TY - JOUR
AU - Mallick, Sushanta, K.
AB - This volume is a collection of essays developing growth theory from the demand‐side instead of the conventional supply‐determined growth paradigm. Besides general discussions of the role of demand in the long run, the contributions fall in the Kaldorian and Kaleckian traditions, with a section on the relationship between structural change and demand‐led growth. The supply‐side neo‐classical propositions that demand has only a transitory impact on the utilisation of resources and that the development of these resources (and hence potential output) over time is independent of demand are mere abstractions that have been well challenged by Setterfield in the introduction. If the goal of growth theory is to show the mechanism of growth taking note of the demand side, then the neo‐classical growth theory (so‐called endogenous growth with technological progress augmented by human capital) falls short. Two questions follow from this: (i) without effective demand how does one talk of actual growth, since the upper limit to potential growth can keep changing in line with demand growth; (ii) is it sensible to talk about ‘endogenous’ growth while leaving demand side out of the picture? In other words, the expansion of productive capacity cannot take place without a prior expectation of an appropriate demand growth. Part 1 of the book focuses on the fundamental issues in the theory of demand‐led growth, with Palley providing a framework for the relation between growth theory and macroeconomics by distinguishing between potential and actual output. The labour augmenting technical progress in Romer‐Lucas’ new endogenous growth theory introduces a range of mechanisms, especially knowledge and human capital formation, while the British variant (Kaldor‐Mirrlees‐Scott) of endogenous growth emphasises investment in physical capital, which is influenced by a range of policies. Demand conditions however ultimately determine the level of investment spending. This, in turn, affects the rate of technical progress and thereby output growth, which then feeds back on demand growth and so on. In the short run, there will be disequilibrium depending on the extent of excess capacity, but in the long run, both demand and supply would grow together with demand being the leading factor in deciding potential output. Besides, technological change is also demand‐determined – which was first recognised by Kaldor in 1957 in his technological progress function – making the natural rate of growth endogenous. Halevi and Taouil make a crucial distinction between output being determined by productive capacity and investment spending, linking the level of investment tied to uncertain expectations, while Atesoglu finds one cointegrated equation explaining output, being dependent on investment, government spending, exports and the money supply. The empirical exercise does not seem very satisfactory in its treatment of investment as an exogenous factor, given the previous analysis that investment spending is influenced via different policies and uncertain expectations. In reality, GDP growth is largely demand‐constrained and it is effective demand that helps determine the rate of capacity utilisation (or output gap). For example, the output collapse during the Asian financial crisis of 1997–8 was mostly due to the demand shock resulting from the loss of consumer and business confidence. Consequently imposing tight fiscal policies and raising interest rates at this time were inappropriate. Part 2 of the book discusses Kaldorian models of demand‐led growth. Setterfield and Cornwall identify three macroeconomic regimes, namely demand, productivity, and institutional regimes within which different growth episodes, i.e. the golden age (1945–73), the age of decline (post‐1973), and a neo‐liberal growth episode in the 1990s, are analysed. They conclude that institutional differences explain the generalised slowdown in output and productivity growth since 1973. McCombie and Roberts attempt to assess the role of the balance of payments in economic growth, in contrast to neo‐classical growth theory where there is virtually no mention of international trade or the growth of exports, except discussions on technological externalities or spillovers. They suggest that ‘explanations of long run growth that ignore the role of demand and economic openness are likely to be incomplete’. Palley in Chapter 7 also presents a short treatment of how supply growth adjusts to the growth of demand (emanating from the mechanism of import demand) to restore current account balance. The East Asian miracle from 1965–96, which was based on an export‐led mechanism, does help explain the importance of exports in the growth process, but we cannot expect the world as a whole to follow export‐led growth as a key development strategy. It can be important only in the context of small open economies as they lack enough local demand. Domestic demand growth should therefore be the core focus of a growth paradigm, since export‐dependent economies can be more vulnerable to external shocks. At the same time, with rapid domestic expansion the challenge would be to ensure a steady growth in exports in line with import growth. Part 3 looks at Kaleckian models of demand‐led growth whether growth should be wage or profit‐led. Although there is no simple answer, Blecker provides conditions under which demand‐driven economies are more likely to be wage‐led or profit‐led within a neo‐Kaleckian framework. Mott points out two key longer‐run factors – mark‐up and productive capacity – that affect short‐run conditions influencing income distribution between wages and profits, and thereby output, employment and the efficacy of policy actions, while Lavoie and Cassetti discuss the interaction between the conflict theory of inflation and the Kaleckian growth model. A crucial feature of the Kaleckian model is its investment function, in which the desired rate of capital accumulation is a linear function of the expected rate of profit and of capacity utilisation. Setterfield in part 4 uses traverse analysis to reinterpret and extend Kaldor's cumulative growth schema, while the final section discusses the ways in which the demand growth is endogenous where supply and demand do not seek an equilibrium, but rather induce feedback effects on each other, resulting in perpetual change. The bottom line is that the current neglect of the role of demand in analyses of long‐run growth is unwarranted. As the ‘Washington Consensus’ ideology has failed in guiding development policy and boosting growth, there is a need for a new model of development along the lines argued by different authors in this book. Although the focus of this volume is more on capitalistic economic systems, the idea of demand‐led growth holds true even in emerging‐market and developing economies. © Royal Economic Society 2003
TI - The Economics of Demand‐led Growth: Challenging the Supply‐side Vision of the long run
JF - The Economic Journal
DO - 10.1046/j.0013-0133.2003.172_12.x
DA - 2003-11-01
UR - https://www.deepdyve.com/lp/oxford-university-press/the-economics-of-demand-led-growth-challenging-the-supply-side-vision-3SCBLcZV2K
SP - F674
VL - 113
IS - 491
DP - DeepDyve
ER -