Export-Led Growth and the Balance-of-Payments Constraint

There are two main reasons for believing in the importance of exportled growth; one uncontroversial, the other more contentious. The first is that export growth can lift a balance-of-payments constraint on demand and therefore permit faster growth if factor supplies are available to be utilised. The second is that export growth may create a virtuous circle of growth by virtue of the link between output growth and productivity growth. A number of models of this genre have appeared in the literature in recent years (e.g. Lamfalussy, 1963; Beckerman, 1962; Kaldor, 1970; Dixon and Thirlwall, 1975a) and they are surveyed later. There is a problem with these models, however, and that is they do not incorporate an explicit balance-of-payments equilibrium condition or constraint, which means that the equilibrium growth rate specified may be inconsistent with the long-run requirement of payments balance.2 The implicit assumption seems to be that provided it is exports that are the engine of growth, as distinct from domestic demand, the balance of payments will look after itself. Indeed, it is assumed in some models that the initial export growth and trade surplus generates such favourable responses in the economy that the balance-of-payments surplus actually grows.