A Short-Run Macroeconomic Model for Less Developed and Newly Industrializing Countries based on the Keynesian Aggregate Demand Function

Özlen Hiç Birol, Mükerrem Hiç


Discussions on macroeconomic systems, their
relevance and validity mainly focused on Developed Countries.
Survey of development literature, on the other hand, shows
there was scanty direct effort to discuss which macroeconomic
system or school was relevant for the Less Developed Countries
(LDCs) and Newly Industrializing Countries NICs). Similarly,
for instance, much of the more recent discussions concerning
the implementation of market economy in these countries. Yet
we long had three major blocks to build a macroeconomic
model for LDCs and NICs. These were: the relevance of
Keynesian aggregate demand, the excess labor and scarcity of
capital, and the limited substitutability between labor and
capital. The latter two gave rise to capital constraint for
production and to technological unemployment. In addition,
rigidities and non-automaticity of aggregate demand generally
gave an inflationary gap and demand inflation alongside
technological unemployment. This model is fundamentally
Keynesian with special conditions surrounding the production
function, supply and demand for labor taken into
consideration. Going further, we may also add foreign
exchange constraint to the capital constraint. Problems of
LDCs and NICs, policy recommendations to achieve prudent
financial management, and the more recent attempts to move
towards the market economy and globalization can all be
explained within this Keynesian framework.

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