‘Thirlwall's Law’ and balance of payments constrained growth: more on the debate

The various criticisms that have levelled against Thirlwall's Law by McGregor and Swales are examined. It is shown that their arguments are untenable. The relationship between the necolassical law of one price and Thirlwall's Law is clarified. Thirlwall's Law is not overwhelmingly rejected by the evidence as McGregor and Swales assert. Their suppression of the influence of the price term on the estimates used in the test proposed by McCombie is inappropriate. Their regression analyis is also mid-specified and a preferable specification provides no support for their conclusions. They repeatedly argue that Thirlwall's modele cannot account for changes in market shares and the that the estimated income elasticities of demand for exports and imports cannot capture the effects of non-price competition. This was shown to be erroneous by McCombie and the reasons advanced are further elaborated. McGregor and Swales provide another interpretation of the relationship between Thirlwll's Law and the Harrod foreign trade multiplier, But their criticism of McCombie is unwarranted. The methodology of McGregor and Swales seems to be one of ‘naive falsificationism’.     

The PRC's long-run growth through the lens of the export-led growth model

We explain China's remarkable growth performance over the last three decades through an export-led growth (ELG) model, where countries need to export to pay for their imports. We show that China's actual long-run growth rate is well approximated by its balance-of-payments equilibrium (BOPE) growth rate, defined as the long-run growth rate consistent with current account equilibrium. This growth rate is given by the ratio of the growth rate of exports to the income elasticity of imports. We estimate the latter using the Kalman filter, which allows us to obtain a time-varying estimate of China's BOPE growth rate. We find that the average value of China's BOPE growth rate during 1981–2016 was about 11 percent but fluctuated significantly over time and declined notably after 2007. It is estimated to be 5.9 percent in 2015. We then discuss the determinants of China's BOPE growth rate and of the income elasticity of imports, with the help of the Bayesian Model Averaging technique. The analysis highlights the role of the composition of aggregate demand as the main driving force, both for its direct effects on the income elasticity of imports, and for the indirect effects on export growth via capital accumulation, in particular fixed asset investment. Our analysis has important implications to understand China's transition to a “New Normal” of a lower growth rate and the effects of the external and internal rebalancing strategy pursued from the early 2000s.     

Mexico's Economic Growth and the Balance of Payments Constraint: A cointegration analysis

This paper applies the basic balance-of-payments constraint model (BPCmodel), developed by A.P. Thirlwall, to the analysis of Mexico's economic growth in 1950-96.With the use of unit-root tests and cointegration analysis it estimates the long-run association between the growth of Mexico's real exports and real output in 1950-96, and selected subperiods. The results tend to show significant and positive cointegration between these two variables, thus giving support to the BPC-model as a relevant hypothesis to explain Mexico's long-term economic growth. Moreover, the findings of cointegration tests for selected subperiods suggest that the slowdown in its economic growth since 1982 is associated with an increase in the long-term income elasticity of imports that made more binding the balance-of-payments constraint on the expansion of domestic output.     

An Analysis of Exports and Growth in India: Cointegration and Causality Evidence (1971–2001)

The relationship between exports and economic growth has been analysed by a number of recent empirical studies. This paper re‐examines the sources of growth for the period 1971–2001 for India. It builds upon Feder's (1983 ) model to investigate empirically the relationship between export growth and GDP growth (the export led growth hypothesis), using recent data from the Reserve Bank of India, and by focusing on GDP growth and GDP growth net of exports. We investigate the following hypotheses: (i) whether exports, imports and GDP are cointegrated using the Johansen approach and Breitung's nonparametric cointegration test; (ii) whether export growth Granger causes GDP growth; (iii) and whether export growth Granger causes investment. Finally, a VAR is constructed and impulse response functions (IRFs) are employed to investigate the effects of macroeconomic shocks.     

Balance of Payments Constrained Growth and Developing Countries: An examination of Thirlwall's hypothesis

Thirlwall's hypothesis of balance of payments constrained growth has been widely tested for developed countries, but much less for developing countries. Further, previous tests have used dated estimates derived using non-robust econometric techniques. After discussing the conditions under which Thirlwall's hypothesis would be valid and the econometric issues involved, this study reports error correction estimates of import and export demand functions for a large sample of developing countries. Deriving the long run income elasticities of demand from these functions, the study reports tests for different specifications of Thirlwall's hypothesis on this sample and finds some support for it.     

The impacts of China on economic growth: Evidence for Brazil,Chile, and Peru

This study empirically analyzes the direct impacts derived from the swift increase in exports to China (referred to as “the impact of China”) on the economic growth of three selected South American countries, Brazil, Chile, and Peru, during the commodity boom between 2001 and 2008. The results stemming from the balance-of-payments-constrained growth model suggest that the magnitude of China’s impact was less than 1 percent, although it ranged from the largest to the second largest impact among all trading partners for the three countries. The estimated balance-of-payments growth rate of domestic income is lower than the real growth rate of domestic income. This is because the growth rates of the export volumes were not sufficient even during the commodity boom, on account of the continued increasing trends of income elasticity of demand for imports. Furthermore, the income elasticities of demand for imports from China were especially high. Therefore, the three countries will continue to face further increase in the income elasticity of demand for imports as well as a stagnant growth rate of export volumes. Thus, the balance-of-payments position will continue to be the main growth constraint for these countries.     

ESTIMATING IMPORT AND EXPORT DEMAND ELASTICITIES FOR MAURITIUS AND SOUTH AFRICA

In this paper, we re‐estimate the import and the export demand functions for Mauritius and South Africa using time series data. We use the bounds tests for cointegration and find evidence of a long‐run relationship between import demand, income and prices for both countries. Our long run elasticities reveal that domestic income and relative prices have significant effects on the import demand for both countries, with income being the most important determinant. Furthermore, we find that while South Africa's export demand is not responsive to relative prices or income; for Mauritius income is statistically significant.     

An empirical investigation of the causal relationship between openness and economic growth in China

This study investigates the causal relationship between openness and economic growth in China. The integration and cointegration properties of the data are analysed and the models of Granger, Sims, Geweke and Hsiao are used to identify a bi-directional causal relationship between GNP and exports plus imports. This bi-directional causation is consistent with China's development strategy of protected export promotion     

Modelling economic growth with internal and external imbalances: Empirical evidence from Portugal

Thirlwall's Law considers that growth can be constrained by the balance-of-payments when the current account is in permanent deficit. The Law focuses on external imbalances as impediments to growth and does not consider the case where internal imbalances (budget deficits or public debt) can also constrain growth. The recent European public debt crisis shows that when internal imbalances are out of control they can constrain growth and domestic demand in a severe way. The aim of this paper is to fill this gap by developing a growth model in line with Thirlwall's Law that takes into account both internal and external imbalances. The model is tested for Portugal which recently fell into a public debt crisis with serious negative consequences on growth. The empirical analysis shows that the growth rate in Portugal is in fact balance-of-payments constrained and the main drawback is the high import elasticity of the components of demand and in particular that of exports.     

Assessing dynamics of crude oil import demand in Korea

Although Korea was the world's seventh largest oil consumer and fourth largest oil importer, relatively little attention has been paid to empirical analyses of the Korean crude oil market. In this paper, we have attempted to expand the scope of previous literature by examining Korea's import demand for crude oil in a dynamic framework of cointegration. The empirical focus is on assessing the short- and long-run relationships among volume of crude oil import, economic growth and price of imported crude oil in Korea. For this purpose, an autoregressive distributed lag (ARDL) approach is applied to quarterly data for 1986–2010. Results show that income level is a more powerful determinant of the long-run behavior of Korea's crude oil imports than crude oil price. In the short-run, on the other hand, oil price is found to play a more important role in determining crude oil imports than income level.     

Estimating an Import Demand Function in Developing Countries: A Structural Econometric Approach with Applications to India and Sri Lanka

Owing to the unavailability of time‐series data on the domestic market‐clearing price of imports, the estimation of notional price and income elasticities of aggregate import demand remains a daunting task for a large number of developing countries. This paper develops a structural econometric model of a two‐goods representative agent economy that incorporates a binding foreign exchange constraint at the administered prices of imports. A theoretically consistent parameterization of the “virtual relative price” of imports circumvents the data problem, and thus enables the estimation of income and price responses by cointegration approach. The price and income elasticity estimates for India and Sri Lanka, in contrast to the extant literature, have correct signs, high statistical significance, and plausible magnitudes.     

Growth and dynamics of Australia's education exports

Australia is the third largest global exporter of education services and generated $18.6 billion in 2009–2010. The education sector ranks as the top services exports and number three of all export earners in recent years after coal and iron ore. This study analyses the major determinants of Australia's education exports. Using the Johansen cointegration technique, a stable long run relationship is found between education export earnings, real exchange rate, world income and terms of trade. It is also found that policy reforms relating to opening up the education sector from the mid 1980s had a positive growth effect on the sector.     

The Balance of Payments Constraint and the Post 1973 Slowdown of Economic Growth in the G7 Economies

This paper presents estimates of export and import demand functions for the G7 economies over the period 1956 to 1995 and over two sub-periods 1956-73 and 1974-95. These estimates are used to construct predictions of the equilibrium growth rates for these economies by use of the 'Thirlwall's Law' relationship. The estimates are consistent with observed cross country growth patterns over the whole sample and the post 1973 period but are less convincing in the pre 1973 sub-period. It is argued that the slowdown in economic growth after 1973 can be partly explained by the growing internationalisation of the world economy coupled with a slowdown in the overall growth of world trade.     

Tourism,trade and growth: the case of Cyprus

Although the relationship between international trade and economic growth has found a wide application area in the literature over the years, this can not be said about tourism and growth or trade and tourism. This study employs the bounds test for cointegration and Granger causality tests to investigate a long-run equilibrium relationship between tourism, trade and real income growth, and the direction of causality among themselves for Cyprus. Results reveal that tourism, trade and real income growth are cointegrated; thus, a long-run equilibrium relationship can be inferred between these three variables. On the other hand, Granger causality test results suggest that real income growth stimulates growth in international trade (both exports and imports) and international tourist arrivals to the island. Furthermore, growth in international trade (both exports and imports) also stimulates an increase in international tourist arrivals to Cyprus. And finally, real import growth stimulate growth in real exports in the case of Cyprus.     

The impact of coal price fluctuations on China’s economic output

Due to the important role of coal in China’s macroeconomic growth, the price of coal significantly influences its economic output. Employing a VAR model, a cointegration test and a state-space model of time-varying variables, this article analyses the influence of coal price fluctuations on the volume and structure of China’s economic output, including both the strength and the time delay of such influence. This article further explores the corresponding relationships between coal price fluctuations and variations in the effects of these fluctuations to analyse the asymmetric influence of coal price fluctuations on China’s macroeconomy. Coal price fluctuations exerted significant long-term positive effects and short-term negative effects on China’s output variables, with an average delay of 11 months; they had positive effects on investment and consumption over the long term and an increasingly negative effect on imports and exports. The average delays were 9 months for investment, 6.5 months for consumption and 10 months for imports and exports. There was an asymmetric correlation between coal price fluctuations and the time-varying elasticity of their impact on GDP. The results in this study are consistent with the actual operating circumstances of the Chinese economy.     

A 'Generalised' Version of the Balance-of-Payments Growth Model: An application to neighbouring regions

This paper applies a 'generalised' version of Thirlwall's balance-of-payments (BOP) constrained growth model by testing for long-run relationships between the output growth rates of OECD countries and two neighbouring regions; South Africa (SA) and the rest of the Southern African Development Community (RSADC). The empirical results find strong support for the 'generalised' BOP growth model, which stresses the mutual interdependence of the world economy where one country's growth rate depends on others'. Although the policy implications are not mutually exclusive, they may be viewed from the individual perspectives of SA and RSADC. SA is only BOP constrained with respect to OECD. The message to SA's policy makers is that faster growth rates may be the result of an improvement in the structural demand features of its exports to OECD. RSADC is only BOP constrained with respect to SA. Growth-promoting policies in SA may have a high and positive impact on the whole SADC region. Policy-makers in RSADC, however, are advised to reduce their dependence on SA by improving the structural demand features of their exports to OECD.     

Intertemporal sustainability of current account imbalances: New evidence from the OECD countries

This study estimates the intertemporal model for the relationship between exports and imports and examines the sustainability of current account deficits (CADs) and the validity of intertemporal budget constraint for 24 Organisation for Economic Co‐operation and Development countries. The standard ordinary least squares (OLS)‐based two‐step Engle and Granger test, the cointegration regression Durbin–Watson (CRDW) test, and the Stock–Watson test performed on the one‐regime model with time‐invariant parameters and no structural break provide mixed support for the presence of cointegration between exports and imports. The recursive least squares‐based cumulative sum of recursive residuals (CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ) tests and the OLS‐based Andrews‐Quandt (AQ) and Andrews – Ploberger (AP) tests suggest the presence of structural breaks in the long‐run relationship between exports and imports for a number of countries. The end‐of‐sample new cointegration breakdown tests performed on the OLS, fully modified OLS, and full‐information maximum‐likelihood estimates of the model suggest the presence of cointegration between exports and imports for most countries. The dominant support for cointegration between trade flows points toward the sustainability of CADs and the validity of intertemporal budget constraint. The macroeconomic stabilization policies seem to have been effective in correcting the market failures and maintaining the steady‐state equilibrium relationship between trade flows in the sample countries. The findings of this study have important implications for empirical research. The structural breaks in the cointegrating vector could occur even over the short time periods and at any point in time. It is essentially important to assess the sustainability of the external position in the presence of long‐period as well as short‐period breaks in the cointegrating vector.     

Estimating the import demand function for China

This paper estimates the import demand elasticity for China using three fully efficient cointegrating regressions and the autoregressive distributed lag (ARDL) method. This paper is the first to accommodate the perception of global risk in an investigation of the information transmission mechanism between the relationship import demand and its determinants in China. The empirical results show that real imports are cointegrated with domestic economic activity, real effective exchange rate, and the perception of global risk. Domestic income is found to have a significantly positive effect on imports. Contrary to theory, the real effective exchange rate carries negative coefficients, which suggests that a decrease in external competitiveness (appreciation) will decrease the level of imports in the case of China. One of the reasons for this may be the tied anti-dumping duty on some import items. Since the perception of global risk adversely affects China's aggregated imports, policy-makers should consider the degree to which the perception of global risk affects the implementation of trade policies.     

Export-led Growth and Import Compression: Further Time Series Evidence From LDCs

This paper conducts tests of the export-led growth and the import-compression hypotheses for four less developed countries (LDCs) – India, Nigeria, Fiji and Papua New Guinea (PNG). Based on Johansen's multiple cointegration test preceded by unit root tests, we test for cointegration between real output, exports and imports. Non-rejection of cointegration between the variables excludes the possibility of Granger non-causality and suggests at least one way Granger causality. Real output, exports and imports are found to be cointegrated in two of the countries and the resulting error-correction models suggest that Granger causality runs from exports and imports to real output in these cases. Exogeneity tests are conducted for exports with respect to real output. However, while the assumption of weak exogeneity is validated in two of the countries, the null hypothesis of super exogeneity is rejected. The test results therefore cast doubts on policy recommendations for the LDCs based on the export-led growth hypothesis.