The real exchange rate matters, but why? A new developmentalist assessment

IASCO-PEREIRA, HUGO C.; MISSIO, FABRÍCIO J.

doi:10.1590/0101-31572023-3482

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Brazilian Journal of Political Economy

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Articles • Brazil. J. Polit. Econ. 43 (4) • Oct-Dec 2023 • https://doi.org/10.1590/0101-31572023-3482 copy

The real exchange rate matters, but why? A new developmentalist assessment

A taxa de câmbio real é importante, mas por quê? Uma nova avaliação desenvolvimentista

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

New Developmentalism doctrine defends the central role played by a competitive real exchange rate in promoting catch-up in developing economies. Recently, this theory has been questioned by critics; the main criticism has been that an outward growth strategy based on a competitive real exchange rate would harm income/real wage distribution and have a negative effect on the economy. This study discusses how the real exchange rate influences growth in light of the new developmentalist doctrine and the contrasting experiences of Asian and Latin American countries. Its main contribution is to document the influence of the real exchange rate on economic performance, specifically through certain transmission channels. The article’s findings suggest that a competitive RER is an important aspect in a country’s growth path, insofar as it favors profits, capital accumulation, net exports, and gains in social capabilities.

KEYWORDS:
Real exchange rate; economic development; new developmentalism

	(1)^a	(2)^a	(3)	(4)	(5)	(6)	(7)	(8)
Dependent variable	Wage-share				Income’s Gini
y_t-1	0.32	0.02	0.15	0.04	0.98***	0.98***	0.99***	1.01***
y_t-1	(0.19)	(0.14)	(0.15)	(0.12)	(0.03)	(0.02)	(0.03)	(0.02)
Mis	0.09**	0.04*			0.03	0.05***
Mis	(0.04)	(0.02)			(0.03)	(0.01)
LRER			-0.01	0.03			0.02*	0.03***
LRER			(0.06)	(0.03)			(0.01)	(0.01)
AR (2)	0.12	0.39	0.22	0.14	0.66	0.13	0.11	0.17
Hansen/Sargan	0.16	0.23	0.38	0.29	0.45	0.15	0.52	0.18
Hansen-Diff	0.61	0.61	0.67	0.23	0.48	0.13	0.28	0.09
Groups	114	114	114	114	126	123	126	124
Instruments	16	31	11	15	18	22	21	24

	(1)	(2)^a	(3)^a	(4)^a	(5)^a	(6)^a	(7)^a	(8)^a	(9)	(10)	(11)	(12)
Dependent variable	Investment				Consumption				Net Exports
y_t-1	0.15	0.24*	0.17	0.20	0.49***	0.50***	0.38***	0.39***	-0.07**	-0.05**	-0.09**	-0.04*
y_t-1	(0.11)	(0.12)	(0.12)	(0.14)	(0.17)	(0.09)	(0.07)	(0.08)	(0.03)	(0.02)	(0.04)	(0.02)
Mis	-0.17*	-0.16**			0.22**	0.21**			-0.14**	-0.04
Mis	(0.10)	(0.07)			(0.08)	(0.08)			(0.05)	(0.03)
LRER			-0.32**	-0.21**			0.05**	0.14*			-0.0003	-0.0003
LRER			(0.13)	(0.09)			(0.02)	(0.07)			(0.03)	(0.02)
w_t-1		0.08		0.05		-0.44		-0.40		-0.36***		0.15
w_t-1		(0.43)		(0.64)		(0.41)		(0.28)		(0.09)		(0.10)
AR (2)	0.13	0.14	0.15	0.17	0.89	0.78	0.93	0.66	0.75	0.97	0.80	0.99
Hansen	0.25	0.35	0.10	0.36	0.54	0.17	0.12	0.24	0.23	0.30	0.19	0.39
Hansen-Diff	0.76	0.58	0.32	0.25	0.97	0.33	0.35	0.40	0.28	0.48	0.78	0.30
Groups	140	114	140	114	140	114	140	114	140	114	140	114
Instr.	34	39	29	32	20	24	35	31	35	39	35	39

	(1)^a	(2)^a	(3)	(4)	(5)^a	(6)^a	(7)^a	(8)^a
Dependent variable	Social Capability				TFP
y_t-1	0.14	0.11	0.07	0.08	0.44***	0.37***	0.34	0.23
y_t-1	(0.10)	(0.10)	(0.11)	(0.11)	(0.10)	(0.12)	(0.24)	(0.16)
Mis	-0.64***	-0.64***			-0.10*	-0.13**
Mis	(0.03)	(0.03)			(0.05)	(0.05)
LRER			-0.54***	-0.54***			-0.14***	-0.14***
LRER			(0.03)	(0.03)			(0.03)	(0.04)
w_t-1		0.06		0.23		-0.01		-0.15
w_t-1		(0.30)		(0.28)		(0.16)		(0.13)
AR (2)	0.23	0.26	0.23	0.22	0.68	0.76	0.88	0.63
Hansen/Sargan	0.72	0.76	0.86	0.32	0.22	0.20	0.47	0.12
Hansen-Diff	0.87	0.87	0.38	0.70	0.58	0.59	0.44	0.38
Groups	106	106	106	106	106	106	17	30
Instr.	17	18	17	18	32	30	106	106

	(1)^a	(2)^a	(3)	(4)	(5)^a	(6)
Dependent variable	Wage-share			Income’s Gini
y_t-1	0.32	0.02	0.04	0.58***	0.80***	0.78***
y_t-1	(0.19)	(0.14)	(0.10)	(0.10)	(0.05)	(0.06)
Mis	0.09**	0.04*		0.007	0.04**
Mis	(0.04)	(0.02)		(0.02)	(0.02)
LRER			-0.02			0.04**
LRER			(0.03)			(0.02)
AR (2)	0.12	0.39	0.20	0.10	0.08	0.09
Hansen/Sargan	0.16	0.23	0.79	0.15	0.45	0.31
Hansen-Diff	0.61	0.61	0.83	0.19	0.21	0.22
Groups	114	114	70	80	79	79
Instruments	16	31	15	23	39	39

	(1)	(2)	(3)^a	(4)^a	(5)^a	(6)^a	(7)^a	(8)	(9)
*Dependent variable*	*Investment*			*Consumption*			*Net Exports*
y_t-1	0.09***	0.11***	0.14	0.28	0.35***	0.16*	-0.09	-0.15***	-0.13***
y_t-1	(0.03)	(0.03)	(0.09)	(0.19)	(0.05)	(0.09)	(0.07)	(0.03)	(0.03)
Mis	-0.11*	-0.22***		0.39***	0.45***		-0.36**	-0.33***
Mis	(0.06)	(0.07)		(0.09)	(0.09)		(0.15)	(0.03)
LRER			-0.39***			0.23**			-0.23***
LRER			(0.09)			(0.09)			(0.03)
w_t-1		-0.05	0.96**		-0.33	0.03		-1.44***	-1.39***
w_t-1		(0.14)	(0.45)		(0.28)	(0.33)		(0.15)	(0.16)
AR (2)	0.35	0.54	0.93	0.69	0.39	0.27	0.94	0.92	0.98
Hansen	0.11	0.27	0.67	0.15	0.50	0.17	0.58	0.73	0.88
Hansen-Diff	0.56	0.41	0.64	0.37	0.45	0.43	0.96	0.48	0.24
Groups	95	70	70	95	70	70	95	70	70
Instr.	34	38	19	29	24	30	35	39	38

	(1)	(2)	(3)^a	(4)^a	(5^)a	(6)^a
Dependent variable	Social Capability			TFP
y_t-1	0.14**	0.10	0.08	0.29	0.36	0.38*
y_t-1	(0.06)	(0.06)	(0.13)	(0.20)	(0.22)	(0.20)
Mis	-0.69***	-0.66***		0.11	0.09
Mis	(0.07)	(0.08)		(0.07)	(0.07)
LRER			-0.62***			0.07
LRER			(0.16)			(0.07)
w_t-1		-0.03	0.18		0.05	-0.04
w_t-1		(0.38)	(0.38)		(0.14)	(0.21)
AR (2)	0.13	0.13	0.12	0.72	0.89	0.97
Hansen/Sargan	0.68	0.67	0.74	0.63	0.48	0.48
Hansen-Diff	0.54	0.47	0.86	0.83	0.62	0.89
Groups	65	65	65	65	65	65
Instr.	17	18	18	30	34	29

Country	Country	Country	Country	Country	Country
Angola	Chile	Ghana	Korea	Norway	Slovak Republic
Albania	China	Guinea-Bissau	Kuwait	Nepal	Slovenia
United Arab Emirates	Cote d’Ivoire	Equatorial Guinea	Lao PDR	New Zealand	Sweden
Armenia	Cameroon	Greece	Lebanon	Oman	Eswatini
Antigua and Barbuda	Colombia	Grenada	Sri Lanka	Pakistan	Seychelles
Australia	Comoros	Guatemala	Lesotho	Panama	Chad
Austria	Cabo Verde	Guyana	Lithuania	Peru	Togo
Burundi	Costa Rica	Hong Kong	Luxembourg	Philippines	Thailand
Belgium	Cyprus	Honduras	Latvia	Papua New Guinea	Tajikistan
Benin	Czech Republic	Croatia	Morocco	Poland	Turkmenistan
Burkina Faso	Germany	Haiti	Moldova	Portugal	Tonga
Bangladesh	Dominica	Hungary	Madagascar	Paraguay	Trinidad and Tobago
Bulgaria	Denmark	Indonesia	Maldives	Qatar	Tunisia
Bahrain	Dominican Republic	India	Mexico	Romania	Turkey
Bosnia and Herzegovina	Algeria	Ireland	North Macedonia	Russia	Tanzania
Belarus	Ecuador	Iceland	Mali	Rwanda	Uganda
Belize	Egypt	Israel	Malta	Saudi Arabia	Ukraine
Bolivia	Spain	Italy	Mongolia	Sudan	Uruguay
Brazil	Estonia	Jamaica	Mauritania	Senegal	United States
Barbados	Ethiopia	Japan	Mauritius	Singapore	Vietnam
Brunei Darussalam	Finland	Kazakhstan	Malaysia	Solomon Island	Samoa
Bhutan	Fiji	Kenya	Namibia	Sierra Leone	Yemen
Central African Republic	France	Kyrgyz Republic	Niger	El Salvador	South Africa
Canada	Gabon	Cambodia	Nigeria	Serbia
Switzerland	United Kingdom	Kiribati	Netherlands	Sao Tome and Principe

Variable	Definition	Source	Obs.	Descriptive statistics
LRER	Bilateral real exchange rate	World Bank	878	Average: -0.74
LRER	(Price level ratio of PPP conversion factor RER_t,i = PPP_t,i /XRAT_t,i)	World Bank	878	St. deviation: 0.5
LPIBCAPITA	Real GDP per capita (PPP)	World Bank	877	Average: 9.09
LPIBCAPITA	Real GDP per capita (PPP)	World Bank	877	St. deviation: 1.21
w	Wage share as % of GDP (employed in log-diff)	Penn World Table 9.1	570	Average: -0.67
w	Wage share as % of GDP (employed in log-diff)	Penn World Table 9.1	570	St. deviation: 0.26
gini	Gini income: estimate of Gini index of inequality in equivalized household disposable income (post-tax, post-transfer) at 1% of uncertainty estimate (in the Bayesian sense)	Solt (2020)	703	Average: -0.98
gini		Solt (2020)	703	St. deviation: 0.23
i	Investment as % of GDP (employed in log-diff)	Penn World Table 9.1	710	Average: 0.04
i	Investment as % of GDP (employed in log-diff)	Penn World Table 9.1	710	St. deviation: 0.29
c	Consumption as % of GDP (employed in log-diff)	Penn World Table 9.1	710	Average: 0.001
c	Consumption as % of GDP (employed in log-diff)	Penn World Table 9.1	710	St. deviation: 0.14
nx	Net exports (exports minus imports) as % of GDP (employed in log-diff)	Penn World Table 9.1	710	Average: -0.02
nx		Penn World Table 9.1	710	St. deviation: 0.29
sc	Social Capability: TFP level at current PPPs (USA=1) (employed in log-diff)	Penn World Table 9.1	530	Average: -0.01
sc		Penn World Table 9.1	530	St. deviation: 0.15
tfp	TFP at constant national prices (2011=1) (employed in log-diff)	Penn World Table 9.1	530	Average: 0.02
tfp		Penn World Table 9.1	530	St. deviation: 0.10
inflation	Consumer price %	World Bank	842	Average: 30.4
inflation	Consumer price %	World Bank	842	St. deviation: 205
Mis	Measure of RER misalignment using LPIBCAPITA	Authors	876	Average: -0.74
Mis	Measure of RER misalignment using LPIBCAPITA	Authors	876	St. deviation: 0.26

Centro de Economia Política Rua Araripina, 106, CEP 05603-030 São Paulo - SP, Tel. (55 11) 3816-6053 - São Paulo - SP - Brazil
E-mail: cecilia.heise@bjpe.org.br

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[TFN1] Notes: (1) The dependent variable is Growth Rate of Wage-Share of GDP represented by wt; (2) estimates using two-step System GMM with Time Dummies; (3) *,** and *** indicate significance at 10%, 5% and 1%; (4) a denotes the use of Robust Standard Errors (between parentheses); (5) The estimated parameter for the variable inflation is not presented, as well as the constant - which is available upon request.