Essays on Balance of Payments Constrained Growth: Theory and Evidence

Essays on Balance of Payments Constrained Growth: Theory and Evidence

Essays on Balance of Payments Constrained Growth: Theory and Evidence

Essays on Balance of Payments Constrained Growth: Theory and Evidence

Synopsis

This collection of essays explores the relationship between a country's balance of payments and its rate of economic growth. The evidence and ramifications presented here will be of interest to economists and policy-makers in developing countries.

Excerpt

The orthodox, mainstream (classical and neoclassical) approach to the analysis of the growth performance of countries is to focus on resource availability and the supply of factor inputs, and to explain growth rate differences between countries in these terms. Heavy emphasis is placed on capital accumulation and technical progress. It should be obvious, however, that resource availability itself is not a sufficient condition for growth because resources may be unemployed or underutilised. It should be equally apparent that most resources for growth are not fixed in supply, or exogenously given to an economic system, which conventional growth and trade theory tends to assume. Most resources for growth, such as the quantity and quality of labour inputs, capital accumulation and improved productivity through technical progress, are elastic in supply and endogenous to an economic system, dependent on the growth of output itself. This insight provides the starting point for the debate between those who believe that growth is supply driven (and analyse growth in this way) and those who believe that growth is demand driven, and that it is constraints on demand-be they economic or institutional-that explain growth rate differences between countries. One major economic constraint is the availability of foreign exchange. If a balance of payments deficit, or foreign exchange shortage, is not automatically eliminated through a change in the relative prices of domestic and foreign goods, it immediately becomes a constraint on demand if the deficit cannot be indefinitely financed at a constant rate of interest, and will therefore affect the growth process. This is the basic thesis of this book of essays, which elaborates theoretically, and supports empirically, the central proposition that it is impossible to understand differences in the long-run economic performance of nations without reference to the balance of payments. Before turning to the essays, however, the reasons why orthodoxy ignores the link between trade, the balance of payments and growth needs to be understood.

One reason is that mainstream economists have an abiding faith in the price system which leads them to believe that the balance of payments is self-equilibrating through internal or external relative price movements. In particular, if the exchange rate is endogenous to the current account, a balance of payments deficit can never be a constraint on output growth because currency depreciation will increase the value of exports and/or decrease the value of imports.

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.