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I. Introduction
The Thirlwall (1979) balance of payments constrained growth (BOP) model postulates that the
balance of payments position of a country is the main
constraint on economic growth, because it imposes
a limit on demand to which supply can adapt. The
model has been tested extensively by regressing the
McGregor and Swales (1985) suggest that the model can be tested by regressing the actual domestic growth rate on the
predicted growth rate, and test whether the regression coefficient is equal to unity and the constant term is equal to zero.
McCombie criticizes McGregor and Swales on the grounds that the independent variable is itself calculated using estimated
parameters and hence is subject to errors.
Applied Economics Letters ISSN 13504851 print/ISSN 14664291 online 2006 Taylor & Francis
http://www.tandf.co.uk/journals
DOI: 10.1080/13504850500404886
763
G. M. Ghani
764
countries for the period 1980 to 2000, and we extend
the McCombies individual country test using export
elasticity.
aij ln Ycjt
j 1, . . . , 15
bk PXkt
"i
mi
ywi
"i ywi
yc i mi
) "i i w w
i
yi
yi
765
i 1; . . . , 26
k 1; . . . , 25
First a price index is constructed for each of the top 26 markets of country i using the export prices of 25 other top exporters
to that market weighted by their share of exports in a particular year. Then the resulting 26 price indexes are combined with
the same weights used to calculate the foreign GDP for country i. Hence each exporter has a price index comparing the
exporters price with the weighted average of the export prices of its 25 competitors in each of the 26 markets. If this procedure
is used, developing countries will compete with industrial countries that are not true. Houthakker and Magee (1969) use
these procedures to estimate trade elasticities for industrial countries, hence developing countries is not a big issue.
3
Hussain (1999) shows that 17 out of 29 African countries and 5 out of 11 Asian countries the implied import elasticity is not
statistically different from estimated import elasticity. Using elasticity estimation from Wu (2003) it was found that 9 out of 34
the implied import elasticity is not statistically different from estimated import elasticity and 15 out of 34 the implied export
elasticity is not statistically different from estimated export elasticity.
G. M. Ghani
766
Table 1. The balance of payments constrained model predicted growth rate against the actual
domestic growth rate (19802000)
Industrial
y 0:004 1:17y
0:71
Asia
y 0:025 0:82y
1:39
Africa
Latin America
y 0:013 0:62y
2:09
All Countries
0:85
0:79
jtj 0.604*
R 0.32
jtj 0.372*
R2 0.33
jtj 1.78*
R 0.38
2:90
y 0:004 1:11y
jtj 0.849*
2:75
y 0:009 1:15y
0:63
R2 0.63
5:84
R 0.53
jtj 0.515*
9:02
V. Conclusion
Even though the cross-section analysis supports the
BOP growth model, only about 45% of the countries,
estimated and implied elasticities are statistically not
different. Moreover, for some countries where its
estimated and implied import elasticity are not
statistically different, its estimated and implied
export elasticity are statistically different and viceversa. In order for BOP to hold for individual
countries, both of the implied import and export
elasticity need to be statistically indifferent from its
estimated elasticities. If one of the conditions does
References
Houthakker, H. and Magee, S. (1969) Income and price
elasticities in world trade, Review of Economic and
Statistics, 51, 11125.
Hussain, M. N. (1999) The balance-of-payments constraints and growth rate differences among African
and East Asian economies, African Development
Review, 11, 10337.
Johansen, S. (1991) Estimation and hypothesis of cointegration vectors in Gaussian vector autoregression
models, Econometrica, 59, 155180.
McCombie, J. S. L. (1989) Thirlwalls law and balance of
payments constrained growth a comment on the
debate, Applied Economics, 21, 61129.
McGregor, P. G. and Swales, J. K. (1985) Professor
Thirlwall and balance of payments constrained
growth, Applied Economics, 17, 1732.
Newey, W. K. and West, K. D. (1987) A simple, positive
semi-definite, heteroskedasticity and autocorrelation
consistent covariance matrix, Econometrica, 55, 7038.
4
Hussains (1999) extended model (including capital flows) accepted that implied and estimated import elasticity are not
statistically different for 23 of out 29 cases for African countries and 6 out of 11 cases for Asian countries.
5
Using the strong form of Thirlwalls law, i.e. yci "i ywi =i (Perraton and Turner, 1999) does not change the result.
767
Thirlwall, A. P. (1979) Balance of payments constraint as
an explanation of international growth rate differences, Banca Nazionale del Lavoro Quarterly Review,
128, 4453.
Thirlwall, A. P. and Hussain, M. N. (1982) The balance of
payments constraint, capital flows and growth rate
differences between developing countries, Oxford
Economic Papers, 34, 498510.
Wu, Y. (2003) Growth, expansion of markets and income
elasticities in world trade, Georgetown University
Working Paper.
Appendix A
Estimated income elasticity
Test results
Country
Import
Import
Import
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Israel
Ireland
Italy
Japan
Netherlands
New Zealand
Norway
Portugal
Sweden
Switzerland
Great Britain
United States
Spain
1.825
2.980
1.937
2.497
2.270
2.218
2.482
2.539
1.516
1.530
1.615
3.042
2.743
2.009
1.828
1.635
2.526
3.123
1.472
1.419
2.396
3.201
2.151
3.337
2.084
2.061
2.041
3.160
2.647
1.596
2.172
1.025
4.511
2.807
1.097
2.669
1.634
2.939
2.654
1.938
1.465
1.782
2.601
3.801
2.158
1.966
2.106
2.492
2.263
2.425
2.531
1.606
2.673
1.186
2.163
2.683
1.455
2.086
2.311
1.955
2.100
2.969
2.200
1.892
2.279
2.457
1.956
2.607
1.909
2.111
1.873
4.912
2.209
1.905
2.562
1.383
3.445
2.421
1.443
2.350
1.747
1.988
3.481
1.765
1.560
2.193
2.550
3.926
4.387
4.925
1.839*
0.053*
0.065*
0.630*
0.175*
2.312
2.449
1.294*
8.703
1.768*
6.574
0.504*
3.613
1.826*
1.631*
0.657*
3.438
0.907*
0.657*
4.954
1.157*
4.176
2.231
0.593*
1.179*
2.063*
4.204
2.151
3.516
3.152
4.046
2.967
4.960
1.842*
1.792*
2.895
3.957
1.376*
0.916*
4.326
0.377*
0.629*
Bangladesh
China
Hong Kong
India
Indonesia
Israel
Korea
Malaysia
Pakistan
Papua N. Guinea
Philippines
Singapore
Sri Lanka
Syria
Thailand
1.499
1.349
1.469
1.580
0.985
1.821
1.366
1.648
0.733
0.495
3.273
1.227
1.206
0.385*
1.665
3.418
3.577
2.174
3.717
1.596
2.369
3.641
2.794
2.656
2.279
1.561
2.298
1.979
4.280
2.896
2.496
1.431
2.166
1.689
1.002
1.455
1.618
1.733
1.309
1.325
2.650
1.627
1.406
2.490
1.804
2.628
3.248
2.525
2.371
1.551
2.363
3.515
2.583
1.013
0.027
1.986
2.282
1.885
0.286
2.809
6.443
2.083*
4.549
0.769*
0.091*
1.372*
1.138*
3.646
6.725
4.263
3.819
5.850
3.251
5.032
2.568
2.164
0.900*
0.835*
2.133
0.133*
0.051*
1.079*
3.976
10.703
7.630
1.115*
0.102*
0.519*
17.608
0.476*
Algeria
Benin
Burkina Faso
Burundi
Cameroon
0.295*
0.741
0.752
0.449*
1.481
1.378
1.585
0.323*
0.752*
0.646*
1.891
0.107
0.190
5.165
4.252
1.583
0.195
0.832
0.520
0.671
Export
Export
3.135
4.028
5.362
15.632
12.661
Export
49.427
9.143
2.063*
0.456*
1.040*
(continued)
G. M. Ghani
768
Appendix A Continued
Estimated income elasticity
Test results
Country
Import
Export
Import
Export
Import
Export
Chad
Zaire
Congo
Cote dIvoire
Egypt
Ethiopia
Gabon
Gambia
Ghana
Kenya
Madagascar
Malawi
Mali
Mauritania
Mauritius
Morocco
Mozambique
Niger
Nigeria
Senegal
Sierra Leone
South Africa
Togo
Tunisia
Uganda
Zambia
Zimbabwe
1.573
1.218
1.018*
0.317*
0.333
0.762
0.133*
0.999
2.491
1.264
2.540
1.011
1.040
0.090*
1.025
1.251
0.942
1.745
0.996
0.469
0.507*
1.797
0.246*
0.848
1.418
0.951
2.757
0.019*
1.628
1.194
1.052
2.620
1.195
2.325
1.247
4.926
1.503
1.406
1.567
4.968
0.012*
2.558
2.734
1.383
0.211*
2.550
0.722
1.639*
1.543
0.300
2.728
3.611
0.084*
3.283
0.757
0.275
2.153
1.243
1.180
0.854
1.783
0.417
1.860
1.357
1.780
1.049
2.645
0.005
1.365
1.981
1.848
0.225
1.061
0.923
5.965
2.719
0.238
1.392
1.490
0.685
2.263
0.357
1.118
0.533
0.015
0.174
1.115
0.548
0.049
2.834
1.897
0.010
0.457
2.499
0.059
3.247
2.370
0.261
2.433
1.247
0.551
2.880
1.345
0.217
1.482
2.603
0.508
5.516
1.571*
3.502
2.897
2.363
14.782
0.230*
5.580
2.696
1.660*
0.360*
2.991
0.103*
7.366
0.332*
2.198
3.922
4.515
2.619
0.179*
3.676
10.332
1.966*
1.239*
4.979
0.731*
3.835
1.965*
0.393*
0.982*
17.403
7.994
21.124
0.138*
17.732
2.170
3.784
2.151
9.965
4.992
4.517
0.119*
4.404
4.032
2.872
4.958
15.559
1.906*
3.999
2.551
0.477*
4.203
0.768*
5.832
1.435*
3.582
1.518
2.217
1.475
1.627
1.787
1.828
0.894
2.720
2.233
2.405*
1.353
1.009
4.590
1.840
1.444
3.090
1.347
2.146
2.575
1.549
3.768
1.925
2.157
3.190
2.933
3.795
2.477
1.674
2.081
2.288
0.774*
0.635
2.330
3.811
0.791
0.121*
3.028
1.112
0.740
3.137
1.728
2.749
1.949
2.587
1.427
2.014
2.033
1.742
2.409
1.586
1.110
3.163
0.466
1.452
3.914
3.920
0.065
2.806
2.867
6.329
2.260
2.350
5.089
2.542
2.388
2.846
2.717
3.131
2.038
0.297
2.811
1.867
2.073
1.042
1.788
3.002
0.540
0.773
3.349
1.552
0.234
3.091
1.010
3.653
3.115
0.805*
0.702*
2.564
1.652*
0.138*
7.023
2.922
2.860
2.431
6.427
1.196*
1.817*
7.982
7.728
0.712*
5.813
11.464
0.371*
2.721
1.766*
3.358
1.537*
3.159
1.417*
2.283
2.100*
5.240
1.012*
2.007*
1.628*
3.046
1.818*
2.379
0.537*
1.730*
0.732*
0.894*
3.272
0.185*
4.389
Argentina
Bolivia
Brazil
Chile
Colombia
Costa Rica
Dominican Rep.
Ecuador
El Salvador
Guatemala
Haiti
Honduras
Jamaica
Mexico
Nicaragua
Panama
Paraguay
Peru
Trinidad & Tobago
Uruguay
Venezuela
Test results are the value of the i-statistic based on the null hypothesis that estimated elasticity is equal to implied elasticity.
*For estimated elasticity Indicates that estimated elasticity is not statistically significant at 95% significant level.
*For test result Indicates that implied elasticity is statistically different from estimated elasticity.