FIXED FACTORS, TERMS OF TRADE AND GROWTH IN UNBALANCED PRODUCTIVE STRUCTURES

PANIGO, DEMIAN TUPAC; MEDICI, FLORENCIA

Conferencia; 12th International Post Keynesian Conference; 2014

The main aim of our proposal is to analyze theoretically and empirically the relationship between the foreign asset formation and the terms of trade (TOT) in countries characterized by having unbalanced productive structures. For this purpose, we will discuss the structuralist thesis about the positive effects of a rise in the TOT from a balance-of-payment constrained growth model. According to most structuralist authors (e.g. Prebisch, 1959; Diaz-Alejandro, 1968; Diamand 1972, 1973; Canitrot, 1975; Krugman & Taylor, 1978), an unbalanced productive structure can be defined by the existence of two sectors. On the one hand, a primary exporter one, highly productive, which generates foreign currency but almost no employment (and intensively uses fixed production factors). And on the other hand, an industrial one, labor intensive but significantly less competitive, that produces for the internal market. In this context, we put forward the idea that the preponderance of fixed factors of production in export sectors, which are -without public intervention- more profitable than industrial sectors, causes a lower rate of investment and a higher propensity for foreign currency purchase. Hence, our general hypothesis is that, paradoxically, an improvement in the TOT may have little or no effects -and even negative consequences- on relaxing the external constraint. In the theoretical analysis, we will follow the Thirlwall's Law (Thirlwall, 1979) and its modifications. These extensions highlight some omitted effects in the original law: capital flows (Thirlwall & Hussain, 1982); external indebtedness; interests payment abroad (McCombie & Thirlwall, 1997; Dutt, 2001; Barbosa-Filho, 2001; Moreno-Brid, 2003, 1999); and a larger income-elasticity of demand for food in developing peripheral countries (Chena, 2008 ; Harrod, 1973). However, none of these improvements have taken into account the "TOT paradox" associated with a fixed-factor-intensive export sector. Therefore, our main theoretical contribution to the already modified Thirlwall's Law will be to explain and formalize the low, null or even negative effects of the TOT on the Balance of Payment due to the quasi-rent generated in the export sector of an unbalanced productive economy. In addition, to reinforce this idea, we will econometrically show the existence of a significant and positive relationship between the TOT and the private foreign currency purchases in developing countries.