New Structuralism and the Balance-of-Payments Constraint

Structuralists and Post-Keynesians share the perspective that in the long run economic growth is shaped by the income elasticity of exports and imports, and that such elasticities are a positive function of the degree of diversification and technological intensity of the pattern of specialization. Since the mid-seventies, New Structuralists began to stress the role of two set of variables in driving the pattern of specialization: a stable and competitive real exchange rate, and the relative intensity of innovation / diffusion of technology in center and periphery. In this paper we modify the Balance-of-Payments constrained growth model to include these two set of variables. The model provides a mechanism that ensures the validity of the original Thirlwall’s perspective, namely that adjustment to the Balance-of-Payments-constrained equilibrium takes place through changes in the rate of growth of aggregate demand rather than through changes in relative prices. In addition, it shows that a macroeconomic policy aimed at sustaining a competitive real exchange rate is a necessary complement to an active industrial policy for fostering international convergence.