Does Balance of Payments Constrained Growth Model Hold in Saudi Arabia?

Abstract

The paper aims to examine whether or not the balance of payments constrained growth model holds in Saudi Arabia. Also, the paper seeks to examine whether the balance of payments constrained growth model can predict Saudi Arabia's real GDP growth rate. In the long-run, the estimation results show that Saudi Arabia has an elastic income elasticity of demand for imports and an inelastic price elasticity of demand for imports. The McCombie test shows that the hypothetical income elasticity of demand for imports, which assumes balance of payments is in equilibrium, is not significantly different from the estimated income elasticity of demand for imports. The test was conducted by assuming that the terms of trade remains constants in the long-run and by including terms of trade effect. As a result, the paper provides evidence proving the validity of the Thirlwall's model in Saudi Arabia. Furthermore, the paper shows that Saudi Arabia's real GDP growth rate behaves in a similar fashion to the growth rate predicted by the balance of payments constrained growth model. In addition, the paper has provided an overview of Saudi Arabia's 2030 vision and how the balance of payments constrained growth model's recommendation can fit into Saudi Arabia's 2030 vision.