Growth and the external constraint: lessons from the Spanish case

Abstract

The present article attempts to determine the role played by the balance-of-payments constraint on economic growth in Spain (1960-94), using cointegration techniques. This empirical exercise also serves to reveal some shortcomings in the usual procedures for estimating Thirlwall's Law. In particular, the Spanish case reveals how important it is to introduce a variable that expresses the competitiveness gains generated by improvements in quality of the goods and services into the export function. It also demonstrates the inadequate simplification entailed in an a priori exclusion of relative prices in external equilibrium equation. Not taking these two aspects into consideration may give rise to an erroneous confirmation of Thirlwall's Law, especially if, as in the Spanish case, both effects offset each other. Finally, if the aim is to analyse long-term relationships between variables, it would seem advisable to use procedures, such as cointegration, with variables in levels.