Externally constrained growth: Testing the applicability of Thirlwall’s law in South Africa

This study tests whether the performance of South Africa’s trade balance, that is, the country’s export and import performance, can effectively explain the economy’s growth rate. Formally, the study tests the applicability of Thirlwall’s law to the South African economy. The law states that the estimated growth rate $\lpar {\rm y}_{{\rm Bt}}\rpar$(yBt) of an economy is proportional to the growth rate of exports $\lpar {\rm x}_{\rm t}\rpar$(xt) divided by the income elasticity of imports${\rm \;\ }\lpar {\rm \pi } \rpar$ (π). The South African Reserve Bank (SARB) quarterly data from 1960 to 2009 for exports, imports, the exchange rate, export prices, import prices, and the economic growth rate is used for regression. The study runs an autoregressive distributed lag (ARDL) model in the presence of structural breaks and after adjusting for structural breaks and finds that growth in the South African economy can be shown to be trade balance constrained. This finding has policy implications with regard to trade promotion and strategies and strategies to enhance growth performance by increasing the overall competitiveness of the South African economy.