Volume 44, Number 175,
October-December 2013
Would a more flexible exchange rate improve competitiveness?
Guadalupe Mántey

It is also of note that imports and exports in the countries studied moved in the same direction and in similar proportions, even when the real exchange rate varied, as can be seen in Figure 2.

Figure 2. Import and Export Growth in Twelve Developing Countries from 1996 to 2009

Source: Prepared by the author based on data from International Financial Statistics from the International Monetary Fund.

A review of the literature revealed two possible explanations for the negative effect of real devaluation of the exchange rate on exports in developing countries.

The first, based on pioneering work by Baldwin and Krugman (1989) on exchange rate movement in oligopolistic markets, would explain the phenomenon as the result of the fixed sunk costs of exporting that generate hysteresis in foreign trade.

The second would attribute the adverse effects of devaluation to liability dollarization and the changes that this measure produces to the balance sheets of export companies (Lane and Shambaugh, 2010; Calvo et al., 2004; Eichengreen et al., 2001; Calvo and Reinhart, 2002; Céspedes et al., 2004).

It is useful to note that these two explanations are not mutually exclusive, and could even complement each other.

The Fixed Sunk Costs of Exporting

From the perspective set forth by Baldwin and Krugman (1989), a real devaluation in the exchange rate does not encourage new companies to immediately target foreign markets, because that would imply fixed sunk costs similar to an investment, which may be impossible to recover.

These costs include adapting the product to the preferences of the importing country, establishing marketing and distribution networks and becoming familiar with the legal framework, sanitation provisions and administrative and bureaucratic procedures (Baldwin, 1989). Devaluation therefore makes it advisable to wait a bit longer.

Companies that already export and have paid the fixed cost will benefit from the devaluation, because it gives them a competitive advantage. However, their marginal sunk costs will increase in terms of national currency, and if these costs have been covered with foreign financing (which is likely for export companies in developing nations, because there are lower financial costs), the revaluation of liabilities in foreign currency could generate even greater losses to their competitive advantage than what the devaluation provided.

Research from Grier and Smallwood (2007) on the effects of exchange rates uncertainty on the behavior of exports in a sample of 18 developed and developing countries from 1973-2003 revealed that exchange rate uncertainty reduces export growth in developing countries, which is not the case for developed nations.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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