Thirlwall’s Law and uneven development under Global Value Chains: a multi-country input–output approach

Abstract

A notable explanation for uneven development between countries has been the problem of balance of payments constraints, as advanced by Thirlwall (1979). For developing countries in particular, this can undermine growth when low-income elasticities for exports combine with high-income elasticities for imports, as captured by Thirlwall's Law, for which the vast majority of studies have provided empirical support (see Thirlwall 2013, Table 5.2). The suggested policy prescription under this balance of payments-constrained growth model is for structural change to promote exports in favour of imports. This structural change approach has recently been developed with the specification of income elasticities for industrial sectors under the Multisectoral Thirlwall Law

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

“…After presenting simpler examples involving two or three countries, Trigg (2020) derives the general solution for the BP-equilibrium growth rate of any given country j relative to another country k (in a world of R > 2 countries) as follows:…”

“…The original MSTL framework of Araujo & Lima (2007) has been used in one important recent extension, which is designed to incorporate “global value chains” (GVCs) in a BPCG model. Trigg (2020) goes back to the Pasinettian roots of the original MSTL model and develops a formulation using input‐output analysis. In this approach, it is possible to generalize the MSTL by incorporating trade in intermediate goods between any number of countries.…”

“…After presenting simpler examples involving two or three countries, Trigg (2020) derives the general solution for the BP‐equilibrium growth rate of any given country j relative to another country k (in a world of R > 2 countries) as follows: $$\begin{equation}\frac{{{{\hat Y}^j}}}{{{{\hat Y}^k}}} = {\xi ^{k,j}}\frac{{{{\bf{n}}^j}{{\bf{c}}^k}}}{{\left( {\sum\nolimits_{\iota = 1}^R {{{\bf{n}}^\iota } - {{\bf{n}}^j}} } \right){{\bf{c}}^j}}}\end{equation}$$where ξ k , j is the ratio of population (employment) in country k to country j , n ι is a $$(1 \times GR)$$ row vector of vertically integrated (direct and indirect) labor coefficients for intermediate goods exported by any country ι in all sectors and to all other countries, c ι is a $$(GR \times 1)$$ column vector of per capita (per worker) consumption coefficients for all goods (including both domestic products and goods imported from all other countries) for country ι , and again G is the number of goods. This approach, which Trigg (2020) calls the “Multi‐Country Sectoral Thirlwall's Law” (MCSTL), reflects how much value added is included in a country's exports and imports, rather than the gross value of that trade. So, for example, if country j engages in assembly of imported intermediate goods for export with relatively little domestic value added contained in the exports, the coefficients in the n j vector would be correspondingly low, and this would depress the country's relative growth rate for any given level of foreign consumption (as reflected by the coefficients in c k ) and other parameters.…”

Measuring the International Structural Competitiveness and the Hierarchy of National Economies: The Case of the European Union

“…The more developed countries mostly produce and export commodities of higher technological level and higher income elasticity of demand compared to those produced by the less developed countries (Prebisch 1959;Krugman 1989;Thirlwall 1999;Economakis et al 2014Economakis et al , 2015Economakis et al , 2018. This means that there is a dissimilarity in the structure of production-trade between the more and the less developed countries, which is reflected in the different "relative" income elasticities of demand, that is income elasticities of demand for an economy's exports against those for its imports (Krugman 1989;Thirlwall 1991;Trigg 2020). As a consequence, as income increases, the demand for products from the more developed countries is higher than that for products from the less developed countries (the so-called "Engel's Law").…”

Impact of Globalization and Internationalization Processes on Added Value in EU Countries

“…Another factor is the US-China trade war which has already forced multinational companies to relocate production from China [20]. However, one of the problems [21] is the role of the Global Value Chain (GVC) in specifying sectoral income elasticity. Because intermediate product inputs can be traded more than once between countries in the global production network, gross trade flows may fail to find the original source of added value and overestimate its extent.…”