Balance of payments constrained growth and structural change

Abstract

The direct relationship between the balance of payments and economic growth has been the subject of several studies among post-Keynesian economists. Anthony Thirlwall (1979) developed a model he called "balance of payments constrained growth", explaining that without deteriorating the external balance or entering into major debts, the economy can grow sustainably through equilibrium growth rate. Theoretically, Thirlwall analyzes the relevance of the relationship between the income elasticities of exports and imports for the process of economic development, through the formulation of the model. His law states that if the long-term equilibrium of the balance of payments on current account is necessary and the real exchange rate remains relatively constant, the long-term growth of a country can be approximated by the ratio between the growth of exports and the elasticity of import demand for income. The paper presents computer simulations to test how structural changes affect long-term economic growth. This is why we also analyze the hypothesis suggesting that structural changes measured by variations in the income elasticities of a country's export and import demands are influenced by the difference between the effective equilibrium level and industry of the real effective exchange rate. To test the hypothesis in question, a sample including data from 9 countries for the period from 1980 to 2018 was analyzed and to obtain the relationship for the Moroccan case, a dynamic econometric model was developed. The control variables included the share of manufactures in value added, exports of manufactures and the current account balance. The results show that the correlation between the dependent and independent variables is positive, which confirms our hypothesis.

Keywords: balance of payment constrained growth, Thirlwall’s law, structural change, income elasticities, real exchange rate.

JEL Classification : E00, F14, F41, F43, F62, O10

Paper Type : Empirical Research