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

Empirical research has revealed that devaluation, and even mere uncertainty with respect to the future evolution of the exchange rate, has a negative effect on the export dynamics of countries.

Berman and Berthou (2009) studied the influence of exchange rate variations on export growth in a sample of 27 developed and developing countries from 1990-2005. They included independent variables in their models, as well as conventional factors like the gdp of the importing and exporting countries and relative prices, other variables representative of the level of development of the financial market and the amount of debt in foreign currency. Their estimates showed that financial development has a positive effect on export volumes, while debt in foreign currency has a strong negative effect that cancels out the positive effect of the exchange rate on competitiveness.

These authors also observed that the effects of the two financial variables included were stronger among the subset of developing countries than in the developed nations in their sample. By estimating the effects of a standard deviation of the exchange rate on exports, they found that countries like Great Britain and the United States, where companies have debt in their own currencies and obtain credit based on the expected profitability of their projects, the effect on the volume of exports was positive, albeit small (3% and 1%, respectively). By contrast, in Argentina and Brazil, where there are high amounts of debt in foreign currencies, their financial systems are less developed and credit is granted based on real guarantees, the effect of a standard deviation of the exchange rate was negative and close to 25% (Berman and Berthou, 2009).

In order to further analyze this phenomenon, this research built a database of annual data for the time period 1996-2009 for the twelve developing countries that reported the most complete macroeconomic information to International Financial Statistic of the International Monetary Fund.4

Figure 1 relates the growth rate of exports (measured in dollars) with the average rate of real exchange rate variation in these twelve economies, revealing that devaluation leads to export contraction, and not to a boost, as predicted by conventional theory. The inverse effect of the real exchange rate and growth on exports is observed on an individual level for the twelve countries in the sample.

Figure 1. Export Growth and the Real Exchange Rate
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.

4 The countries included in the sample are as follows: Argentina, Brazil, Chile, Colombia, Dominican Republic, Egypt, Philippines, Indonesia, Mauritius, Mexico, Sri Lanka and Thailand. This note is applicable to the figures.

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,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Moritz Cruz. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: June 27th, 2018.
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