Balance of Payments Constrained Economic Growth

The concept of balance of payments constrained economic growth posits that a country’s long-run expansion is ultimately limited by its external sector. Originally formalised through Thirlwall’s Law, the framework asserts that sustainable growth depends on the ratio of export to import income elasticities and the rate of growth in world demand. In practice, economies that fail to expand their export base or improve competitiveness risk chronic external deficits, forcing real exchange rate adjustments or external financing that may jeopardise stability. Over recent decades, scholars have enriched the model by integrating capital flows, debt sustainability and the role of intermediate inputs, while structuralist and post-Keynesian traditions have emphasised supply-side constraints. Contemporary debates also focus on the challenges of green structural change, where decarbonisation efforts must reconcile carbon-intensive export sectors with the imperative to diversify and upgrade productive capacity. Policy implications range from exchange-rate management and export promotion to targeted industrial upgrading and investment in human capital, highlighting the global significance of balance-of-payments considerations for inclusive and sustainable growth.

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Balance of Payments Constrained Economic Growth publication trend

The graph below shows the total number of articles in balance of payments constrained economic growth across all publications each year (not limited to Nature Index journals).

Technical terms

Balance of payments constraint: The limit placed on an economy’s growth by its ability to finance external deficits through exports or capital inflows without destabilising the exchange rate or debt sustainability.

Thirlwall’s Law: A rule stating that a country’s long-run growth rate is determined by the ratio of the income elasticity of exports to that of imports, multiplied by the growth rate of world income.

Income elasticity of demand: A measure of how responsive the demand for a good (exports or imports) is to changes in income, influencing trade balances over time.

Real exchange rate: The relative price of domestic goods to foreign goods, adjusted for inflation differentials, which affects competitiveness and trade flows.

Green structural change: The process of transforming an economy’s productive structure towards low-carbon, environmentally sustainable activities while maintaining external equilibrium.

References

1. The green transition dilemma: The impossible (?) quest for prosperity of South American economies. Ecological Economics (2025).
2. International trade and economic growth in Croatia. Structural Change and Economic Dynamics (2024).
3. The role of intermediate inputs in a multisectoral balance-of-payments-constrained growth model: the case of Mexico. Journal of Economic Structures (2019).
4. Effects of Internal and External Imbalances and the Role of Relative Prices on Economic Growth: Evidence From Turkey. SAGE Open (2020).
5. Macroeconomic ingredients for a growth model analysis for peripheral economies: a post-Keynesian-structuralist approach. New Political Economy (2022).