Competitiveness and dynamic cumulative causation in an export-led growing economy

Abstract

Abstract The role of the real exchange rate (RER) in explaining long-run processes of catching-up and falling-behind continues to be a question of central importance among alternative theories of growth and distribution. Existing empirical evidence suggests a positive association between exchange rates in levels and growth, especially in developing countries, though a currency depreciation has adverse effects. While these two elements have been separately incorporated into demand-led growth theories, a comprehensive assessment of the dynamic interaction between them is still missing. This article attempts to fill such a gap in the literature by developing an export-led growth model in which price and non-price competitiveness respond to the level and variation of the RER. In equilibrium, relative prices and the fundamentals of the productive structure are simultaneously determined. A more depreciated exchange rate and higher non-price competitiveness are associated with a higher rate of growth. It is shown that the interplay between a destabilizing force from the goods market, and a stabilizing mechanism from the labor market, might give rise to persistent and endogenous long-run cycles of structural change. The model is used to revisit the historical experience of East Asia (EA) and Latin America (LA) in the post-war period. We show our system fits crucial stylized facts, particularly the tendency of LA to have a more appreciated RER, its lower non-price competitiveness and dynamic economies of scale, and stronger distributive conflict, resulting in less growth and greater volatility.