Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia
In: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7)
The paper tests the Balassa-Samuelson hypothesis (rapid economic growth is accompanied by real exchange rate appreciation because of differential productivity growth between tradable and nontradable sectors) using data of the APEC economies. Japan, Korea, Taiwan and, to a lesser extent, Hong Kong and Singapore, were proved to follow the Balassa-Samuelson path. These countries follow a similar industrialization pattern, increasing the weight of high value-added exports. Although Hong Kong and Singapore grew fast, their real exchange rates appreciated only moderately. High productivity growth in service sectors might have been the reason for this. Other fast-growing ASEAN countries, such as Thailand, Indonesia and Malaysia did not experience real appreciation. Closer examinations of various components of the Balassa-Samuelson hypothesis revealed that key assumptions are not uniformly supported: There is no uniform pattern for the movement of nontradable prices relative to tradable prices; and tradable prices (measured by common currency) do not show the international arbitrage.
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