Are the transition economies balance-of-payments constrained? An aggregate and multi-sector approach applied to Central and Eastern Europe

The balance of payments can act as a constraint on the output growth rate, since it puts a limit on the growth of demand. This paper focuses on verifying whether the Balance-of-Payments-constrained growth hypothesis is suitable for explaining the growth performance in several transition economies of the Central and Eastern Europe that joined the European Union in 2004. According to Thirlwall´s Law, we determine the balance of payments equilibrium growth rate of an economy by the ratio of the income elasticities of the demand for exports and imports and the growth of foreign demand. The obtained results are compared with the multi-sector version of Thirlwall´s Law as an alternative approach that considers the structure of the economy and how specific specialization affects the Balance-of-Payments-constrained growth. Our results show that almost all transition countries in the sample grew and a higher rate that the one consistent with the Balance-of-Payments equilibrium and that the multi-sector version of this approach makes a suitable prediction of the actual growth in these countries.