Micaela Antunes

Growth Rates Constrained by Internal and External Imbalances: A Demand-Orientated Approach

Thirlwall’s Law considers that growth can be constrained by the balance of payments when the current account is in permanent deficit.* The law focuses on external imbalances as impediments to growth and does not consider the case where internal imbalances (budget deficits or public debt) can also constrain growth. The recent European public debt crisis shows that when internal imbalances are out of control they can constrain growth and domestic demand in a severe way. The aim of this chapter is to fill this gap by developing a growth model in line with Thirlwall’s Law that takes into account both internal and external imbalances. The model is tested for Portugal, which in 2010 fell into a public debt crisis with serious negative consequences on growth. The empirical analysis shows that the growth rate in Portugal is in fact balance of payments constrained and the main drawback is the high import elasticity of the components of demand and in particular that of exports.

Growth rates constrained by internal and external imbalances and the role of relative prices: empirical evidence from Portugal

Thirlwalls law (Thirlwall 1979) considers that growth can be constrained by the balance of payments when the current account is in permanent deficit. The law focuses on external imbalances as impediments to growth and does not consider the case where internal imbalances (budget deficits or public debt) can also constrain growth. The recent European public debt crisis shows that when internal imbalances are out of control they can constrain growth and domestic demand in a severe way. Recently, Soukiazis, Cerqueira, and Antunes (2012a) developed a model-hereafter the SCA model-that takes into account both internal and external imbalances but in which relative prices do not play any role on the pace of economic growth. The aim of this paper is to extend the SCA model by relaxing this assumption and introducing explicitly relative prices into it. The model is tested for Portugal, which recently (2011) fell into a public debt crisis with serious negative consequences for growth. It is shown that our new model makes a significant improvement in explaining actual growth in Portugal. Our empirical analysis reveals that Portuguese growth is balance-of-payments constrained and that policies aimed at reducing external imbalances and changing the share of imports and exports toward trade equilibrium will help the economy to grow faster. Competitive devaluations and lower costs of financing the economy also produce an important stimulus to growth.

Foreign trade, human capital and economic growth: An empirical approach for the European Union countries

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.

Growth Performance in Portugal since the 1960s: A Simultaneous Equation Approach with Cumulative Causation Characteristics

The aim of this paper is to explain growth performance in Portugal in the last decades (1965-2006) through a multi-equation system with cumulative growth characteristics. The model uses a demand-orientated approach to determine the main relationships, which explain growth through a virtuous cycle. The idea is to identify the driving forces of growth with causal linkages and feedback tendencies that enable the process to be self-sustained. We estimate the multi-equation growth model by 3SLS to capture more efficiently the interrelations between the main growth forces and to control for the endogeneity of the regressors. Our evidence shows that the proposed model can successfully explain the Portuguese growth performance, highlighting the importance of export competitiveness as the key factor in this process. The cumulative growth process was interrupted at some points mainly due to the incapacity to transfer productivity gains into domestic prices and to make the economy more competitive. We also show that capital accumulation does not affect productivity growth, and domestic prices do not improve export competitiveness. These are the main drawbacks of the Portuguese economy that could explain the failure to achieve higher growth rates in the period 1965-2006.

Under What Conditions Do Structural Funds Play a Significant Role in European Regional Economic Growth? Some Evidence from Recent Panel Data

Abstract: Strengthening economic, social, and territorial cohesion is a central objective of the European Union. However, disparities between European regions are considerable, and there are doubts as to whether they are likely to be attenuated. In recent years, there has been a growing body of literature that examines the effectiveness of the European Union’s funds for promoting growth and reducing asymmetries among members. We contribute to this literature by examining the conditions under which the European Union’s financial aid may be affecting regional growth. We explore the interactions between transfers and income and other regional characteristics, such as human capital or innovation. We apply this study to a panel of 137 European regions, covering the period from 1995 to 2009. Our conclusions suggest a positive and significant marginal impact of funds only in regions with low levels of human capital and innovation.

Structural Funds and European Regional Growth: Comparison of Effects among Different Programming Periods

Abstract Strengthening social, economic and territorial cohesion is a central objective of the European Union (EU) and the Structural Funds reflect the main financial effort of the EU to pursue this goal. So far we have gone through four programming periods; to what extent the EU Funds have become more effective in promoting growth and reducing the disparities between EU Member countries is a matter of concern. We investigate the existence (or not) of learning effects and efficiency improvements following the reforms of Regional Policy. The study is applied to data from EU regions (EU12) in the most recent programming periods where data are available. The results suggest an improvement of the Funds efficiency in growth in 2000–2006 when compared to the previous programming period. Moreover, the returns from investments of Funds tend to be higher in richer, higher-educated and more innovative regions. Finally, the Cohesion group has not been able to transform the large transfers received into additional growth.

The Greek economy under the twin-deficit pressure: a demand orientated growth approach

Abstract This paper uses an alternative growth approach in line with Thirlwall’s model in order to predict economic growth in Greece taking into account internal and external imbalances caused by public deficit/debt and lack of trade competitiveness. It is shown that the simple Thirlwall’s Law (given by the product of the ratio of the income elasticities of demand for exports and imports, and the growth of foreign demand) over-predicts real growth in Greece while the more complete extended model, makes a closer prediction which is consistent with the high deficit/debt and current account deficit experienced in this country. The simulation approach shows that the most efficient policy to attain higher growth is to reduce external imbalances while policies to reduce internal imbalances are low growth enhancing.

What can eastern European countries learn from the Slovak economy? A twin deficit growth approach

This paper applies an extended growth model to the Slovak economy and explains the potential pitfalls that a transition economy faces on the way to converging with other advanced European countries. Our empirical analysis shows that Slovakia grew at a higher rate than that allowed by the balance-of-payments equilibrium rate and that this is consistent with the accumulation of trade deficits over time. A scenarios analysis shows that improving trade competitiveness, changing import and export shares toward a current account balance, and financing the economy at a lower cost will be the most successful ways to achieve higher growth.