As any introduction to macroeconomics class will tell you, a decrease in the value of a country’s currency leads to goods and services becoming more competitive on the world market – increasing demand and spurring economic growth. However, according to a new study by the World Bank, this vital tool in the arsenal of finance ministers and central bankers across the world is becoming less reliable.
The analysis of 46 countries found that since the 1990s, the effectiveness of currency depreciations in increasing exports and spurring on economic growth has halved. As the paper points out, “over the period 1996–2012…the elasticity of manufacturing export volumes to the real effective exchange rate has decreased over time.”
This may come as bad news for China, which recently went through a series of currency devaluations, some speculate, to reboot their faltering economy
Countries that have become embedded in the global economy’s “global value chains” are most likely to see a decline in the effectiveness of currency depreciations. “As countries are more integrated in global production processes” the study continues, “currency depreciation only improves the competitiveness of a fraction of the value of final goods exports.” Goods are increasingly produced as part of a global supply chain, meaning devaluation in one country has a minimal impact on a product’s final price. The savings made are often likely to be absorbed by the multinational company in control of the supply chain, without necessarily raising the demand in the country with a devaluated currency.
This may come as bad news for China, which recently went through a series of currency devaluations, some speculate, to reboot their faltering economy. Latest figure show, for instance, that Chinese manufacturing has suffered its largest contraction since 2009. As the study notes, integration into the world economy’s supply chain – and China deeply is- particularly makes economies more immune to currency devaluations.
Eurosceptics pushing for Greece’s withdrawal from the eurozone are also likely to take note of this study. The convention has been to argue that inclusion in the monetary union, alongside economic powerhouses like Germany, has made Greek exports uncompetitive. Likewise, being locked in the union has prevented Greece from being able to revive its economy through currency depreciation. However, as the study underlines, Greece dropping the euro in favour of a devalued currency, such as a new drachma, may not be as effectiveness a tool for boosting growth as it once was.
