Volume 44, Number 175,
October-December 2013
Would a More Flexible Exchange
Rate Improve Competitiveness?
Guadalupe Mántey

These authors maintain that countries that have been wealthy for a long time offer the benefits of broad and efficient infrastructure, accumulated experience, highly qualified personnel and better social welfare plans than those available in less developed countries, which make their companies more profitable. In addition, the set of activities in these countries, which each exploits these externalities, means that consortiums obtain an agglomeration revenue that gives them greater competitive advantages, which is why they tend to move towards less developed countries.

If these proposals are correct, it is clear that producers in developing countries would have to overcome these competitive advantages (the agglomeration revenue) if they intend to insert themselves into the production chain of foreign business, or replace foreign providers. In this situation, the advantages of an under-valued exchange rate or low real salaries will be less important than what mainstream theory would believe in conditions with free competition in international commerce.

The question that arises is therefore the following: In this new economic geography, what type of policies should countries late to industrialization follow to overcome external restrictions on growth and achieve the full employment of their productive capacities with equilibrium in their payment balance?

For those who would propose greater flexibility in the nominal exchange rate to establish an screr, the strategy consists of modifying the productive specialization pattern and promoting exports of products with a high added value. However, they warn that the real exchange rate on its own cannot guarantee productive diversification, as development of these new activity sectors does not spontaneously appear as a result of market mechanisms. Rather, it must be fostered by the State. Consequently, they recommend that exchange policy be coordinated with other policies, such as industrial, educational, technology, fiscal and credit policies, in order to achieve more favorable insertion into the global economy (Frenkel and Taylor, 2009; eclac, 2012; Epstein and Yeldan, 2009). These authors also support controlling the international movement of capital, mainly by prudent regulation of the financial system.

Once the difficulties that developing countries face when competing in the new geographic economy have been acknowledged, as well as the limits and flexibility of the nominal exchange rate as a result of liability dollarization and the way in which the country risk of international financial markets is assessed, it becomes clear that the above strategy must be modified.

Based on the results of this research as well as other work on the fixed sunk costs of exporting that companies in developing countries encounter, the following paragraphs propose two fundamental changes to the growth strategy described above.

The first would be to maintain the objective, tacitly present in many emerging countries, of a stable nominal exchange rate, and to seek to increase competitiveness through greater productivity resulting from positive externalities in companies. These externalities can be generated through the strategic intervention of the State and the responsible use of monetary sovereignty, such as the following examples: selective credit granting policy that provides financial resources in national currency at costs and timeframes appropriate to the growth needs of priority sectors and that promotes productive chains, the granting of government guarantees for the performance of investment funds in SMEs at no fiscal cost through a wealth guarantee of the companies that would benefit, regulating the portfolio of pension funds to contribute to channeling long-term resources towards activities that generate jobs so that internal market growth can produce economies of scale and increase public revenue, strengthen educational and health systems, develop systems that increase public administration and efficiency, improve communication infrastructure, ports, customs, etc. and reduce the costs of exporting and foster research and technological development.

The second change proposed is to give priority to import substitution over promoting exports, in order to reverse the deindustrialization processes that have been observed in emerging economies following commercial liberalization.

This proposal does not mean ignoring export promotion nor returning to past protectionism. Rather, it means implementing policies to reduce external restrictions in growth, preferably in areas where quantitative results can be the highest and where the behavior of the economic agents involved is most known.

In Latin America, the elasticity of import revenue is greater than that of exports (eclac, 2012), and it has increased considerably with commercial openness. There are therefore reasons to believe that reestablishing the productive chains lost with commercial liberalization could represent a greater currency saving that marginal revenue by promoting exports, especially from the perspective of the low growth of industrialized countries.

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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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