Economic Growth

5 Economic Growth and the Balance-ofPayments Constraint

Dr John McCombie Director Cambridge Centre for Economic and Public Policy University of Cambridge



Approaches to economic growth
Two paradigms • The neoclassical supply-oriented approach, based on the production function and full employment

• The Keynesian demand-oriented balance-of payments-constrained growth. Output may be less than full employment

The Growth Rates of Countries are Interlinked
• The growth rates of even the advanced countries are inextricably linked – indeed the large OECD simulation macroeconomic model is known as the LINK model

• The beggar-my-neighbour policies of the advanced countries in the 1930s. “Exporting unemployment” by tariffs and quotas.
• Rapid post-war growth led by first the US and then Germany as the engine of growth. Rapid reduction of tariffs under GATT. It was the growth of world demand that became crucial for the Golden Age. • UK stop-go policies 1950-1973 associated with balance-ofpayments crisis. As output grows, so the current account deteriorates as imports increase rapidly, and exports grow at a constant rate determined by world demand.


But did not the floating exchange rates essentially delink the economies of the world?
• In the current crisis, attention is still focused on the degree to which the US and China can lead the world out of recession.

• Cannot understand the growth of the middle income countries without reference to the balance of payments and international crises. The “lost decade of growth” in Latin American associated with balance-ofpayments crisis and collapse of the currency. Mexico, Brazil and Russia • The 1997 Asian Crisis; Globalisation has exacerbated the situation. Excessive borrowing; rapid turnaround from capital inflows to outflows, collapse of the currency; internal liquidity crisis as the repayments of debt in terms of the domestic currency rocketed.

The Ineffectiveness...