Thirlwall's law, external debt sustainability, and the balance-of-payments-constrained level and growth rates of output

Abstract

Thirlwall's law, given by the ratio of the rate of growth of exports to the income elasticity of imports is a key result of balance-of-payments-constrained long-run growth models with balanced trade. Some authors have extended the analysis to incorporate long-run net capital flows. We provide a critical evaluation of these efforts and propose an alternative approach to deal with long-run external debt sustainability, based on two key features. First, we treat the external debt-to-exports ratio as the relevant indicator for the analysis of external debt sustainability. Second, we include an external credit constraint in the form of a maximum acceptable level of this ratio. The main results that emerge are that sustainable long-run capital flows can positively affect the long-run level of output, but not the rate of growth compatible with the balance-of-payments constraint, as exports must ultimately tend to grow at the same rate as imports. Therefore, Thirlwall's law still holds.

Current External Challenges to the Economic Expansion of Emerging Markets: A Balance-of-Payments Constrained Growth Perspective

“…Equation 22represents the growth rate of domestic income consistent with the short-term constraint given by the trade balance and the inflow of foreign capital. In this model, the business cycle is given by the difference between the short-term and long-term rates of growth of the domestic economy: Another approach to the inclusion of capital flows within this theoretical perspective is that of Bhering et al (2019)…”

“…In conclusion, Bhering et al, (2019) take the debt/exports ratio as the relevant sustainability indicator because exports are the source of cash flow in international currency used to pay liabilities, in addition to introducing an external credit restriction in the form of a maximum level.…”

State-owned and multinational enterprises partnership as an import substitution strategy: A narrative ARDL approach to the case of oil contracts in Argentina (1958–1962)

“…Moreno-Brid (1998) introduced a constant trade account deficit to income ratio as a way to model the Balance of Payments constraint. We follow a similar strategy, although we normalise the trade deficit with exports because exports are a proper measure of a country's ability to repay liabilities invoiced in foreign currency (Bhering et al, 2019). We introduce the trade deficit-to-exports ratio as a threshold (k), representing the maximum trade deficit that the international capital market is willing to finance.…”

Investigation of Balance of Payment Constrained Growth Model: The Impact of Export Growth, Capital Flows, and Real Effective Exchange Rate on Growth of the UK

“…Four decades have elapsed since the emergence Thirlwall's law; remarkable progress and adaptations have trailed this standpoint. Some of the extensions and modifications include the incorporation of capital flows- Thirlwall and Hussain (1982); sustainable deficit and debts- McCombie and Thirlwall (1997), Moreno-Brid (1999), andBhering et al (2019); interest rate payments on debt- Moreno-Brid (2003), North-South models- Dutt (2002), andSasaki (2021); Multisectoral models-Araujo 2007; internally and externally constrained models- Soukiazis et al (2014) and Panshak et al (2019a); cumulative causation and alternative time frames Ribeiro et al (2017).…”