Essays on Exchange Rates, Exports and Growth in Developing Countries

Abstract: This dissertation is a collection of four essays, where the unifying theme is how different exchange rate regimes have affected developing countries’ economic performance in different respects. In particular, we analyse the consequences on developing countries’ exports, but also, to some extent, the effects on their economic growth. Chapter 1 serves as an introductory chapter and provides a background to the dissertation. Furthermore, it outlines the main results of the study. Chapter 2 analyses the effects of exchange rate risk on exports in a theoretical framework. The implications of fixed versus variable costs of production are explored and contrasted between exporting firms in developing countries and industrialised countries. We argue that exporting firms in developing countries generally have short-run variable costs to greater extent than exporting firms in industrialised countries, and that these differences imply that exporting firms in developing countries are more likely to reduce their export quantity as a consequence of exchange rate risk. Chapter 3 examines the effects of exchange rate volatility on the export supply of some South East Asian developing countries and on developed countries’ demand for their exports, using quarterly data from 1979 to 1989. Since the developing countries of the study have ‘managed’ their exchange rates one way or the other, a proxy variable for realignment expectations is included in their export supply functions. Exchange rate volatility measures are estimated in a univariate GARCH model, and the parallel to official exchange rate ratio is used as a proxy for realignment expectations. The results indicate that exchange rate volatility vis-à-vis the U.S. dollar has hampered the export supply of the developing countries, while no such effects are found on the developed countries’ demand for exports. As for realignment expectations, no effects are found on the developing countries’ export supply. Chapter 4 analyses the effects of different exchange rate regimes on developing countries’ exports. Previous studies have often focused on the export effects of exchange rate volatility and exchange rate misalignments separately. Our approach differs since we concentrate on the net effects of exchange rate regimes on exports, thereby accounting for the export effects of both exchange rate volatility and exchange rate misalignments. During our study period, 1983-1992, countries pegging to a single currency have experienced the weakest export performance, while countries with an independently floating currency have experienced the strongest export performance. Our results may be interpreted as an indication that exchange rate misalignments have affected the developing countries’ export performance to a relatively greater extent than exchange rate volatility. Chapter 5 brings out some empirical evidence on the determinants of nine Asian developing countries’ real effective exchange rates (REER), covering the period 1966 to 1992. We derive measures of REER misalignments and analyse if such misalignments have affected the real GDP per capita growth rates by affecting total factor productivity and factor accumulation. A first finding is that REER misalignments have differed largely across countries, ranging from slight undervaluations to large overvaluations. A second finding is that the more overvalued the REER has been, the lower has investments as a share of GDP been. Since we also find that the investment share is positively related to the real GDP per capita growth rate, we have a link between REER misalignments and growth. The more overvalued the REER, the lower the rate of factor accumulation, and the lower the real GDP per capita growth rate. No effects are, however, found of REER misalignments on the real GDP per capita growth rate through effects on total factor productivity.