Instituto T ecnol¶ogico y de E studios Superiores de M …estudioseconomicos.colmex.mx/archivo/EstudiosEconomicos...24 ESTUDIOS ECONOM ICOS 1. Introduction The aim of this study is

T H IR L W A L L 'S L A W W IT H A N E M P H A S ISO N T H E R A T IO O F E X P O R T / IM P O R T IN C O M EE L A S T IC IT IE S IN L A T IN A M E R IC A N E C O N O M IE S

¤D U R IN G T H E T W E N T IE T H C E N T U R Y

C a rlo s G u e rr e ro d e L iz a r d i

In stitu to T ecn o l¶ogico y d e E stu d io s S u perio res d e M o n terrey

R esu m en : C o n b a se en u n a esp eci ca ci¶o n esto c¶a stica q u e en fa tiza el p a p el d e la

rela ci¶o n d e la s ela sticid a d es in g reso d e la s ex p o rta cio n es e im p o rta -

cio n es, a p lica m o s el m o d elo d e crecim ien to restrin g id o p o r la b a la n za

d e p a g o s a 1 9 p a¶³ses d e A m ¶erica L a tin a en tre 1 9 0 0 y 2 0 0 0 . P o sterio r a

la p resen ta ci¶o n d e la \ L ey d e T h irlw a ll" v eri ca m o s la ex isten cia d e u n a

rela ci¶o n d e la rg o p la zo en tre ca d a u n a d e la s eco n o m ¶³a s seleccio n a d a s

y la d e E sta d o s U n id o s, p a ra a n a liza r el co rto p la zo estim a m o s u n

m o d elo d e p a r¶a m etro s ca m b ia n tes m ed ia n te el F iltro d e K a lm a n . L o s

resu lta d o s su g ieren u n a red u cci¶o n d el ta m a ~n o d el co e¯ cien te releva n te

a lo la rg o d el sig lo X X , lo q u e rep resen ta u n a ca ra cter¶³stica in esp era d a

y n eg a tiva d el m o d elo d e d esa rro llo im p la n ta d o en la reg i¶o n .

A bstra ct: U sin g sto ch a stic sp eci ca tio n s th a t em p h a size th e ro le o f th e ra tio o f

ex p o rt/ im p o rt in co m e ela sticities, th is p a p er a p p lies th e b a la n ce-o f-

p ay m en ts co n stra in t m o d el to n in eteen L a tin A m erica n co u n tries fro m

1 9 0 0 to 2 0 0 0 . T h e p a p er b eg in s w ith a b rief p resen ta tio n o f T h irlw a ll's

w ell-k n ow n m o d el. Im m ed ia tely fo llow in g th is, w e v erify th e ex isten ce

o f a lo n g ru n rela tio n sh ip b etw een d ev elo p in g eco n o m ies o n o n e h a n d ,

a n d th e U S eco n o m y o n th e o th er. T o ex p lo re th e sh o rt term ev o lu tio n

o f th e q u a n tita tiv e lin k b etw een eco n o m ies, a tim e va ry in g m o d el is

estim a ted b y m ea n s o f a n a lg o rith m k n ow n a s a K a lm a n ¯ lter. M a in ly,

th e resu lts sh ow a d im in ish in g th e ra tio o f ex p o rt/ im p o rt in co m e ela s-

ticities ov er th e y ea rs, w h ich rep resen ts a n u n ex p ected a n d serio u s

fea tu re o f th e n ew eco n o m ic stra teg y th a t h a s a lrea d y b een im p la n ted

in th e reg io n .

C la si ca ci¶o n J E L : C 2 2 , E 1 2 , F 0 0

P a la bra s cla ve: ley d e T h irlw a ll, L a tin oa m ¶erica , K a lm a n , T h irlw a ll's la w , L a tin

A m erica , K a lm a n .

F ech a d e recepci¶o n : 6 X 2 0 0 4 F ech a d e a cep ta ci¶o n : 2 6 V II 2 0 0 5

¤ ca rlo s.g u errero .d e.liza rd i@ itesm .m x

23

¶24 E S T U D IO S E C O N O M IC O S

1 . In tro d u c tio n

The aim of this study is to test the balance of payments constrainedgrowth model using stochastic speci¯cations that emphasize the roleof the ratio of export/import income elasticities (Davidson, 1990-91)for nineteen Latin American economies from 1900 to 2000. The pa-per begins with a brief presentation of Thirlwall's well-known model.Immediately following this, using the Johansen procedure we identifythe long-run value of the ratio of export/import income elasticitiesand, recognizing that we are in the presence of a time varying pa-rameter, we draw on a state-space representation to determine itsevolution over time. Concluding remarks are in the ¯nal section.

2 . T h e o r e tic a l F r a m e w o rk

Thirlwall's model can be represented by three equations:

x = ´ (p ¡ p ) + ¼ w (1)d f

m = ' (p ¡ p ) + » y (2)f d

(p + x ) = (p + m ) (3)d f

with ´ ;' < 0 and ¼ ;» > 0. Here, x ;m ;w , and y are the growthrates of real exports, imports, rest of the world income, and domes-tic income respectively, and (p ¡ p ) is the growth rate of relatived f

prices measured in a common currency. Equations (1) and (2) arestandard export and import demand functions. Price elasticities ofexports and imports are ´ and ' respectively. Income elasticities ofexports and imports are ¼ and » respectively. It is worthwhile tohighlight that both income elasticities re°ect the non-price aspectsof competition (McCombie and Thirlwall, 1994, p. 265; Bairam andDempster, 1991, p. 1720) . Equation (3) assumes that the currentaccount is continuously balanced.

Substituting equations (1) and (2) into (3) gives the balance ofpayments constrained growth model rate of real domestic income,designated by y :b

¼ w + (´ + ' + 1) (p ¡ p )d fy = (4)b

»

T H IR L W A L L 'S L A W IN L A T IN A M E R IC A N E C O N O M IE S 25

As Thirlwall (1979, p. 49) points out, if the assumption canbe made that the Marshall-Lerner condition is exactly satis¯ed or ifrelative prices measured in a common currency do not change overthe long run, equation 4 can be reduced to:

¼ wy = (5)b

»

In reference to equation (5) , Davidson clari¯es:

\ ...th e ra te o f g row th a n a tio n ca n m a in ta in w ith o u t ru n n in g in to a ceteris

pa ribu s b a la n ce o f p ay m en ts p ro b lem d ep en d s o n th e rest o f th e w o rld 's rea l

eco n o m ic g row th a n d th e releva n t in co m e ela sticities fo r im p o rts a n d ex p o rts..."

(1 9 9 0 -1 9 9 1 , p . 3 0 0 ).

The policy implications of equation (5) are relevant in the sensethat in an open economy, pertinent economic management is the onethat manipulates the income elasticities of exports and imports.

\ ...A su ccessfu l eco n o m ic p o licy th a t in crea ses th e va lu e o f ¼ a n d / o r re-

d u ces th e va lu e o f » , rela x es th e b a la n ce o f p ay m en ts co n stra in ts a n d , ev en tu a lly,a ccelera tes eco n o m ic g row th ..." (B a ira m a n d D em p ster, 1 9 9 1 , p . 1 7 2 0 ).

Allowing a stochastic residual term (u ) , equation (5) can bet

written as:

y = ® w + u (6)b;t t t

¼Here ® = is the coe±cient. It is expected to be positive, and»

the larger it is, the better. Its vector autoregressive (V A R ) form is thefollowing:

y = ® + ® y + ® y + uj;t 0 i U S ;t¡ i i j;t¡ i j;t(7)

y = ¯ + ¯ y + ¯ y + uU S ;t 0 i U S ;t¡ i i j;t¡ i U S ;t

Where j represents each of the 19 Latin American countries se-lected, i indicates the number of lags required, y is the natural log-arithm of the real gross domestic product, and u are iid N (0;−)t

processes. The following section presents results of econometric esti-mations of equation (6) under the form of vector autoregressive (V A R )models with cointegration, and of state-space representations, for theselected developing economies.


3 . E c o n o m e tric R e su lts a n d D isc u ssio n

As a preliminary step for evaluating equation (6) , table 1 providesbackground information about selected countries. Certainly, the an-alyzed time period for each economy depends on the availability ofinformation. According to the World Bank, two countries listed be-long to the category of \low income" (less than 735 U S dollars) , nineto the \lower middle income" (between 736 and 2 935 U S dollars) ,and eight to the \upper middle income" (between 2 936 and 9 075 U Sdollars) .

During the 20th century we found two speci¯c developing strate-gies implemented in Latin America. The ¯rst one corresponds to amodel based on protecting national markets and on state interven-tion. Under the second one, the tendency has been for the marketto replace regulation, private ownership to replace public ownership,and competition, including that from foreign goods and investors, toreplace protection. For each economy, the precise cut-o® year wasdetermined based on a trade index {see Lora (2001) for details{ andconsidering the trough of its business cycle.

The question about the order of integration of the variables isrelevant in order to apply the Johansen procedure into a balancedV A R model. The state of the art econometrics does not accept theuse of the Augmented Dickey-Fuller test and the Phillips-Perron tests,because of their size distortion and their low power (Maddala andKim, 2002, chapter 4) . Thus, we applied the D F -G L S test (Elliott,Rothenberg and Stock, 1996) and the Perron-Ng test (Perron andNg, 1996) . As expected, the results show that the Latin Americanand U S economies are integrated of order one.

Once it is clear that the analyzed variables are non stationary, wecan proceed with the estimation of V A R models for real gross domesticproduct of the selected countries and of U S . As was established inthe previous section, the relevant parameters represent elasticities.Therefore, a log-log functional form was chosen. In order to checktheir statistical adequacy, misspeci¯cation tests were applied, and

1their stability was veri¯ed by means of the long run matrix.

1 \ C o n sid er th e im p a ct o f a sh o ck to in n ova tio n in o n e o f th e eq u a tio n s o f aV A R ; d o es th e resp o n se to th is sh o ck (ev en tu a lly ) d ie o u t a s w e g et fu rth er aw ayin tim e fro m th e d a te o f th e sh o ck ? If th e a n sw er is y es th e m o d el is sta b le; if n o tth e m o d el is u n sta b le...A sta b le m o d el is th u s w ell b eh av ed in th e sen se th a t th eim p a ct o f a sh o ck is ca lcu la b le a n d ¯ n ite. T h is is p a rticu la rly im p o rta n t in th eco n tex t o f w h a t is k n ow n a s m u ltip lier a n a ly sis" (P a tterso n , 2 0 0 0 , p p . 6 0 1 -6 0 2 ).A cco rd in g to L Äu tk ep o h l (1 9 9 1 ), th e estim a ted V A R is sta b le if a ll ro o ts o f th e


.

ch a ra cteristic A R p o ly n o m ia l h av e a m o d u lu s o f less th a n o n e a n d lie in sid e th e

u n it circle.


.


.


.


Speci¯cally, the following tests were applied: multivariate resid-ual autocorrelation tests based on Box-Pierce/Ljung-Box Q-statistics(LÄutkepohl, 1991) and on L M statistics (Johansen, 1995) , the mul-tivariate extension of the Jarque-Bera residual normality test using{as factorization matrix{ the inverse square root of residual covari-ance matrix (Urz¶ua, 1997) , and extensions of White's (1980) test for

2systems of equations as discussed by Kelej ian (1982) .To determine the lag length of the V A R models, we weighed

the information criterions {Akaike, Schwarz, and Hannan-Quinn{,and positive/negative results of diagnostic statistical tests. Speci¯-cally, the lag length for Ecuador was one, for Argentina, Chile, ElSalvador, and Mexico it was two, for Colombia, Costa Rica, Haiti,Panama, Peru and Uruguay it was three, for Brazil, Dominican Re-public, Guatemala, Honduras, Nicaragua and Venezuela it was four,and for Paraguay it was ¯ve. Table 2 shows relevant outcomes.

The estimated ratios of export/import income elasticities areconsistent with ¯gures obtained by other authors. Bairam (1993)reports 1 .20 for Colombia. Senhadj i (1997) , and Senhadj i and Mon-tenegro (1998) reveal 1 .008, 1 .275 and 0.566 for Argentina, Colombiaand Haiti respectively. Lopez and Cruz (2000) , and Guerrero (2003)state 1 .692 and 1.640 for Mexico, respectively. Lastly, Moreno-Bridand Perez (2003) report 1 .94 and 1.50 for Costa Rica and El Salvador,respectively.

The content of table 2 represents positive evidence for Thirlwall'sLaw under the form of expression (6) . The long run co-movementbetween domestic and U S economies reinforces our belief that thebalance of payment constraint represents a mayor force driving theeconomic growth process. In other words, results positively support{let me propose{ \the rest of the world lead growth hypothesis. . . " . Asa matter of fact, statistical tests (Johansen, 1995, chapter 8) indicate{as expected{ that the U S economy is weakly exogenous with respect

3to Latin American countries.Noticeably, the estimated ratios of export/import income elas-

ticities were useful to simulate the observed economic growth rates.Certainly, the di®erence between observed and balance of payments

2 E co n o m etric tests w ere im p lem en ted u sin g a u to m a tic ro u tin es o f E -view sa n d P cF IM L . In d eed , th e co m p lete set o f sta tistica l resu lts - w h ich in clu d es u n itro o t tests, sy stem tests, a n d in fo rm a tio n tests fo r 1 9 V A R m o d els - is h u g e. It is

ava ila b le fro m th e a u th o r.3 T h e a ccep ted restrictio n s w ere im p o sed o n th e ® m a trix { w h ich in clu d es

th e a d ju stm en t co e± cien ts. T h u s, if w e so w ish ed , it w o u ld b e va lid to estim a te

sin g le-eq u a tio n erro r co rrectio n m o d els.


constrained economic growth rates is a consequence of the in°uence ofterms of trade and capital in/out°ows (Thirlwall and Hussain, 1982) .

To examine the annual behavior of the export/import incomeelasticity ratios, we split equation (6) under the form of state-spacerepresentation (Hamilton, 1994, chapter 13) . In the observation equa-tion (8) , the export/import income elasticity ratios are speci¯ed astime-varying coe±cients, and in the state equation (9) as ¯rst orderautoregressive processes.

T a b le 2N o rm a lized co in tegra tin g coe± cien ts, U S eco n o m y a vera ge

gro w th ra te, a n d o bserved a n d sim u la ted a vera geG D P gro w th ra tes fo r selected co u n tries


y = » y + u (8)j;t t U S ;t j;t

» = ¸ + ¸ » + u (9)t+ 1 0 1 t t+ 1

The system of equations (8) and (9) was estimated using a fore-cast recursive algorithm known as a Kalman ¯lter. Figure 1 showsresults for the nineteen economies.

It is plausible to group selected economies into four categories.One distinctive country is Chile. It seems that there is a link be-tween the early implementation of economic liberalization policiesand the increasing ratio of export/import income elasticities. Dur-ing the eighties and nineties, which include periods of armed con°ict,sensibility to U S economy growth rate increased in Central Americancountries and the Dominican Republic. For the ¯rst four economiesof the region, Brazil, Mexico, Argentina and Colombia, the externalperformance was negative. Unfortunately, Bolivia, Ecuador, Haiti,Paraguay, Peru, Uruguay and Venezuela, all exhibited the same re-sult.

F ig u re 1S h o rt-ru n beh a vio r o f th e expo rt/ im po rt

in co m e ela sticities ra tio s


F ig u re 1

(co n tin u ed )


F ig u re 1

(co n tin u ed )


F ig u re 1

(co n tin u ed )


F ig u re 1

(co n tin u ed )


F ig u re 1

(co n tin u ed )


F ig u re 1

(co n tin u ed )


F ig u re 1

(co n tin u ed )


F ig u re 1

(co n tin u ed )


F ig u re 1

(co n tin u ed )

T H IR L W A L L 'S L A W IN L A T IN A M E R IC A N E C O N O M IE S 4 3

4 . C o n c lu d in g R e m a rk s

The ¯ndings suggest the existence of a link among Latin Americanand U S economies during the twentieth century. This represents apiece of empirical evidence in favor of \the rest of the world leadgrowth hypothesis" .

During the analyzed period, the annual evolution of the ex-port/import income elasticities ratio is somewhat di®erent for thenineteen selected economies. Nevertheless, for the four major coun-tries of the region -and others-, this ratio declines noticeably over thelast two decades. On the other hand, Chile {the ¯fth major economy{was the ¯rst country in Latin American to implement economic lib-eralization measures and, fortunately, has relaxed its balance of pay-ments constraint. In this sense, and looking at what is happeningright now around the world, the region needs to make a second e®ortin order to improve its e±ciency.

Finally, from a broader perspective equation (6) emphasizes thedependency of Latin American countries on U S . Indeed, it is not de-sirable for the region to discontinue or even to reverse the economicreform process, but recent disillusionment with the results of this pro-cess has been growing in our countries, see Lora and Panizza (2002) ,among others.

R e fe re n c e s

B a ira m , E . I. (1 9 9 3 ). In co m e E la sticities o f E x p o rts a n d Im p o rts: A R e-ex a m i-n a tio n o f th e E m p irica l E v id en ce, A p p lied E co n o m ics, 2 5 , 7 1 -7 4 .

| | a n d G . J . D em p ster (1 9 9 1 ). T h e H a rro d F o reig n T ra d e M u ltip lier a n dE co n o m ic G row th in A sia n C o u n tries, A p p lied E co n o m ics, 2 3 , 1 7 1 9 -1 7 2 4 .

D av id so n , P . (1 9 9 0 -1 9 9 1 ). A P o st K ey n esia n P o sitiv e C o n trib u tio n to T h eo ry ',J o u rn a l o f P o st K eyn esia n E co n o m ics, 2 , 2 9 8 -3 0 3 .

D o o rn ik , J . A . a n d D . F . H en d ry (1 9 9 5 ). P cF IM L 8 .0 , C h a p m a n & H a ll.

E llio tt, G ., T . J . R o th en b erg , a n d J . H . S to ck (1 9 9 6 ). E ± cien t T ests fo r a nA u to reg ressiv e U n it R o o t, E co n o m etrica , 6 4 , 8 1 3 -8 3 6 .

G u errero , C . (2 0 0 3 ). M o d elo d e crecim ien to eco n ¶o m ico restrin g id o p o r la b a la n -za d e p a g o s: ev id en cia p a ra M ¶ex ico , 1 9 4 0 -2 0 0 0 , E l T rim estre E co n ¶o m ico ,L X X (2 ), n o . 2 7 8 , 2 5 3 -2 7 3 .

H a m ilto n , J . D . (1 9 9 4 ). T im e S eries A n a lysis, P rin ceto n U n iv ersity P ress.

J o h a n sen , S . (1 9 9 5 ). L ikelih ood -ba sed In feren ce in C o in tegra ted V ecto r A u to re-gressive M od els, O x fo rd U n iv ersity P ress.


K elejia n , H . H . (1 9 8 2 ). A n E x ten sio n o f a S ta n d a rd T est fo r H etero sk ed a sticityto a S y stem s F ra m ew o rk , J o u rn a l o f E co n o m etrics, 2 0 , 3 2 5 -3 3 3 .

L o p ez, J . a n d A . C ru z (2 0 0 0 ). T h irlw a ll's L aw a n d B ey o n d : T h e L a tin A m erica nE x p erien ce, J o u rn a l o f P o st K eyn esia n E co n o m ics, 3 , 4 7 7 -4 9 5 .

L o ra , D . (2 0 0 1 ). S tru ctu ra l R efo rm s in L a tin A m erica : W h a t H a s B een R e-fo rm ed a n d H o w to M ea su re It, In ter-A m erica n D ev elo p m en t B a n k , W P n o .4 6 6 .

L o ra , D . a n d U . P a n izza (2 0 0 2 ). S tru ctu ra l R efo rm s in L a tin A m erica U n -d er S cru tin y, In ter-A m erica n D ev elo p m en t B a n k a n d In ter-A m erica n In -v estm en t C o rp o ra tio n , p rep a red fo r th e sem in a r: R efo rm in g R efo rm s.

L Äu tk ep o h l, H . (1 9 9 1 ). In trod u ctio n to M u ltip le T im e S eries A n a lysis, S p rin g er-V erla g .

M a d d a la , G . S . a n d I. M . K im (2 0 0 2 ). U n it R oo ts, C o in tegra tio n , a n d S tru ctu ra lC h a n ge, C a m b rid g e U n iv ersity P ress.

M cC o m b ie, J . S . L . a n d A . P . T h irlw a ll (1 9 9 4 ). E co n o m ic G ro w th a n d th eB a la n ce-o f-P a ym en ts C o n stra in t, S t. M a rtin 's P ress.

M o ren o -B rid J . C . a n d E . P ¶erez (2 0 0 3 ). L ib era liza ci¶o n co m ercia l y crecim ien toeco n ¶o m ico en C en tro a m ¶erica , R evista d e la C E P A L , 8 1 , 1 5 7 -1 7 4 .

P a tterso n , K . (2 0 0 0 ). A n In trod u ctio n to A p p lied E co n o m etrics: a T im e S eriesA p p roa ch , M a cm illa n P ress.

P erro n , P . a n d S . N g (1 9 9 6 ). U sefu l M o d i ca tio n s to S o m e U n it R o o t T estsw ith D ep en d en t E rro rs a n d T h eir L o ca l A sy m p to tic P ro p erties, R eview o fE co n o m ic S tu d ies, 6 3 , 4 3 5 -4 6 5 .

S en h a d ji, A . (1 9 9 7 ). T im e-series E stim a tio n o f S tru ctu ra l Im po rt D em a n d E qu a -tio n s: a C ro ss-co u n try A n a lysis, IM F , W P / 9 7 / 1 3 2 .

| | a n d C . M o n ten eg ro (1 9 9 8 ). T im e-S eries E stim a tio n o f E xpo rt D em a n dE qu a tio n s: a C ro ss-C o u n try A n a lysis, IM F , W P / 9 8 / 1 4 9 .

T h irlw a ll, A . P . (1 9 7 9 ). T h e B a la n ce o f P ay m en ts C o n stra in t a s a n E x p la n a -tio n o f In tern a tio n a l G row th R a te D i® eren ces, B a n ca N a zio n a le d el L a vo roQ u a rterly R eview , 1 2 8 , 4 5 -5 3 .

| | a n d M .N . H u ssa in (1 9 8 2 ). T h e B a la n ce o f P ay m en ts C o n stra in t, C a p ita lF low a n d G row th R a te D i® eren ces B etw een C o u n tries, O xfo rd E co n o m icP a pers, 3 , 4 9 8 -5 1 0 .

U rz¶u a , C . M . (1 9 9 7 ). O m n ib u s T ests fo r M u ltiva ria te N o rm a lity B a sed o n aC la ss o f M a x im u m E n tro p y D istrib u tio n s, in T h o m a s B . F o m b y, a n d R .C a rter H ill (E d s.), A p p lyin g M a xim u m E n tro p y to E co n o m etric P ro blem s,A d va n ces in E co n o m etrics, v o l. 1 2 , 3 4 1 -3 5 8 .

W h ite, H . (1 9 8 0 ). A H etero sk ed a sticity -C o n sisten t C ova ria n ce M a trix a n d aD irect T est fo r H etero sk ed a sticity, E co n o m etrica , 4 8 , 8 1 7 -8 3 8 .

Instituto T ecnol¶ogico y de E studios Superiores de M …estudioseconomicos.colmex.mx/archivo/EstudiosEconomicos...24 ESTUDIOS ECONOM ICOS 1. Introduction The aim of this study is

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