A New Developmentalist model of structural change, economic growth and middle-income traps

• Published in: Structural change and economic dynamics Vol. 55; pp. 26 - 38
• Main Authors: Oreiro, José L., da Silva, Kalinka M., Dávila-Fernández, Marwil J.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.12.2020
• Subjects: Demand-led growth; Exchange rates; New developmentalism; Structural change; Exchange rates; Demand-led growth; O04; O14; New developmentalism; Structural change; O11
• ISSN: 0954-349X; 1873-6017
• DOI: 10.1016/j.strueco.2020.07.008

•We present a new developmentalist model of growth, structural change, and middle-income traps.•An innovative definition for the industrial equilibrium exchange rate is proposed based on the concept of technology gaps.•The discovery of natural resources and an external savings growth strategy may lead to an exchange rate overvaluation.•We show that the adoption of an inflation targeting regime is equivalent to growing with external savings.•The resulting equilibrium point will be Pareto-inferior to the developmentalist alternative. When a rapidly growing country stagnates at middle-income levels and fails to transition into a high-income economy, we say it has fallen into a middle-income trap. An original interpretation of the causes of this phenomenon was offered in recent years by the so-called Brazilian New Developmentalist School. It must be noted, however, that this approach lacks a coherent formalization of its main propositions. This article aims at filling this gap in the literature. We assess, analytically and through numerical simulations, whether the Dutch disease can be propelled by the discovery of natural resources and the adoption of an external savings growth strategy. In both cases, a class coalition between workers and rentiers leads to an overvaluation of the real exchange rate. As a consequence, inflation is kept under control while artificially increasing real wages and financial incomes. The model provides a bridge between classical development theory and demand-led growth theories, drawing on elements from both traditions.