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Working Paper No. 316

Harrod versus Thirlwall: A Reassessment of Export-Led Growth by Jamee K. Moudud Faculty member, Department of Economics, Sarah Lawrence College, and Research Associate, The Jerome Levy Economics Institute of Bard College, jmoudud@mail.slc.edu 2000
I would like to thank Anwar Shaikh and John Sarich for their many helpful and critical comments.

INTRODUCTION Globaleconomic integration and the gradual dismantling of barriers to trade and capital mobility have raised important questions in several circles about macroeconomic policy. These questions about the role of economic policy in this period of global laissez faire are of special relevance now given the contemporary worldwide economic stagnation and mass unemployment. Persistent trade imbalances in manycountries have added a certain measure of urgency to these discussions, not only because of the question of the stability of foreign debt/GDP ratio but also because these imbalances have direct and indirect impacts on domestic interest rates, investment, output, and employment. The economic crisis that has ravaged East Asia in recent years highlights the gravity of these issues. The significance ofglobal laissez faire can not only be discerned in academic conferences (Eatwell, 1995) and in the concerns of the labor movement, but also in discussions amongst certain sections of the business class which, whatever their motivations, are beginning to voice their own concerns about the impact of globalization.( 1 ) The critical problems that plague many countries in the contemporary world economyare mass unemployment, economic stagnation, and large trade deficits. The orthodox policy prescriptions that are used to rectify these problems have as their basis the open economy extension of the ISLM model (the Mundell-Fleming model) or the monetary approach to the balance of payments (Dernberg, 1989). These models make the usual neoclassical assumptions with regard to the law of comparativeadvantage, the exogeneity of money, and full employment although the Mundell-Fleming model does allow for short-run unemployment. On the whole, the orthodox perspective holds that the removal of market "rigidities" and imperfections, along with contractionary fiscal and monetary policies and exchange rate devaluations would bring about appropriate price movements that would raise the long-run growthrate, restore full employment, and correct all trade imbalances.( 2 ) In the heterodox literature, open economy models in the Keynes/Kalecki tradition have provided the most significant alternative to those of the neoclassical tradition. The key feature of these models is the assumption that unemployment and excess capacity are structural features of the capitalist economy. Thus, in contrast toneoclassical models, exogenous demand growth from exports plays a central role in the accumulation process. Pioneering work on export-led growth was done by Beckerman (1962) and Lamfalussy (1963).( 3 ) Thirlwall's famous model (Thirlwall, 1979; Thirlwall and McCombie, 1997) is the contemporary extension of the earlier work in this tradition. In fact, the so-called Thirlwall's law is the model ofexport-led growth that is used the most widely in the heterodox literature; in some sense, it has become the workhorse of heterodox analyses of open economy macrodynamics. This paper seeks to investigate the effects of foreign trade within a new context. It has its roots in the dynamic perspectives of Quesnay and Marx which in the modern times was revived by Harrod in his seminal work on growth andcycles (Eltis, 1998). Its central purpose is to demonstrate that an endogenous growth and cycles model which is in this classical-Harrodian tradition offers a number of insights which show the importance of both demand- and supply-side factors. ( 4 ) The first part of the paper analyzes Thirlwall's model. It is followed by a discussion of Harrod's approach to open economy macrodynamics, drawing...
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