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Demand & balance of payments in developing countries

The ultimate constraint on growth in an open developing country is the balance of payments because it sets the limit to the growth of demand to which supply can adapt – a discussion paper.


This paper draws on Thirlwall’s Law which asserts that if long term balance of payments equilibrium on current accounts is a requirement and the real exchange rates stay relatively constant, then the long term growth of an economy can be approximated by the ratio of the growth of exports to the income elasticity of demand for imports (Thirlwall, 1979). On this premise, a discussion is carried out mindful of the neo-classical growth theories which are closed economy models with no demand constraints. Several relevant theoretical, empirical and policy implications are then drawn from this view of balance of payments constrained growth.

Keywords: Economy, external constraints, balance of payments, trade, developing countries, constrained growth, export, import, equilibrium, growth rate, Thirlwall’s law, elasticity, growth rate, empirical

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