Balance Of Payments Constraint Research Articles

Leftist governments, distributive strategies, and the politics of balance of payments-constrained growth in Chile and Uruguay

Leftist governments in peripheral economies have usually faced problems fulfilling their distributive mandate. Because of their inability to earn foreign exchange to pay for imports or service their debt, these governments often ended in epic balance of payments crises and renounced their electoral programs while embracing stabilization and fiscal austerity. This reflects the fact that economic growth and distribution in peripheral economies are fundamentally balance-of-payments-constrained. How can we understand variation in the form of distributive strategies advanced by left parties in government if they are subject to balance of payments constraints? And how can we understand the emergence of different growth models within those constraints? This article contributes to understanding the politics of peripheral growth models by studying the variation in left government distributive and growth strategies in the context of balance-of-payments (BoP) constrained growth. While the BoP constraints are real and challenging and the push for monetary and fiscal responsibility has been blunt, we argue that the extent to which governing left parties build linkages with grassroots and subordinated groups, and extant institutional architectures, allow spaces for political agency that leftist governments can use to pursue distinct distributive and growth strategies. In turn, these strategies allow for diverse ways of managing the macroeconomic implications of the BoP constraints.

Demand‐led industrialisation policy in a dual‐sector small open economy

AbstractThis article models the process of structural transformation and catching‐up in a demand‐led Southern economy constrained by its balance of payments. Starting from the Sraffian Supermultiplier Model, we model a dual‐sector small open economy with a traditional and a modern sector that interacts with a technologically advanced Northern economy. We propose two (alternative) autonomous elements that define the growth rate of this demand‐led economy: government spending and exports. Drawing from the Structuralist literature, productivity in the technologically laggard Southern economy grows by absorbing technology from the Northern economy, by both embodied and disembodied spillovers, and potentially closing the technology gap. The gap affects the income elasticity of exports, bringing a supply‐side mediation to the growth rates in line with the Balance of Payments Constrained Model. We observe that a demand‐led government policy plays a central role in structural change, pushing the modern sector to a larger share of employment than what results under export‐led growth. Such a demand policy is the only way in which partial catching up (in productivity and GDP per capita) can result, and this is facilitated by a global market place in which the balance of payments constraint is relatively soft.

International competition, income distribution, and North-South uneven development under the balance of payments constraint

This study builds a North–South trade and growth model and investigates the effect of a change in each country’s income distribution on economic growth in both countries. The North is assumed to be a demand-led Kalecki-type economy with the markup pricing rule and the principle of effective demand, while the South is a supply-led Lewis-type economy with surplus labor and hence, the real wage is fixed. Furthermore, it is assumed that international competition influences the markup rate of North firms. The following four main results are obtained. First, in the short-run equilibrium, an increase in the bargaining power of capitalists of the North increases (decreases) the economic growth rate of the North if the North exhibits profit-led (wage-led) growth. Such an increase in the bargaining power of capitalists of the North necessarily decreases the economic growth rate of the South. Second, in the short-run equilibrium, an increase in the profit share of the South decreases (increases) the economic growth rate of the North if the North exhibits profit-led (wage-led) growth. Such an increase in the profit share of the South can either increase or decrease the economic growth rate of the South. Third, in the long-run equilibrium, an increase in the bargaining power of capitalists of the North decreases (increases) the economic growth rates of the North and the South if the North exhibits wage-led (profit-led) growth in the short-run equilibrium. Fourth, in the long-run equilibrium, an increase in the profit share of the South increases (decreases) the economic growth rates of the North and the South if the North exhibits wage-led (profit-led) growth in the short-run equilibrium.

Structural Change, Balance of Payments Constraint, and Economic Growth: Evidence from Vietnam

The impact of demand-side factors and rapid structural changes have largely been ignored in explaining the economic growth of Vietnam. This paper employs the multisectoral balance-of-payments constrained economic growth model to capture the influence of structural changes on the exports and economic growth of Vietnam over the period 1997–2016. Based on the estimates for the sectoral income elasticities of demand for exports and imports obtained from autoregressive distributed lag models, this paper argues that it is not relative prices but income that has played a significant role in Vietnam’s economic growth, the income elasticities of demand for exports have grown faster than those of demand for imports, and the weight of exports has significantly moved from primary to high-technology products.JEL Classification: E12, F43, O53

Trade Complementarity and the Balance of Payments Constraint Hypothesis: A New Free Trade Agreement between Mexico and South Korea

Market diversification is one of the keys to success in the new era of world trade. Highly competitive countries have accomplished positive and sustained growth rates by not depending on a single market for their exports and imports. In Mexico, on the contrary, 80% of exports and 45% of imports concentrate in the United States. The South Korean market represents an opportunity for the Mexican economy, as the relationship between the two countries has strengthened in recent decades. This opportunity would promote greater economic growth for both countries if they reached a Free Trade Agreement, as we show in this work. The aim of this research is to assess the complementarity between these countries and estimate their external long-term equilibrium using the Thirlwall trade restriction model. Results confirm the existence of trade complementarity between the two economies and show that these are able to achieve long-term equilibrium in the external sector. Additionally, the Mexican economy would not face balance of payment constraints for growth when trading with South Korea, as it currently does with the United States.

The La Marca model revisited: Structuralist goodwin cycles with evolutionary supply side and balance of payments constraints

AbstractThis research is aimed at investigating the causes of volatility that affect middle‐income countries by studying the La Marca model. Drawing from the open‐economy Goodwin tradition, this model demonstrates that economic activity, income distribution and accumulation of foreign assets dynamically interact, resulting in a pattern of dampened cycles. The study consists in analyzing the characteristics of the model by initially imposing: (I) a constant real exchange rate; (II) a constant net external asset to capital ratio, which is in line with the balance of payments dominance theory and (III) a fixed income distribution. We then (IV) expand the original model by adding an evolutionary supply‐side in which productivity is at the center of the economic dynamic through international technology transfer and the Kaldor‐Verdoorn effect. The results show that (1) the model always converges. (2) The restrictions (I) and (II) remove the cyclical component of the model, which highlights a central difference between La Marca and the original Goodwin model. (3) Fixed income distribution leads to a monotonic trajectory that reduces oscillations. (4) The inclusion of productivity dynamics generates new sources of volatility in the relationship between productivity, capacity utilization and net external assets and is in line with the structuralist argument of structural fragility.

Thirlwall\u2019s Law and uneven development under Global Value Chains: a multi-country input\u2013output approach

A notable macroeconomic explanation of uneven development, with particular relevance to developing countries, has been the problem of balance of payments constraints, as captured by Thirlwall’s Law: where relative growth rates are explained by differences between income elasticities for exports and imports. Araujo and Lima have formulated a one-country multisectoral disaggregation of this hypothesis using a vertically integrated input–output framework, which is extended here in two main ways. First, international trade in intermediate inputs—the basis for Global Value Chains—is introduced; second, the model is extended to multiple countries. The main outcome of the paper is the development of a new multisectoral method for modelling balance of payments constraints: a Multi-Country Sectoral Thirlwall Law (MCSTL) under which key sector relationships are nested in intercountry trading relationships that encompass both intermediate and final goods. The identification of this input–output structure is developed in analytical stages, moving from a one-country vertically integrated system, to two, three and finally multi-country systems. In addition to its theoretical contribution to understanding the industrial structure of trade, an implication of this multi-country/multi-sector approach is that it can also be tested in future empirical work using the recently available World Input–Output Database of national tables.

Environmental innovations, income distribution, international competitiveness and environmental policies: a Kaleckian growth model with a balance of payments constraint

The article integrates a baseline Kaleckian model with a balance of payments constrained growth for addressing the interaction among: income distribution, international competitiveness and environmental innovation taking into account the proactive role of environmental policies The crucial link is given by intermediate inputs (raw materials and energy) in the Kaleckian price equation, which impacts on real wages, the wage share, the rate of capital utilization (and hence growth) and international competitiveness (through changes in domestic prices for a given international inflation rate). It is shown that an economy which has higher energy efficiency will attain at the same time a higher wage share and higher growth. Being green not only helps attain a more sustainable growth path, but also a more inclusive one both in the short run and the medium-run. In the long-run, within a balance of payments constraint, the combination of green taxes with an industrial policy aimed at increasing the energy efficiency of production and the diversification of the economy is crucial to raise the wage share and sustain growth.

Crescimento econômico com restrição externa: uma análise da Lei de Thirwall para os períodos FHC e Lula

Este artigo buscou avaliar os períodos dos governos FHC e Lula, bem como o período completo de 1995 a 2010, com objetivo de investigar em que medida o Brasil teve seu potencial de crescimento econômico limitado por restrições no balanço de pagamentos e quais diferenças observáveis entre os períodos. Para a análise empírica, adotou-se o procedimento econométrico de cointegração, empregado para estimativas de elasticidades-preço e renda da demanda por importação dos períodos, tendo como resultado um relaxamento na restrição externa no período Lula comparativamente ao governo FHC. Os resultados indicam que embora as restrições externas tenham reduzido durante o governo Lula em relação ao governo FHC, há evidências de que continuaram desempenhando papel relevante sobre a taxa de crescimento de longo prazo do Brasil.

Вплив потоків капіталу на сальдо бюджету країн Європейської "периферії"

Зв'язок між потоками капіталу і сальдо бюджету становить важливий елемент дослідження фіскальної політики країн інтеграційного утворення, включно з особливостями взаємодії його найбільших країн та країн умовної "периферії". Насамперед доречно порівняти залежність від потоків капіталу та обмежень платіжного балансу країн Центрально-Східної Європи і Балтії, оскільки ці країни відрізняються за рівнем доходу, особливостями політики обмінного курсу та підходами до євроінтеграційного процесу. Припускається, що з підвищенням ступеня економічної інтеграції підсилюється залежність від потоків капіталу та обмежень платіжного балансу, що порівняно самостійно впливає на проведення фіскальної політики. Водночас поглиблення інтеграції призводить до уніфікації найбільш загальних параметрів фіскальної політики, як сальдо бюджету та рівень державного боргу, що полегшує гармонізацію фіскальної політики на рівні інтеграційного утворення. На підставі річних даних 1990-2018 рр. проаналізовано залежність сальдо бюджету країн Центральної і Східної Європи, Південної Європи і Балтії від припливу капіталу і ставки LIBOR (англ. London Interbank Offer Rate). Показано, що залучення іноземного капіталу призводить до погіршення сальдо бюджету країн європейської "периферії", але вплив зникає з урахуванням циклу ділової активності, що засвідчує проциклічність потоків капіталу. Для нейтралізації надмірного припливу-відпливу капіталу, що так чи інакше впливатиме на фіскальні показники, необхідні заходи координації фіскальної політики на обох рівнях – національному і наднаціональному.

Balance of Payments Constraint — Trade and Finance

This paper summarizes conceptual aspects of two contemporary global phenomena: “economic growth external constraint” or “balance of payments constraint (BPC)” and “financial flows”, both of them especially studied as structural features of Argentina economy. Our general hypothesis is that external constrain, in its commercial (exports and imports relative income-elasticity) or financial (unsustainable debt, interest payments) versions, means a significant difficulty for some countries’ growth. Besides, financial outflows (purchase of foreign assets by residents, capital flight), offer various additional complexities. Both performs simultaneously as cause and consequence of growth, as circular cumulative causation (CCC).

Attitudes towards climate policies in a macrodynamic model of the economy

In a recent article published in this journal, Guarini and Porcile (2016) expanded the Balance-of-Payments Constraint (BoPC) growth model suggesting a way to make it possible to address some of the challenges posed by greenhouse gas emissions. Building on their set up, we formalise into the model a mechanism that explains how people with different environmental attitudes or sentiments influence each other and contribute to the design of environmental policies. We detail the concept of transition probabilities for the agent's switching from pro- to anti-environmental positions and vice-versa and discuss the macroeconomic results that follow. Numerical simulations allow us to investigate in more detail the implications of the validity of Porter's hypothesis as well as to discuss the feasibility of decoupling conditions. A policy implication of our analysis is that we should encourage the dissemination of pro-environmental attitudes among the public because this could lead to a more desirable equilibrium. As important as enhancing public knowledge of climate change is to keep alive the debate at the collective level so as to influence the probability of switching sides.

Impact of Exchange Rate Management on the Nigerian Economic Growth: Empirical Validation

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Jordan: The Elements of a Growth Strategy

In the decade 1999-2009, Jordan experienced an impressive growth acceleration, tripling its exports and increasing income per capita by 38%. Since then, a number of external shocks that include the Global Financial Crisis (2008-2009), the Arab Spring (2011), the Syrian Civil War (2011), and the emergence of the Islamic State (2014) have affected Jordan in significant ways and thrown its economy out of balance. Jordan’s debt-to-GDP ratio has ballooned from 55% (2009) to 94% (2018). The economy has continued to grow amidst massive fiscal adjustment and balance of payments constraints, but the large increase in population – by 50% between 2008 and 2017 – driven by massive waves of refugees has resulted in a 12% cumulative loss in income per capita (2010-2017). Moving forward, debt sustainability will require not only continued fiscal consolidation but also faster growth and international support to keep interest payments on the debt contained. We have developed an innovative framework to align Jordan’s growth strategy with its changing factor endowments. The framework incorporates service industries into an Economic Complexity analysis, utilizing the Dun and Bradstreet database, together with an evaluation of the evolution of Jordan’s comparative advantages over time. Combining several tools to identify critical constraints faced by sectors with the greatest potential, we have produced a roadmap with key elements of a strategy for Jordan to return to faster, more sustainable and more inclusive growth that is consistent with its emerging comparative advantages.

New Perspective on the ‘Net Errors and Omissions’ in Balance of Payment Accounts: An Empirical Study in Australia

This study explores the macroeconomic determinants of the ‘net errors and omissions’ behaviour in balance of payment accounts. Two empirical equations are being estimated as suggested by the balance of payments constraint, and income-expenditure approach, respectively. This study finds that GDP, interest rate, and exchange rate are the important factors explaining the Australian ‘net errors and omissions’. Causality tests have recognized the possible transmission channels. This study can be considered a new perspective in this topic and reference for further research.

Redistribution as social justice for decarbonising the global economy

AbstractAlthough the issue of redistribution is glossed over by Marglin, there are three reasons why decarbonisation must be accompanied by a massive scaling up of redistribution from the global North to South if the agenda is to be founded on a social justice approach. First, constructing a capital infrastructure in the South in a manner that maximises the potential for decarbonisation would tend to be very import-intensive. Hence, it would require external financing or else risk running aground through balance of payment constraints. Second, there is already a tendency in the global economy of siphoning resources from South to North, in particular through the increasing control over flows of value and wealth by Northern corporations from their commanding positions within international networks. Southern productivity needs to be contextualised from this perspective given the risk that climate negotiations lock in the subordination of Southern countries within these global networks, rather than seeking ways for Southern producers to leverage more value for the output and carbon emissions they are already producing. Third, population and labour transitions in the South place relatively greater pressure than in the past on employment generation in tertiary (service) sectors, in which distributive and redistributive processes play essential roles in bolstering labour demand. The neglect of global redistribution could undermine the capacity of Southern countries to face these broader development challenges, which are already immense even in the absence of decarbonisation. A key question is how to organise global redistributive transfers in a manner that does not continue to subordinate Southern populations to Northern interests. The challenge for decarbonisation is the forging of a political will for redistribution that is motivated by climate change rather than geopolitics, and that respects national ownership and self-determination.

English

The objective of this paper is to examine the relationship between macroeconomic variables and poverty alleviation in Sub-Saharan Africa, by applying descriptive illustration and weighted least square (WLS) regression econometric analysis using the multidimensional poverty index (MPI) taken from the oxford poverty and human development initiative (OPHI) as dependent variable. Furthermore, principal component analysis (PCA) was performed to avoid multicollinearity problems and to improve the estimation power of the regression. Long-term annual gross domestic product (GDP) growth trends were analysed by dividing countries into four groupings, namely upper income, lower middle income, lower income and conflict countries. The results show that post-conflict nations experience good progress in economic growth. With the exception of the ratio of government expenditure to GDP (GEXPGDP), foreign direct investment, net inflows (% of GDP) (INFGDP), agriculture, value added (% of GDP) (AGR.GDP) and the Gini coefficient (GINICOEF) (not significant and not reported), all other variables were found to be statistically significant at the specified significance level. Furthermore, population growth (annual %) (POPGRWTH) holds greater positive magnitude, and shows that economic growth is moving at a slower pace compared to population growth, which complicates the economic development agenda on this continent. The major factors limiting growth are restrictive fiscal policy, contractionary monetary policy in most countries, and balance of payments constraints. Furthermore, it is important to improve local capabilities and inter-firm linkages, thus achieving well-managed privatisation, while it is equally important to have subsidies reaching the poor.   Key words: Sub-Saharan Africa, multidimensional poverty index (MPI), macroeconomic variables, poverty alleviation.

Trade liberalization and the balance of payments constraint with intermediate imports: The case of Mexico revisited

Previous studies have found that a tightening of the balance of payments (BP) constraint can explain the slowdown in Mexico's growth after its trade liberalization in the late 1980s. This paper develops a disaggregated model of the BP constraint with two types of exports (manufactures and primary commodities) and two types of imports (intermediate and final goods). Econometric estimates (including tests for structural breaks) show that the BP-equilibrium growth rate did not fall, but instead rose in the post-liberalization period, so this model cannot account for the country's growth slowdown. Instead, the analysis points to the need to consider the real exchange rate as well as internal obstacles and policies.

Curses, Diseases and Other Resource Confusions

Natural resource rents, development assistance and unrequited foreign exchange inflows such as remittances relax the balance of payments constraint on economic growth. The failure of some governments to translate these resources into successful development has been attributed to an affliction called ‘Dutch disease’, or, more ominously, to a ‘curse’ associated with the availability of natural resources. This paper examines the disease/curse analysis and rejects it in favour of a political economy explanation of the problems associated with resource use. We argue that conventional analysis of resource-rich countries is misleading because its various manifestations are based on inappropriate assumptions and flawed logic. In practice the ‘curse’ and the ‘disease’ are outcomes of policy decisions, rather than manifestations of deep structural weaknesses, and they are more likely to be suffered in countries whose governments pursue neoliberal economic policies.

Determinants of Export Performance in the Wake of the Global Financial Crisis: Evidence from South Asia

The idea that trade is important for economic growth dates back to the nineteenth century when classical economists like Adam Smith, Ricardo, John Stuart Mill etc. advocated the favourable effects of international trade on output. Since then a rich body of both theoretical and empirical literature has evolved with regards to exports and trade policy. Within this overall literature, two competing approaches that can be broadly identified are Import Substitution industrialisation (IS) and Export-Led (EL) growth. According to the EL growth hypothesis, exports can promote economic growth through three main channels that are as follows: (i) trade enables firms (at the micro level) and countries (at the macro level) to gain through specialisation and economies of scale. The most efficient producers witness increasing market shares, that in turn lead to aggregate productivity gains through a reallocation of resources [Taylor (1981) and Melitz (2003)], (ii) Exports are an important source of foreign exchange. These resources are important not just for the purchase of vital inputs such as capital and machinery but are extremely valuable where balance of payments constraints are widespread [Faridi (2012)]. (iii) Trade is an important source of knowledge and technological transfers. New growth theory has shown that trade with technologically innovative countries allows access to the technological know-how of trading partners, and also has the potential of encouraging innovative activity by increasing the returns to innovate as traders have access to a larger market relative to non-trading firms.