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Ignacio Perrotini-Hernández and Juan Alberto Vázquez-Muñoz
The article draws together the analyses of the interaction between economic capacity (ec), the endogeneity of the natural growth rate (gn) and the growth rate consistent with balance-of-payments equilibrium (gtb) that constrains economic activity. We identify two possible scenarios: the self-correcting scenario where gtb is more elastic than the normal natural rate of growth (gnn) vis-à-vis ec, and the self-aggravating scenario where gnn is more elastic than gtb with respect to ec. We empirically assess our central tenet (ec is a determinant of the relations between gtb, gw and gnn) for the cases of Argentina, Brazil, Chile and Mexico, and found that, in all countries, the relationships between ec and gnn and between ec and gtb are positive, except in the case of Argentina where the relation between gtb and ec was negative in the sub-period 1975–1990.
Excellent Mhlongo and Kevin S. Nell
This paper re-evaluates the recent criticisms of ‘Thirlwall's law’ against the literature on growth transitions. The unpredictable nature of growth transitions in developing economies suggests that the evidence derived from single-regime regression models, on which critics have based most of their arguments, is only suggestive about the long-run causes of growth. A rigorous test of Thirlwall's law requires a more in-depth analysis of turning points in a developing country's growth performance, and whether the growth law accurately predicts the sustainability of growth transitions. These arguments are illustrated with an application to South Africa over the period 1960–2017. The results show that it is misleading to evaluate Thirlwall's law across a single regime. Once regime shifts are controlled for, the growth law accurately predicts South Africa's growth performance during 1977–2003, and sheds light on the sustainable and unsustainable nature of growth transitions across the sub-periods 1960–1976 and 2004–2017, respectively. Since the literature on growth transitions identifies a competitive exchange rate as an initiating source of growth, rather than an individual long-run determinant, the omission of the level of the real exchange rate from the original growth law should not be regarded as a major weakness.
Jesus Felipe, Matteo Lanzafame and Gemma Estrada
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).
Gabriel Porcile and Giuliano Toshiro Yajima
Structuralists and Post-Keynesians share the perspective that in the long run economic growth is shaped by the income elasticity of exports and imports, and that such elasticities are a positive function of the degree of diversification and technological intensity of the pattern of specialization. Since the mid 1970s, New Structuralists began to stress the role of two sets of variables in driving the pattern of specialization: a stable and competitive real exchange rate, and the relative intensity of innovation and diffusion of technology in the center and periphery. In this paper we modify the balance-of-payments-constrained growth model to include these two sets of variables. The model provides a mechanism that ensures the validity of the original Thirlwall perspective, namely that adjustment to the balance-of-payments-constrained equilibrium takes place through changes in the rate of growth of aggregate demand rather than through changes in relative prices. In addition, it shows that a macroeconomic policy aimed at sustaining a competitive real exchange rate is a necessary complement to an active industrial policy for fostering international convergence.
Esteban Pérez Caldentey and Juan Carlos Moreno-Brid
This paper extends the balance-of-payments-constrained (BoPC) growth model and Thirlwall's law to include the terms of trade with and without capital flows. Without capital flows a positive (negative) change in the terms of trade by improving (worsening) export performance can ceteris paribus augment (reduce) the rate of growth of an economy compatible with balance of payments’ long-run equilibrium. With the inclusion of capital flows the BoPC dynamics become more complex. Assuming no changes in the real exchange rate and in the import elasticity of demand, an improvement in the terms of trade can increase the level of the external deficit compatible with BoPC growth. This results from the terms-of-trade effects on the purchasing of exports and on foreign-capital inflows. The positive effect of an improvement in the terms of trade may be partially offset by an appreciation of the real exchange rate and an increase in the import elasticity of demand, when the model is extended to allow for such interactions in the analysis.