Thirlwalls Law Introduction
blobMetropolis, 2020
An introductory video explaining the basics of Thirlwall's Post-Keynesian model of balance of trade-constrained growth for open economies.
Comment from our editors:
A major point of debate in developing economics has always been the relative merits of growth strategies centred on the substitution of imports or the fostering of exports, respectively. A major part of that debate is the aspect of relative balance of payments stability, both to secure the value of the domestic currency as well as reliable foreign currency inflows.
In 1979, Anthony Thirlwall came up with a theorem later named after him, that the actual constraint for the growth of developing countries is their access to export markets. This was in direct contrast to the neoclassical growth theory typically assuming no demand constraints. Thirlwall highlighted that when developing countries concentrate on exports of primary goods with relatively low-income elasticities of demand while importing high value-added goods with high-income elasticities of demand, their growth is effectively demand constrained as the proceeds of foreign exchange from exports are insufficient to pay for the imports. Thus, Thirlwall demonstrated that it is not so much relative prices in international trade ruling the stability of developing countries' balances of payments, but a structural disadvantage in the relative distribution of income elasticities and, thus, developing countries' relative lack of access to exports markets in secondary goods.