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Export surges : the oower of a competitive currency

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  • Freund, Caroline
  • Pierola, Martha Denisse

Abstract

How can countries stimulate and sustain strong export growth? To answer this question, the authors examine 92 episodes of export surges, defined as significant increases in manufacturing export growth that are sustained for at least seven years. They find that export surges in developing countries tend to be preceded by a large real depreciation-which leaves the exchange rate significantly undervalued-and a reduction in exchange rate volatility. In contrast, in developed countries, the role of the exchange rate is less pronounced. The authors examine why the exchange rate is so important in developing countries and find that the depreciation leads to a significant reallocation of resources in the export sector. In particular, depreciation generates more entries into new export products and new markets, and the percentage of new entries that fail after one year declines. These new products and new markets are important, accounting for 25 percent of export growth during the surge in developing countries. The authors argue that maintaining a competitive currency leads firms to expand the product and market space for exports, inducing a large reorientation of the tradable sector.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4750.

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Date of creation: 01 Oct 2008
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Handle: RePEc:wbk:wbrwps:4750

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Keywords: Currencies and Exchange Rates; Emerging Markets; Debt Markets; Economic Theory&Research; Achieving Shared Growth;

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References

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Citations

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Cited by:
  1. Ridha Nouira & Patrick Plane & K. Sekkat, 2011. "Exchange Rate Undervaluation and Manufactured Exports: A Deliberate Strategy?," Working Papers, HAL halshs-00617573, HAL.
  2. Cimoli, Mario & Fleitas, Sebastian & Porcile, Gabriel, 2011. "Real Exchange Rate and the Structure of Exports," MPRA Paper 37846, University Library of Munich, Germany.
  3. Diego Bastourre & Luis Casanova & Alejo Espora, 2011. "Tipo de Cambio Real y Crecimiento: Síntesis de la Evidencia y Agenda de Investigación," Department of Economics, Working Papers 082, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
  4. Bown, Chad P. & McCulloch, Rachel, 2009. "U.S.-Japan and U.S.-China trade conflict: Export growth, reciprocity, and the international trading system," Journal of Asian Economics, Elsevier, Elsevier, vol. 20(6), pages 669-687, November.
  5. Lederman, Daniel, 2011. "Large devaluations, foreign direct investment and exports : a speculative note," Policy Research Working Paper Series, The World Bank 5619, The World Bank.
  6. Resiandini, Pramesti, 2010. "Financial development and trade: evidence from the world's three largest economies," MPRA Paper 25631, University Library of Munich, Germany.
  7. Dani Rodrik, 2008. "The Real Exchange Rate and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 365-439.
  8. Razmi, Arslan, 2012. "The Exchange Rate, Diversification, and Distribution in a Modified Ricardian Model with a Continuum of Goods," ADBI Working Papers, Asian Development Bank Institute 337, Asian Development Bank Institute.

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