Growing differently? Financial cycles, austerity, and competitiveness in growth models since the Global Financial Crisis

By Karsten Kohler, Engelbert Stockhammer

PKES Working Paper 2008

March 2020, revised November 2020

The paper contributes to the recent growth models debate through a cross-country analysis of growth drivers before and after the 2008 Global Financial Crisis (GFC). It argues that the widely used dichotomy of export-led versus (debt-financed) consumption-led growth has lost its usefulness since the GFC. The common method to identify those growth models through growth contributions can give misleading results after the GFC that led to sustained changes in the drivers of economic growth. The paper contends that Comparative Political Economy (CPE) neglects the unstable nature of financial growth drivers, effectively ignores fiscal policy, and overemphasises price competitiveness as a growth driver. It shows empirically that, first, debt-financed growth is cyclical and financial booms come with busts and debt overhang; second, post-GFC growth dynamics are strongly shaped by the fiscal policy reaction; third, price competitiveness through wage deflation has played a negligible role in driving growth. We conclude that CPE needs to broaden its analysis of growth drivers in order to understand how the GFC transformed growth models.

Keywords: growth models, austerity, financial cycles, comparative political economy, post-Keynesian macroeconomics

JEL classification: B50 O47 O57