Thursday, 21 November 2013

Global Value Chains and the end of sectoral and exchange rate policies

Koen De Backer at OECD is talking at a conference now. He documents, as did the project global value chains.  Here's the idea.

The traditional case for exchange rate deprections is that countries regain competitiveness since they can export more.  But, nowadays, production of exports needs imports or, production chains are distributed throughout the world.  So, a deprecation helps exports, but hurts imports of goods that are then exported.

here's a diagram that shows this. Note Germany.  Has it benefitted from a weak Euro relative to what it would be if it left?  Yes, to the extent that its exports are cheaper.  No to the extent that the imports to make those exports are more expensive.

Note two more points.  First, in this world, manufacturing is meaningless since its doing lots of service activities too.  Second, intangibles becomes even more important in terms of value added. (Source: based on Shih (1992), Dedrick and Kraemer (1999) and Baldwin (2012)).