The paper develops a model that privileges exports as the key element of demand; not only do exports permit the exploitation of scale economies by enlarging the size of the market served by domestic producers but also lead to the effective use of the relatively abundant factor, i e, labour. The development literature has further emphasised the fact that exports are instrumental in inducing investment because of the incentive they provide to introduce new techniques through additions to the capital stock. The model introduces somewhat different export and investment equations in an otherwise traditional Keynesian model. Exports lead to investment and investment, in turn, leads to higher capacity utilisation and further investment, which stimulates growth. However, the commodity composition of a developing economy’s exports implies that exports are a function of the real exchange rate. An increase in the real exchange rate (depreciation), while stimulating exports and thus growth, however, leads to an erosion of the real wage share because of a price rise through imports. The steady state can be interpreted as a balance of these two forces – an exchange rate depreciation leads to growth through an increase in exports but simultaneously causes a cutback in government expenditure to maintain a floor wage share, impeding the growth process.

RAJIV JHA

I

If public investment does not enjoy a “relative autonomy” and a structural demand constraint inheres in developing economies because of low per capita incomes, then the sustained expansion of private industrial investment must be anchored in some “exogenous” sources of demand [Kalecki 1954]: it is the contention of this paper that this pivotal autonomous impulse is provided by exports. We suggest an alternative model that steers clear of state investment as the instrument of autonomous investment; exports, by enlarging the size of the market, provide an inducement to invest, identical in impact to that provided by public investment.

This is followed by Section IV that delineates the impact of the changes in the parameters of the system on the steady state values of endogenous variables; Section V contextualises the model and draws the strands of the argument together in a conclusion.

The two critical variables, which determine the rate of growth of the economy in steady state, are exports and investment. Export behaviour, in our model, is specified by the following equation: Xt = Xt–1 [1 + y0 + k (It–1/Kt–1) + h (et – et–1) + δet] …(1)

The rate of growth of exports, [(Xt/Xt–1) – 1], can be conceptualised as depending upon three sets of factors: price factors – both the change in, and level of, the exchange rate (et) have a positive impact on exports (h and δare both non-negative); y0, the expected rate of growth of world demand, while exogenous to the domestic economy, is the income factor determining the rate of growth of exports; finally, augmenting the capital stock (It–1/Kt–1), through capital stock revamping or otherwise, increases the competitiveness of the economy (k ≥0) and helps the country grab a larger share of a given world demand. This factor comes into effect with a one period lag. It is important to clarify why the coefficient of y0 is 1: suppose that neither the exchange rate nor additions to the capital stock have any impact on the rate of growth of exports (h = δ= 0 and k = 0), then the rate of growth of exports would simply be equal to the (exogenous) expected rate of growth of world demand.

The exchange rate (‘e’) is defined as the domestic price of foreign currency; further, domestic and foreign price levels are normalised to unity and hence ‘e’ refers to the real exchange rate. Thus, a depreciation of the domestic currency in this period vis-à-vis the last period increases this period’s (period ‘t’) value of exports but not its steady state value (h ≥0); the level of the exchange rate, on the other hand, does have an impact on the steady state value of exports. The impact of the exchange rate on exports is a version of Joan Robinson’s “beggar my neighbour” policy: it can be visualised as a “switching effect” – given stagnant world demand, lower international prices of the underdeveloped domestic economy’s products lead to a switch from the exports of other underdeveloped economies. Even if there were to be no relative depreciation in time, the level (and the rate of growth) of exports would still depend upon the level of the exchange rate.

Exports, in our model, thus explicitly depend upon the exchange rate. Two clarifications, both concerning the exchange rate, must be made at this juncture. Following Prebisch, export elasticity pessimism (in terms of primary commodities) has been a significant element in the development literature of the post-war period. The global export surge from the mid-1960s to the mid-1980s, spearheaded by the east Asian economies, has questioned the validity of Prebisch’s conjecture. Further, the export basket of developing economies has undergone a dramatic transformation: the share of manufactures has surged from 28 per cent of merchandise exports in 1980 to 66 per cent in 2000. The exchange rate is an important determinant of export demand for “light” manufactured goods: this proposition has been corroborated most recently by the flood of Chinese exports.

The other clarification is regarding the “real wage resistance” to nominal depreciation – to neutralise the increase in prices, which follows a nominal depreciation, trade unions in developed economies bargain for, and obtain, higher nominal wages. This “inflationary feedback” undermines the impact on exports of a nominal depreciation. Unlike developed economies, there exists a large reservoir of non-unionised surplus labour in underdeveloped economies, which is always vulnerable to its real wages being squeezed.1 The electoral process channels their collective voice to the state and we attempt to model state behaviour as reconciling two contradictory ends – growth and distribution [see equation (3)].

Finally, how does investment in a given period get linked to exports in the next period? If the exchange rate were to remain constant and there were to be no growth in world demand, the country could still increase its exports by grabbing a larger share of the given world demand through capital stock revamping (It–1/Kt–1) in the previous period.

The critical insight which the model offers is that the inducement to invest (and capital stock revamping) is greater when production is geared towards exports rather than the domestic market – this idea is embedded in an otherwise standard Keynesian model. It is captured in the model as the additional positive impact (d > 0) that the time invariant rate of growth of world demand (y0) has on planned investment. Investment in the economy is specified by the following equation: It+1/Kt+1 = aIt/Kt + b (ut – u0) + d.y0 …(2)

Here I is the level of gross investment, K is the capital stock already installed (0 < a <1), u is the rate of capacity utilisation and u0 is the desired (time independent) rate of capacity utilisation. The change in the level of planned investment as a proportion of the capital stock [I t +1/K t+1] is posited as varying positively with the deviation between the actual and the desired rate of capacity utilisation (b ≥0) in the previous period – investment is Harrodian in character rather than accelerator determined. The additional positive impact that the expected rate of growth of world demand (assumed to be independent of time in our model) has on the level of planned investment is captured by the term d.y0. Investment behaviour has a simple dynamic interpretation: capacity is created in any period if the rate of capacity utilisation is greater than the rate of desired capacity utilisation in the previous period (b ≥0); further, even if the actual and the desired rates are equal, there would still be some investment because of the rate of growth of world demand. The growth of world demand, in our model, is an independent determinant of investment – it plays the same role as innovation does in Kalecki’s and Goodwin’s models of growth: in an oligopolistic milieu, capitalists attempt to steal a march over their rivals by catering to the expected growth of world demand through investment. This element of investment does not depend upon changes in capacity utilisation.

Gt+1/Kt+1= – λ [(It/Kt ) – (It–1/Kt–1)] – η.(et – e0 ) …(3)

Government expenditure (G), in this model, responds implicitly to the level of output and inflation in the economy. The state (the terms state and government are being used synonymously) seeks to maintain a particular level of real activity through (Keynesian) counter-cyclical investment. Its attempts to stabilise the economy at a high level of output in a counter-cyclical manner – if private investment as a proportion of capital stock falls in the previous period, the government increases its own expenditure as a proportion of the capital stock (λ≥0).

Further, the state seeks to protect the real wages of the workers from the impact of “imported” inflation by cutting back on its own expenditure. This fact is embedded in a minimalist distributional assumption: in any given period, contingent upon the

Economic and Political Weekly March 4, 2006 level of the exchange rate vis-à-vis the target exchange rate (e0), the state safeguards the real wage share of the workers by reducing its own expenditure (η≥0).

The inverse relation between the real exchange rate and wage share can be easily demonstrated. Let price formation in the economy be represented by [wl + (e.p1.m)].(1+μ) = P. The symbols represent the following: ‘w’ is the nominal wage rate, ‘l’ represents the labour requirement per unit of output, ‘m’ represents the physical imports per unit of output produced by the domestic developing economy(it is a given), (p1.m) represents the number of Dollars the domestic developing economy needs per unit of domestic production, ‘e’ is the exchange rate or the domestic price of foreign exchange and thus (e.p1 .m) is the domestic currency price of imports per unit of domestic production. ‘P’ is the domestic price and μis the mark-up over prime cost per unit of output. Domestic price is simply a mark-up over two elements of cost – domestic labour cost and the cost of imported raw materials per unit of output. Dividing through by P, we obtain [ω+ (e.p1.m/P)] = [1/(1+μ)], where ωis the wage share in national income. This can be alternatively stated as ω= {[1/(1+μ)] – m.e} if domestic and foreign prices are normalised to 1. Thus ω, the wage share, is inversely related to e.

The state, in any given period, reacts to the exchange rate of that period as well as the change in the rate of private investment in the previous period. In steady state, the capitalists, workers and the rest of the world make claims on each unit of output produced by the economy. If the capitalists’ share cannot be squeezed and the rest of the world stakes its claim through the terms of trade or the exchange rate, the state protects a floor real wage share of the workers by cutting back on its own expenditure should the exchange rate exceed the desired exchange rate.

There remains the specification of the adjustment process for the real exchange rate. In a given period, a possible positive or negative balance of trade would lead to some change in the real exchange rate. We assume that the government operates with a figurative ceiling of the trade deficit to output ratio (α): international lenders are chary of lending to the domestic economy if the trade deficit to output ratio exceeds α. Thus, whenever the ratio exceeds the target level α, the government engineers a rise in the real exchange rate (i e, a depreciation). The exact modus operandi need not be made explicit for our purposes.2

The adjustment process set out in equation (4) would be meaningful only if we assume an increase in the real exchange rate leads to a fall in the ratio of trade deficit to output. et+1– et = θ.{[(et Mt – Xt)/Yt] – α} …(4)

We assume θ> 0. Mt represents the physical imports in any given period; et Mt is the value of imports in the domestic currency (‘e’ has been defined already as the number of units of the domestic currency needed to buy a unit of the foreign currency). It is clear that foreign financers would not be willing to finance a perpetual balance of trade deficit – in the very long run, unlike our model, the current account would have to be in balance.

We need a few more equations to complete the model. Consumption (C) may be postulated as being proportional to the level of output (Y). Ct = cYt …(5)

The level of imports (M) is postulated to be an increasing function of domestic output. Import behaviour could be represented by equation (6) as follows: Mt = mYt …(6)

The propensity to import (m) is postulated not to depend upon the exchange rate because of two reasons: there exists a technological floor to the level of imported inputs required per unit of output of the domestic underdeveloped economy; further, as international demonstration effects are strong, the consumption of capitalists is independent of the exchange rate (‘m’ represents the physical imports per unit of output; p*m is the foreign currency value of imports per unit of domestic output and p* is normalised to 1).

long run (steady state) rate of growth does not make economic sense: we shall, therefore, assume that z [which is defined as (d.y0 – b.u0)] is positive.

The Exchange Rate in Steady State

The rate of investment, the rate of growth of exports and the rate of growth of output are all equal to the rate of growth i*, i e, in steady state,) (I/K)* = (

XX

From the export equation (1), i*.(1–k) = y0 + δe* Hence, e* = [i*.(1–k)/δ]– (y0/δ) …(11) If the value of i* were known, e* can be determined as a function of the parameters of the system.

(G/K)* in Steady State

From equation (3), in steady state: g* = η (e0 – e*)

We know that η .e0 is a constant. Denoting it by ‘v’, the above equation can be rewritten as g* = v– η e* where v = η e0 …(12)

From the Income Expenditure Equilibrium

From equation (9), in steady state: Y/K = C/K + I/K + G/K + X/K – e M/K Using (4), (5) and (6), we obtain,

(Y/K) (1–c + α) = I/K + G/K because [(e*.M – X)/Y] = α in steady state. From (7) and the above equation, βu* (1–c + α) = i* + g* where i* = (I/K)* and g* = (G/K)*

Substituting for g* from (12) and e* from (11), we obtain δβu* (1–c + α ) = δi*–ηi*(1–k) + δv + ηy0 Or {δAu*/[δ – η (1–k)]} – {(δv + ηy0)/[δ – η (1–k)]} = i* Let A= β.(1–c + α) and B = [δ – η (1–k)]. Then, i* = (δAu*/B) – [(δv + ηy0)/B] …(13)

(13) and (10) together determine the values of i* and u* simultaneously (as functions of the parameters of the system).

X/K in Steady State

From equation (9): [(e*.M – X)/Y] = α e*.m – (X/Y) = α e*m – [x*/βu*] = α e*mβu* – αβu*=x* where x*=X/K in steady state …(16)

If the values of u* and e* are known, the value of x* can be calculated. From (11), we know that e* is a function of the rate of growth. In the next step, we calculate the values of i* and u* as a function of the parameters of the system. Thus, the value of x* would also be known.

Stability and the Steady State Values of i and u

Equation (10), the investment equation in steady state and equation (13), the reduced form of the income expenditure equation in steady state, represent two equations in the two primary endogenous ratios of the system, i* and u*. In Figure 1, which is drawn in the (u, i) plane, we graph the two equations: the II schedule represents the investment equation, derived from (10), and the YY schedule is the reduced form of national income equilibrium condition, derived from (13). We would like to stress that both YY and II are steady state schedules. Solving (10) and

(13) simultaneously, we obtain the steady state values of i*(the rate of growth) and u* (the rate of capacity utilisation): i* = fδAz/[b(δA–f.B)] + f[(δv + ηy0)/(δA– f.B) …(14) u* = [z.f.b + b.(δv + ηy0)]/[δA – f.B] …(15)

The two schedules II and YY are depicted through a diagram in Figure 1 – their point of intersection defines the steady state values of u* and i*. The II schedule intersects the i axis in the positive quadrant: i equals (fz/b) when capacity utilisation is zero. Analogously, the YY schedule cuts the i axis in the negative quadrant: i equals

– {(δA + ηy0)/[δ – η.(1-k)]} when u is equal to zero. For (u*, i*) to represent a stable steady state, the necessary and sufficient condition is that the YY schedule is steeper than

the II schedule – this entails that (δ.A)/B > f or δ.A > f.B. The latter is tantamount to assuming δβ (s + α) > f.[δ – η.(1–k)].

(iii) As stated earlier, a necessary and sufficient condition for stability is δ.A > f.B or equivalently δβ (s + α) > f.[δ–η.(1 – k)]. The inequality holds if δβ (s+α)> f.δ or β (s + α) > f (where ‘s’ is the average/marginal propensity to save).

Multiplying both sides by Δu, we obtain β (s + α). Δu > f.Δu. This condition can be restated as follows: for a unit increase in capacity utilisation, the increase in savings is greater than the increase in investment. This is a fairly standard assumption for stability in a whole family of macrodynamic models4 (including, for instance, Kaldor’s (1940) model of the business cycle).

The key endogenous ratios of the system are i, u, g, e and x while the primary parameters are y0, k, α, m and e0. We confine our comparative dynamics to the impact of changes in the parameters of the system on our key endogenous ratio – the steady state rate of growth. All our comparative dynamic exercises involve the expression δ.A – f.B in the denominator: the stability condition δ.A > f.B helps us focus our attention on the sign of the numerator.

Impact of a Change in y0

∂ i*/∂y0 = {fδAd/[b(δA– f.B)]} + {f.η/(δA – f.B)}

In the last section, we stated that a necessary and sufficient condition for stability is δA > f.B. Assuming that this condition holds, an increase in the rate of growth of world demand shall lead to an increase in the steady state rate of growth. This is depicted in Figure 2 below: P is the initial steady state; as a result of an exogenous increase in world demand, the economy reaches a new steady state Q where both capacity utilisation and the rate of growth settle at higher levels.

Economic and Political Weekly March 4, 2006

Figure 1: The Steady State Levels of Growthand Capacity Utilisation

i

I

Y I X Y u

Impact of a Change in k

∂i*/∂k=(∂i*/∂B).(∂B/∂k)={[fδAz+fb(δA+ηy0)].[–f.η]}/(δA–f.B)

The numerator is negative and the denominator is positive. An increase in the “efficiency” of investment (k) in this model leads to “overinvestment”, a fall in capacity utilisation and thus a decline in the steady state rate of growth.

∂i*/∂e0 = (∂i*/∂a).(∂a/∂e0) = (fδη)/(δA– f.B). If the government’s target exchange rate is pushed up, it implies that the government’s concern for maintaining a particular wage share no longer has the force it had. It is willing to sacrifice equity for growth.

∂i*/∂α = (∂i*/∂A).(∂A/∂α) = – bδβ[f2Bz + fδAz + bf (δv + ηy0)/[b(δA – f.B)]2

As the willingness to lend increases, so do imports. This leads to a consequent fall in capacity utilisation and thus growth.

From (iv), we know that (∂i*/∂α) is negative; from (16), we know that (∂α/∂m) is e. The product of the two is negative (i e ∂i*/∂m is negative). Thus, an increase in the marginal propensity to import would lead to a lower steady state rate of growth. This can be easily explained – an increase in the marginal propensity to import reduces capacity utilisation, leading to a lower steady state rate of growth.

Five features of the model need reiteration – first, even in the steady state, the economy may not achieve the desired rate of capacity utilisation. Unlike short-run Keynesian models wherein the demand constraint manifests itself through actual capacity utilisation being less than the desired capacity utilisation (ut < u0) and long-run models in which the actual and the desired rates of capacity utilisation are equal in steady state (u* = u0), capacity

Figure 2 : Impact of an Increase in the Rate of Growth of World Demand

Y i

Y Y1Y1 u P Q

I1

I1

I

utilisation in our open economy may well exceed (or be less than) the desired rate of capacity utilisation in the steady state.

Second, our model is a balance of payments constrained model and not a savings constrained model – the foreign exchange constraint restricts imports. It is clear from equation (1) that an increase in investment would increase exports in the next period; the consequent increase in the rate of capacity utilisation would provide a further stimulus to investment in the following period [from equation (2)]. This self-propelling growth path faces a barrier only because the foreign exchange earnings through exports (and loans) may not suffice to maintain the import requirements of the economy. In other words, there is an accounting constraint: in any given period, the value of imports must be less than or equal to the value of exports and the capital available through foreign lenders.This can be stated explicitly as et.m.Yt – Xt = α Yt or et..m – (xt /βut) = α. Now, if the numerator of the second term on the left hand side increases more than the denominator, then for the equation to hold in any given period, etmust increase, i e, the domestic currency must depreciate. The impact of currency depreciation on state expenditure is spelt out next.

The state, in our model, is concerned with both growth and its distributional consequences. In fact, the steady state can be seen as a balance of two forces – an exchange rate depreciation leads to growth through an increase in exports but simultaneously causes a cut back in government expenditure to maintain a floor

Table: Exports, Investment and Incremental Capital Output Ratios

Country 1960-1973 1973-1983 1983-1997 I/Y ICOR GVX I/Y ICOR GVX I/Y ICOR GVX (Per Cent) (Per Cent) (Per Cent)

India 19.6 5.67 2.33* 21.74 5.41 4.98 22.72 4.07 9.57 China 21.24 2.68 0.79 32.66 5.03 12.81 36.75 3.9 12.64 Taiwan 22.1** NA NA 29.32 3.69 NA 22.65 3.11 NA S Korea 16.47 1.93 26.3 27.03 4.03 13.9 33.55 4.23 11.27 Malaysia 20.31 3.17 5.58 28.94 4.06 7.56 35.3 4.67 12.79 Indonesia 9.17 1.86 5.82 20.75 2.95 1.21 28.31 3.94 8.04 Thailand 27.55 3.54 9.9 31.21 4.58 9.12 35.99 4.2 14.36

Notes: * The figures for India are between 1965 and 1973.** For Taiwan , the first figure is that of the gross saving rate (at currentprices) from the Taiwan Statistical Data Book.

Source: World Development Indicators,1999 and Asian DevelopmentBank,1999 as quoted in Tendulkar (2003, pp 176, 177 and 178). I/Y is the per annum average of investment/GDP ratio at constantprices (local currency units). The incremental capital output ratio(ICOR) has been calculated implicitly (given the rate of growth). GVXdenotes the annual average rate of growth of a country’s exports atconstant $ US 1995.

Economic and Political Weekly March 4, 2006

wage share, impeding the growth process. An increase in external demand, engineered through a depreciation, has an enervating impact on domestic demand and the steady state can be interpreted as a balance of the two.

The option of continuous depreciation is ruled out because the state finds its hands tied in its attempt to reconcile two somewhat contradictory policy goals. In any given period, it must calibrate its expenditure to compensate for any slack in private investment; on the other hand, to retain its electoral base, it must cut back on its spending if an export enhancing exchange rate simultaneously leads to the wage share being eroded. As the state cuts back on its expenditure, capacity utilisation would fall. In all other situations, state policy would be limited to attempts at manipulating the parameters of the model such as k (cajoling capitalists to invest in capital equipment of recent vintage), m (a kind of import substitution), α (attempts to increase the confidence that lenders have in the economy) and y0 (attempts to negotiate more open international markets, given a particular expected rate of growth of world demand).

Fourth, the real exchange rate is an important determinant of exports: this distinguishes our model from two classes of models: post-war models which emphasised price inelastic export demand and the broad genre of balance of payments constrained growth models popularised by Thirlwall. Empirical evidence from east Asia and China buttresses our assumption: in the entire spectrum of manufactures in which developing countries have traditionally enjoyed a comparative advantage (such as cotton textiles and garments), prices have been the determining element of export demand. Within developed economies, where trade occurs in differentiated, technologically sophisticated goods, the “balance of payments constrained growth rate” may well be inversely related to the income elasticity of import demand and depend directly upon the income elasticity of exports and not depend upon the real exchange rate [for a balance of payments constrained model which builds upon this basic insight of Harrod, see Thirlwall and Hussain 1982]. In a developing economy, on the other hand, a depreciation of the domestic currency certainly would enhance the level of exports and hence the rate of capacity utilisation and growth.

Fifth, and this may appear foolhardy to many, the model excludes globalisation of finance as a fundamental feature of the global economy today. This is not because we do not recognise that unhindered financial flows undermine the scope of state intervention [Patnaik 1999; Patnaik and Rawal 2005; Bhaduri 2004]. However, the experience of both the east and south-east Asian economies sustains our belief that large labour surplus economies like India too need to experiment with exports as the basis of both rapid accumulation as well as labour absorption in capital light industries. What really distinguishes the “successful” east, and south-east Asian economies from India is the higher rates of investment they enjoyed; the efficiency of their investment, measured through the incremental capital output ratio was not very different from India [Tendulkar and Sen 2003]. The table corroborates this fact.

We would still like to accord exports a privileged status in inducing investment. Though not explicitly demonstrated in our model, exports (as opposed to agriculture or public expenditure) are instrumental in causing a revamping of the capital stock. The initial export thrust of a developing economy occurs in commodities in which she enjoys a comparative advantage due to low labour costs; later, the modernisation of the capital stock occurs because of exports and it facilitates a climb up the ladder of comparative advantage by moving into both scale intensive and differentiated products.

rnr

Email: rajivjha_8@hotmail.com

[Though he does not agree with the basic thrust of the paper, the present structureand form of the model owes much to Prabhat Patnaik. K L Krishna has been painstakingly meticulous in commenting on various drafts of the paper in theface of my obduracy. Amit Bhaduri and V N Pandit offered useful suggestions.Without implicating them, I would also like to express my gratitude to AmalSanyal, C Saratchand and Avinash Jha in writing the paper.]

1 Ashok Mitra had made this prescient observation as early as 1989, “thevast majority (of the poor in India)…have no real defence against thelowering of their level of living which each depreciation of the rupeebrings about”.

2 Though the entire model is based on the presumption that capital flowsare accommodating, an upper limit to accommodating capital flows certainlyexists. Our formulation seeks to capture this constraint in a particularlysimple fashion. A high and rising trade deficit will lead via a number ofroutes to some variant of self-fulfilling crises.

3 We characterise a closed planned economy through two features – it doesnot participate in foreign trade and secondly, the planners ensure that actualand desired capacity utilisation rates are always equal to each other. Weknow that in the one sector Harrod Domar model of the closed economy,the rate of growth is equal to (s/σ) where ‘s’ is the average/marginalpropensity to save and ‘σ’ is the incremental/average capital output ratio.In a closed planned economy, with actual and desired capacity utilisationrates always equal, the rate of growth (of capital stock) can be shown tobe equal to sβu0. For the open economy, we can use (5), (6) and (9) toderive the following expression for capacity utilisation and growth in anygiven period: βut.(1 – c + m.et) = it + xt + gt The rate of growth (of capital stock) in our open economy, in any given period, is thus equal to it= βut.(1– c + m.et)– gt– xt . It should be apparent thatin our model, a sufficient condition for the rate of growth (in any givenperiod) to be equal to sβut is xt = 0 = gt = m. If we assume that a market economy is normally demand-constrained, then it may be contended thatthe current period rate of growth (of capital stock) sβu0 in a planned closedeconomy is always greater than our open economy because u0 is alwaysgreater than ut. This conclusion is unwarranted: it has been demonstrated that the current period rate of growth (of capital stock) in our open economymodel varies depending, inter alia, upon the current period values of et, ut, gt and xt: a priori, this could well be greater than (or less than) sβu0. It is only under the assumption that xt = 0 = gt = m that the current periodrate of growth in our open economy is equal to sβut: in that case, however, the model ceases to remain an open economy model.

4 Kaldor’s (1940) model of the business cycle can be briefly summarisedas follows: X = α [I(Y, K) – S (Y, K)]; α > 0; (∂I/∂y) > 0 and (∂S/∂y) > 0; (∂I/∂K) < 0 and (∂S/∂K) < 0. KX = I(Y, K) The condition for the stability of the equilibrium was (∂I/∂K) < (∂S/∂K). Similar conditions have been derived for the stability of dynamicmultipliers.

Bhaduri, Amit (2004): ‘The Dynamics of Balance of Payments under CapitalFlows’ in Aditya Bhattacharjea and Sugata Marjit (eds), Globalisation and the Developing Economies, Manohar.

Dumenil, G and D Levy (1999): ‘Being Keynesian in the Short Run andClassical in the Long Run’, The Manchester School, Vol 67 (6).

Gandolfo, G (1997): Economic Dynamics, Springer Verlag.

Kaldor, N (1940): ‘A Model of the Trade Cycle’, Economic Journal, March.

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London. Lewis, W A (1954): ‘Economic Development with Unlimited Supplies of

Mitra, A (1989): ‘Calcutta Diary’, Economic and Political Weekly, June 24.

Nurkse, R (1953): Problems of Capital Formation in UnderdevelopedEconomies, Basil Blackwell.

Patnaik, P (1999): ‘Capitalism in Asia at the end of the Millennium’,Monthly Review, July/August.

Patnaik, P and V Rawal (2005): ‘Level of Activity in an Economy with FreeCapital Mobility’, Economic and Political Weekly, April 2-8.

Tendulkar, S and B Sen (2003): ‘Markets and Long-Term Economic Growthin South Asia (1950-1997)’ in Isher Ahluwalia and John Williamson (eds),The South Asian Experience with Growth, Oxford, Delhi.

Thirlwall, A and M Hussain (1982): ‘The Balance of Payments Constraint,Capital Flows and Growth Rate Differences between DevelopingCountries’, Oxford Economic Papers, November.

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