4 ms·

Even just speculating about a peg substantially below the current exchange rate sounds like a great way to send your exchange rate downwards. And low exchange

by t_mann 4y ago

Even just speculating about a peg substantially below the current exchange rate sounds like a great way to send your exchange rate downwards. And low exchange rates only help with exports if you have an export industry (tourism reacts to a lot more factors than just prices - the instability coming from a currency crisis may not help, eg). And higher prices for imports don't help with industrial development. Countries rich in natural resources face a different set of problems, which is why I excluded them in the first post.

pydry 4y ago
If you dont have an export industry pegging low is even more critical. It means you can develop one. It also means you can build up a foreign exchange reserve that will let you weather crises. Most of the asian tigers + China did this and it was pretty successful in all cases - they followed a path from poor to rich. Floating is fine if you're a big country who is substantially self reliant and with lots of exports but it's riskier if you're small fry at the mercy of international markets.
- t_mann 4y ago
  industrial development is a little bit harder than just setting an artificially low exchange rate. you need a well-trained workforce, access to input materials (if you have to import those at higher prices you have a bit of a hen-and-egg situation), infrastructure, logistics, a strong legal system, political stability,... if you only lower your exchange rate without any of the other factors in place, my guess would be that you'd just end up being poorer. on the other hand, if you do have the other factors, Switzerland is a good example that a low exchange rate is not necessary to be an export powerhouse
  - pydry 4y ago
    It's definitely not a magic wand but it's a prerequisite for sure. Switzerland has actually tried to pursue a policy of keeping its exchange rate depressed to make its industry and agricultural exports competitive. High exchange rates dont preclude switzerland from exporting complex industrial machinery or watches or anything else high up on the value chain but you need to develop industrially before getting to the point where you can do that. El Salvador cant export fancy watches. 1990s China couldnt even dream of it either. China after decades of pegging low can do it.

by t_mann 4y ago

pydry 4y ago

If you dont have an export industry pegging low is even more critical. It means you can develop one. It also means you can build up a foreign exchange reserve that will let you weather crises. Most of the asian tigers + China did this and it was pretty successful in all cases - they followed a path from poor to rich. Floating is fine if you're a big country who is substantially self reliant and with lots of exports but it's riskier if you're small fry at the mercy of international markets.

t_mann 4y ago
industrial development is a little bit harder than just setting an artificially low exchange rate. you need a well-trained workforce, access to input materials (if you have to import those at higher prices you have a bit of a hen-and-egg situation), infrastructure, logistics, a strong legal system, political stability,... if you only lower your exchange rate without any of the other factors in place, my guess would be that you'd just end up being poorer. on the other hand, if you do have the other factors, Switzerland is a good example that a low exchange rate is not necessary to be an export powerhouse
- pydry 4y ago
  It's definitely not a magic wand but it's a prerequisite for sure. Switzerland has actually tried to pursue a policy of keeping its exchange rate depressed to make its industry and agricultural exports competitive. High exchange rates dont preclude switzerland from exporting complex industrial machinery or watches or anything else high up on the value chain but you need to develop industrially before getting to the point where you can do that. El Salvador cant export fancy watches. 1990s China couldnt even dream of it either. China after decades of pegging low can do it.