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This paper shows that real exchange rate undervaluation through the accumulation of foreign reserves may improve welfare in economies with learning-by-investing externalities that arise disproportionately from the tradable sector. In the presence of targeting problems or when policy choices are restricted by multilateral agreements, first-best policies such as subsidies to capital accumulation, or subsidies to tradable production are not feasible. A neo-mercantilist policy of foreign reserve accumulation "outsources" the targeting problem or overcomes the multilateral restrictions by providing loans to foreigners that can only be used to buy up domestic tradable goods. This raises the relative price of tradable versus non-tradable goods (i.e. undervalues the real exchange rate) at the static cost of temporarily reducing tradable absorption in the domestic economy. However, since the tradable sector generates greater learning-by-investing externalities, it leads to dynamic gains in the form of higher growth. The net welfare effects of reserve accumulation depend on the balance between the static losses from lower tradable absorption versus the dynamic gains from higher growth.
Access to Finance --- Comparative advantage --- Currencies and Exchange Rates --- Debt Markets --- Devaluation --- Economic Theory & Research --- Emerging Markets --- Equilibrium --- Externalities --- Finance and Financial Sector Development --- GDP --- Growth models --- Growth rate --- Human capital --- Macroeconomics --- Macroeconomics and Economic Growth --- Mercantilism --- Multilateral trade --- Net exports --- Open economy --- Organizational capital --- Private Sector Development --- Productivity --- Productivity growth --- Reserve --- Undervaluation --- Wages --- WTO
Book
Year: 2007 Publisher: Washington, D.C., The World Bank,
Abstract | Keywords | Export | Availability | Bookmark
Loading...Choose an application
- Reference Manager
- EndNote
- RefWorks (Direct export to RefWorks)
Production networks have been at the heart of the recent growth in trade among East Asian countries. Fragmentation trade, reflected mainly in the trade in parts and components, is expanding more rapidly than the conventional trade in final goods. This is mainly due to the relatively more favorable policy setting for international production, agglomeration benefits arising from the early entry into this new form of specialization, considerable intercountry wage differentials in the region, lower trade and transport costs, and specialization in products exhibiting increasing returns to scale. The economic integration of China has deepened production fragmentation in East Asia, countering fears of crowding out other countries for international specialization. International production fragmentation in East Asia has intensified intraregional trade but has depended heavily on extraregional trade in final goods. While production networks centered on China have contributed significantly to growth in East Asia, they also breed vulnerabilities. They have not automatically led to technology spillovers and have led to an extreme interdependence across East Asian countries.
Capital --- Costs --- Development --- Economic Growth --- Economic Integration --- Economic Theory and Research --- Emerging Markets --- Exports --- Free Trade --- Goods --- Income --- Increasing Returns --- Increasing Returns To Scale --- Industrialization --- Industry --- Inputs --- International Economics & Trade --- Law and Development --- Macroeconomics and Economic Growth --- Organizational Capital --- Patents --- Private Sector Development --- Production --- Production Costs --- Public Sector Development --- Technology Industry --- Trade --- Trade Barriers --- Trade Law --- Trade Liberalization --- Trade Policy --- Wage Differentials
Book
Abstract | Keywords | Export | Availability | Bookmark
Loading...Choose an application
- Reference Manager
- EndNote
- RefWorks (Direct export to RefWorks)
This paper shows that real exchange rate undervaluation through the accumulation of foreign reserves may improve welfare in economies with learning-by-investing externalities that arise disproportionately from the tradable sector. In the presence of targeting problems or when policy choices are restricted by multilateral agreements, first-best policies such as subsidies to capital accumulation, or subsidies to tradable production are not feasible. A neo-mercantilist policy of foreign reserve accumulation "outsources" the targeting problem or overcomes the multilateral restrictions by providing loans to foreigners that can only be used to buy up domestic tradable goods. This raises the relative price of tradable versus non-tradable goods (i.e. undervalues the real exchange rate) at the static cost of temporarily reducing tradable absorption in the domestic economy. However, since the tradable sector generates greater learning-by-investing externalities, it leads to dynamic gains in the form of higher growth. The net welfare effects of reserve accumulation depend on the balance between the static losses from lower tradable absorption versus the dynamic gains from higher growth.
Access to Finance --- Comparative advantage --- Currencies and Exchange Rates --- Debt Markets --- Devaluation --- Economic Theory & Research --- Emerging Markets --- Equilibrium --- Externalities --- Finance and Financial Sector Development --- GDP --- Growth models --- Growth rate --- Human capital --- Macroeconomics --- Macroeconomics and Economic Growth --- Mercantilism --- Multilateral trade --- Net exports --- Open economy --- Organizational capital --- Private Sector Development --- Productivity --- Productivity growth --- Reserve --- Undervaluation --- Wages --- WTO
Book
Year: 2007 Publisher: Washington, D.C., The World Bank,
Abstract | Keywords | Export | Availability | Bookmark
Loading...Choose an application
- Reference Manager
- EndNote
- RefWorks (Direct export to RefWorks)
Production networks have been at the heart of the recent growth in trade among East Asian countries. Fragmentation trade, reflected mainly in the trade in parts and components, is expanding more rapidly than the conventional trade in final goods. This is mainly due to the relatively more favorable policy setting for international production, agglomeration benefits arising from the early entry into this new form of specialization, considerable intercountry wage differentials in the region, lower trade and transport costs, and specialization in products exhibiting increasing returns to scale. The economic integration of China has deepened production fragmentation in East Asia, countering fears of crowding out other countries for international specialization. International production fragmentation in East Asia has intensified intraregional trade but has depended heavily on extraregional trade in final goods. While production networks centered on China have contributed significantly to growth in East Asia, they also breed vulnerabilities. They have not automatically led to technology spillovers and have led to an extreme interdependence across East Asian countries.
Capital --- Costs --- Development --- Economic Growth --- Economic Integration --- Economic Theory and Research --- Emerging Markets --- Exports --- Free Trade --- Goods --- Income --- Increasing Returns --- Increasing Returns To Scale --- Industrialization --- Industry --- Inputs --- International Economics & Trade --- Law and Development --- Macroeconomics and Economic Growth --- Organizational Capital --- Patents --- Private Sector Development --- Production --- Production Costs --- Public Sector Development --- Technology Industry --- Trade --- Trade Barriers --- Trade Law --- Trade Liberalization --- Trade Policy --- Wage Differentials
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