Real Exchange Rates and Export Performance in Oil-Dependent Arab Economies

Diversifying oil economies, toward manufacturing and more sophisticated products and services, is one of the most pressing public policy challenges facing these countries. This paper provides new evidence about the impact of oil rents and real exchange rate undervaluation on various measures of exports, using a global sample spanning 1980-2011. Our results suggest that RER undervaluation can ameliorate the negative impact of oil rents on exports, and that it can be particularly effective in countries with underdeveloped financial markets or low institutional development. In light of these findings the paper argues that a strategy of depreciating the real currency can be a viable, albeit a second best industrial policy choice in order to promote export diversification, technical upgrading and export sophistication in institutionally-deficient oil and mineral-dependent economies. Moreover, this type of public policy can minimize the reliance on traditional vertical industrial policy, which usually requires high initial institutional capacity in order to succeed.