Abstract
This paper re-evaluates the recent criticisms of ‘Thirlwall’s (1979) law’ against the literature on growth transitions. The unpredictable nature of growth transitions in developing economies suggests that the evidence derived from single-regime regression models, on which critics have based most of their arguments, is only suggestive about the long-run causes of growth. A rigorous test of Thirlwall’s law requires a more in-depth analysis of turning points in a developing country’s growth performance, and whether the growth law accurately predicts the sustainability of growth transitions. These arguments are illustrated with an application to South Africa over the period 1960-2017. The results show that it is misleading to evaluate Thirlwall’s law across a single regime. Once regime shifts are controlled for, the growth law accurately predicts South Africa’s growth performance during 1977-2003, and sheds light on the sustainable and unsustainable nature of growth transitions across the sub-periods 1960-1976 and 2004-2017, respectively. Since the literature on growth transitions identifies a competitive exchange rate as an initiating source of growth, rather than an individual long-run determinant, the omission of the level of the real exchange rate from the original growth law should not be regarded as a major weakness.