Volume 44, Number 175,
October-December 2013
Would a More Flexible Exchange
Rate Improve Competitiveness?
Guadalupe Mántey
DEVELOPMENT POLICY IN THE “NEW ECONOMIC GEOGRAPHY” ( ...continuation )

Policies intended to substitute imports have the advantage of starting with a profound knowledge of local markets and industrial organization, and use tools to influence the decisions of economic agents. They are monitored within their own territory and their effects are felt throughout the entire productive chain. Moreover, technology requirements are lower for substitution of consumer goods and imported intermediary products.

Contrarily, a growth strategy centered on promoting high-added value exports depends on the choices of external agents, whose behavior is less predictable and where the governments of developing countries have little influence.

Producers in developing countries face difficulties in their competitive positions as compared to multinational companies dominant in international commerce for two reasons. First, they must become integrated into the productive chains of developed countries. They not only must compensate for the agglomeration revenue of more advanced countries, but they also must compete with intra-firm prices and respond to global strategies of process localization.

Secondly, because multinational companies have inherent advantages in foreign trade due to their knowledge of external markets, their commercial relations and familiarity with regulations in other countries, they face lower fixed sunk costs than companies in developing nations (Sinani and Hobdari, 2006).

In response to this last limit, it would be useful for governments to pay more attention to reducing the fixed sunk costs for export companies, rather than increasing competitiveness through a nominal devaluation of the currency, by providing information on potential foreign markets and developing the infrastructure required for exporting.

CONCLUSIONS

This work has argued that the strategy of making the nominal exchange rate more flexible to promote growth based on exports is unadvisable due to the following:

  • The high liability dollarization present in developing economies makes it difficult to use the exchange rate to stabilize the payment balance, because devaluation can have severe repercussions on the solvency of economic agents.
  • Due to the effect of devaluation on the balance sheets of developing countries, this measure is strongly penalized in international credit ratings and affects the refinancing of external debt.
  • In the process of integration to global production, the influence of real exchange rates and relative unit labor costs on the competitiveness of countries is declining, and being displaced by technological progress.
  • Export companies in developing nations face disadvantages from the start as compared to multinational firms, due to the positive externalities that the latter obtain from their governments (agglomeration revenue) and because they have high liability dollarization.

In response to these issues, this work proposes an alternative strategy, which consists of the following:

  • Maintain the objective of stabilizing the nominal exchange rate, which emerging countries have tacitly adopted in recent years.
  • Boost competitiveness through financial policies that stimulate productivity growth by improving the productive infrastructure and strengthening the internal market.
  • Give priority to import substitution rather than promoting exports, taking into account that the marginal benefits in terms of currency savings would be less uncertain and of greater magnitude as compared to the marginal revenue from external sales of new products.

BIBLIOGRAPHY

Abbas, S. Ali; Nazim Belhozine; Asmad El-Ganainy, and Mark Horton (2011), “Historical patterns of dynamics of public debt: evidence from a new database”, IMF Economic Review, vol. 59, num. 4, Washington, IMF, pp. 717-742.

Aglietta, Michel, and Pierre Deusy-Fournier (1995), “International money: competition and organizing principles”, mimeo, Paris, Université Paris X-Nanterre.

Baldwin, Richard (1989), “Sunk-cost hysteresis”, nber working papers, num. 2 911, Cambridge Mass., nber.

________, and Paul Krugman (1989), “Persistent trade effects of large exchange rate shocks”, Quarterly Journal of Economics, vol. 104, num. 4, Oxford, Oxford University Press, pp. 635-654,

________ (2004), “Agglomeration, integration and tax harmonisation”, European Economic Review, vol. 48, London, Elsevier, pp. 1-23.

Berman, Nicolas, and Antoine Berthou (2009), “Financial market imperfections and the impact of exchange rate movements on exports”, Review of International Economics, vol. 17, num. 1, Malden Mass., Wiley Blackwell, pp. 103-20.

Bresser-Pereyra, Luiz Carlos (2006), “Foreword”, in Matías Vernengo, (coord), Monetary integration and dollarization: No panacea, Cheltenham, E. Elgar, pp. XIII-XIX.

________, and Paulo Gala (2008), “Foreign savings, insufficiency of demand and low growth”, Journal of Post-Keynesian Economics, vol. 30, num. 3, Armonk, M. E. Sharpe, pp. 315-34.

Calvo, Guillermo A.; Alejandro Izquierdo, and Luis Fernando Mejía (2004), “On the empirics of sudden stops: the relevance of balance-sheet effects”, nber working paper, num. 10 520, Cambridge Mass., nber.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 193, April-June 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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