Inequality, Growth and ’hot’ Money

224 Pages·2016·3.557 MB·English

by  Pablo G Bortz

Inequality, Growth and ‘Hot’ Money
Pablo G. Bortz - 9781784715007
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NEW DIRECTIONS IN POST-KEYNESIAN ECONOMICS
Series Editors: Louis-Philippe Rochon, Laurentian University, Sudbury, Canada
and Sergio Rossi, University of Fribourg, Switzerland
Post-Keynesian economics is a school of thought inspired by the work of John
Maynard Keynes, but also by Michal Kalecki, Joan Robinson, Nicholas Kaldor
and other Cambridge economists, for whom money and effective demand are
essential to explain economic activity. The aim of this series is to present original
research work (single or co-authored volumes as well as edited books) that
advances Post-Keynesian economics at both theoretical and policy-oriented levels.
Areas of research include, but are not limited to, monetary and financial
economics, macro and microeconomics, international economics, development
economics, economic policy, political economy, analyses of income distribution
and financial crises, and the history of economic thought.
Titles in the series include:
Post Keynesian Theory and Policy
A Realistic Analysis of the Market Oriented Capitalist Economy
Paul Davidson
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Inequality, Growth
and ‘Hot’ Money
Pablo G. Bortz
University of San Martin, Argentina
NEW DIRECTIONS IN POST-KEYNESIAN ECONOMICS
Cheltenham, UK • Northampton, MA, USA
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© Pablo G. Bortz 2016
All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system or transmitted in any form or by any means, electronic,
mechanical or photocopying, recording, or otherwise without the prior
permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2015957869
This book is available electronically in the
Economics subject collection
DOI 10.4337/9781784715014
ISBN 978 1 78471 500 7 (cased)
ISBN 978 1 78471 501 4 (eBook)
Typeset by Servis Filmsetting Ltd, Stockport, Cheshire
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1
0
Contents
List of tables vi
Foreword Servaas Storm vii
Preface ix
1. Introduction 1
2. Growth and distribution: the last 300 years 16
3. Growth and distribution: the Kaleckian perspective 31
4. An integration of the real and the monetary economy 74
5. Financial flows, distribution and capital controls 129
6. Epilogue: challenges and possibilities 172
References 176
Name index 207
Subject index 212
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Tables
1.1 Real GDP average growth rates 4
3.1 Paradox of costs and paradox of thrift 32
3.2 Notation 33
3.3 Conceptual summary 38
3.4 List of equations of the Onaran and Stockhammer
(2004, 2006) model 53
3.5 Survey of empirical applications of the Kaleckian growth
model 55
3.6 Results of the consumption function estimation 62
3.7 Results of the investment function estimation 63
3.8 Results of the trade balance function estimation 1950–1981 65
3.9 Results of the trade balance function estimation 1950–1976 65
3.10 Results of the trade balance function estimation 1982–2006 66
3.11 Results of the SVAR estimation 68
3.12 Hypotheses tests 71
4.1 Balance sheets 85
4.2a Transaction matrix USA 87
4.2b Transaction matrix Argentina 89
4.3 Summary of shock responses 115
5.1 Balance sheet 138
5.2 Transaction matrix 139
5.3 Vector Error Correction Model in Mexico 154
5.4 Vector Error Correction Model in South Korea 157
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Foreword
The mainstream of the economics profession was caught unprepared and
unaware when the Great Financial Crisis struck in 2008 and has been
left clueless in the face of the subsequent secular stagnation until today.
Mainstream economics is in an existential crisis – even if most economists
are still in a state of denial. Willem Buiter was only more explicit than most
when he wrote (in the Financial Times, 3 March 2009) that mainstream
thinking ‘tended to be motivated by the internal logic, intellectual sunk
capital and esthetic puzzles of established research programmes rather
than by a powerful desire to understand how the economy works – let
alone how the economy works during times of stress and financial insta-
bility’. Luckily, a few determined economists, going against the powerful
mainstream current, have never given up their desire to understand how
the economy works – and continued building an ‘economics for the real
world’. This volume on Inequality, Growth and ‘Hot’ Money, written by
Argentinean macroeconomist Pablo Bortz, must be counted as a new – and
impressive – contribution to this vibrant school of real world economics,
as it combines rigorous macroeconomic and econometric modelling and
informed theoretical understanding to shed new light on economic growth,
income distribution, foreign debt, financial stability and crisis. Its main
source of inspiration is Michał Kalecki’s (wage- led or profit- led) model of
economic growth. This framework is skilfully applied to the Argentinean
open economy (1950–2006), and the econometric findings reveal that
Argentina is not a profit-l ed economy; hence, macro policies which help
restore profitability (by wage share repression) must fail in bringing
about economic growth. But this book offers much more: it develops the
Kaleckian model in two further directions to make it even more relevant
to the real world.
The first development embeds Kalecki’s macro model in a comprehen-
sive (‘no- black- holes’) two- country Stock-Flow Consistent (SFC) growth
model in the best tradition of Wynne Godley and Marc Lavoie. Dynamic
simulations using the complex SFC model bring out the overwhelming
importance of financial flows and stocks in determining the exchange
rate, the current account deficit and real economic growth. This explains
why cutting wage costs to improve export price competitiveness may not
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viii Inequality, growth and ‘hot’ money
improve the balance of payments, and why one must not blame the fiscal
deficit for causing a current account deficit. EU policymakers dealing with
Greece and Spain should take these important lessons to heart and stop
insisting on ‘internal devaluation’ and ‘fiscal austerity’ as solutions to the
Eurozone crisis!
The second extension is the introduction in the Kaleckian model of
private foreign indebtedness (as an endogenous variable). Private capital
flows to firms and households in the emerging and developing economies
(EDEs) have surged in the 2000s and even more so after the crisis of 2008.
These inflows, often very short term, have been fuelling domestic credit
expansion and asset price inflation, raising financial fragilities and making
these EDEs vulnerable to a sudden stop or reversal of these capital inflows.
This is exactly the issue explored in Chapter 5, which not only presents an
innovative Kaleckian model featuring private foreign debts (denominated
in foreign currency), but also empirically applies it to South Korea and
Mexico – two emblematic (but structurally different) EDEs which expe-
rienced large private foreign capital inflows, followed by a sudden stop
and reversal. The analytical and econometric findings underscore the need
for capital controls – and as this book uncovers, this is the exact view put
forward by Keynes, who argued that ‘[i]n my view, the whole management
of the domestic economy depends upon being free to have the appropriate
rate of interest without reference to the rates prevailing elsewhere in the
world. Capital control is a corollary of this’ (CW, Vol. XXV, pp. 148–9).
Willem Buiter is certainly right in dumping mainstream economics
(for being ‘useless’), but the present volume shows him evidently wrong
when he concludes that in its place, we have only ‘an intellectual pot-
pourri of factoids, partial theories, empirical regularities without firm
theoretical foundations, hunches, intuitions and half- developed insights’
(Financial Times, 3 March 2009, http://blogs.ft.com/maverecon/2009/03/
the- unfortunate- uselessness- of- most- state- of- the- art- academic- monetary-
economics/#axzz3yT0PEBbJ). Building on the work of Keynes and
Kalecki, Pablo Bortz’s book is testimony to the fact that we do have a theo-
retically consistent, viable and empirically grounded framework for macro
and monetary policymaking. There is an alternative: do read this book.
Servaas Storm
Delft University of Technology, the Netherlands
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Preface
The writing of this book at the suggestion of Servaas Storm and the
prompt response of Louis- Philippe Rochon coincided with many changes
in my life. I changed my country of residence three times; changed jobs
three times; moved back and forth; almost lost my work due to my compu-
ter crashing; spoke Dutch, Spanish, English and French at different times;
and progressed with the book.
Looking back, even though it was a short span of time, it was very
profitable for me as an economist and for the material that I included in
the book. Important articles and books appeared in between; the global
economy changed in ways remarkably germane to the argument of this
book (notably, the fall in commodity prices and the reversal of financial
flows in emerging countries); and I got the chance to refine and develop
the message, economic implications and policy aspects of the theoretical
contributions included here. Alan Sturmer gave a first round of criticisms
on the initial draft of the manuscript.
The main influence in the process has undoubtedly been Servaas Storm.
With his relentless encouragement, he motivated me to finish the book
even amidst several changes and developments that happened in between.
He provided comments, suggestions and criticisms on several chapters, and
inspired me to strengthen and remove many of the weaknesses in my ideas.
Without him, this book would not have seen the light of day.
I profited from discussions and debates with many people, some
of which I met at the different workplaces that I had in 2014 and
2015. Notably, the people at the Centre for International Economy and
UNCTAD’s Division of Globalization and Development Strategies were
subjected to endless talks around the topics tackled here. I want to thank
in particular Gabriel Michelena (who patiently read previous versions
of Chapter 4), Alex Izurieta, Alfredo Calcagno, Joerg Mayer (who read
Chapter 5) and Edgardo Torija- Zane, who wonderfully played devil’s
advocate in questioning my ideas and forcing my to clarify, contextualize
and revise my arguments. I would also like to take the opportunity to thank
Sebastian Gechert, Thomas Theobald and Sebastián Valdecantos.
Other sources of encouragement in this tough process have been
Demián Dalle, Adriana Diaz Arias, Alfred Kleinknecht, Gustavo Murga,
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x Inequality, growth and ‘hot’ money
Alexa Obando, Manuela Robba and Marianela Sarabia. The editors at
Edward Elgar Publishing corrected a good number of mistakes and typos.
But most of all, I want to thank my family, without whom none of this
would have been possible.
Buenos Aires
September 2015
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