Differential impacts of currency undervaluation on growth and exports in natural resource vs. manufacturing exporting countries
In the existing literature, we find a huge debate on the impact of exchange rate undervaluation (depreciation) on growth and exports. Some argue that undervaluation has positive effects on growth, especially in the case of developing countries. However there is ample criticism against the undervaluation leads to growth argument as well. The critics argue that large undervaluation discourages investment and in fact may lead to negative economic growth. Our premise is that the impact of currency undervaluation (overvaluation) would be different in countries with different exports structure, particularly between manufacturing vs. mineral exporting countries. This paper aims to analyze the differential impact of exchange rate undervaluation on growth and exports in different countries. We consider two sets of countries in our dataset-18 countries are included in manufactures- exporting sample while 16 countries are included in the minerals-exporting sample; Countries included in the former group have at least 70 percent share of manufactured products in total exports in 2010; while those in the latter contribute to more than 40 percent in total exports. This paper uses a cross sectional panel analysis using both five years average data and one year average data; pooled OLS, panel fixed effects, random effects estimations. It controls for the endogeneity problem by using a system generalized method of moments estimations. Estimation results of our study suggest currency overvaluation is good for mineral resource exporting countries. Moreover, results show a negative impact of undervaluation on growth and exports in both the long-run and the short-run for mineral and manufacture exporting countries. At the same time, negative coefficients on share of mineral exports on growth and exports implies the need of export diversification in many Latin American countries and Africa.
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