The Nature of Economic Growth
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The Nature of Economic Growth

An Alternative Framework for Understanding the Performance of Nations

A. P. Thirlwall

This concise book, by one of the leading scholars in development economics, has been developed from a series of lectures given to masters students and will serve as an excellent introduction to the principles of growth and development theory.
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Chapter 5: Balance of Payments Constrained Growth: Theory and Evidence

A. P. Thirlwall


It has been a central feature of most of my own work on growth to try and put demand back into growth theory, and to argue that for most countries demand constraints bite long before supply constraints operate, and that, to understand growth rate differences between countries over the long run, the analysis and understanding of demand constraints cannot be ignored. In an open economy, the major constraint on the growth of demand (and therefore growth performance) is likely to be its balance of payments. At a theoretical level, it can be stated as a fundamental proposition that no country can grow faster than that rate consistent with balance of payments equilibrium on current account unless it can finance ever-growing deficits, which, in general, it cannot. There is a limit to the deficit to GDP ratio (Moreno Brid, 1998), and a limit to the debt to GDP ratio beyond which the financial markets become nervous and a country is unable to borrow more. If capital flows are included in the model, every country must have a growth rate consistent with its overall balance of 66 Thirlwall 02 chaps rprnt 66 28/6/07 15:02:05 Balance of payments constrained growth 67 payments because, by definition, the total balance of payments must balance. At the empirical (observational) level, the evidence for the proposition I am making is that many countries find themselves in balance of payments difficulties, and have to constrain growth, while the economy still has surplus capacity and surplus labour....

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