Currency Devaluations and Industrial Development

As developing countries continually attempt to increase the competitiveness of their exports through currency devaluations, this project examines an increasingly important set of questions regarding the impact of currency devaluations on the manufacturing sector of four different countries. 

Motivated in large part by the East Asian experience of rapid “export-led” growth, as well as a host of empirical findings that suggest exporting is highly correlated with increased productivity and accelerated growth in manufacturing, many developing countries are focusing on improving the competitiveness of their exporters. One of the most common tools for boosting export competitiveness is currency devaluation, and this project seeks to answer a series of questions related to the impact of currency devaluations on the manufacturing sector.

The research team will look at firm-level data from India, Indonesia, Mexico, and Ethiopia, all developing countries at different stages of industrial development that have undergone large devaluations in the past two decades. They aim to identify whether the impact of a devaluation can be different across firms or industries, whether exporting firms that use domestic inputs benefit more from than those who use foreign inputs, what the spillover effects to non-exporters supplying inputs to local exporters and non-exporters domestically supplying consumer goods are, and how a devaluation may change the structure of the manufacturing sector.

As the overall effects of a currency devaluation on manufacturing growth and trade are ambiguous and have not been studied rigorously using firm-level panel data, this project will provide invaluable information for policymakers. It will identify the beneficiaries (and the victims) of the devaluation, the spillover effects, the firm adjustment process, and the overall effect on manufacturing growth, which in turn will provide policymakers with a better understanding of how effective currency devaluations are at spurring manufacturing growth and development.