Semi‑endogenous growth in a non‑Walrasian DSEM for Brazil: Estimation and simulation of changes in foreign income, human capital, R&D, and terms of trade

In an empirical, dynamic simultaneous equation model (DSEM) for Brazil with 22 equations and variables, we show that foreign income is a driver of economic
growth besides semi-endogenous technical change. With a balance-of-payments
constraint and endogenous terms of trade, the major mechanism is (i) world GDP
driving exports, (ii) exports paying for imported capital goods, which (iii) enter a
production function increasing output and the foreign-debt/GDP ratio and (iv)
increase the endogenous labour force, and (v) slightly reduce human capital growth. The savings gap drives foreign debt and interest rates up and make the model unstable. Permanent increases of human capital increase the R&D/GDP ratio, labour-augmenting productivity, and GDP. A policy to increase the R&D/GDP ratio leads to more human capital, labour productivity and GDP levels. Both knowledge policies reduce the debt/GDP ratio. A lasting shock on the terms of trade reveals that there is no Harberger–Laursen–Metzler effect. The results hold in the presence of endogenous terms of trade, foreign debt, net foreign income, and net current transfers from abroad, and non-Walrasian (dis-)equilibrium variables: inflation and changing inventories for the goods market, and unemployment in the labour market. Policy should strengthen the weak link from R&D (research and development) to technical change and make education more attractive.