The Strategic Growth Approach As a Relevant Economic Growth Modelling for the 21st Century

Abstract

Globalization has highly increased the interconnection among the economies of the 21st century. A consequence is that local production plans may depend now on many international partners and providers. This, in turn, has led to the prevalence of production and complementation agreements among multinational firms acting on different countries. This mutual interdependence makes economic growth dependent of other economies? performances. For instance, a considerable part of the car production in a given economy requires importing spare parts and non-locally produced components. In this way, manufacturing processes in diverse economic sectors become internationally complemented through the interaction of local production with foreign raw and intermediate inputs. Many contributions in the literature conclude that the most of international trade is composed of intermediate and raw goods, which require local processing before reaching the final consumer. Trade agreements have fostered this process and helped firms in different economies to ground their production plans on free tariff inputs. In fact, local production and foreign inputs usually compete in the domestic market. In these highly integrated economies, the production of intermediate inputs in one economy becomes crucial for production of final or intermediate goods in associated economies. How we can model optimal economic growth in this context of interdependence? Strategic growth models capture the mutual interdependence in economic growth assuming that the process can be conceived as a differential game. Players with conflicting interests must decide how to respond with contingency plans. The model presented here analyzes economic growth in the light of the theory of differential games to reveal new aspects of macroeconomic interrelations. This contribution presents a brief survey of the relevant literature, postulates a generic model and concludes by working out two examples in which the main features are interdependence of inputs and arms race.