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

2019 ◽  
Vol 7 (4) ◽  
pp. 486-497
Author(s):  
Gustavo Bhering ◽  
Franklin Serrano ◽  
Fabio Freitas
Keyword(s):  
Capital Flows ◽  
Income Elasticity ◽  
Growth Models ◽  
Critical Evaluation ◽  
External Debt ◽  
Balance Of Payments ◽  
Debt Sustainability ◽  
Rate Of Growth ◽  
Long Run ◽  
Alternative Approach

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.

scholarly journals The Dynamic Impact of Public External Debt on Capital Formation in Sub-Saharan Africa: The Pooled Mean Group Approach

2021 ◽  
Vol 3 (4) ◽  
pp. 144-157
Author(s):  
Chukwunenye N Kocha ◽  
Marshal Iwedi ◽  
James Sarakiri
Keyword(s):  
External Debt ◽  
Capital Formation ◽  
Debt Service ◽  
Sub Saharan Africa ◽  
Interest Payment ◽  
Debt Sustainability ◽  
Pooled Mean Group ◽  
Long Run ◽  
Short Run ◽  
Sub Saharan

The increasing reliance on public external debt stocks in Africa and other developing countries has raised the question of debt sustainability, especially in the face of Covid-19, which has forced many counties (both developed and developing) into an unforeseen and unplanned recession. This study contributes to the literature on debt sustainability by examining the effect of public debt on capital formation in Sub-Saharan Africa (SSA) from 2000 to 2008 using the pooled mean group estimation approach. The debt variables considered are external debt stock, debt service on external debt, and interest payment on external debt. Consistent with the overhang theory, our results show that increasing external debt stock and interest payment on external debts only have a marginal impact on capital formation in the short run and exerts a serious negative effect in the long run. Our results also show that debt service burden has a positive effect on gross fixed capital formation in the long run. Therefore, we argue that despite being faced with a huge debt service burden resulting from large external debt stock, SSA countries are not neglecting investments in critical infrastructures needed to drive economic growth. However, we recommend that increasing government revenue base, minimizing economic waste associated with public expenditure, and intensifying negotiations for debt relief may be a plausible way out.

scholarly journals BALANCE OF PAYMENTS CONSTRAINED, STRUCTURAL CHANGE AND NATIONAL INNOVATION SYSTEM

2019 ◽  
Vol 7 (7-12) ◽  
Author(s):  
Douglas Alcântara Alencar
Keyword(s):  
Income Elasticity ◽  
Growth Models ◽  
Average Rate ◽  
Innovation System ◽  
National Innovation System ◽  
Point Of View ◽  
Systems Of Innovation ◽  
Long Run ◽  
Innovation Approach ◽  
Major Criticism

There is one major criticism about balance of payment constrained growth models, which states that the long run growth is determined by the average rate of exports in relation with the ratio of income elasticity of imports. If the income elasticity of imports is bigger than the average rate of exports, economic growth will be constrained. The empirical evidence about this approach, known as Thirlwall’s Law, can be found in several papers as Thirlwall and Hussain (1982), McCombie (1989), Moreno-Brid (2003), Lima and Carvalho (2009), and Britto and McCombie (2009). However, the approach does not have a complete consistent explanation about why the external constraint occurs. Some authors have tried to explain why the countries have their growth constrained using the Systems of Innovation approach, as Silveira, Romero and Britto (2010), Missio and Jayme Jr (2011), Jayme Jr and Resende (2009), and Silva and Hasenclever (2010). In their point of view, the main determinant of the deterioration of the terms of trade in an economy lies in the lack of maturity of its National Innovation System.

scholarly journals Can Pakistan Raise More External Debt? A Fiscal Reaction Approach

2020 ◽  
Vol 12 (4) ◽  
pp. 21-42
Author(s):  
Sadia Mansoor ◽  
Mirza Aqeel baig ◽  
Irfan Lal
Keyword(s):  
External Debt ◽  
Negative Relationship ◽  
Macroeconomic Policies ◽  
Debt Sustainability ◽  
Debt Burden ◽  
Long Run ◽  
Significant Negative Relationship ◽  
Fiscal Reaction Function ◽  
Debt Policy

This study has assessed the role of existing policies in determining the state of debt sustainability for the Pakistan economy (1980- June 2019) through fiscal reaction function. This study adds to the literature in two aspects. First, a policy index has been constructed to formulate a debt-policy interactive term that implies whether or not existing macroeconomic policies contribute in making external debt sustainable in Pakistan. Second, this study has gauged the potential sustainable external debt through in-sample forecast method. The estimated results obtained by the ARDL method show that Pakistan has just entered into a phase of unsustainable debt burden in the long run as fiscal reaction analysis exhibits the weak significant negative relationship between primary balance and external debt to GDP ratio. Moreover, existing macroeconomic policies also show a negative association with the primary balance that implies the ineffectiveness of policies in making external debt sustainable for Pakistan. This study suggests that an increase in foreign inflows through remittances or export earnings may improve the debt sustainability state in Pakistan.

scholarly journals THE MACROECONOMIC IMPLICATIONS OF CONSUMPTION: STATE-OF-ART AND PROSPECTS FOR THE HETERODOX FUTURE RESEARCH

2017 ◽  
Vol 35 (especial) ◽  
Author(s):  
Lídia Brochier ◽  
Antonio Carlos Macedo e Silva
Keyword(s):  
Growth Models ◽  
Private Investment ◽  
Final Demand ◽  
Future Research ◽  
Long Run ◽  
Alternative Approach ◽  
Autonomous Consumption ◽  
Macroeconomic Implications ◽  
State Of Art

The recent US economic scenario has motivated a series of heterodox papers concerned with household indebtedness and consumption. Though discussing autonomous consumption, most of the theoretical papers rely on private investment-led growth models. An alternative approach is the so-called Sraffian supermultipler model, which treats long-run investment as induced, allowing for the possibility that other final demand components – including consumption – may lead long-run growth. We suggest that the dialogue between these approaches is not only possible but may prove to be quite fruitful.

scholarly journals New Structuralism and the balance-of-payments constraint

2019 ◽  
Vol 7 (4) ◽  
pp. 517-536 ◽  
Author(s):  
Gabriel Porcile ◽  
Guiliano Toshiro Yajima
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Income Elasticity ◽  
Aggregate Demand ◽  
Positive Function ◽  
Balance Of Payments ◽  
Long Run ◽  
Innovation And Diffusion ◽  
International Convergence ◽  
Pattern Of Specialization

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.

scholarly journals Endogeneity of the elasticities and the real exchange rate in a balance of payments constrained growth model: cross-country empirical evidence

2019 ◽  
Vol 5 (2) ◽  
pp. 214-238
Author(s):  
Renato S. Campos ◽  
Frederico Gonzaga Jayme Jr. ◽  
Gustavo Britto
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Income Elasticity ◽  
Growth Models ◽  
Balance Of Payments ◽  
Sustainable Growth ◽  
The Real ◽  
Income Elasticities ◽  
Sustainable Growth Rate ◽  
Cross Country

Balance of payments constrained growth models are notable for their longevity. This is especially true for the case of Thirlwall’s Law, which defines that a country’s sustainable growth rate is given by the ratio between the income elasticity of exports and that of imports. In light of this, the current paper explores the hypothesis that the income elasticities of this type of models are endogenous. The debate on the latter is resurgent in the literature.  The results provide evidence that the ratio is, indeed, exogenous, and that the level of the real exchange rate influences economic growth as it determines such ratio. In other words, the real exchange rate is important for improving non-price competitiveness without, however, making the ratio between elasticities endogenous.

Europe’s Real Economic Challenges

2017 ◽  
Author(s):  
Martin Sandbu
Keyword(s):  
Capital Flows ◽  
Demand Management ◽  
Aggregate Demand ◽  
Balance Of Payments ◽  
Living Standards ◽  
Real Economy ◽  
Single Currency ◽  
Long Run ◽  
National Borders

This chapter defines the three main economic challenges of the members of the single currency. The first is to deal better with balance-of-payments crises — both finish the job of fixing the financial fragmentation from 2010–11 and safeguard against future ones. This is a financial and monetary task, one of ensuring that capital flows across national borders in an orderly and efficient way. The second challenge is a ‘real economy’ task of ensuring that each economy's resources are fully employed: the classic macroeconomic problem of aggregate demand management. Both of these tasks are largely about undoing self-inflicted errors. Finally, the long-run challenge is to make labour and capital as productive as they can be, which is what sustains long-term improvement in living standards.

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