Do Developing Countries Still Suffer from the Foreign Exchange Constraint? An Empirical Study for 1990–2014

Globalization can potentially ease or firm up the foreign exchange constraint of a country. Considering a sample of 42 less developed countries and fixing an approximate date of globalization in 1991, we show that, at the aggregate level, the constraint has relaxed for them since the 1990s. After fixing the approximate dates of globalization for each country from the available literature and replicating the analysis at the country level, we found mixed results. Though the results are mixed, a general conclusion can be derived from the results: The foreign exchange constraint has relaxed due to globalization in upper-middle and lower-middle-income developing countries, while the opposite is true for low-income countries. Balance-of-payment accounting statistics show interesting correspondences. Merchandise exports and Foreign Direct Investment (FDI) tend to have a high and positive correspondence with relaxing the burden of the constraint while Foreign Portfolio Investment (FPI) and efforts toward reduction of imports have no correspondence. Policy insights derived from the analysis suggest export diversification is important for improving current account balance.