Grado: Doctor.

Especialización: Economía.

Grado: Doctor.

Especialización: Economía.

Grado: Doctor

Especialización: Urbanismo

After a critical assessment of both Thirlwall’s long-run growth model and Clavijo’s and Ros’s (2015) model in which capital accumulation determines output growth, this paper displays an alternative model where capital accumulation and the growth rate of capital productivity determine the long-run growth rate of output which is consistent with a constant position of the balance of payments as a percentage of GDP. Then, the latter is applied to inquire the causes accounting for Mexico’s low economic growth rate during 1982-2014. We conclude, on empirical grounds, that the sharp decline in the internal demand for domestic goods and both the rates of net capital accumulation and capital productivity played a major role in the slowdown of the Mexican economy. The income elasticities of the demand for exports and imports also played a role, albeit to a lesser extent.

En este artículo contrastamos el modelo de Thirlwall (1979) y el de Clavijo y Ros (2015) que ofrecen explicaciones dicotómicas del crecimiento económico de largo plazo. Proponemos, además, un modelo en el que la acumulación de capital y la tasa de crecimiento de la productividad del capital determinan la tasa de crecimiento económico de largo plazo consistente con una posición constante de la balanza de pagos como porcentaje del PIB. Aplicamos este modelo para explicar las causas del lento crecimiento de la economía Mexicana durante el periodo 1982-2014. Nuestro análisis empírico nos conduce a la conclusión de que la drástica disminución de la demanda interna de bienes nacionales y de las tasas de acumulación neta de capital y de la productividad del capital es significativa para explicar el estancamiento de la economía Mexicana. Asimismo, las elasticidades ingreso de la demanda de exportaciones y de importaciones también explican, aunque en menor medida, ese estancamiento.

By and large, economists adhering to different theoretical persuasions agree that, in the long-term, productive activity is bounded by exogenous factors stemming from either the demand side or the supply side of the economy. According to Thirlwall (

The aim of this paper is to empirically inquire the relative influence of both demand side and supply side variables on the Mexican economy’s growth dynamics between 1951 and 2014. In particular, we consider that capital accumulation and the growth rate of capital productivity could affect the growth rate of the demand for imports because imported capital goods generate economic capacity which, in turn, could generate an import substitution process. Therefore, apart from the growth rate of exports, capital accumulation and the growth rate of capital productivity are determinants of the long-run growth rate of output which is consistent with BoP equilibrium.

This paper is organized as follows. The first section presents the essence of Thirlwall’s model, the second one summarizes Clavijo’s and Ros’s model of a small open economy in which capital accumulation is the engine of economic growth; this model is then compared with Thirlwall’s. Section three displays our model in which capital accumulation and the growth rate of capital productivity determine the long-run growth rate of output which is consistent with a constant position of the BoP. Such a model is applied to the analysis of the Mexican economy for the period 1951 – 2014 in the fourth section. Our empirical analysis led us to argue that Mexico’s low economic growth rate, seen ever since the foreign debt crisis of 1982, is deeply rooted in a pattern of low capital accumulation and low rate of capital productivity. Mexico’s dull economic performance also stems from increased demand and external constraints. The last part of the paper concludes.

Thirlwall (

where _{d}, p_{f}
_{ }and e stand, respectively, for the growth rates of the domestic price of exports in domestic currency, the foreign price of imports in foreign currency and the exchange rate measured as the price (in domestic currency) of the foreign currency; _{z} _{
y
} is the income elasticity of the demand for imports.

Now, suppose a small open economy for which the growth rate of exports (

Assuming constant
relative prices and current account equilibrium (

Equation (

Ros and Clavijo
(

Clavijo and Ros (

where α
and 1-α are capital and labor elasticities of output
respectively. The domestic output is used as a consumption
good (

For simplicity, workers do not save at all, whilst firms save a fraction (sП) of profits (П). Under these assumptions, equilibrium in the domestic goods market is:

or

or,
using equations (

solving
equation (

where σ
stands for capital productivity. It can readily be seen that, since (

where h is the profitability elasticity of net capital accumulation. So, the growth rates of

Clavijo’s and Ros’ model implicitly assumes that

Clavijo and Ros (

Capital accumulation has played a major role in the literature on the determinants of the long-run growth rate of output. Particularly, Nurkse (

In our model the growth rate of exports is (given) equal to x0 and the growth rate of the demand for imports is determined as follows:

where

Following Ibarra’s critique (_{z} obtained by equation (

Furthermore, even in the latter case (i.e., no imports of good _{
z
}) the estimation of ψ_{I} would indicate the percentage increase of imports of capital goods required to increase by 1% the capital stock for the production of good z.

There is yet one more particular issue with Thirlwall’s Law that, to the best of our knowledge, has not hitherto been thoroughly discussed: contrary to Pugno´s interpretation (

which is higher (equal or lower) than (to) zero when ψ is higher (equal or lower) than (to) zero. The ratio

Now, the problem is not so much that the composition of the aggregate demand is changing. In fact, we think that it is very important to bear in mind the endogenous change of the composition of the aggregate demand. However, the problem is that we do not observe economies transiting to become either actual closed economies or ones producing just for the external market. Instead, there is always some domestic demand for domestic goods as well as some external demand for domestic goods. Hence the specification represented by equation (

where

where ϕ
is the ratio exports to imports (_{tbI}):

Before explaining the above equation, let us assume that the growth rate of economic capacity is equal to the net capital accumulation plus the growth rate of capital productivity:

where δ
is the depreciation rate of capital and is the growth rate of capital productivity. Substituting equation (

For the sake of
explaining our result in a simple manner, let’s assume, following Thirlwall
(_{tbI}
_{tbI}
_{tb}
_{I}.
We can get the long-run growth rate of output which is
consistent with a constant position of the BoP as a percentage of the output (_{tbI}

Substituting
equation (

Again, aiming for a simple explanation of our result, assume that the trade balance is in equilibrium (it means that ϕ=1) and that the external demand for domestic goods tends to zero (it means that (1-λ) and (1-ω) tend to zero). Then, , x and convey a positive effect on g_{
tbI
}; if ψ-ψI is higher (equal or lower) than (to) zero, _{tbI}
_{tbI}

Now, given x^{0}, if ψ is higher (equal or lower) than (to) ψI, an increase in_{tbI}
_{tbI}
_{ }(see Figures

Moreover, using
equation (^{0},_{tbI}
_{,}
the growth rate of the ratio

Therefore, even when
ψ > 1,

Graph 1, below, shows the output performance of the Mexican economy from 1951 to 2014. On average, the growth rate of Mexico’s GDP averaged 6.51% during 1951-1981, a period that encompasses the golden age of the country´s industrialization (1940-1970), the loss of macroeconomic stability in the seventies and the oil boom period (1978-1981) (Moreno-Brid and Ros, 2009). Mexico’s economic activity lost momentum after the foreign debt crisis of 1982: the average growth rate of GDP declined to 2.27% in 1982-2014. Moreover, the North American Free Trade Agreement (NAFTA) only brought an average growth rate of output equal to 2.59% during 1994-2014.

According to the balance-of-payments constrained growth approach, the sharp deceleration of Mexico’s output growth rate can be looked upon in two ways. One is through a decrease of the growth rate of exports; the other is through an increase in ψ (cf. Moreno-Brid,

Now, determining -in
a very simple way- a value of ψ consistent with a dynamic BoP equilibrium, we
divide the growth rate of exports by the effective growth rate of GDP

Yet, as mentioned above, according to our model both capital accumulation and the growth rate of capital productivity are also important in determining the long-run growth rate of the economy. As can be seen from graph 3, the growth rate of net capital followed the same pattern of behavior as the growth rate of GDP: its annual average growth rate was 5.91% during 1951-1981, 3.34% in 1982-2014, 3.22% during 1986-2014 and 3.41% during 1994-2014. After the foreign debt crisis of 1982 the path of net capital accumulation faltered, it fell down 2.57 percentage points, and the NAFTA did nothing to improve it.

On the other hand,
capital productivity

Bearing in mind the above stylized facts, we apply our model estimating the following equation for the determinants of the annual growth rate of the demand for imports:

where t
stands for time, DU represents a Dummy variable in the relevant cases (see
below), β_{
i
} are the parameters to be estimated and ut
is a white noise. Our results of the ordinary least square method of estimation
of equation (

Now, the estimated
parameters of equation (_{1},
β_{2,} β_{3},
and β_{4 }represent ε, ψI,
ωψ and (1-ω)ψ
respectively. Therefore, id_{tb} can be determined
as:

where t indicates the number of years of each subperiod for which the econometric model was run. In order to derive _{tbI} _{I}, ψ, _{tbI}
_{0}, , x,

First and foremost, according to our empirical estimations, contrary to some received accounts for the sharp deceleration of Mexico’s growth rate of GDP after the debt crisis of 1982 and the advent of trade liberalization in the late 1980s, a more accurate elucidation of the dismal performance of the Mexican economy must embed the interaction of the balance-of-payments constraints elements and the influence of capital accumulation. Our empirical results show that y increased from 1.94 to 2.23 between 1951-1981 and 1986-2014, although during the NAFTA sub-period it went down to 1.94 again. Moreover, the gross capital elasticity of demand for imports -not relevant in the balance-of-payments constrained growth model- remains more or less constant throughout the whole period under analysis. Likewise, the autonomous growth rate of the demand for imports, measured by the Dummy variables, and the rate of annual variation of the real exchange rate are not very important in the determination of idtbI and gtbI; their contributions are lower than one percentage point for each of the subperiods considered (

The contribution of the growth rate of exports to _{tbI}
_{tbI}
_{,} instead, was a bit higher: 3.26 percentage points in 1951-1981; 4 percentage points during 1982-2014; 2.94 percentage points during 1986-2014 and 3.58 percentage points in 1994-2014. So, the blame for the dismal performance of the economy cannot be laid on the behavior of exports.

Finally, we consider the contribution of capital accumulation to _{
tbI }and_{tbI }
_{tbI} _{tbI}
_{ }from 1951-1981 (3.45 percentage points) to 1982-2014 (-0.28); its contribution in 1986-2014 was null (0.05) and negative (-0.29 percentage points) during 1994-2014. Therefore, as the decline in

Another way of looking upon the importance of capital accumulation in the determination of gtbI stems from the disaggregation of the determinants of m. Table 4 shows that the autonomous growth rate of the demand for imports is positive, although low, for all the subperiods, except for the NAFTA one in which the annual average value is -0.35%. The real exchange rate, in turn, exhibits a low effect in the determination of the growth rate of the demand for imports for each of the subperiods under analysis. Given that the income elasticities of the demand for imports for each subperiod is almost the same, it is normal to see that the growth rate of the demand for imports, derived from the growth rate of income, was lower after the debt crisis of 1982. Lastly, the net effect of capital accumulation on the demand for imports was negative during 1951-1981 (-6.32%), but positive during 1982-2014 (0.58%). It is important to bear in mind the behavior of the income and gross capital accumulation elasticities of the demand for imports, if one is to understand that the problem of the Mexican economy was a sharp reduction in the net capital accumulation and the growth rate of capital productivity, combined with an increase in

With the aim of checking the robustness of our results, we contrast the differences between id and idtbI and between _{tbI}

The balance-of-payments constrained growth model put forth by Thirlwall (

Looked at in this way, there is a dichotomy in the theory of economic growth. Yet, this need not be so. We argued, in this paper, that there is no adequate reason for drawing such a sharp line of distinction between the relevance of those variables in the determination of the long-term growth position of a small open economy. Capital accumulation played a major role in the slowdown of the Mexican economy in the aftermath of the 1982 debt crisis. The growth rate of net capital accumulation dropped from 5.66% to 3.12% between 1951-1981 and 1982-2014 and, consequently, the growth rate of capital productivity diminished from 0.73% to -0.62% over the same years. While the income and gross capital stock elasticities of the demand for imports and the growth rate of exports changed somewhat over the same periods, the bulk of the explanation of Mexico’s low economic growth rate corresponds to a faltering process of capital accumulation. It is worth mentioning that the role of adjustment variable for both controlling the growth rate of aggregate demand and moderating the external restriction has been assigned to the internal demand for domestic goods: the annual average growth rate of internal demand was 6.52% during 1951-1981, and 1.23% in 1982-2014. This phenomenon could be reflecting not only the bad performance of the non-tradable sector, but also the strict policy control over real wages required for the central bank (the Banco de Mexico) to meet its inflation target.

All in all, our empirical analysis points out that capital accumulation and the balance of payments interact with one another so as to determine the dynamic position of the Mexican economy in the long-period. A number of policy implications and research topics for further inquiry ensue from this main result, for instance the impact of a progressive fiscal policy reform on public investment, capital accumulation and balance payments stability.

We should like to thank Anthony Thirlwall, Mohan Rao and two anonymous referees for their useful comments and suggestions that helped us improve the paper. The usual disclaimer applies.

According to Lewis (

The disaggregation of output between internal demand and external demand for domestic goods does not reveal a good division between winners and losers of the performance of the economy, but it could to some extent be a reasonable proxy since the output of tradable industries is subject to both internal and external demand, while the output of non-tradable industries is subject to internal demand only.

The average growth rate of GDP for the whole period of trade liberalization, 1986-2014, was only 2.53%.

We solved equation (3) for ψ in order to get the income elasticity of demand for imports consistent with a dynamic BoP equilibrium.

See the appendix for the determination of capital productivity.

Shaikh and Moudud (2000) assume that the growth rate of capital productivity is partly autonomous and partly induced by the capital accumulation itself.

We use the perpetual inventory method to get the net capital stock series.

The description of the methodology to get CE is presented in the next section.

Following Shaikh and Moudud (2004), Mexico’s economic capacity is estimated as a cointegration relationship with net capital stock. Particularly, we explicitly consider the components of CE, namely the net capital stock of Machinery and Equipment (ME) and the net capital stock in Non-Residential Structures (CO).

We posit the following identity:

Then µ is defined as
the utilization rate of the economic capacity (

We assume that
output fluctuates around capacity over the long-run,
so the actual utilization rate of economic capacity also fluctuates around some
desired or normal utilization rate of economic capacity (µ*=

where υ_{µ}
is a random error term. As for the case of

where υ_{k}

Equation (B.5) can be re-written as follows:

where Ω_{
0 }=_{1} =
(1-b_{1}),
Ω_{2} =
b_{2}, Ω_{3 }=
b_{3}
and υ = υ_{k}+υ_{µ}
_{.} Now, we can
estimate equation (B.6) with a contegration technique to obtain the Economic
Capacity.

As seen in Table B.2
above, all the series,

Now, we compute the F-statistics for the null hypothesis that all the parameters of the dependent and independent variables in levels in table A.2 are equal to zero and such value is compared with the critical value reported in Pesaran, Shin and Smith (2001) for the case of a cointegration relationship with unrestricted intercept and no trend. As shown in table B.4, we can accept the existence of a cointegration relationship between lnY and lnK, lnME and lnCO given that the F – statistics computed is higher than the upper critical value.

Given our previous results, we can postulate the long-run equation determining Mexico’s economic capacity for the period 1950 – 2014 as follows:

where^{E}
^{E }