Does the balance of payments constrain economic growth? Some evidence for transition countries

The balance of payments can act as a constraint to the rate of growth of output, since it puts a limit to the growth in the level of demand to which supply can adapt. The experiences of several countries show how an unsustainable external deficit requires sooner or later a correction, which puts a brake on further output growth. In this paper we examine this issue for the case of several transition countries, by computing their balance of payments-constrained growth rates, following Thirlwall’s approach, as the rate of growth of exports divided by the income elasticity of demand for imports. By comparing these computed balance of payments-constrained growth rates with their actual growth rates we would be able to assess whether the balance of payments has acted as a constraint to economic growth in the countries analyzed.