Fixed Factors, Terms of Trade and Growth in Unbalanced Productive Structures

MEDICI, FLORENCIA; PANIGO, DEMIAN TUPAC

Kansas City

Conferencia; 12th International Post Keynesian Conference; 2014

Levy Economics Institute of Bard College, University of Missouri?Kansas City and Journal of Post Keynesian Economics

The aim of this paper is to theoretically and empirically analyze the relation between foreign asset formation (FAF) and terms of trade (TOT) in countries characterized by having unbalanced productive structures. For this purpose, we will discuss and modify the structuralist thesis about the (overstated) positive effects of a rise in TOT on the balance-of-payment equilibrium GDP growth rate. In this context, we put forward the idea that the preponderance of quasi-fixed factors of production in export sectors, which -without public intervention- are much more profitable than industrial sectors, causes a lower rate of investment and a higher propensity to capital outflows. Hence, our general hypothesis is that, paradoxically, an improvement in the TOT may have little or no significant effects on relaxing the external constraint. In the theoretical analysis, we will follow Thirlwall?s Law (Thirlwall, 1979) and its subsequent modifications. Our main contribution will be to explain and formalize therein the low ?and even null- effects of TOT on Balance of Payment (BOP) constraints due to the quasi-rent generated in the export sector of an unbalanced productive economy. In the empirical section, to reinforce this idea, we will econometrically show the existence of a significant and positive relationship between TOT and private foreign currency purchases in developing countries.