Balance Of Payments Constrained Growth Research Articles

Rethinking the balance-of-payments-constrained approach, in the light of the recent commodity boom

We develop a balance-of-payments-constrained growth (BPCG) model to explain the specific conditions of small commodity-dependent countries. Based on Thirlwall’s model and subsequent contributions, we elaborate a new model that assumes exogenous export prices, infinite price elasticity of export demand, and supply of commodities that react to prices with positive, but not infinite, elasticity. We contribute to explaining the central role of export prices and the relevance of price competitiveness in the growth dynamics. It is shown that a real devaluation and an improvement in terms of trade (TT) in a context of increasing international prices increase the equilibrium growth rate. However, export prices are more relevant than import prices in determining the growth of these countries, challenging the traditional interpretation of TT. Moreover, our model enriches the extensive literature which has corroborated that a development strategy based exclusively on increasing production capacity in commodity sectors is doomed to fail.

Balance-of-payments-constrained growth model: an application to the Kazakhstan’s economy

In this paper we analyze whether the long-term economic growth of Kazakhstan is subject to macroeconomic constraints. The balance-of-payments-constrained growth (BPCG) models predict that a country’s growth rate can be approximated through the ratio of growth rates of exports to the income elasticity of demand for imports. We apply the BPCG model to Kazakhstan’s quarterly data—a typical emerging economy with a low trade to GDP ratio. To estimate the trade parameters we use Johansen’s cointegration technique. Vector error correction model is employed to analyze the short-run adjustments of income elasticities. The results demonstrate that the average growth rate estimated by the BPCG hypothesis projects around 2% long-run economic growth for Kazakhstan and current economic growth is aggregate demand constrained.

Estimation of Import Demand Elasticities, In the BPCG Model and the Import Demand Function (The Case Study of Iran)

In this study, the demand elasticities of import are estimated, with two approaches, the balance of payments constrained growth (BPCG) or Thirlwall model and the import demand function, by using data in Iran during the period 1980 to 2018 and ARDL method.
 According to BPCG model, economic growth is equal to the ratio of export growth to income elasticity of import demand, so it is related to the growth of exports and income elasticity of import demand in the long run.
 Based on this model, if national income increase and the income elasticity of import demand is high, the imports increase, the effect of export growth and consequently economic growth decreases.
 The results showed that in the long run, the income elasticity of import demand in BPCG model isequal to 0.04 and based on the import demand function is 0.34 and the relative price elasticity of import demand (the ratio of import price to domestic price) is -0.52. Therefore, imports in Iran have been more affected by price than income effects.
 Due to the smaller amount of income elasticity of import demand in both models and based on the BPCG model, the greater income elasticity of import demand, reduces the effect of export growth coefficient, it can be concluded that the magnitude of this elasticity has not been a constraint to Iran's economic growth. Given the significant impact of prices on imports, economic planners should focus on increasing the competitiveness of domestic products.

New advances and controversies in the framework of balance‐of‐payments‐constrained growth

AbstractThis article surveys selected recent contributions and debates regarding fundamental aspects of the theory of balance‐of‐payments‐constrained growth (BPCG). The survey focuses mainly on studies, from roughly the period since 2010, in four broad (and related) areas: whether and how relative prices and the real exchange rate affect export performance and long‐run growth; the role of endogenous technological progress; the causes and consequences of structural change; and the dynamics of adjustment toward (or cycles around) a long‐run growth equilibrium with a balance‐of‐payments constraint. The discussion also highlights the increasing incorporation of insights from other theoretical traditions (Kaleckian, Kaldorian, Schumpeterian, Goodwinian, and structuralist) into the BPCG framework. The survey suggests the need to clarify the underlying assumptions and policy implications of the BPCG model and to complement its focus on long‐run growth rates with analyses of medium‐run adjustments and level effects.

Testing the balance of payments constrained growth model in a VECM framework: the cases of Brazil, Korea, Mexico and Turkey

ABSTRACT The aim of this study is to explore the empirical application of a previously unexplored procedure to systematically estimate and test the tenets of the balance of payments constrained growth (BOPCG) the model within a VECM framework. The three structural equations that constitute the BOPCG model are estimated as long run equilibrium relations using the Johansen cointegration analysis technique for Brazil, Korea, Mexico and Turkey over the 1980–2016 period. The BOPCG hypothesis is then tested in terms of non-linear coefficient restrictions on the cointegrating vectors. Hypotheses on the exogeneity of real exchange rate and the world income are also tested in terms of tests on the adjustment coefficients. Results provide evidence in favour of Thirlwall’s Law for the cases of Brazil and Korea.

A Study of the Iranian Economic Growth by Using the Balance of Payments Constrained Growth Model

This study is conducted aimed at investigating the Iranian economic growth based on the balance of payments constrained growth (BPCG) model. In contrast to the view of classical models that consider the economic growth to be related to supply-side in the economy, this model holds that the economic growth is dependent on demand-side in the economy, stating that the demand growth is inhibited by balance of payments deficit, and thus, it constrains achieving a higher economic growth rate. To investigate the model mentioned, the data on Iran’s non-oil export growth and non-oil GDP growth over the period 1980–2017 are analyzed using the Granger causality test and Auto Regressive Distributed Lag (ARDL) method. Results indicated that there was a long-run relationship between the non-oil economic growth and the non-oil export growth, and that the economic growth increased by 0.54 percent with a 1 percent increase in the non-oil exports. So, based on the above model, the need to pay attention to the non-oil exports to achieve a sustainable economic growth is confirmed.

Thirlwall's law and the terms of trade: a parsimonious extension of the balance-of-payments-constrained growth model*

This paper extends the balance-of-payments-constrained (BoPC) growth model and Thirlwall's law to include the terms of trade with and without capital flows. Without capital flows a positive (negative) change in the terms of trade by improving (worsening) export performance can ceteris paribus augment (reduce) the rate of growth of an economy compatible with balance of payments’ long-run equilibrium. With the inclusion of capital flows the BoPC dynamics become more complex. Assuming no changes in the real exchange rate and in the import elasticity of demand, an improvement in the terms of trade can increase the level of the external deficit compatible with BoPC growth. This results from the terms-of-trade effects on the purchasing of exports and on foreign-capital inflows. The positive effect of an improvement in the terms of trade may be partially offset by an appreciation of the real exchange rate and an increase in the import elasticity of demand, when the model is extended to allow for such interactions in the analysis.

Is Indonesia's growth rate balance-of-payments-constrained? A time-varying estimation approach

This paper analyses the performance of Indonesia's economy since the early 1980s using Thirlwall's balance-of-payments-constrained (BoPC) growth model, estimated in state-space form to take account of the varying nature of the income elasticities of demand for exports and imports. Results indicate that after peaking in the mid 1980s at above 10 percent, Indonesia's BoPC growth rate has declined significantly, to about 3 percent in recent years. This is the result of changes in the three components of this growth rate: the income elasticities of demand for exports and imports, and the growth rate of world income, all three significantly lower. Especially worrisome for Indonesia's future is the decline in the income elasticity of demand for exports, a variable that summarizes the non-price competitiveness of its exports. This is the consequence of the lack of progress in upgrading the export basket and increasing its sophistication, with natural resources and low value-added manufacturing still dominating the country's exports. Focusing on the two income elasticities, the analysis shows that their determinants are variables that proxy the economy's structural changes (for example, the manufacturing employment share) and within-sector productivity growth (for example, complexity of the economy, gross fixed capital formation as a share of GDP).

Path dependence, distributive cycles and export capacity in a BoPC growth model

In Dávila-Fernández and Sordi (2019), we have extended Goodwin's (1967) model to study the interaction between distributive cycles and international trade for economies in which growth is balance-of-payments constrained (BoPC). Building on that set-up, we investigate the implications of allowing exports to be a function of the capital stock. Using the existence part of the Hopf bifurcation theorem, we show that the resulting 3-dimensional system admits a limit cycle solution. We rely on numerical simulations to verify if fluctuations are persistent and bounded. Applying panel cointegration techniques, we also provide empirical evidence for a sample of 19 OECD countries between 1950–2014 that gives support to the formulation adopted for the exports function. Our main contribution lies in developing a simple base-line model to study distributive dynamics in open economies in line with recent developments in the BoPC growth literature. Furthermore, we show how the interaction between demand and innovation waves can generate complex dynamics as a representation of the statement “history matters”.

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

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).

Is the Balance of Payments Constrained Growth Rate Time-Varying? Exchange Rate Over Valuation, Policy-Induced Recessions, Deindustrialization, and Long Run Growth

A long-held view among macroeconomists in the UK and US is that sustained currency over valuation – often the result of financial-sector dominance – weakens domestic macroeconomic performance and results in premature deindustrialization. Similar concerns have been expressed about persistent, policy-induced recessions. According to balance-of payments-constrained growth (BPCG) theory, meanwhile, the BPCG rate in a multi-sector economy varies directly with the share of manufacturing in total output. This chapter develops a simple model that combines these observations to show how a temporary but persistent shock to the nominal exchange rate and/or domestic demand can both affect the actual rate of growth in the short run (by moving it away from the long-run equilibrium BPCG rate), and alter the BPCG rate itself (by lowering the income elasticity of demand for exports as a result of induced premature deindustrialization). The result is a time-varying balance-of payments constrained growth (TV-BPCG) rate. Because actual growth and the TV-BPCG rate vary directly, the latter is also characterized as quasi path dependent.

The debate over ‘Thirlwall's law’: balance-of-payments-constrained growth reconsidered*

Several recent critiques have questioned the theoretical logic of standard models of balance-of-payments-constrained growth (BPCG) and the empirical support for ‘Thirlwall's law’. On the empirical side, critics charge that most econometric estimates of this model have effectively only tested whether exports and imports grow at similar rates in the long run. On the theoretical side, the criticisms have focused on the role of foreign income growth, capital accumulation, relative prices and country size in BPCG models. This article reviews the current state of the debate over these critiques and also offers a brief discussion and evaluation of three alternative models. The alternative models all highlight a significant role for the level of relative prices (or the real exchange rate) in determining long-run growth, which is consistent with recent empirical studies.

Correctly analysing the balance-of-payments constraint on growth

The balance-of-payments-constrained growth (BPCG) model provides an interesting hypothesis regarding economic growth. The main implication is that world demand places the dominant constraint to which individual country growth adjusts. I discuss this implication and argue that tests of the BPCG model have essentially been tests of the hypothesis that trade is balanced over the long run; a plausible hypothesis but one that need not hold mainly through responses to world demand (as transmitted via income elasticities). I then discuss the role of relative prices and investment, point out logical inadequacies in the traditional BPCG framework and suggest an alternative theoretical framework to investigate its robustness. Our theoretical and empirical explorations suggest that traditional tests of the BPCG model may be misleading. Including investment as a proxy for the capacity to export and addressing endogeneity issues, for example, noticeably weakens the influence of world demand. The evidence presented contributes to reconciling evidence supporting the BPCG hypothesis with recent work that consistently finds an important role for the level of the real exchange rate and investment, independently of world demand.

An alternative explanation of India's growth transition: a demand-side hypothesis

This paper formalises the balance-of-payments-constrained (BPC) growth model in a two-regime framework to re-examine India’s growth transition in 1980 from a demand-side perspective, as an alternative to the ‘supply-oriented’ approaches of previous studies. The results provide strong evidence of a demand-led growth transition. Although the government-led expenditure strategy of the 1980s fulfilled the role of moving the Indian economy out of its slow-growing demand regime (1952– 79) into a faster-growing one, it could not sustain demand growth at the natural rate due to a balance-of-payments constraint. Consistent with the prediction of the BPC growth model, faster export growth in the post-1990 liberalisation period sustained demand growth at its maximum rate by allowing expenditure (including government spending) to grow at a fast rate. The analysis further suggests that India’s export surge in the post-1990 liberalisation period has a significant demand-side explanation, rather than an exclusively supply-side interpretation.

A note on intermediate imports and the BPCG model in Mexico

Numerous applications of the balance-of-payments-constrained growth (BPCG) model have concluded that Mexico’s equilibrium GDP growth rate fell after trade liberalization, because of a sharp rise in the income-elasticity of imports. Following the bounds testing approach of Pesaran et al. (2001), the present note estimates equations for intermediate and other types of imports in Mexico from 1960 to 2006. It shows that intermediate imports are significantly affected by manufactured exports, and that once the effect is controlled for, there is no significant rise in their income-elasticity—in contrast to what is observed for other types of imports. Since manufactured exports are highly intensive in imports, what the typical BPCG regression detects as an increase in the elasticity of intermediate imports may reflect a compositional effect, namely, the re-composition of GDP towards exports. Some implications for the BPCG model are briefly discussed in the conclusions.

Exploring the robustness of the balance of payments-constrained growth idea in a multiple good framework

This paper derives the balance of payments-constrained growth (BPCG) model as a special case of a three good framework that incorporates exportables, importables, and non-tradables. The conditions under which the canonical form of the BPCG rate can be derived are made explicit and the assumptions scrutinized. It is shown that the presence of nontradables, substitutability between exportables and importables, and incomplete specialization in expenditure generally dampen the externallyconstrained growth rate. These …ndings help explain why empirical estimates tend to overestimate the BPCG rate. Overall our …ndings underscore the observation that tests of the BPCG hypothesis are as much a test of the internal structure of the economy under consideration.

Manufacturing sector performance in México, under balance of payments-constrained growth

Entre 1998 y 2006 se estima una gran baja en la productividad del capital restringida por la balanza de pagos de la industria maquiladora, mientras que la no maquiladora decreció ligeramente. Las dos no han establecido la cadena del valor agregado de las actividades productivas; sin embargo la productividad de ambas está restringida por la reserva de divisas. La liberalización comercial, particularmente la promoción de la importación temporal para la reexportación, no ha contribuido al crecimiento dirigido por la exportación de México.

Trade-growth relationship in Cuba: Estimation using the Kalman filter

In this article, time-varying coefficients are used to estimate the balance of payments constrained growth (BPCG) model for Cuba. Exports are considered to have been a decisive factor in Cuba’s recovery following the crisis. Also, there was an estimated increase in income elasticity of demand for imports in the early 1990s and between 2003 and 2005, indicating a decrease in import substitution. The conclusion is that, given the rapid rise in the export of services, there are now better growth prospects for the Cuban economy. However, prospects could be better and would benefit a larger share of the economy if import substitution were also made more efficient and other export sectors with a greater multiplier effect were expanded. K E Y W O R D S