Balance-of-payments-constrained growth and convergence: one more piece of the jigsaw

Abstract

Broadly speaking, the balance-of-payments-constraint hypothesis as developed by Thirlwall (1979) has been empirically supported. Yet, it fails to interpret correctly the necessary conditions for convergence. Although the neoclassical explanation of economic growth is not necessarily the correct one, it is a fact that some countries have indeed converged to others. When Thirlwall's model accounts for the possibility of convergence, it shows two main puzzling implications since it depends on income elasticities. First, a higher income elasticity to exports/imports ratio in backward countries not only implies convergence but divergence in the long run. Second, the non-price competitiveness is higher in the backward countries since they have a higher ratio. This study aims at developing a model that is able to reconcile the balance-of-payments-constraint hypothesis with convergence. Subsequently, it is applied to countries of the Organization for Economic Cooperation and Development (OECD).

Keywords:

• External constraint
• convergence
• growth