Three essays on balance of payments-related constraints on the growth of developing economies

This dissertation consists of three essays with balance of payments-related constraints on the growth of developing economies providing the unifying thread. The first essay develops a structuralist theoretical model of the effects of foreign direct investment inflows on the balance of payments of a stylized developing economy. The effects are shown to depend upon a number of factors such as the nature of the products produced, income distribution within the economy, the import and export intensities of production, the extent of backward linkages, the structure of internal demand, and government policies toward transnational corporations. Different sets of actors are affected differently by various policy choices, and by attempting to analyze these links this essay highlights the political economy considerations involved. The consequences of various policy choices raise concerns regarding recent trends in international investment agreements. The second essay tests the validity of the balance of payments constrained growth (BPCG) model using Indian data for the period 1950--99. Rather than assuming homogeneity or similar elasticities of substitution between goods produced in different regions, the study tests the appropriateness of these working assumptions. Johansen's cointegration technique is employed to determine India's trade parameters. Short-run adjustments in response to disequilibria are explored with the help of a vector error correction framework. The study provides support for the BPCG model only in its weak form (i.e., assuming exogenous exports) in the long run. The third essay investigates the possible existence of a fallacy of composition (FOC) resulting from the simultaneous promotion of manufactured exports by a number of developing countries. A dataset consisting of 10 industrialized and 18 developing countries is developed. The FOC hypothesis is tested using an extended version of the BPCG model. The econometric results suggest that most developing countries in the sample compete with other developing countries, and not with manufacturers in industrialized countries, both in export markets and growth opportunities. However, dividing the sample into countries that export more "high-tech" versus "low-tech" products shows different patterns of responses of each group to both income and relative price variables.