An Examination of the empirical validity of the Thirlwall ‘Law’: The case of Egypt

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The Balance of Payment constrained growth model was first introduced by Thirlwall in 1979, see [1-2]. According to him a country’s growth rate cannot surpass the rate consistent with its balance of payment equilibrium unless it can finance its endlessly growing current account deficit, which is deemed impossible. In addition, this country’s actual growth rate should be equal to its potential growth rate calculated based on its income elasticity of demand for exports and imports in the long run. Based on these assumptions, this paper examines the Thirlwall Balance of Payment (BOP) constraint growth model in the case of Egypt for the period of 1980 to 2016 using the bounds testing Auto Regressive Distributed Lag (ARDL) model. The model suggests the validity of Thirlwall’s assumption of a long run relation between imports, gross domestic product (GDP) and relative prices having a negligible effect. The actual growth rate was found to be equal to the calculated potential growth rate given the BOP constraint assumption. The empirical results support the historical development of the Egyptian BOP analysis which shows how the external balance was and remains a major factor affecting Egypt’s growth rate. Policy decisions aiming to achieve the calculated potential growth in Egypt should focus on sustaining a balanced current account, through promoting exports and external financial flows.