Abstract
In recent years, growth rate differences have increased and have elicited numerous explanations. Among the most controversial interpretations is that postulated by Thirlwall (1979) and later extended by Thirlwall and Hussain (1982), both papers arguing that growth rate differences are best explained by demand constraints found in the balance of payments. Although the inclusion of capital flows by Thirlwall and Hussain (1982) is widely viewed as an improvement in the original model, still we believe the model to be less than complete because it omitted the effect of debt servicing. Extending the model to include the effect of debt servicing, this paper improves the predictability of the original model as it brought the actual growth rates closer to the predicted growth rates for most of the countries used in the previous research.
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