Balance of Payments Constraint and Economic Growth: Evidence from the Thirlwall’s Law in Developing Oil Countries (ARDL and Kalman Filter Approach)

In the Balance of Payments Constrained Growth (BPCG) model, demand variables such as export and import determine the limit of economic growth in the long run. In this study, we compare the results of both basic and extensive forms of the Thirlwall model for developing oil producing countries considering the key role of oil exports and foreign-exchange reserves. To do so, two groups of oil developing countries are categorized based on the average daily oil production. The first category includes Iran, Saudi Arabia, Venezuela, and Mexico, and the second one is Egypt, Algeria, Nigeria, and Indonesia. Additionally, the price and income elasticities of demand for imports and exports as well as the co-integration are investigated by using an ARDL (Autoregressive Distributed Lag) model and Pesaran and Shin’s bound test. The price and income elasticities are also calculated with Kalman filter method. Then, we calculate the constrained growth in various forms for ten-year overlapping periods from 1960 to 2016 and finally test the validity of the Thirlwall law. The results indicate that Thirlwall law is not confirmed for several developing oil producing countries. The lower rate of real growth compared to constrained growth of payments in some economies including Iran can be attributed to factors such as the lower rate of capital inflow growth than the growth rate of export volumes as well as the positive effect of foreign income on the constrained growth of payments. The results show that the balance of payments is not a limiting factor for Iran's economic growth which confirms the fact that improving economic growth, in the long run, depends on the improving of the supply side.