The balance-of-payments-constrained growth model for Malawi: Evidence from the bounds testing approach

Abstract

Using the autoregressive distributed lag (ARDL) bounds testing approach to cointegration, this paper tests the application of Thirlwall’s law, also known as the Balance of Payments constrained growth model, on Malawi between 1980 and 2017. The results of the simplified and the extended version of Thirlwall’s law show that the predicted economic growth for Malawi is 8.92% and 5.79% respectively. However, the actual average economic growth rate for Malawi during the sample period is 3.55%, which suggests that the Balance of Payments position of Malawi constrains its economic growth. The results support Thirlwall (1979) postulation that demand constraints in the balance of payments best explain growth rate differences. To relieve the Balance of Payments constraint, Malawi needs to reduce its income elasticity of demand for imports by reducing its imports on consumption goods, addressing structural demand features of its exports, and diversifying the production structure of the economy from agriculture.