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

It is important to note that exchange rate appreciation in these countries was facilitated by the favorable evolution of their terms of trade throughout the majority of the time period 2002-2008, and that many of these nations took advantage of these circumstances to reduce their external liabilities. In this way, both factors can explain the reduction in debt. Figure 4, however, shows that variations in the proportion of foreign debt with respect to gdp throughout the entire time period mainly came about due to variations in the real exchange rate.

The strong effect of devaluation on balance sheets is not unique to developing countries, although the effect is stronger for them. Recently, Abbas et al. (2011) showed that the largest increases in foreign public debt in 19 developed countries from 1880 to 2007 were due to the effect of devaluations of national currencies on the valuation of reserves.

The reduction in debt that goes along with appreciation of exchange rates improves country risk indicators and promotes an influx of foreign capital that contributes to sustaining currency appreciation (Céspedes et al., 2004). When there is devaluation, the mechanism operates inversely: debt increases, risk perception is greater and capital outflows accelerate the currency devaluation. If authorities try to contain the devaluation by depressing income growth, the risk premium only further increases (Malone, 2009).

Figure 4. Growth in the Real Exchange Rate and Variation
in the Foreign Debt/gdp Relationship 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.


The findings of recent empirical research would suggest that the negative effects of currency devaluation on a developing nation’s exports are linked to its incapacity to obtain external financing in its own currency and the high dollarization of internal liabilities.

To prove this hypothesis, an export growth model for developing countries was estimated, taking into account their financial restrictions. Annual data for the previously mentioned sample of twelve countries from 1995-2009 was used for this model.

The basic model considers four variables that influence the export growth rate (measured in dollars) and account for real and financial restrictions that export companies face in these types of economies:

  • The real growth of the global economy in the period prior.
  • The devaluation rate.
  • The growth of the international financial market.
  • The level of leverage of the current account of the payment balance.

Different proxy variables were used to represent each of these. The growth of the global economy was approximated with the growth rate of global exports (expwg) and the global gdp growth rate ( indicegdprwg ). The devaluation rate was tested in nominal terms (ticg) and real terms (ticro5g). International financial market growth was represented with cross-border bank credit variables (aexttg) and the sum of these plus bond placements in international markets (finwg). The leverage of the payment balance (finacbcomimp) was defined as the quotient of dividing the financial account of the payment balance minus the commercial balance by imports.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 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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