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

Abstract

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).

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

“…Thirlwall (2011) surveyed that literature up to about 2010. A recent contribution that is particularly innovative in its econometric methodology is Felipe et al (2019). 3 For more comprehensive presentations, see McCombie & Thirlwall (1994) and Blecker & Setterfield (2019).…”

“…A recent contribution that is particularly innovative in its econometric methodology is Felipe et al. (2019).…”

Thirlwall's law is not a tautology, but some empirical tests of it nearly are

“…33 The authors then test whether these two difference variables are (i) stationary, mean-reverting processes and (ii) zero-mean processes. Using unit-root tests for hypothesis (i) and an autoregressive regression model for (ii), Felipe et al (2019) find that both conditions are met in the Indonesian data. Notably, this approach goes beyond testing for whether actual growth tends to equal the BP-equilibrium rate (which is confirmed by the tests of (ii)) to also show that divergences between the two rates do not persist and the former adjusts to the latter (as implied by the evidence for (i))although the calculated half-lives of the deviations are around five years, indicating 'that deviations from the long-run equilibrium are very persistent' (ibid., p. 550).…”

“…(b) Filtered values at the end of the sample are very different from those in the middle and are also characterized by spurious dynamics'. This is especially troublesome because Felipe et al (2019) find differences in the income elasticities (especially for exports) at the end of their sample compared with the earlier part. Hence, using an alternative method of measuring the trend, such as the one suggested by Hamilton (2018), would be an important sensitivity test for their results.…”

Infraestrutura e elasticidades de comércio exterior: evidências empíricas para China

“…De outra forma, 𝑦 𝑡 − 𝑦 𝐵𝑡 = 𝑦𝑑𝑖𝑓𝑓 𝑡 = 0. Seguindo testes aplicados mais recentemente na literatura (Felipe et al, 2019 e Felipe e Lanzafame, 2020), duas hipóteses são testadas: testes de raiz unitária em 𝑦𝑑𝑖𝑓𝑓 𝑡 (Hipótese 1), e se a taxa de crescimento do BoPC não difere significativamente da tendência da taxa de crescimento (Hipótese 2). 23 Os resultados estão na Tabela 1.…”