Convergence and Balance of Payments Constrained Growth: Is There a Puzzle?

One of the main implications of the neoclassical approach to growth is the existence of convergence across economies — although not necessarily to the same steady states — as a consequence of decreasing returns to capital. But, according to the balance of payments constrained growth theory as developed by Thirlwall, international convergence cannot be taken for granted. Although convergence can indeed occur in Thirlwall’s framework, the conditions that backward countries must fulfil to converge toward the leaders have some puzzling implications. In particular, non-price competitiveness must be higher in the less advanced countries than in the leading countries. This chapter is aimed at solving this puzzle by developing a model that attempts to reconcile the balance of payments constraint hypothesis with the notion of convergence. This model is employed to analyse economic growth in a sample of eleven developed nations over recent decades.