Thirlwall’s Law: An Application to Poland

Abstract

The present study validates assumptions of Thirlwall’s law and illustrates its implication for Poland. Furthermore, a rarely used “strong” form of Thirlwall’s law is tested. This law reflects the importance of trade balance restrictions on economic growth prospects. This aspect is now very relevant. The research aims to find out whether both forms of Thirlwall’s law are valid in Poland. The assumption that the relative prices do not influence trade performance of Poland does not hold, therefore, influence of terms of trade was considered and the balance of payments (BOP) constrained growth rate was calculated with and without terms of trade effect. For the “strong” form of Thirlwall’s law, the existence of correlation between growth of income of Poland and the rest of the world was tested. The existence of cointegration between rates of growth of export and gross domestic product (GDP) is tested as a main idea of growth model based on export. After verifying that all assumptions of the model hold, Autoregressive Distributed Lag (ARDL) cointegration approach and error correction model are applied to estimate income elasticities. Further, statistical equality of growth rates of predicted and real GDP was tested to validate Thirlwall’s law, and it supports the importance of external imbalances for Polish economy for the period between 1995 and 2018. Both “weak” and “strong” forms of Thirlwall’s law turned to be valid. Further research may focus on testing the validity of assumptions of Thirlwall’s law on data from other countries of Eastern Europe, as well as post-Soviet countries, since there are very few such studies to date.