TESTING THE VALIDITY OF THIRLWALL’S LAW AND THE ENDOGENEITY OF NATURAL RATE OF GROWTH: EVIDENCE FROM NIGERIA
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This study seeks to examine the validity of Thirlwall’s ‘Law’ which contends that actual growth of domestic
income must be compatible with equilibrium growth rate determined by balance of payments (BoP) to avoid
crises on its external account. It also attempts to verify whether natural rate of growth is endogenously
determined in the Nigerian context. The study blends autoregressive distributed lagged model (ARDL) and
Toda-Yamamoto (TY) Granger econometric methods for the analysis. To achieve research objectives, study
first estimate the balance-of-payments-constrained growth (BPCG) rate as well as the natural rate of growth
for the period spanning 1982 to 2015. Then, it makes comparison between the estimated growth rates and
actual growth of the economy. As a side test of the endogeneity hypothesis, we also test for the direction of
causality between, exports, national output and labour productivity for the country. The outcome of the
study showed that the Thirlwall’s Law holds for Nigeria. We equally found that the natural rate of growth
adjusts towards actual growth of domestic income; and since Thirlwall’s is valid, natural rate is endogenous
to BoP conditions. The results bring to the fore the importance of focusing on demand pressures in the
understanding of long-run growth experience of the Nigerian economy.