Demand-driven theories and models of regional growth

In this chapter, we focus on theories and models of growth that have their origin in Keynesian economics. Their common features are that firstly, growth is largely export-driven; secondly, increasing returns yield path dependencies and possible divergence; thirdly, full resource utilization is not guaranteed; fourthly, economic expansion may face a balance of payments constraint, even at the regional level; and fifthly, institutions matter. We first briefly contrast demand-driven growth theories with neoclassical and other perspectives in taxonomy of growth theories. We then show how growth in exports yields regional income growth via a multiplier that is positively associated with the propensity to consume locally produced output and the propensity to invest but negatively related to regional tax rates and the extent to which government transfers are countercyclical. We show that Verdoorn’s law - economic expansion generates productivity growth - leads to both sustained export growth and steady-state income growth, with the latter in balance of payments equilibrium equaling the rate of growth of exports divided by the income elasticity of the demand for imports. Next, theories are reviewed that suggest that policies that encourage regional growth in wages and public expenditure can be growth enhancing. Finally, we argue that the effectiveness of such demand-driven growth policies depends on institutional settings.