North-South Relations
Trade Cycles ?

In the mid-1970s high prices of primary commodities were associated with a low rate of growth of advanced regions of the world (the 'North'). In the early 1980s low prices of primary commodities have been associated with a low rate of growth of the less-developed regions (the 'South'). Does the first event lead to the second, or vice versa? Or is there an equilibrium growth process in which the North and South grow in step? What might determine such an equilibrium growth rate - the availability of primary commodities?

CEPR Research Fellow David Vines uses a formal model in Discussion Paper No. 26 to suggest answers to these questions. The world is divided into two regions: the more developed 'North', which produces capital goods (machines), and the less developed 'South', which produces consumption goods (primary products, such as food). Like other recent North-South models it focuses on the complementarity of Northern output (capital goods) and Southern output (consumption goods) and identifies the North-South terms of trade as a mechanism linking the growth rates of the two regions. Vines attempts to incorporate into his model ideas on these issues to be found in earlier writings of Lord Kaldor.

Vines's model suggests that in the long run, world growth is constrained by the availability of natural resources and land and by technical progress in their use. In this it differs from the recent North-South analyses put forward by Findlay and Taylor. These authors locate the ultimate determinants of world growth respectively in Northern labour force growth and in Northern investment dynamism.

Vines also argues that the terms-of-trade linkage between North and South is a loose one. As a result, in response to events like the energy crisis or agricultural crop failure, the North- South terms of trade may exhibit exaggerated 'overshooting' behaviour, moving towards a new equilibrium, but then beyond it. Furthermore, a cyclical process of adjustment may occur in which there is under-investment followed by over-investment in both the South and the North.

These results, Vines argues, formalize Kaldor's conjectures that the terms-of-trade linkage operates slowly and wastefully and tends to set up perverse and unnecessary cycles in world economic activity.

A North-South Growth Model Along Kaldorian Lines
David Vines

Discussion Paper No. 26, August 1984 (IT)