Export Surplus & the Complementarities among Countries: A Note.

AuthorPadhi, Satya Prasad


The Keynesian literature would accept that the historical long run productivity growth would be demand constrained, and depends on export growth, without indicating the need of exports surpluses per se (Patnaik, 1972). The long run relationship between exports and productivity growth however has to depend on foreign growth; if the relationship is consistent with trade balances, and is true of all major trading partners, there is support for each other's long run export-led growth processes. This could explain why the existing Keynesian literature zeros in on the balance of payments constrained growth (BPCG) model (1)--the dynamic version of the Harrod foreign trade multiplier (Thirlwall, 1979; 2011; McCombie & Thirlwall, 2004; Blecker, 2013). It has strong empirical support (assuming away the role of foreign capital flows, for the sake of a simplified argument); output growth (and productivity growth) of each participating country equals the foreign growth multiplied by the ratio of exports to imports income elasticities of demand. Kaldor (1970; 1981) in fact argues that the model captures the essence of Keynesian dynamics dealing with cumulative causation processes that emphasize the demand side role of exports. This understanding then makes clear the willingness to participate in international trade is guided not by static gains, as would be suggested by the neo classical trade theories, but by the imperative to actualize better supply responses (i.e. management of productivity growth).

There is, however, the criticism by Palumbo (2009; 2015) that Kaldor should not have relied on the model if his intention (as his late writings suggest) is to draw attention to the fact that economic activities are demand-constrained. This criticism tries to show that the model undermines the otherwise more realistic Keynesian insights. It notes that the model, viewed as the 'dynamized' versions of the simplified short run Harrod foreign trade multiplier, does not assign a Keynesian demand side role of exports. This is when in every short run the required automatic short run trade balance in such models is specific to the strict equality between savings and investment; if so, the model assumes away any Keynesian short run over-savings situations, and the possible demand side role of exports to correct them. For example, it can be that the realization of full employment output requires imports and the need of exports (and trade balance) is to meet the foreign exchange requirement (2). Second, this criticism (Palumbo, 2009: 356-60) also suggests that the dynamized version depends necessarily on the acceleration principle that translates into a residual demand hypothesis i.e. investment demand exceeds the increase in savings. This then takes the domestic demand growth--and the demand-led growth of productivity--for granted; if so, there is also no demand side role of exports in the long run, say to actualize productivity growth. The criticism goes on to suggest that the growth process underlying the BPCG model refers to a particular version of Kaldorian cumulative causation process in which the limits to growth come from supply constraints and the role of exports is to remove such constraints. (Palumbo also notes that in any case the growth possibility depends on a naive acceleration principle, based on the simple multiplier-based output determination.)

The short run context and the dynamics that follow from it have to be given up. If one were to reject a simplified dynamic version of static Harrod foreign trade multiplier per se (i.e. the short run static one), is there an alternative explanation of the growth facts? Will it then underline Keynes' insights, though translated in a long term view? It should be noted, at the outset, if Keynes's basic insight pertains to the role of new investment opportunities in an income determination process, Kaldor's focus was more on what explains higher pace of investment as such, which should be forming the basis of his technological progress function (Kaldor, 1957). It is true, as noted by Palumbo, Kaldor in various writings gave various unsatisfactory formulations of the basic naive acceleration principle; however, his elaboration of Young (1928) is different. According to Young, initiation of better supply response creates external economies, which indicates further generation of generalized (macro) supply responses that are more productive; here, Kaldor (1972), rightly pointed out that the supply responses, in each instance, has to be viewed as finance-led new investment opportunities, and if so, they would induce the growth of aggregate demand (in the Keynesian fashion), which is necessary to actualize the responses. At the same time, he neglected the issue of external economies that pace the growth of investment, and define the induced growth of demand. He somehow formulated a thesis in which the causation runs from growth of demand to better supply responses. In its naive form, it is nothing but dynamizing Keynes' income determination scheme the naive acceleration principle that does not inform on what guides the pace of investment. The purpose of the present paper is to correct this interpretation of Young, and focus more on external economies that guide the pace and induce "potential" magnified increase in aggregate income (and productivity growth).

There is no doubt that better supply responses, as a macro phenomenon, have to be actualized by the support of growth of demand. A better formulation could be: supply responses that are associated with such macro demand conditions matter. For instance, the pace of better macro supply responses, in a cumulative way, is such that each response targets larger markets (and such market-led profits), and could be dependent on exports. That is, if initiation of such productive supply response would target capturing of domestic market, the macro aspect of it would be demand constrained by the initial "low" size of domestic market, and exports market removes the constraint. Once exports permit the realization of better supply response, it can create the Youngian external economies and the scope of further better supply responses, to be actualized by further exports, and so on; there is this demand side role of exports (Padhi, 2015).

One basic criticism could be that this reinterpretation would give importance to short run exports surplus; and, (if so) it can be argued that the main obstacle for the intended Keynesian story is that such short run demand side role of export that takes into account short run trade imbalances may not be consistent with the long run empirical prediction of the BPCG model. For example, even if a broad Keynesian mode of thinking (Luxemburg, 1964; Kalecki, 1971) would readily consent to the demand side role of the initial export surpluses for the realization of higher profits (underlying better supply response), their role in conferring any long run advantages on any country would also be dismissed straight away. Such development of international trade implies putting one's trading partner (and one's long run exports prospects) in a disadvantageous position (Robinson, 1958; Bhaduri, 1986: chapter 5). In fact, if the initial exports (and export surpluses), as in the modified version of Young discussed below, arise from the country's superior position with respect to absolute cost advantages, they result in a feedback effect in terms of further costs (and trade advantages), and would be responsible for long run trade imbalances. (3)

Here, the present paper maintains that the above concern is much misplaced; the underlying tone is also static. The post Keynes perspective generally challenges the orthodox neo classical view that exports surplus-led increases in money translates into higher prices without any real impact. At the same time, the alternative macro real impact perspective should not be limited only to the demand side role of exports surplus in the income determination process. The static implications would take place, but the consequences should not be "dynamized". The role of export surpluses in generating Youngian increasing returns, and its implications should not be undermined.

To elaborate, in the context of the modified Youngian-Kaldorian perspective, the short run exports surpluses actualize new better supply response (with higher profits and savings), which supports Youngian external economies-led further supply responses that are more productive. If supply responses are seen as investment guided by prospective profits, there is a Youngian acceleration principle, as an alternative to the naive acceleration principle. Then, the demand side role of exports surplus is its role in enabling the initiation of external economies-based productivity growth, which results in a magnified increase in overall growth. It embodies two important consequences. One, export surplus and profits permit the growth of finance, and finance-led investment, which can reduce the dependence on exports (per se). It is also quite possible (see below) that such overall growth can generate the need of, or need to support of, imports, which, in turn, sustains it. For instance, the imports can remove the supply constraints to achieve the induced overall growth. This can, in principle, permit the innovating country's trading partners to avail the opportunity of participation in such export surplus-led growth processes. This possibility calls for an inquiry into the conditions under which all countries take advantage of such short run export surplus-led growth processes that in turn would highlight the possibility of increasing returns on the international stage i.e. exports led increasing returns-led cumulative growth processes in one economy is consistent with such possibilities in others. Allowing the fact...

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