A new developmentalist model of structural change, economic growth and middle-income trap

By Jose Luis Oreiro, Kalinka Martins da Silva

PKES Working Paper 1920

October 2019

Despite the growing literature on new developmentalism published in the last 5 years, which includes a textbook published in 2015, up to now the ideas of the Brazilian New Developmentalist School were no longer presented in terms of a coherent formal growth model. The main objective of the present article is precisely to fulfill this gap, presenting a formal model of structural change and economic growth according to the New Developmentalism theoretical propositions. The model to be presented here is, in a large sense, a synthesis between ideas presented by the Classical Development Theory and Post Keynesian Theory of Demand Led-Growth and can be used to explain the Middle-Income Trap (MIT), in which many developing countries seems to be stuck. According to Glawe and Wagner (2016) a MIT usually refers to countries that have experienced rapid growth and thus quickly reached middle-income status, but then failed to overcome that income range to further catch up to the developed countries. That was precisely the case of middle-income Latin American countries such as Brazil and Argentine. New developmentalism asserts that a MIT can occur in countries where Dutch disease suddenly appears due to the discovery of natural resources (for example, new petroleum reserves in Brazil after 2006) or ceased to be neutralized and/or the adoption of an external savings growth strategy. In both cases, real exchange rate overvaluation is the ultimate consequence of a class coalition between workers and the rentier class that favors exchange rate appreciation due to its positive effects over inflation and real wages, on one hand; and financial income, on the other (Bresser-Pereira, 2015).

Keywords: New Developmentalism, Demand-Led Growth, Structural Change and Real Exchange Rate

JEL classification: O11 O14 O40