Are the Transition Economies Balance-of-Payments Constrained? An Aggregate and Multisector Approach Applied to Central and Eastern Europe

The balance-of-payments (BoP) can act as a constraint on the output growth rate because it limits the growth of demand. This article focuses on verifying whether the hypothesis that BoP constrains growth is suitable for explaining the growth performance of several transition economies in Central and Eastern Europe that joined the European Union after 2004. According to Thirlwall’s law, the BoP equilibrium growth rate in an economy is determined using the ratio of the income elasticities of demand for exports and imports and the growth in foreign demand. The results obtained are compared with the multisector version of Thirlwall’s law as an alternative approach that considers the structure of the economy and how specialization affects BoP-constrained growth. The results show that almost all the transition countries in the sample grew at a higher rate than is consistent with the BoP equilibrium and that the multisector version of this approach predicts actual growth in these countries.