The relationship between trade, growth and the balance of payments: Application of balance of payments-constrained growth model to the Turkish economy

The relationship between trade, growth and the balance-of-payments (BOP) has been a subject of considerable interest and empirical scrutiny to growth and development economics in recent years. This study takes as its motivation these developments and addresses the following question: "How did trade liberalization affect the BOP and growth of the Turkish economy over the period from 1960 to 2004?" This research question has become even more crucial after the financial crises in the 1990s and early 2000s, in particular those in East Asia, Russia, Turkey and Argentina.; The basic theory behind this study is based on balance of payments-constrained growth (BPCG) models developed by Keynesian economists. Especially within the post-Keynesian tradition, external demand is considered to be the major constraint on the long-run growth performance of open economies. The first-generation BPCG model, known as Thirlwall's Law, postulates that a country's growth rate is determined by the ratio of the income elasticity of demand for its exports to its income elasticity of demand for imports, multiplied by world income growth. The second-generation BPCG model incorporates the impact of foreign capital flows. Finally, the third-generation BPCG model incorporates the requirement of a sustainable path of external debt accumulation. This dissertation presents an empirical investigation into the determinants of long-run growth for Turkey based on the first- and second-generation BPCG models, which are analytically and empirically so far the most relevant research methodologies among BPCG models over the period from 1960 to 2004.; First, this dissertation analyzes the pattern in estimated income elasticities of import demand for the Turkish economy. Second, it finds empirical support for the BPCG growth model for the whole period under consideration. Third, I will consider the appropriateness of the BPCG models to different subperiods of the complete period, during which the economics differed crucially. Fourth, the theoretical and empirical relevancy of the third-generation BPCG model is discussed. Finally, the main policy implication of this dissertation is that an economic policy which reduces income elasticity of imports while continuing to promote exports would permit Turkey to increase its rate of growth by relaxing the balance of payments constraint.