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

The results of empirical research on the negative effects of devaluation on the export dynamics of developing countries, including this work, invite reflections on the viability and appropriateness of a flexible nominal exchange rate with the goal of establishing a stable and competitive real exchange rate in these countries.

Economic opening and financial deregulation have transformed the structure of international commerce and the productive specialization of nations, as the competitive advantages of nations no longer depend on their unit labor costs.

Figure 5 shows that exports in the twelve developing countries in the sample grew more when the exchange rate appreciated, while their dynamics were hardly related to the evolution of unit labor costs.

Figure 5. Growth of the Unit Labor Cost, the Real Exchange Rate and Exports
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.

In light of the negative effects that currency devaluation produces for the balance sheets of economic agents in developing countries, and taking into account the decreasing role of unit labor costs in determining export dynamics, proposals to make the nominal exchange rate more flexible to achieve a stable and competitive real exchange rate appear somewhat dubious.

Some authors even believe that there is some benefit to maintaining a slightly appreciated exchange rate for these types of economies. Yotopoulos and Sawada (1999) have argued that similar to how it is prudent to establish an interest rate below the equilibrium level in banking markets with asymmetrical information,6 in currency markets, where the asymmetrical reputations of currencies makes the weaker currencies systematically devalued, it is useful to put in place a slightly appreciated exchange rate.

Salama (1999) advises that in countries late to industrialization, currency over-valuation can have the effect of introducing capital-saving technical progress, as it allows for the import of machinery and equipment at low prices, which increases labor productivity and facilitates technological leaps.

It is notable that following the 1990s crisis, emerging countries were able to avoid maxi-devaluation and promote currency appreciation. However, another phenomenon that has been observed is an attempt to compensate for loss of competitiveness due to currency appreciation with salary containment policies and increasing the flexibility of the labor market, which has impaired income distribution without reversing deindustrialization processes (Salama, 2010). These trends create the need to review the growth strategies that developing countries have adopted.

Recently, Baldwin and Krugman (2004) proposed the need to build a novel theoretical framework to address the new economic geography resulting from the global integration of production. One particularly interesting aspect of their argument is that they emphasize the differences between developing and developed countries, which are decisive when optimizing economic policy strategy.

6 In order to avoid adverse selection and moral risk problems (Stiglitz and Weiss, 1981).

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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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