Volume 44, Number 175,
October-December 2013
Would a More Flexible Exchange
Rate Improve Competitiveness?
Guadalupe Mántey*
Date received: January 14, 2013. Date accepted: April 11, 2013
Abstract

This article investigates the effects of currency devaluation on the export dynamics of developing countries. Unlike conventional theory, this work demonstrates that the negative effect on the balance sheets of exportation companies, due to the elevated dollarization of liabilities, cancels out any possible gains in competitiveness. Based on the results of empirical research, this text argues that establishing a competitive and stable real exchange rate by making the nominal exchange rate more flexible would not be advisable for these countries. Finally, this work proposes an alternative strategy to increase productivity, in order to obtain a more favorable position in the global economy.

Keywords: exchange rates, economic policy, developing countries, export promotion.
INTRODUCTION

In recent years, a variety of distinguished Latin American economists have championed the benefits of nominal exchange rate flexibility for countries in the region in order to establish a stable and competitive real exchange rate that could contribute to reducing external restrictions on growth (Bresser-Pereira; Bresser-Pereira and Gala, 2008; Frenkel, 2006, 2007 and 2008; Galindo and Ros, 2008; eclac, 2012).1

Mainstream theory postulates that currency devaluation will boost exports if:

  • The prices of goods are expressed in the currency of the exporting country and not determined based on the market.
  • There is price elasticity for external demand.
  • The exportable supply is also elastic.

This article argues that even when these conditions are met, the negative effects of nominal devaluation on the balance sheets of economic entities in developing countries outweigh the advantages that this measure might have for export competitiveness. It is therefore preferable to implement other policies to boost economic growth in equilibrium with the commercial balance. This outcome is due to imperfections in financial markets that have a greater effect on export companies in these nations, as well as the oligopolistic structure of international commerce, where competitive advantages are derived more from the level of technological advancement and the external benefits that companies receive from their governments than from relative labor costs.

This work is organized into seven sections. The first examines arguments in favor of exchange rate flexibility as a method to improve the external competitiveness of developing countries. The second presents evidence of an enigmatic negative relationship between variations in the exchange rate and export dynamics in these nations, as well as the influence of the sunk costs of exporting and the dollarization of liabilities in this area. The next two sections analyze the factors that lead to the dollarization of liabilities in these economies, and the repercussions of devaluation on the solvency of economic agents. The fifth section estimates an econometric model to understand the effect of exchange rate adjustments on export growth in twelve developing countries in the time period 1996-2009. Based on the results of the model and the theory of new economic geography, set forth by Baldwin and Krugman (2004), the sixth section proposes a policy strategy to boost external competitiveness without recurring to nominal devaluation, encompassing diverse ideas proposed by other authors, including the eclac (2012). The final section summarizes the conclusions of this research.

* The author would like to acknowledge the comments and suggestions provided by the anonymous panel, which contributed substantially to improving this work, and the papiit program of the unam for financing granted to carry out this research;

**Researcher at the Faculty of Advanced Studies Acatlán of the unam, Mexico. E-mail: gmantey@unam.mx.

1 These authors define the real exchange rate as the relationship between the price of internationally marketable goods and non-marketable goods.

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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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