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Abstract
While neoclassical growth theory does not consider external demand to be a constraint to growth, the Keynesian approach emphasizes that demand forces are actually the key factors determining growth. In this paper, an attempt is made to introduce the balance-of-payments constraint hypothesis into the neoclassical growth model through a consideration of a sample of 14 European Union (EU) countries over the period 1980–2004. A panel data model is estimated using different proxies for human capital and foreign trade as conditioning factors to explain growth. The income-elasticity ratio with respect to exports and imports and the degree of openness are also used to capture the effects of (non-price) competitiveness and trade intensification on growth. The regression analysis shows that the inclusion of human capital, external trade and interaction terms between them have significant effects on growth. Depending on the combination of variables used, the constraining factorto growth can be shown to be due to foreign trade, human capital or both.
Notes
1. Thirlwall (1979), Bairam (1988), Marin (1992), Muscatelli, Stevenson, and Montagna (1994), Atesoglu (1995) and McCombie (1997) are some of the studies that have been carried out on the issue of export-led growth.
2. Although Romer (1986) and Lucas (1988) point out the positive effects of international trade on growth, Rodriguez and Rodrik (2000) question the sign and the significance of such impact.
3. Button and Pentecost (1993) blame the exchange rate mechanism for the reduction of the speed of convergence among the EU members during the 1980s. Borota and Kutan (2008) offer an overview on the convergence issue across the EU, arguing that economic integration had positive growth effects in Europe.
4. For studies on the positive impact of human capital on income, see Söderbom and Teal (2003) and Ciccone and Papaioannou (2006).
5. This hypothesis is reasonable for the EU countries with free trade and towards a fixed exchange rate over the period considered aiming to adopt a single currency by 1999.
6. The income-elasticity ratio with respect to exports (ϵ) and imports (π) measures the non-price characteristics of the goods produced and traded associated to quality, design, durability, confidence, innovation, marketing and sales efficiency. These are known as the supply characteristics.
7. The set is made up by Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden and the UK.
8. A detailed description of the variables and data sources is provided in Appendix1.
9. The terms net foreign balance and net foreign trade will be used alternatively and refer to net exports of goods and services.
10. For a detailed analysis of the balance-of-payments problems in the UK, see Thirlwall and Gibson (1992).
11. This indicator is a direct measure of the stock of human capital (Islam, 1995). However, it is limited in the sense that it does not allow us to understand the efficiency of human capital in a broader sense.
12. For this argument, see Mankiw, Romer, and Weil (1992).
13. The exogeneity of interaction terms was tested by the use of the difference-in-Hansen test.
14. The regressions were run by Stata.
15. There are several growth studies based on 5‐year intervals, among them those of Islam (1995), Caselli, Esquivel, and Lefort (1996), Söderbom and Teal (2003) and Economidou, Lei, and Netz (2006).
16. No significant results were obtained from its inclusion in the regression.
17. To the annual population growth rate ni ,t , we added (g + δ) = 0.05, with g the rate of technological progress and δ the rate of (human and physical) capital depreciation, equal across countries and through time. For more details on this issue, see Islam (1995).
18. These results are not given here but are available from the authors on request.
19. The cut-off point is given by: exp(0.5272/0.1524) = exp(3.459) = 31.8.