Enhancing Industry-Modern Services Integration via Competitive Real Exchange Rates

This article discusses theoretically the role of the Real Exchange Rate (RER) on the integration of industrial and modern services sectors. It highlights the historical importance of manufacturing in economic growth and explains how deindustrialization since the 1970s has elevated the significance of modern services, which are critical for productivity and innovation. The symbiotic relationship between the manufacturing and services sectors is a vital force that induces pro-growth structural economic change. We demonstrate how competitive RER encourages structural adjustments and investments, promoting interaction between the manufacturing and services sectors, particularly in developing economies, thereby enhancing global competitiveness. In a two-cycle process, a competitive RER initially boosts profitability and external competitiveness, leading to increased automation and collaboration with modern services. This interaction catalyzes "amplified dynamic increasing returns to scale," driven by shared innovations. Over time, as sectors reap profits, they deepen their integration, improve products, and broaden market access. Consequently, the RER fosters a symbiotic relationship that is essential for sustainable economic development and competitiveness in international trade.