On some limits of the exchange rate as a tool for industrial competitiveness

ARIEL DVOSKIN; GERMAN FELDMAN; GUIDO IANNI

Workshop; 4th Developmentalist workshop; 2019

Fundación Getulio Vargas

Abstract. By means of a simple two-tradable-sector model for an open, price-taking economy, which conceives the pattern of trade as a technical choice problem, we examine some difficulties with the recourse to exchange-rate policy as a ?light-switch?, i.e. as a tool to promote sectorial competitiveness. To this aim, we distinguish between economies that only produce manufactures from those in which the most profitable sector exploits natural resources under conditions of differential rent. We show that, when both tradable sectors produce industrial goods, conventional devaluation does not generally allow one domestic sector to reach international competitiveness without damaging the other. While when the prevailing sector operates under conditions of differential rent, even though the development of a new sector -by setting the exchange rate at its ?industrial-equilibrium? level- is possible, this requires that the policymaker determines the effect of changes in the exchange rate, both in direction and magnitude, on the other distributive variables. We conclude that exchange-rate policy does not seem to be the most efficient tool to promote industrialization. Or, at least, that this policy should be heavily complemented by other tools, such as investment policy, public expenditure in R&D, credits to innovation, subsidies to imports of capital goods, etc.