International Competition, Income Distribution, and North-South Uneven Development under the Balance of Payments Constraint

This study builds a North-South trade and growth model, and investigates the effect of a change in each country's income distribution on both countries' economic growth. The North is assumed to be a demand-led Kalecki-type economy in which the markup pricing rule and the principle of effective demand prevail, while the South is a supply-led Lewis-type economy in which surplus labor prevails and hence, the real wage is fixed. Moreover, it is assumed that the markup rate of North firms is influenced by international competition. The following four main results are obtained. First, in the short-run equilibrium, an increase in the distributive shift parameter of the North increases (decreases) the economic growth rate of the North if the North exhibits profit-led (wage-led) growth. Such an increase in the distributive shift parameter of the North also necessarily decreases the economic growth rate of the South. Second, in the short-run equilibrium, an increase in the profit share of the South decreases (increases) the economic growth rate of the North if the North exhibits profit-led (wage-led) growth. Such an increase in the profit share of the South can either increase or decrease the economic growth rate of the South. Third, in the long-run equilibrium, an increase in the distributive shift parameter of the North decreases (increases) the economic growth rates of the North and the South if the North exhibits wage-led (profit-led) growth in the short-run equilibrium. Fourth, in the long-run equilibrium, an increase in the profit share of the South increases (decreases) the economic growth rates of the North and the South if the North exhibits wage-led (profit-led) growth in the short-run equilibrium