some implications of stable structural disequilibrium ... · the inclusion of a time exponent...

Some Implications of Stable Structural Disequilibrium: Cyclical Growth, Suppressed Inflation,Dynamic Inefficiency, and the Pattern of Comparative Advantage in a CPEAuthor(s): Ventsislav AntonovReviewed work(s):Source: Soviet and Eastern European Foreign Trade, Vol. 27, No. 4 (Winter, 1991/1992), pp. 55-70Published by: M.E. Sharpe, Inc.Stable URL: http://www.jstor.org/stable/27749267 .Accessed: 10/05/2012 10:05

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Ventsislav Antonov

Some Implications of Stable Structural

Disequilibrium

Cyclical Growth, Suppressed Inflation, Dynamic Inefficiency, and the Pattern of Comparative Advantage in a CPE

1. Introduction

It is perhaps commonplace to start with the obvious proposition that underlying the stylized facts of the socialist economy is the stable reproduction of shortage, or, to put it differendy, of structural disequilibrium There is indeed a long tradition of implicit theorizing about the socialist economy in "disequ?ibrhim" terms. Notwithstanding the fundamental novelty of the "tectological" dynamic equilibrium approach, pioneered by a.a. Bogdanov (1921) and pursued by L.N. Kritsman (1921) and more rigorously by g.a. Feldman (1928), dynamic?i.e., disequilibrium?economics became something of an underground economics. The recognition that socialist economics is essentially the economics of shortage (Komai 1980) did much to undermine this "underground" status of disequilib rium phenomena, yet it added but a few quantitative concepts to support its

largely qualitative propositions. This is now a highly inconvenient state of af

fairs, as emphasized by an alternative "disequilibrium" school (Portes 1981 and

1989), and attempts to remedy the situation should, no doubt, be welcomed. This paper presents my personal view of what the meaning and implications

of structural disequilibrium in a socialist economy are. There is obviously an immediate link between die vision of die socialist economy as it stands today and the vision of what it may become in the years to come. The removal of the

ideological burden from the economics profession in the CPE (Centrally Planned

Economy) countries has made us all, I believe, a little more pragmatic. Now econometric pragmatism means simple (though not oveisimplistic) models, crude

estimates, and, unfortunately, some hand-waving in between. I therefore confess

Ventsislav Antonov is affiliated with the Institute for Macroeconomic Analyses and

Forecasting, Higher Institute of Economics, Sofia, Bulgaria.

55

56 SOVIET AND EASTERN EUROPEAN FOREIGN TRADE

at the very outset that the work reported here is not exempt from all these sins

and, what is perhaps least to my credit, that most of it was committed in cold blood and clear reason.

One might call what follows "Variations on a Theme by Michael Bruno Some

Twenty-five Years Later." Indeed, it was not until 1988 that I came across an Econometrica summary of a 1963 M. Bruno paper read at the Copenhagen meeting of the Econometric Society that same year, in which he extended the famous K. Arrow, H. Chenery, B. Minhas, R. Solow (1961) approach by setting up an empirically testable model that produced an explicit measure of the dis

placement from equihbrium. While Bruno's formulation of the Constant marginal Share or CMS production function was prompted by an investigation of aggregate time series relating to Israel's manufacturing sector and an attempt to rationalize the evidence on factor productivity and factor shares, it is certainly not limited to time series applications alone. In fact, I will argue that the most appealing feature of the Bruno approach?the explicit measurement of structural disequilibrium? ties in better with cross-section analysis.

An unfortunate feature of the original Bruno formulation (Bruno 1968) was the inclusion of a time exponent intended to reflect the contribution of exogenous technical progress or, to put it more bluntly, of the Residual Factor that plagued all early production functions applications. Now there is an impossibility theorem due to P. Diamond and D. McFadden (1965) that rules out the identification of the elasticity of substitution and biases of technical change from smooth time series data. The addition of an explicit "disequilibrium" term to be identified could only make things worse. Indeed, the parameter of exogenous technical

change, together with the "disequilibrium" one, amounts to just the same thing as technical bias, and hence the impossibility theorem applies. Insofar as technical

change is represented by a shift of isoquants in factor space, the CMS approach actually reinforces the Diamond-McFadden result. One has to eliminate the pos sibility of technical change, i.e., study the macrotechnology at a fixed point in

time, to be able to identify the presence of technical bias. But then, what makes for the technical bias comes from die underlying pattern of structural disequilibrium and the corresponding curvature of production isoquants in factor space.

2. The definition and measurement of macroeconomic structural disequilibrium

I will start with the natural distinction between "external" and "internal" disequilibria, the latter being an inherent feature of the existing economic structure while the former come more or less in the form of "shocks" to that very structure. This distinction obviously owes much to the famous Frisch (1933) distinction between the "impulse problem" and the "propagation problem" in dynamic economics and serves no other useful purpose than to delineate the scope and the nature of a

major problem, which is faced by socialist economics nowadays and which has

WINTER 1991-92 57

to be dealt with in some practical way. Insofar as the "internal*' disequilibria stem from the existing economic structure, they are, so to speak, "generic" to the

socialist economy and are not removed by slight perturbations of die parameters

characterizing this structure. "External" disequilibria superimpose on the pattern of

the internal ones in a way that is, by and large, predetermined by this pattern and

hence they play the part of "shocks" or perturbations in this context

The focus of my paper is on "internal" or structural disequilibria, and I will

attempt to present a simple characterization of die type of structural disequilibrium that is generic to the socialist economy. Although all the empirical work that

prompted my interest in "disequilibrium" economics relates to the performance of the Bulgarian economy, I think it provides some general insights into the operation of the socialist economy and thus may prove relevant for other countries as well.

From the point of view of general equihbrium theory (GET), a necessary condition for both product and factor market clearing is the proportionality of marginal factor

productivity and factor rentals. The lack of such proportionality indicates factor market distortions and?via the price system?produces corresponding commodity market distortions that show up as persistent excess demand or shortage. There are

various approaches to the definition and measurement of shortage in a CPE, some of which are competing (e.g., Portes [1981] vs. Kornai [1982]). My feeling is that with all this variety at hand, whichsharply contrasts with the lack of appropriate statistical data in CPEs, the CMS or Bruno (1968) approach to the measurement of structural

disequilibrium has been somehow neglected. Let us start with an empirically testable hypothesis that links the wage rate to

labor productivity in a linear fashion:

(1) Y/L =

cw+d,

where 7, L, and w stand for value added, marihours effectively worked, and the wage rate respectively. Since we are dealing with cross-section analysis, all values correspond to die same time interval and characterize different statistical units such as firms' aggregates or entire industries. We then assume the existence of an implicit production function across all these industries that generates the unobservable relationship between die marginal productivity of labor and the

wage rate:

(2) dY/dL =pw + q.

The p,q parameters that enter the above equation are defined via the two

parameters of the implicit production function thus:

(3) p -

(1 - a)c, q

- (1

- a) d - am , for a (0,1) and me R.

Upon integration of the resulting differential equation while holding a and m

constant, the implicit "disequilibrium" production function obtains in die form:


(4) Y(K,L) -

C(K) Ll~a - ml,

where K stands for the "physical" capital stock. Using the standard change of variables for linearly homogeneous functions y

- Y/L, x - K/L and setting C(K)

=

AKa for AS 1, one arrives at the simplest cross-section Bruno function of the fotm:

(5) y - x" - m, for m R and a (0,1).

The "disequihTsrium" parameter that enters (5) in a very natural sense "measures" the distance of the economy from the perfect GET equilibrium in that it accounts for the divergence of the "true" production function from the equilibrium Cobb

Douglas one. That a unitary value of the elasticity of substitution underlies the

perfect equilibrium case is a valid proposition both theoretically (by the definition of the elasticity of substitution) and empirically (Antonov 1986). It is straightfor

ward to show that the CMS function produces the following variable elasticity of substitution:

(6) a=l--^-|m*|, 1 - a

where m* = m/y stays in the unit interval for m<y. Now, for generically

positive values of the "disequilibrium" parameter m in (5) the true elasticity of substitution will be less than unity, while for generically negative values of m it will exceed one.

The importance of the elasticity of substitution thus comes from the fact that the curvature of die production isoquants in factor space varies with die underlying distribution of factor input and output ratios and hence with the corresponding pattern of structural disequilibria in the economy. There is ample evidence that both the distribution of firms across an industry and that of industries across the

economy by a large array of efficiency parameters is highly irregular (e.g., K. Iwai 1984). What the definition of structural disequilibrium along the cross section Bruno approach implies is that the disequilibrium parameter "measures" the deviation of the distribution of outputs (say, of value added) from the under

lying distribution of inputs. It is all too obvious that there is a certain amount of technical bias involved in any such distribution and that, consequently, some

(unknown) portion of the estimated elasticity of substitution incorporates that bias. The basic point of the CMS approach, as I grasp it, is that the structural

disequilibrium concept allows for the explicit inclusion of technical bias in the estimation of the elasticity of substitution and thus squarely faces the problem posed by die Diamond-McFadden result (1965).

Using data for value added, the capital stock, manhours worked, and the wage rate per manhour effectively worked across the industries of any actual economy, the estimation of equations (1) and (5), together with the transformation (3),

WINTER 1991-92 59

yields all the building blocks necessary to study the implications of structural

disea^ihbrhim It goes without saying that, from die econometric point of view, this may be a formidable exercise in die case of a CPE. By "gluing" the esti

mates of the m-parameter in (5) one gets an approximation to what is supposed to be the smooth time series of structural disequilibrium. Since the factor elastici ties for the CMS function are of the form:

(7) tu -

l-a(l+m*), tiA: =

a(l+m*)

it follows that factor contributions to growth are a function of die "disequilib rium" term, which itself varies with time. Thus die cross specification of the CMS functional form allows us to test the hypothesis advanced by Kornai (1982, 1983) that there is some constant level of shortage in a CPE that is cyclically reproduced.

3. The socialist growth cycle

Looking at (5) from a time perspective and assuming constant technology (i.e., a=

const) or, what is empirically more plausible, a stationary time series for a(f) with zero mean, normally distributed disturbances, it is simple to show that with a

time-dependent, variable "disequilibrium" term, the growth rate of an actual

economy with "generically" negative m-values allows for die following decomposi tion:

I - m* 1 - m*

where G = dy/y, Gx = dx/x and Gl =

dL/L. The "overfull employment" situation

typical of a CPE corresponds to the Gl = 0 case, hence (8) simplifies to:

G = aGx +

1 - m*

Now, let us suppose that there exists an "equilibrium" counterpart to our actual economy that is characterized by die same technology and factor inputs' parameters. Letting an asterisk denote the corresponding values of this model

economy, die latter means that a* - a, Gx = Gx and G* = aG*. The deviations of the actual growth path from the "equilibrium" one then show up as:

,Qv n _ dm*/dt (9) G - G* =

-??,

or, with die function of "effective" disequilibrium defined via die monotonic transformation:


(10) Af (0= In--f?-, as G - G* = dM/dt. 1 - m \t)

An immediate check for the empirical validity of the above "disequilibrium*' growth decomposition would be to find independent estimates for the equilibrium growth rates (G*) and compare their deviations from actual growth rates with the time derivative of the M-function, evaluated numerically on the basis of the m-estimates derived from (5). Such an exercise was performed for the Bulgarian economy over the 1970-85 period using the manufacturing sector to obtain estimates for the "disequilibrium'' term (Antonov 1989) and a closed version of the von Neumann growth model (Christov 1986) to generate "equilibrium'' growth rates. For lack of space to plot the two curves here, suffice it to say that, on the whole, they coincide magnificently, i.e., the G-G* and the dM/dt curves fit together to an extent far beyond what could be expected of such crude experi ments. One implication of this exercise is that appropriate measures of the deviation of actual final demand structures from the corresponding von Neumann rays can be usefully employed as alternative indicators of structural disequilibrium in the

economy. I will now proceed to a demonstration of the implications of the foregoing

presentation of structural disequilibria for the theory of the growth cycle in a CPE.

(See Bauer 1978, or Dahlstedt 1979 for a brief survey). One major feature of Marxian economics as developed in the socialist countries was that it retained the classical dichotomy between the "real" side and the "monetary" side of the

economy while excluding the operation of the "invisible hand" both in theory and in practice. One of the presumed implications of this state of affairs was that the CPE was deemed to operate without any regular fluctuations in economic

activity (e.g., Nemtchinov 1963). The mounting evidence of both persistent shortages and fluctuating nracroeconomic performance gave rise to the empirically plausible hypothesis that the CPE growth cycle was something of a "shortage cycle." Without an explicit measure of the shortage phenomena, however, the

"shortage cycle" theory naturally collapses to a theory of the investment cycle, such as the one expounded by Bauer (1978), for instance. It would be reasonable to expect that, with an explicit "disequilibrium" term in the production function, the CPE growth cycle can be successfully reconstructed with more rigor and in a

way that allows for the econometric evaluation of the period of the cycle. Let M(t) be the function of the "effective" structural disequilibria, defined by

(10). Suppose the "equilibrium" rate of growth associated with the existing eco nomic structure is fixed and constant, i.e., G* = T. if our basic growth equation (9) "explains" the actual path of an economy both in terms of an equilibrium structural parameter and a disequilibrium one, then all we need is to "close" (9)

by means of a certain M(y,dy/dt) function We could then study the resulting differential equation and find out whether it contains some closed orbits, limit

cycles, or the like.

WINTER 1991-92 61

Let Af - J(oy u) be some such contmuously diffetentiable function of a =

o(y,dy/dt) and u = u(y,dy/dt)y where a(. ,.) stands for some index of macroeco

nomic consumption shortages and w(.,.) stands for the respective index of mac

roeconomic investment shortages. By assuming that df/da = c> 0 and

df/du = b > 0, die total time derivative of the function of macroeconomic struc

tural disequilibria takes on the form:

(11) dM(oy u)/dt = cido/dt) + b\du]dt).

The assumptions underlying this representation of die Af-function can be sum

marized as follows: 1. there exists a stable relationship between die index of structural disequilibria

as measured by (10) and some properly denned generalized indices of consumption and investment shortages at die macrolevel. The response of the Af-function to

changes in the sectoral shortage indicators is constant over time and proportional to their values. Rising sectoral shortages are positively correlated with the function of structural disequilibria;

2. die Af-function does not depend explicitly on time. This, in principle, rules out die impact of external shocks and hence whatever the model obtained in die final account may prove to be, it will not be a model of the Frisch type (Blatt 1980);

3. all cross-effects among the sectoral shortage indicators are essentially ruled out, i.e., the mixed derivative of the Af-function cancels out.

Thus (11) is the simplest nontrivial equation linking the "real" shortages, measured in "physical" terms, with an aggregated index of their "monetary" counterparts, produced by factor market distortions. Let co = ln(y). Then d&fdt

?

G and the basic equation of our model becomes:

(12) da/dt - T + c(do/dt) + bidu/dt),

where T, c, b are all positive constants. I take the total time derivatives of the sectoral shortage indicators in the form:

do/dt = X (dco (t - $)/dt)

- nco (r),

du/dt -

p(da>(t -$)ldt) -

?(dco(f -$)df)3y

where -d Z+ accounts for the reaction lag of the sectoral shortage indicators to

changes in the growth rate and X,p,r|, and ^ are all positive constants. In the

following, we assume d = 1. Upon substitution in (11), and after setting e = cx\, u' =

cX + bp and y' =

b%y the following differential equation obtains:

d(o(t)/dt - T - eco(f) + ii9do>(t-l)/dt

- y\da>(t-l)/dt)3.


Now, for t - t - 1 we can use linear approximations for co(t + -d), dco(x + -dydt in a neighborhood of x for d * 1 and an appropriate change of variables u - co -

r/e,*** u/e", J^t/ST, to obtain:

d2*/***2 + x - (u' - e - 1) (dx/dt)//** f(dxjdtf / /e ? 0.

The curve defined by the equation:

C(<?c/<ft) = v(dx/df)3 -

|i(dz/<fr),

where y -

y'/ /e~, u = (u' - e - 1)/ VTis obviously a cubic for jli' > 1 + e. We

then have the basic equation of our model reduced to a Raleigh equation of the form:

(13) cPx/dt2 + C(dx/dt) + x(t) - 0.

By a standard change of variables vi = dx/dt, vi = ~x, the latter collapses to the canonical Lienard system (Naifeh 1981):

(14) dvi/dt = v2- C(vi), dvrfdt

- - vi.

Now there is a well-known theorem, asserting the existence of a unique nontrivial periodic solution to (14), such that each nonstationary trajectory of the

system converges to it The system oscillates (Hirsch and Smale 1974). Put differ

ently, the phase diagram of the model contains a stable limit cycle encompassing an unstable focus at the origin Taking exponentials from both sides of co = ln(y) converts the limit cycle in terms of the original variables and hence our "model"

economy moves along exponentially growing cyclical paths. While there is indeed a lot of empiricism underlying the structure of this

growth cycle model, I would still like to emphasize several points that appear to me of more general interest The first point is that this is a nonlinear cycle in two

dimensions, and hence its operation arises out of the interplay of forces that

continuously feed "energy" into die system and then dissipate it (See, e.g., Andronov et al. 1937.) The source of energy, so to speak, is the particular type of structural disequihbrium, generically reproduced by the system, mediated by the

operation of the inflationary gap />(.), which I have somewhat clumsily chosen to call an index of disequilibrium redistribution This index happens to be?at least in the case of Bulgaria?linearly related to the rate of growth. However, I suspect that this may be a valid proposition in a larger context and not only on empirical grounds.

All that I am trying to say is that the growth performance of a CPE is, by and

large, dominated by inflationary pressures and that this state of affairs is built into the economic structure that fliese countries have chosen to construct. There

WINTER 1991-92 63

fore, maximizing the current rate of growth, which for decades has been the number one priority of most CPEs, amounts to nothing but a maximization of the index of structural disequilibria with the concomitant rise in the suppressed infla

tionary potential, die rate of "forced" accumulation and consumption- investment

shortages. The inevitable resource dissipation, which has been extensively docu mented in the relevant literature, means that a unit increment in the rate of

growth is paid for by a more than unitary increase in the index of structural

disequilibrium. Indeed, this is precisely die condition u > 0 (see above) that underlies the generation of a limit cycle in the context of this model.

A second point that emerges out of this model is that one cannot hope to measure with any sensible degree of precision the macroeconomic aggregates pertaining to a "disequilibrium" economy. After the "measuring rod"?die monetary counterpart of a "real" economy?has been successfully distorted or even de

stroyed, there remains but very litde economic sense to be attached to any such

aggregates. The nonlinear nature of this distortion?when proceeding from "micro" to "macro"?means that we face a problem very similar to that of

quantum mechanics when transcending from "macro" to "micro." And there may well be similar means to cope with the problem.

4. Suppressed inflation, labor exploitation, dynamic inefficiency, and the shortage multiplier

One of the principal component parts of the disequilibrium growth cycle as modeled in die preceding section is the "pumping mechanism" Z>(.) that feeds resources into the system via the operation of a redistributive mechanism. With Sl, sk to denote "shadow" factor shares and clk to denote actual shares, one alternative presentation of the D-index is this:

(15) D = (sL-aL) I aL.

Since negative values of m in (5) generate, by virtue of (7), positive values of

D(.), i.e., Sl> dL> 0, it follows that one of the contentions frequendy voiced in the literature on CPEs, viz. that at the margin labor is paid more than it earns

(see, e.g., Amacher and Conger 1977), turns out to be false. In fact, underlying the process of "hidden" inflationary growth in a CPE is die continuous "pumping out" of a portion of labor's shadow share and its subsequent redistribution in favor of the capital factor. Now, what all this amounts to is that by evaluating the D-index one obtains a measure of "labor exploitation," which summarizes the

various, often roundabout, ways and means through which this is achieved. Since it says something about the level of this "hidden" exploitation, it seems more robust and thus superior to the one proposed by M. Brown (1966).

It is quite clear that with a sufficiently strong pumping out of consumption and feeding into investment (which is just another way of saying that a > 1), the

virtual, "shadow" price of capital turns negative. A necessary and sufficient


condition for this to obtain is obviously that D > ?k I One straightforward implication of this proposition is that for such values of the "inflationary pump," the underlying shadow interest rate is negative and hence the "monetization" of such an economy involves an equilibrating process that is equivalent to the

"expropriation" of capital by economic means. The general conclusion that I now wish to emphasize is that this particular

parameter constellation, which arises out of the m < 0 case in (5), is precisely the one that rationalizes the particular industrialization strategy adopted by most CPEs. In terms of growth maximization and "overfull" employment, it is the one that performs best, as the "disequilibrium" decomposition (8) readily testifies.

Yet, with overfull employment, the costs of achieving this target rise steeply in terms of losses in dynamic efficiency while the concomitant decline in living standards renders the initial efficiency-welfare "trade-off" meaningless.

In the context of the simple framework outlined above, the issue of dynamic efficiency vs. inefficiency is reduced to the estimation of the particular value that the "disequilibrium" elasticity of substitution in the production function takes on.

With m < 0 in (5) a > 1, D > 0 and t\k < i\k , *U > *li > (asterisks denote "equilib rium" values), the economy resides in a state where it is consistently investing

more than it is earning in profit Hence the economy is said to be dynamically inefficient (Diamond 1965). Now, it is an easy exercise to show that under this

type of structural disequilibrium and with dm/dx = 0 as in (8), the "Golden Rule" level of capital accumulation (in the terminology of Phelps 1961) exceeds the "equilibrium," undistorted level. Therefore, even in the long run and from a

normative, welfare maximizing point of view, overaccumulation proves a rational

strategy under this particular type of disequilibrium. It may be that here I am

addressing an issue raised by Abel, Mankiw, Summers, and Zeckhauser (1989), viz. that of dynamic efficiency in "distorted" economies, in not quite rigorous terms, but my feeling is that the problem of uncertainty and that of distortion are, in some fundamental way, very closely related. I would even risk putting forward the highly speculative proposition that whatever kind of uncertainty plagues the

economy, it all derives from some basic distortion of our principal "measuring rod" and that by studying the "laws of preservation" operating within the class of all virtual distortions we may be more successful in grasping the foundations of economic uncertainty and not merely bypassing it in some technically sophisticated way. Of course, all this may prove just another "speculative bubble," but as Tirole has shown (see Abel et al. 1989) this is a perfect "rational expectations" phenomenon in a dynamically inefficient economy such as die one from which I

happen to come.

Proceeding to the measurement of suppressed inflation, I start with the national income identity under fixed real and, of course, somehow distorted

proportions:

pY=(apa + (l-a)pc)Y,

WINTER 1991-92 65

where a is the real rate of accumulation, (1 -

a) is the consumption rate and

Pa, Pc are the prices of die aggregate investment and consumption goods, respec

tively. Since die distribution of incomes underlying this identity is:

wL+rK-pY,

with w and r denoting actual factor wages, it follows that for the consumption market to be in equilibrium, one needs

w =pc(l-a)y, withy -

Y/L

to hold or, equivalendy, for ?l - w/y:

aL=Pc(i-a).

Persistent excess demand means that ?l ? pc (1 ~a) and hence the approach that I employ here will generate consistendy lower estimates of "hidden** inflation.

Now, take a "monetized** counterpart to our actual shortage economy, param eterized by the same real proportions but operating with market clearing prices. That is, a*

= a, y* y, but p*e * pc. With Sl to denote die "shadow" labor share in income distribution and with market clearing one obtains:

(16) sL = p*c (1 -a)

as the equation, defining die "equilibrium** market clearing price of the con

sumption good or, alternatively, by die definition of die D-index (15):

<17)/??MZ>+1).

Hence, for positive values of the inflationary potential D > 0, i.e., for m < 0 in (5), die pattern of structural disea^iilibria in the economy underlying the process of income redistribution produces something of a "hidden inflationary tax** on labor incomes. I therefore measure die amount of "hidden" inflation implicit in the distorted economic structure in terms of the following decomposition:

(mp*c(t+ 1}-Pc(t+ l) xD(t+ 1)+ 1 V ^ Pcif) Pcif) D(f)+1 '

where pc (t + 1) / pc (t) is the index of "open" price inflation that would equilibrate the consumer market at the going consumption and wage rate, and the second term is evaluated by using die estimates for die disequilibrium parameters inequations (1) to (5). This makes transparent the commonplace assertion that suppressed inflation under structurally stable disequilibrium is just another name for labor exploitation.


Put differently, in die context of a disequilibrium economy of this type one cannot

hope to meaningfully discriminate between diese two concepts. If we now "reverse" our assumptions, i.e., assume p* -pc> but a** a with

y* =

y still holding, it is straightforward to obtain the following presentation of the D-index:

(19) D = ?1?, and by letting Aa = a- a*, Ma

= l/(l-a):

1 - a

(20) D = MaAa

Now Ma is obviously a "multiplier" term, which takes on larger values, the

larger the actual rate of accumulation in a distorted economy. The part that our index of "disequiUbrium redistribution" D(.) played in the mechanics of the

growth cycle model above thus becomes somewhat more tangible. In particular, the linear relationship between the growth rate and the D-index is due to the fact that Ma, "the shortage multiplier," reinforces the divergence of the actual investment rate from the equilibrium one and hence produces temporary growth acceleration at the expense of "forced" accumulation

Should we now simultaneously vary bothp*c and a*, while holding the income level constant, that could easily be verified:

oi\ ? 1 -cc(l -ro*) I - a

and hence for a* - a we obtain p*c = a, i.e., under the equilibrium Golden Rule

rate of accumulation, the "shadow" market clearing consumption price equals the

"disequilibrium" value of the elasticity of substitution, Therefore, the standard

implication that higher values of the elasticity of substitution, and in particular a > 1, induce increased investment activity now receives a complementary inter

pretation in terms of the "inflationary tax" on labor incomes that underlies the

growth of investment outlays in a disequilibrium framework

5. The pattern of dynamic comparative advantage under structural disequilibrium

Let me now briefly extend the framework set up by Nishimizu and Page (1986) to deal with the issue of dynamic comparative advantage in a "disequilibrium" setting. The Domestic Resource Cost concept (henceforth DRC) has been exten

sively reviewed and analyzed in the relevant literature. (A summary and synthesis is

presented in Srinivasan and Bhagwati 1978 as well as in the references quoted therein) An obvious integration of the DRC concept with the Total Factor Pro

WINTER 1991-92 67

ductivity (TFP) calculations is to take total differentials of both die production function (incorporating an autonomous TFP component) and of the DRC defini

tional identity, substitute the former into the latter and obtain the following decomposition of changes in the DRC (in terms of growth rates):

(22) GDRC= - Gp + FP+FC-A,

where Gp is die rate of growth of value added at international prices (for

empirical applications it can be approximated by die terms of trade), FP, FC are

the "factor proportions" and die "factor costs" effects respectively, and A stands for all autonomous changes that are usually subsumed in a TFP index. It is nice to

have as simple a decomposition as this with all die terms readily identifiable and

lending themselves to empirical applications as in the contribution of Nishimizu and Page (1986). The point that this presentation of DRCs in an empirical context

raises, however, is how does one estimate the "shadow" factor rentals that enter into the FP and FC terms? Besides, there is the twenty-five year old contention of Bruno (1968) that a TFP index probably measures something else beside total factor productivity.

My guess is that the TFP component in the Nishimizu and Page (1986) decomposition has very much to do with structural disequilibria and that when a

rapidly growing economy gets most of its comparative advantage out of some

magnificent TFP performance?as was the case reported by diem?one has ex

plicidy to include a "disequilibrium" production function in their DRC-decom

position and see what can be made out of it This is clearly a straightforward case and I shall direcdy proceed to the results.

The only difference that naturally emerges in (22) when die disequilibrium term is substituted for die TFP index is that we have dMjdt instead of A with the same sign What this means is, of course, that under this particular type of structural disequilibria, i.e., with m < 0 in (5), die impact of rising "effective"

disequilibria is the same as that of a rising TFP index. With

Gw - G + (sk/sl) dM/dt and

Gr=G-GK-dMjdt

standing for the corresponding rates of growth of die implicit "shadow" factor rental as calculated from the production function and upon substitution in the

respective terms, defining the FP and die FC effects, one ultimately obtains:

fv\\ r* 4. r -l + m* r , ot(l-m*)

(23) GDRC + GP - j-j^

Gl + ][ + ̂ GXt

where a is the technological parameter, m* is die disequ?ibrium one, Gl, Gx are

the rates of growth of labor and capital per unit of labor, respectively.


This provides an explicit measure of both the level and dynamics of the macroeconomic pattern of comparative advantage. By using the estimated pa rameters of the production function at the microlevel and the rates of factor

growth by industrial sectors one can plausibly extend this approach to measure the differential pattern of comparative advantages by industrial sectors.

The substantial point of the proposed extension of the DRC-cum-TFP frame work is that one need not worry about how to estimate the factor "shadow" rentals under factor market distortions. There are, in fact, readily available from the econometric cross-section estimates of the "disequilibrium" production function

A trivial extension of this approach, which in many applications may prove more useful than all the foregoing discussion, is that with data at the firm level, the estimation of Bruno cross-functions for individual industries can provide valu able insights into the operation of comparative advantage at the industry and?

hopefully?even the intraindustry level.

6. Concluding remarks

This paper presents a number of applications in which the "disequilibrium" produc tion function advanced by Bruno-(1968) a?ows-us-to gain further insights into the

operation of a genetically distorted CPE. In particular, it provides consistent discrim ination between two different types of structural disequilibrium that may be present in

any actual economy. Using a cross-section approach to measure the implicit "disequi librium" parameter, I have demonstrated some of the implications that the replication of these structurally stable disequilibria produces. One of the principal points that this

paper emphasizes is that under structural disequilibria (SD) the forced investment industrialization strategy, adopted in most CPEs, can be "rationalized," although it

brings about dynamic inefficiency that ultimately destroys the welfare gains from overfull employment Nevertheless?from a purely economic point of view?this is a viable strategy and, in the medium term, it may even seem desirable. It is precisely the mechanisms underlying this strategy that generate the notorious "shortage cycles" in a CPE. I will provide an example of such a growth cycl e, incorporating nonlinear feedback from investment shortages to consurnption ones, which finally reduces to a

Raleigh equation possessing a stable limit cycle. The approach used to construct this model allows us to evaluate the period of the cycle and thus lends itself to empirical falsification The pattern of dynamic comparative advantage associated with the

CPE-type of structural disequihljriumreinforces the reproductionof shortage and thus adds to the viability of the economic system. Hence, from a pragmatic point of view, the elimination of structural disequilibria is a priority target The elaboration of the

ways and means of achieving this target requires a major scientific effort, which, I

guess, may remain the challenge of the years to come.

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