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Export surges : the oower of a competitive currency

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Author Info
Freund, Caroline
Pierola, Martha Denisse

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

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  11. Maurice Obstfeld, 2002. "Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics," Center for International and Development Economics Research, Working Paper Series 1022, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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  12. Devarajan, Shantayanan, 1997. "Real Exchange Rate Misalignment in the CFA Zone," Journal of African Economies, Oxford University Press, vol. 6(1), pages 35-53, March.
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  15. Aaditya Mattoo & Arvind Subramanian, 2008. "Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization," Peterson Institute Working Paper Series WP08-2, Peterson Institute for International Economics. [Downloadable!]
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  16. Krugman, Paul R, 1981. "Intraindustry Specialization and the Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 959-73, October. [Downloadable!] (restricted)
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  19. Tibor Besedes & Thomas J. Prusa, 2007. "The Role of Extensive and Intensive Margins and Export Growth," NBER Working Papers 13628, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Schank, Thorsten & Schnabel, Claus & Wagner, Joachim, 2007. "Do exporters really pay higher wages? First evidence from German linked employer-employee data," Journal of International Economics, Elsevier, vol. 72(1), pages 52-74, May. [Downloadable!] (restricted)
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  22. Laird, Sam & Nogues, Julio, 1988. "Trade policies and the debt crisis," Policy Research Working Paper Series 99, The World Bank. [Downloadable!]
  23. Alan G. Ahearne & John G. Fernald & Prakash Loungani & John W. Schindler, 2006. "Flying geese or sitting ducks: China’s impact on the trading fortunes of other Asian economies," International Finance Discussion Papers 887, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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