Abstract
This study tests the validity of the simple version of the balance-of-payments-constrained growth (BPCG) model with constant prices and zero capital flows as originally developed by Thirlwall (1979), as well as the extended version incorporating capital flows and relative price changes in the Gambian economy from 1961 to 2017. To fit the BPCG model, the traditional import demand function is estimated using the autoregressive distributed lag (ARDL) modelling procedure of Pesaran et al. (2001). The estimation results indicate that the extended BPCG model is a better predictor of growth in the Gambian economy and that the terms of trade have not played a significant role in influencing growth over the sample period. Rather, The Gambia has relied heavily on capital flows, mainly through aid and foreign debt to lift the demand constraint on growth. The policy implications are that The Gambia cannot overly depend on capital inflows in the form of aid and foreign debt to develop the economy as this is not a plausible strategy to generate rapid and sustained growth. To lift the balance-of-payments constraint on growth, policy makers would need to invoke a two-track strategy of upgrading the endowment structure in the immediate to medium term period before attempting to diversify exports away from primary produce towards manufacturing in the long run. Thus, this dissertation is recommending initially lifting the balance-of-payments constraint through agriculture rather than manufacturing. Agriculture may relax the balance-of-payments constraint through two avenues: first, through a higher income elasticity of demand in foreign markets for agricultural products, thus raising export growth and secondly, it may reduce the income elasticity of demand for imports (foodstuffs), which will also lift the balance-of-payments constraint.
M.Phil. (Industrial Policy)