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

Abstract

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.