The Impact of Payments Unions on Economic Growth

Abstract

Our discussion in Chapters 3 and 4 concludes that a payments union may have important effects on the economies of member countries by expanding the international budget constraint. Given these effects, a successful payments union should positively affect both national income and the observed rate of economic growth in its member countries. In this chapter, we examine the implications of the theory of economic growth for our analysis of RPAs by exploring the possible effects of a payments union within available growth models. In Section 5.1, we explore the limited role for trade and payments liberalization in the neoclassical growth models (cf. Solow 1956). Following Corden (1971) and Baldwin (1989), we argue in Section 5.2 that the removal of barriers to international trade and payments due to a payments union can accelerate the growth rate within the Solow framework, although only over the medium term. We conclude by discussing, in Section 5.3, the ways in which newer theories of economic growth — incorporating increasing returns to scale in the aggregate production function — might affect our assessment of the potential contribution of a payments union. Table 5.1 summarizes the notation used in our discussion of various growth models.