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Cheap labor meets costly capital: the impact of devaluations on commodity firms

  • Forbes, Kristin J.

This paper examines how devaluations affect the relative costs of labor and capital and therefore influence production, profitability, investment, and stock returns for firms in the 'crisis' country as well as competitors in the rest of the world. After developing these ideas in a small, open-economy model, the paper performs a series of empirical tests using information for about 1,100 firms in 10 commodity industries between 1996 and 2000. The empirical tests support the model's main predictions: 1) Immediately after devaluations, commodity firms in the crisis country have output growth rates about 10%-20% higher than competitors in other countries; 2) Immediately after devaluations, commodity firms in the crisis country have operating-profit growth rates about 15%-25% higher than competitors in other countries; 3) The effect of devaluations on fixed capital investment and stock returns (and therefore expected long-run output and profits) is determined by capital/labor ratios and changes in the cost of capital. For example, crisis-country firms have higher rates of capital growth and better stock performance after devaluations if they had lower capital/labor ratios and there was no substantial increase in their interest rates.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 69 (2002)
Issue (Month): 2 (December)
Pages: 335-365

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Handle: RePEc:eee:deveco:v:69:y:2002:i:2:p:335-365
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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  1. Paul Cashin & C John McDermott & Alasdair Scott, 1999. "Booms and slumps in world commodity prices," Reserve Bank of New Zealand Discussion Paper Series G99/8, Reserve Bank of New Zealand.
  2. Michael W. Klein & Scott Schuh & Robert K. Triest, 2000. "Job Creation, Job Destruction, and the Real Exchange Rate," NBER Working Papers 7466, National Bureau of Economic Research, Inc.
  3. Sebastian Edwards, 1986. "Commodity Export Prices and the Real Exchange Rate in Developing Countries: Coffee in Colombia," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 233-266 National Bureau of Economic Research, Inc.
  4. Reuven Glick & Andrew K. Rose, 1998. "Contagion and Trade: Why Are Currency Crises Regional?," NBER Working Papers 6806, National Bureau of Economic Research, Inc.
  5. Jose Campa & Linda S. Goldberg, 1996. "Investment, pass-through, and exchange rates: a cross-country comparison," Staff Reports 14, Federal Reserve Bank of New York.
  6. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  7. Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Sources of contagion: is it finance or trade?," Journal of International Economics, Elsevier, vol. 54(2), pages 293-308, August.
  8. George Allayannis & Jane Ihrig, 2000. "The effect of markups on the exchange rate exposure of stock returns," International Finance Discussion Papers 661, Board of Governors of the Federal Reserve System (U.S.).
  9. Kristin J. Forbes, 2002. "How Do Large Depreciations Affect Firm Performance?," NBER Working Papers 9095, National Bureau of Economic Research, Inc.
  10. Gordon M. Bodnar & M.H. Franco Wong, 2000. "Estimating Exchange Rate Exposures: Some "Weighty" Issues," NBER Working Papers 7497, National Bureau of Economic Research, Inc.
  11. Marvin Barth & Trevor Dinmore, 1999. "Trade prices and volumes in East Asia through the crisis," International Finance Discussion Papers 643, Board of Governors of the Federal Reserve System (U.S.).
  12. Kristin J. Forbes, 2002. "Are Trade Linkages Important Determinants of Country Vulnerability to Crises?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 77-132 National Bureau of Economic Research, Inc.
  13. Graciela Kaminsky & Richard K. Lyons & Sergio Schmukler, 2000. "Managers, Investors, and Crises: Mutual Fund Strategies in Emerging Markets," NBER Working Papers 7855, National Bureau of Economic Research, Inc.
  14. Antonio Spilimbergo & Rupa Duttagupta, 2000. "What Happened to Asian Exports During the Crisis?," IMF Working Papers 00/200, International Monetary Fund.
  15. Linda Goldberg & Joseph Tracy, 1999. "Exchange Rates and Local Labor Markets," NBER Working Papers 6985, National Bureau of Economic Research, Inc.
  16. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  17. Reinhart, Carmen & Calvo, Guillermo, 2001. "Fixing for your life," MPRA Paper 13873, University Library of Munich, Germany.
  18. Kamin, S.B., 1988. "Devaluation, External Balance, And Macroeconomic Performance: A Look At The Numbers," Princeton Studies in International Economics 62, International Economics Section, Departement of Economics Princeton University,.
  19. Kathryn M.E. Dominguez & Linda L. Tesar, 2001. "Exchange Rate Exposure," NBER Working Papers 8453, National Bureau of Economic Research, Inc.
  20. Kristin Forbes, 2000. "The Asian Flu and Russian Virus: Firm-level Evidence on How Crises are Transmitted Internationally," NBER Working Papers 7807, National Bureau of Economic Research, Inc.
  21. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
  22. Ratna Sahay & Deepak Mishra & Poonam Gupta, 2003. "Output Response to Currency Crises," IMF Working Papers 03/230, International Monetary Fund.
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