Models of Balance of Payments Constrained Growth: History, Theory and Empirical Evidence

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In the Thirlwall model the ultimate constraint on growth is a shortage of foreign exchange or the growth of exports to which factor supplies can adapt. It is changes in growth that equilibrate the balance of payments, not changes in relative prices in international trade.

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McCombie, J. London; Routledge. While the econometric estimates do not differ substantially, numerical simulations allowed us to conclude that not considering foreign content of exports can lead us to overestimate the BPCG growth rate, which can give rise to relevant distortions in the long run. The analysis presented here shows that a multisectoral analysis yields a more inclusive approach to the role of building a growth strategy based on foreign content of exports. If, on the one hand, such a strategy allows manufacturers to benefit from having access to varied and good quality intermediate inputs, on the other hand, it lessens the gains from increased exports, potentially leading to a tightening rather than a loosening of the BoP constraint, mainly if the intermediate inputs present high elasticity with respect to exports.

The outcome, namely if such a strategy is beneficial or harmful to growth, is a question addressed in this paper analytically and empirically concerning the Mexican economy. Besides this introductory section, this article comprises three more sections. The fact that Mexican exports are highly dependent on foreign content of exports has been highlighted by some authors as Moreno-Brid et al.

One of the striking aspects of this arrangement is that the exports of final goods require massive imports of intermediate goods, giving rise to the question of whether such a strategy is harmful to growth under a BoP constraint. Notwithstanding the BPCG model has implicitly considered the role of the structure, it was not originally designed for analyzing the impacts of a strategy based on imports of intermediate goods insofar as it considers only the exports and imports of final goods see Thirlwall Conscious of such limitation, Blecker and Ibarra have explicitly introduced the possibility of importing intermediate goods in a BoP framework with four sectors, two exporters, namely manufactured exports and primary commodities, and two importers, namely intermediate and final goods.

By considering the growth rate of imports of intermediate goods as a function of the growth rate of exports of manufactures, the authors have found a reduction in the BoP equilibrium growth rate from an analytical viewpoint.

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More specifically, they have found that the income elasticity of imports of intermediate goods generates a decrease in the income elasticity of exports of final goods. In what follows, we derive a multisectoral version of the MSTL in the same spirit of Blecker and Ibarra but now with an arbitrary number of sectors.

To accomplish that, we consider the existence of two countries namely D domestic and F foreign see Nishi and carry out the analysis from the viewpoint of domestic country. We also consider that price competitiveness plays a role, which allows us to write the sectoral demand for the intermediate input as:.

We also consider the usual export and import functions for the final goods, respectively, as:. By differentiating expressions 1 , 2 and 3 , we obtain:. Note that expression 4 is the multisectoral counterpart of the demand function for imports of intermediate goods introduced by Blecker and Ibarra , p. Substituting 5 in 4 allows us to obtain:. From Araujo and Teixeira and Nishi , the BoP equilibrium in the presence of intermediate inputs may be written as:.

Expression 10 considers that in equilibrium the imports of final and intermediate must be wholly financed by exports since we are not considering the possibility of capital inflows, external debt, etc. Then the main change about Araujo and Lima is that now the domestic country imports two different goods, namely final goods and intermediate goods.

But, unlike Blecker and Ibarra , we do not assume that the prices of such goods are the same.

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By differentiating expression 10 concerning time, it yields after some algebraic manipulation the following expression:. By substituting 7 , 8 and 9 in 12 , it yields after some algebraic manipulation, the growth rate consistent with the BoP equilibrium:. Note that even in the case where the sectoral income export elasticities are constant, a country can achieve higher growth rates by increasing the export share of those sectors with higher income elasticities for exports.

Footnote 5 But now both the numerator and denominator incorporate the presence of foreign content of export.

In the denominator, it is just a matter of decomposition of the imports between final and intermediate goods that were not taken into consideration in the original MSTL. However, the most important difference is in the numerator, where the income elasticity of exports is decreasing in those sectors where intermediate inputs are imported.

The additional message that accrues from expression 13 is that the growth rate consistent with intertemporal equilibrium in the BoP is lower in the presence of intermediate goods being imported to master final goods to export. Although this result is akin to the one obtained by Blecker and Ibarra , it is worthy to highlight a substantial difference.

Those authors have considered a particular structure for the economy, with the export sectors, for instance, being disaggregated in two sectors, namely manufactured and other goods, the latter comprising primary commodities, chiefly oil and agricultural products. The authors then reasonably assume that both the growth rate of exports of the primary goods and their price grow at an exogenously given rate, presuming that conditions in global commodity markets determine their quantities and prices. Here we do not make these assumptions insofar as our first aim was just to obtain a generalization of the MSTL.

Although we do not assume a structure ex - ante for the economy, the model can accommodate such sectoral arrangements with minor changes in the outcome. As previously stated, one of the aims of this paper consists in comparing the predictive power of the original MSTL and the version presented here with foreign content of exports. To reckon the BPCG rate, we have estimated two different versions of the MSTL, namely the one by Araujo and Lima and expression 13 derived here in the presence of intermediate goods.

For the former, according to the methodology adopted by Gouvea and Lima , we consider that all imported goods are computed as final goods, not admitting the existence of foreign content of exports. For the latter, we have split imports into two categories, namely final and intermediate goods. In this regard, we intend to evaluate which of these versions is best suited to explain the economic growth in Mexico from to The nomenclature of these sectors and their abbreviations are: 1 food and live animals prim , 2 crude materials, inedible, except fuels crudem , 3 mineral fuels, lubricants and related materials lowm , 4 manufactured goods classified chiefly by material midm , 5 machinery and transport equipment highm , and 6 miscellaneous manufactured articles others.

From this information, we have reckoned the sectoral trade as well as the relative share of exports and imports in the trade sector. The other variables used, namely the economic growth rate of Mexico gdpmex , the growth rate of the world economy gdpwld and the growth rate of the bilateral real exchange rate exch were drawn from the World Development Indicators WDI. Although the relevant equations of the theoretical model were derived regarding growth rates, we have decided to follow Gouvea and Lima and Blecker and Ibarra who estimated the model by using data in logarithm by using the Johansen methodology.

On the other hand, primary products, which once held a That shows that there has been, to some extent, a structural shift in favor of sectors with a higher income elasticity of demand as pointed out by Gouvea and Lima , implying a better growth performance. This range of view is supported by Blecker and Ibarra , p.

While, the imports of hi-tech products highm decreased by four percentage points or so, the share of intermediate goods midm Mexico has increased in the imports by approximately four percentage points between and The reflection of that on the dynamics of trade of the Mexican economy can be seen in Fig. Moreover, the annual Mexico average per capita economic growth 1. Other factors such as the fierce competition of the Chinese producers in the US market after China entry in the WTO in and repeated economic crisis may help to explain such performance, leading Blecker and Ibarra to conclude that the external constraint was not binding through the whole period.

That shows evidence that had Mexico succeeded in performing a complete structural change; then it would keep growth rates consistent with those in the pre-liberalization period see Blecker and Ibarra Source : WDI. Hence, the Johansen test was used to determine whether the I 1 series are cointegrated. Then, whenever it is not possible to reject the null hypothesis of the existence of at least one cointegration vector, we estimate the equations by the Johansen method. The advantage of such an approach is that there is no loss of information since all variables are in levels.

Thirlwall's Law

Due to the lack of data available for the sectoral prices in the period considered, we used the rate of the effective bilateral real exchange rate US-Mexico as a proxy for the sectoral real exchange growth rate see Gouvea and Lima , which corresponds to the growth rate of the effective bilateral real exchange rate.

Footnote 7. Firstly, it may be noted that practically all parameters concerning the real exchange rate are statistically significant. It might be concluded that changes regarding trade play a role Ibarra and Blecker , that is, effects from real exchange rate affected the Mexican trade performance in recent decades substantially.

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On the other hand, the intermediate import sectors have shown to be playing a negative effect on the elasticity ratio and, hence on the growth performance. Note that the ratio of the elasticities in the model with intermediate inputs is lower than the ratio of the elasticities in the traditional MSTL. However, until , the difference between the ratios of elasticities is almost negligible, while from on, that difference increased slightly.

In the mid-eighties, however, foreign content of exports acquired a more prominent position in explaining the differences between the estimates. Therefore, we conclude that the imports of intermediate goods due to foreign content of exports are of some importance to understanding the reduction both in the ratio of the income elasticities and the growth rate of the Mexican economy, a result also found by Ibarra Therefore, Fig.

Source : Elaborated by the authors. By performing a forecasting exercise, we have found that the average absolute error of the forecast made by the traditional model was 3. Footnote 8 According to them, other factors than the BoP constraint should be considered to explain Mexican growth performance since As can be seen, the results show that MSTL with intermediate goods performs better than the original MSTL insofar as the adjusted R-squared for the former is slightly higher than that of the latter. Our conclusions accrue from the fact that the lower the values of the BIC, AIC and RMSE statistics the best the fit of the model under consideration, which allows us to conclude that the MSTL with intermediate inputs has a better fit than the standard one for the case of Mexico.

These results show that at least for the case of the Mexican economy since , the version with intermediate goods is better to explain the Mexican economic growth than the original MSTL. A possible interpretation of such a result is that the imports of intermediate goods did play a decisive role for the Mexican growth in the post-liberalization period—after Then, it is possible to infer that the MSTL with intermediate goods has a slight predictive advantage over the traditional one.

Notwithstanding the predictive gain may be small, the theoretical conclusions are indeed relevant. By using the original MSTL in the presence of massive imports of intermediate goods with high-income elasticity can lead us to overestimate the growth performance in the long run, yielding an artificially higher income than what could be obtained by using the extended MSTL derived here. In fact, this will be better explained in the next subsection, by using a numerical simulation.

To further investigate the consequences when foreign content of exports is accounted for, the econometric results for the Mexican economy were used to feed a numerical routine. These parameters were used to compare the performance of the Mexican economy under two scenarios, namely with and without disaggregating the imports regarding intermediate goods. Concerning the share of each sector in imports and exports, we have chosen to make them constant through time thus keeping the composition of exports and imports according to the values observed in Concerning the growth rate of the world income, we have used the expression 14 below to reckon it in each period:.

With such information, and by using the parameters estimated econometrically it was possible to generate the growth rate of the Mexico economy under the two scenarios, namely with and without intermediate goods by using the following expression:. Note that for each year the difference between the simulated economic growth rates is increasing—see Fig. In this sense, while a growth strategy based on foreign content of exports with high-income elasticity seems not to yield relevant differences in the BPCG rates, when we consider a broader time horizon, the small percentage differences in growth over time can cause large percentage differences in per capita income.

This confirms what was stated in the final of the previous subsection, namely by using the original MSTL to estimate the BPCG rate in the presence of foreign content of exports can have some negative side effects mainly if the intermediate inputs present a high-income elasticity with respect to exports. As it can be seen from them, the difference in the PNB per capita by using the original and the extended MSTL presents a meaningful difference in the long run, being higher in the first case.

Therefore, the original MSTL tends to overestimate the per capita income in the long run. Finally, Fig. By using the extended MSTL, we conclude that the economy has a worse growth performance than that without intermediate inputs. These results allow us to conclude that although Mexico has obtained some success regarding growth performance, the strategy of relying on massive foreign content of exports may be flawed insofar as it reduces the chance of catching up with advanced economies in the long run.

In this vein, such results suggest that it is essential for Mexico to reduce its dependence on imports of intermediate goods with high-income elasticity concerning exports. So, we conclude that a growth strategy driven by the absence of imports of intermediate high-income elasticity goods is superior regarding the growth performance of an approach based on imports of such goods. International Economics and Economic Policy 10 3 , , Technological and Economic Development of Economy 24 1 , 48——66 , Renewable and Sustainable Energy Reviews 73, , Paper-Faculdade de Economia da Universidade de Coimbra , Artigos 1—20 Mostrar mais.

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