Balance-of-Payments-Constrained Approach: Convergence Sustainability in the Region of Central and Eastern Europe

Abstract

ABSTRACTThe aim of this article is to clarify the Balance-of-Payments (BOP)-constrained growth approach (Thirlwall’s Law) in relation to the convergence theories. According to Thirlwall’s Law, we determine the balance of payments equilibrium growth rate of an economy by the ratio of the income elasticities of the demand for exports and imports and the growth of foreign demand. Using Convergence Quadrants Diagram, we focused on an analysis of different phases of non-price convergence or divergence in the region of Central and Eastern Europe (CEE). The obtained results show that almost all countries of the CEE region grew at a higher rate than the one consistent with the BOP equilibrium. Moreover, it is proven that the convergence of the CEE region is unsustainable considering the lower ratio of income elasticities and increasing external debt.