Balance-of-payment-constrained growth in unbalanced productive structures: disregarded terms of trade negative effects

Abstract:

The aim of this paper is to analyze the relation between foreign asset formation (FAF) and terms of trade (TOT) in countries characterized by unbalanced productive structures (UPS). This is done by modifying the structuralist thesis about the (overstated) positive effects of a rise in TOT on the balance-of-payment equilibrium gross domestic product growth rate. The theoretical analysis follows Thirlwall’s law and its subsequent modifications. The paper’s main contribution will be to explain and formalize the low—and even null—effects of TOT on balance-of-payment constraints due to the quasi-rent generated in the export sector of a UPS. To reinforce this idea, the empirical section econometrically shows the existence of a significant and positive relationship between TOT and FAF in developing countries.

Keywords::

• balance-of-payments-constrained growth
• Thirlwall’s law
• structural heterogeneity
• Argentina

Notes

¹Despite this relative consensus, a large group of post Keynesian researchers and policymakers supported an alternative hypothesis, where expansive fiscal policies and income inequality reductions are important explanations for Latin American sustained GDP growth.

²Uppercase letters are used for variables expressed in levels, and lowercase letters refer to those expressed in growth rates.

³Many empirical works shows that the supply of exports is hardly sensitive to variation in TOT or changes in the real exchange rate in developing countries. Among others, see Berrettoni and Castresana (2009), Catão and Falcetti (2002), and López Gallardo and Cruz (2000).

⁴And keeping the assumption that η = −δ y ψ = −φ.

⁵In order to study some special cases and the stability of the model in depth, see Moreno-Brid (1998). Moreover, an analysis of the limitations of the model can be found in Barbosa-Filho (2002).

⁶We keep the assumption that cross elasticities of demand for imports and exports are equated with price elasticities.

⁷From an empirical and theoretical point of view, portfolio selection theory and uncover interest parity are ineffective tools to understand investment decisions at the micro level and capital flows at the macroeconomic level (see Flood and Rose, 2002; Harvey, 2004).

⁸We do not support the profit rate equalization hypothesis, among other reasons, because of their dependence on the hypotheses of free capital mobility and perfect competition. Furthermore, numerous empirical works account for the absence of any type of tendency toward profit rate equalization at an international level and in different regions of the world (e.g., Bou and Satorra, 2007; Cubbin and Geroski, 1987; McGahan and Porter, 2002; Mueller, 1990; Panigo, 2008.

⁹It is worth noting that, regarding balance of trade, we can expect greater imports due to imitation of the consumer pattern of rich countries (Duesenberry, 1949; Nurkse, 1953).

¹⁰Although there is updated monthly data on dollar purchases, our time period is interrupted in October 2011 due to the implementation of new authorization requirements for foreign currency purchases.

¹¹Analyzing the correlation between both the lagged (lj_li) and forward (fj_li) values of the local interest rate (li) and U.S. dollar purchases (lcpra) since 2007, we can see that lcpra temporarily precedes li (see Appendix).

¹²The kernel-specific smooth function is the Epanechnikov, with a bandwidth of 0.0211.

Additional information

Notes on contributors

Florencia Médici

Florencia Médici is a researcher at the Center of Innovation for Workers (CITRA-UMET/CONICET), and professor at the National University of Moreno (UNM) and University of Buenos Aires (UBA), Argentina.

Demian Tupac Panigo

Demian Tupac Panigo is Director of CITRA-UMET/CONICET and a professor at UNM and National University of La Plata (UNLP), Argentina.