ABSTRACT
The term ‘balance of payments constraint’ refers to the situation where a country’s performance in external markets and the response of the world to this performance, constrain the growth of the country to a rate which is below the rate required for addressing domestic economic problems such as the prevalence of unemployment and underemployment, and the existence of idle resources and capacity (see McCombie and Thirlwall, 1994). The balance of payments constrained growthrate model postulates that the balance of payments position of a country is themain constraint on economic growth, because it imposes a limit on demand to which supply can adapt. It states that no open economy can grow faster, in the long run, than the rate consistent with balance of payments equilibrium on current account unless it can finance ever-growing deficits. Export performance is crucial because no other component of aggregate demand provides the foreign exchange to pay for import requirements associated with the expansion of output. In its basic form, the balance of payments constrained growth rate model is epitomized by the ‘dynamic Harrod foreign-trade multiplier’ (also known as Thirlwall’s Law or the 45 degree rule) pioneered by Thirlwall (1979). On the assumptions of constant relative prices and no capital flows, the basic dynamic Harrod foreign-trade multiplier postulates that the growth rate of a country can be predicted by the rate of growth of its volume of exports divided by its income elasticity of demand for imports. In its extended form introduced by Thirlwall and Hussain (1982), the model incorporates two factors that might cause a country’s growth rate to deviate from the rate predicted by the basic dynamic Harrod foreign trade multiplier namely, changes in the terms of trade and capital flows. The purpose of this chapter is to apply the balance of payments constrained
growth model, in its basic and extended forms, to a sample of African and East Asian countries. The countries of East Asia, led by Japan, have had remarkable growth experiences during the postwar period. However, the impressive development record of Asian countries has been checked by the currency and financial
crises, which have afflicted the region since 1997. Nonetheless, the success of these countries in achieving sustained rapid growth prior to the crises merits further investigation.1 Some of these Asian countries still rely heavily on capital imports, while others have passed this stage and have managed to accumulate huge balance of payments surpluses and/or become capital exporters in their own right. In contrast, most African countries have been able to build growing current account deficits financed by capital inflows, whichmight allow them to grow faster than otherwise would be the case. However, what African countries might gain from capital inflows, they may lose by the adverse terms-of-trade effect; indeed, the former might be partly in response to the latter. In view of this, the chapter attempts to address the following empirical issues:
• to quantify the contribution of capital flows to the growth of African as compared to Asian countries;
• to explain growth rate differences amongAfrican andAsian countries by quantifying the individual and combined contributions of export growth, capital flows and changes in the terms of trade in each country’s case;
• to quantify the net effect of capital inflows and the terms of trade in the case of African countries; and
• to measure the extent to which the actual growth rates of African and Asian countries deviate from those predicted by the basic and extended dynamic Harrod foreign-trade multipliers.
