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

Abstract

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.

Why Thirlwall's law is not a tautology: more on the debate over the law

“…We concentrate on the argument espoused by Blecker (2016), who follows Clavijo Cortes and Ros Bosch (2015), and show that it rests on a fundamental confusion between the mathematical calculation of an elasticity and its econometric estimation. Of course, the principle of testing and determining whether or not relationships in economics are statistically significant is the whole rationale for econometric analysis.…”

“…However, ironically, the same argument criticizing the law has recently been put forward again. See, inter alios, Blecker (2016) and Razmi (2016).…”

Cycles, economic structures and external constraints

“…If the actual growth rate has, in the long run, a higher rate than the BP compatible one, it results in imbalances in the current account, leading the economy to an external crisis. The BPCM consists in a demand-led theory that explains growth in a post-Keynesian perspective for the long-run (Blecker, 2016).…”

“…In this model, 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 La Marca model by imposing the Balance of Payments Constrained Model (BPCM) main assumptions (Blecker, 2016): (I) Price-neutrality (the real exchange rate does not affect long-run economic growth), (II) stability of the external sector (exports and imports grow at the same rate), and (III) a fixed income distribution. We 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 (economic activity leads to increases in productivity).…”

“…2) Zero growth rate in the current account, avoiding the existence of structural deficits in the long run, another central assumption of the BPCM (Blecker, 2016).…”