Weaker currencies still drive export growth, says IMF

Weaker exchange rates have not lost their power to spur higher exports, according to analysis by the International Monetary Fund.
The findings run counter to recent research from the World Bank, which found that currency devaluations are now only half as effective at boosting exports as they were in the mid-1990s.
They are also at odds with analysis by the FT, focused purely on emerging markets, which found that since 2013 currency weakness has not helped boost exports at all, although it has led to a drop in imports.
As such, the IMF’s analysis suggests that one of the key inbuilt stabilisers of the global economic system remains intact.
However, the report may also help fuel the desire of some countries to engage in “currency wars”, letting their exchange rate weaken in order to undercut their neighbours and steal market share.
The IMF paper, which will form part of its next twice yearly World Economic Outlook due to be published this week, examined 60 developed and emerging market economies over the past 30 years.
It found that a 10 per cent real effective depreciation of a currency raised real net exports (exports minus imports) by, on average, 1.5 per cent of gross domestic product, although there was “substantial” variation between countries.
About half of this effect stemmed from a rise in exports and the other half from a fall in imports.
Importantly, the IMF concluded that, stripping out “outliers”, this relationship had not weakened over time and that “recent currency movements thus imply a substantial redistribution of real net exports”.
Although it takes a number of years for the impact to fully materialise, the paper found that the bulk of the adjustment occurred within 12 months of a slide in a country’s exchange rate.
Much of the rationale underpinning a belief that exchange rate movements may have lost efficacy in driving trade patterns has focused on the emergence of ever more complex global supply chains.
In the case of a Chinese-made Smartphone, for example, the screen may have been imported from Japan and the main chip from South Korea, with other parts sourced from Southeast Asia, Europe and the US.