An appraisal of Thirlwall-Hussain model: Capital flows and economic dynamics in Mexico, 1994-2023

Abstract

The present paper empirically assesses the role of capital flows in the output dynamics of the Mexican economy over the period 1994–2023. We hypothesize that capital flows have helped sustain a long-term economic growth rate that exceeds what is warranted by Mexico’s current account equilibrium. Our main contribution is to furnish empirical evidence supporting the Thirlwall-Hussain (1982) hypothesis. That is, capital flows are needed to finance the current account gap of economies growing beyond their means. Our analysis represents the first empirical test ever of such a model for the case of Mexico. Furthermore, our estimates from a vector error-correction model show that capital flows (FDI), imports and exports are intimately linked. Moreover, exports and FDI together provide the foreign exchange used to cope with technological and capital goods dependence. We conclude that finance is the most salient variable of overall economic dependence along the global supply chains. The main limitation of our study is that further empirical comparative analysis is required before generalizations can be reasonably made, a task for future endeavors.