An Accidental Strategy? Household Borrowing and the Consumption-Driven Growth Model

The growth model perspective on comparative political economy offers a number of advantages over the conventional “Varieties of Capitalism” approach (VoC). Not least of these advantages is the added emphasis on the role that households and financial firms play in determining how advanced economies grow. This paper begins by noting that growth through credit-driven consumption is not possible without a financial system that can attract capital into consumer lending and push that credit out to willing household borrowers. Policies such as mortgage interest subsidies, limited lending restrictions, and permitting derivative financial products are all examples of ways to enhance a systemic capacity to engage in credit-driven and consumption-led growth.

This generates two interesting questions: Why do some national systems encourage capital flows to the household sector - permitting the emergence of credit-driven growth - while others do not? This first question can be partly answered by addressing a second: Why do some states that could operate consumption-driven regimes opt against it? I hypothesize that pursuing a consumption-driven growth strategy is generally an unintended result of preferences for deep, deregulated, and innovative mortgage markets. That is, unlike export-led or investment-led growth, economies arrive at consumption-led growth by accident. This is problematic because, once implemented, pursuing a consumption-driven growth strategy tends to strangle alternative approaches.