On the role of the exchange rate as a tool for industrial competitiveness

Abstract

By means of a two-tradable-sector model for an open, price-taking economy inspired by the Classical-Sraffian tradition, which conceives the pattern of trade as a technical-choice problem, we examine some difficulties with the recourse to exchange-rate policy as a tool to promote sectorial competitiveness. To this aim, we distinguish among economies that only produce manufactures from those in which the most profitable sector exploits natural resources under conditions of differential rent. We show that, when both tradable sectors produce industrial goods, conventional devaluation does not generally allow one domestic sector to reach international competitiveness without damaging the other. While when the prevailing sector operates under conditions of differential rent, even though the development of a new sector - by setting the exchange rate at its “industrial-equilibrium” level - is possible, this requires that the policymaker determines the effect of changes in the exchange rate, both in direction and magnitude, on the other distributive variables.