Foreign Trade and Economic Growth: Evidence of Thirlwallâ€™s Law in Iran

Ahmad Jafari Samimi,Ramezan Hosseinzadeh

doi:10.22610/jsds.v2i2.656

Abstract

Thirlwallâ€™s law establishes a relation between the long-run growth rate, the growth of exports and the long-run income elasticity of imports. This paper applies Thirlwallâ€™s basic balance-of-payments constraint growth model to Iranian economic growth for the period of 1971-2007 by using Autoregressive Distributed Lag (ARDL) Bounds Testing approach. The empirical results reveal that import is cointegrated with relative price and income, and the equilibrium growth rates coincide with actual growth rates. However, our estimated findings reveal that the Thirlwallâ€™s law has been rejected in Iran. In other words, balance of payment doesnâ€™t hinder economic growth in this country. The reason may be due to the fact that Iran is a member of OPEC and its oil export plays a significance role in the countryâ€™s foreign trade.

Highlights

Thirlwall’s (1979) balance of payments constrained growth model, which is known as Thirlwall’s Law, demonstrates that neither trade nor financial liberalization and export promotion strategy necessarily lead to better growth performance
The balance of payments constrained growth model describes that the rate of growth in any country is constrained by its balance of payment as the economic growth cannot be higher than the consistent level of the balance of payment equilibrium, or, in other words, at least consistent with a sustainable deficit in the balance of payments
In this paper we empirically analyzed the Thirlwall’s model for Iran using annual data for the period 1951 to 2007. We examined this model using the Autoregressive Distributed Lag (ARDL) Bounds Testing approach

Summary

Introduction

Thirlwall’s (1979) balance of payments constrained growth model, which is known as Thirlwall’s Law, demonstrates that neither trade nor financial liberalization and export promotion strategy necessarily lead to better growth performance. The theoretical basis for this relationship is that if a country’s growth rate results in a rate of import growth exceeding that of exports, the resulting deterioration in the balance of payments, impedes the process of economic growth and reduces economic growth. The interpretation of this result is that balance of payments deficits restrict the rate of growth to a level consistent with a sustainable position in the external sector. In this case overall economic growth can be accelerated by manipulating Harrod’s foreign trade multiplier (Bairam, 1988)

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