Generalized Balance of Payments Constrained Growth and South—South Trade in Sub-Saharan Africa

Abstract

Using a multi-country generalization of Thirlwall’s law, we investigate the contribution to the growth performance of Sub-Saharan Africa (SSA) countries of trade with the low and lower-middle income countries in SSA and South Asia in the last two decades.* Unlike previous multi-country extensions of Thirlwall’s law, our model allows us to measure the contribution to the balance of payments constrained growth of the partner countries’ growth rates, the bilateral terms of trade, and the bilateral market shares (for imports and exports). This degree of detail provides useful insights on the functioning of the BoP constraint in a multi-country setting. The generalized law is estimated using a panel cointegration approach on a sample of 20 developing SSA countries, using annual data from 1990 to 2008 and considering three partner areas: SSA itself, developing Asia, and the rest of the world. Our generalized law is found to perform better than other versions of the law. Moreover, the empirical analysis shows that although each partner area has contributed to the relaxation of SSA countries’ BoP constraint, these contributions have occurred through different channels of transmission. On average, the main contribution of other SSA countries occurs through the real growth effect, that of developing Asia through the market share effect, and that of the rest of the world through the terms of trade effect.