The role of intermediate inputs in a multisectoral balance-of-payments-constrained growth model: the case of Mexico

Ricardo Azevedo Araujo,Matheus Silva De Paiva,Júlio Fernando Costa Santos

doi:10.1186/s40008-019-0153-3

Abstract

We focus on the effects of the imports of intermediate inputs over the growth performance. Such an analysis is essential insofar as some countries import large amounts of intermediate inputs to be used in the production of final goods to export. Then it arises the question of whether such a strategy is harmful to the growth performance in a balance-of-payments-constrained growth (BPCG) setup. To address this point, the paper blends the multisectoral BPCG model incorporating structural change (MSTL), by Araujo and Lima (Camb J Econ 31(5):755–774, 2007), and the BPCG model including intermediate goods by Blecker and Ibarra (Struct Change Econ Dyn 25(C):33–47, 2013), and applies the resulting framework to the Mexican economy from 1962 to 2014. The most important result is that the MSTL growth rate in the presence of foreign content of exports is lower than the ‘standard’ MSTL growth rate calculated in the usual fashion (ignoring intermediate imports). That shows the importance of considering imports of intermediate goods in a BPCG model, at least for countries such as Mexico that rely massively on them. It especially helps to explain the reduction both in the ratio of the income elasticities and the growth rate of the Mexican economy, a result also found by Ibarra (Econ Change Restruct 44:357–368, 2011).

Highlights

The role of imports of intermediate inputs as one of the elements of a sound growth strategy is a contentious issue
In order to check the robustness of this result from an empirical viewpoint, we have focused on the Mexican economy pre- and post-liberalization period and have compared the estimates obtained from the original model incorporating structural change (MSTL) with the one derived here considering foreign content of exports
We aimed at determining whether the presence of those goods in the imports of a country would imply a significant reduction in the balance-of-payments-constrained growth (BPCG) rate

Summary

Introduction

The role of imports of intermediate inputs as one of the elements of a sound growth strategy is a contentious issue. Araujo et al Economic Structures (2019) 8:23 and Thirlwall (2004) such strategy may result in an increase in the income elasticity of demand for imports without a compensating effect on the income elasticity of exports, Blecker and Ibarra (2013) have argued that it may lead to a shift in the composition of imports (i.e., structural change) toward a higher share of intermediate goods If this is the case, a country that relies on imports of intermediate input may experience lower growth rates consistent with balance-of-payments (BoP) equilibrium. The additional message that accrues from expression (13) is that the growth rate consistent with intertemporal equilibrium in the BoP is lower in the presence of intermediate goods being imported to master final goods to export This result is akin to the one obtained by Blecker and Ibarra (2013), it is worthy to highlight a substantial difference. We do not assume a structure ex-ante for the economy, the model can accommodate such sectoral arrangements with minor changes in the outcome

Empirical and numerical analysis

Findings

38 Motion