Thirlwall’s Law, Investment, Productive Chains and Domestic Markets

Abstract

The aim of this paper is to apply the extended Thirlwall’s Law, which incorporates capital accumulation to explain China’s (1971 – 2022) and Mexico’s (1961 – 2022) output growth rates. We use the ARDL cointegration methodology to estimate their import demand functions. We get robust estimations and then calculate their long-run growth rates, which result very close to their actual values. We recommend changing the Mexican industrialization strategy to generate domestic productive chains and domestic industries to substitute import-goods and dynamize the domestic market. One limit of our paper is that we use aggregate variables, but it could be necessary to analyze the effects of exports and capital accumulation in the specific domestic industry subsectors. The originality lies in showing that China’s dynamism during the last decades is more related to its dynamic capital accumulation than to its dynamic growth rate of exports, whereas Mexico’s slow growth rate regime is more related to its low capital accumulation than to its high growth rate of exports.