Some Limits of the Neo-Structuralist Approach to the Relationship between the Exchange Rate and Economic Growth

DVOSKIN, ARIEL; FELDMAN, GERMÁN DAVID; IANNI, GUIDO

Sao Paolo

Workshop; Some Limits of the Neo-Structuralist Approach to the Relationship between the Exchange Rate and Economic Growth?. 2nd New Developmentalism?s Workshop; 2017

Sao Paolo School of Economics FGV/SP, Fundaçao Getúlio Vargas, Sao Paolo, Brasil.

Abstract. In the last decade we have witnessed a growing literature on the role of thereal exchange rate as a key factor to accelerate economic growth in small openperipheral economies (see, among others, Rodrik, 2008; Bresser Pereira, 2008; Rapetti,2013). Although at a theoretical level several channels have been discussed that mayjustify the expansionary impact of devaluations, there is one that deserves specialattention, namely: a higher exchange rate may incentive structural change, by allowingthe incorporation to the prevailing productive structure of new industrial sectors -potentially more dynamic-, that were not profitable before (i.e. at a lower exchangerate).By means of a simple two-tradable-sector model for a small economy opened to tradeand capital flows that determines its pattern of specialization as a technical-choiceproblem, in this paper we discuss some potential limits of this policy tool. To this aim,we distinguish between economies that only produce manufactures and those in whichthe most profitable sector exploits natural resources under conditions of differentialrent.We will examine several indexes of industrial competitiveness usually employed by thisliterature (see Deardorff, 2005, Razmi, 2007, Bresser Pereira, 2008, Marconi, 2012) toshow that, when both tradable sectors produce industrial goods, in general it is notpossible to encourage through a conventional devaluation the development of onesector without damaging the other, unless one assumes the existence of differentialwages or profit rates among them. While when the prevailing sector operates underconditions of differential rent, although it is possible to develop a new sector byadjusting the exchange rate towards its ?industrial equilibrium? level, this requires thatthe policymaker is able to determine, not only the kind of relationship amongdistributive variables (real wage, real exchange rate and profit rate), but also itsparticular magnitude.We conclude that, at least in economies that face high degrees of technologicaldependency, the difficulty, or even impossibility, to determine the direction andmagnitude of distributive interactions, together with the strong distributive conflictsthat may prevail in some countries, make exchange rate policy an inadequate tool topromote industrialization. Or, at best, this policy must be complemented with othermeasures already emphasized by the old structuralist school, such as investment policy,innovation promotion, subsidies to the importation of capital goods, etc.