryofeconomicthought.Itis

perhapsamatterforregretthatheneverwroteagrandTreatiseinthetraditionofSmith,

Mill,Ricardo,MarxorMarshall.Thereasonhedidnotdosowasnotbecausehelacked

thevision, intellect,orabilitytowrite,butbecausehesuccumbedtothetemptationto

becomeinvolvedintoomanyprojectsatthesametime,andneverfoundthetimetosit

downforlongconcentratedperiodswhichsuchamagnumopusrequires.Myowndebt

tohimwillbehiscontributiontotheappliedeconomicsofgrowth,andhisstressonthe

importance of structure and demand in understanding the different levels of

development, and differences in the growth performance, of countries. His 1966

InauguralLecturestartedthebreakwithone-goodmodelsof theorthodoxneoclassical

mainstream,andnowoccupiescentre-stage inseriousdiscussionsofhowtoaccelerate

theprogressofdevelopingcountries(seeSzirmai,NaudeandAlcorta,2013).

15

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