3 min read.Updated: 07 Oct 2017, 12:47 AM ISTTadit Kundu
Foreign capital which flows in to exploit natural resources can lead to exchange rate appreciation, adversely affecting industrial growth
Intervention in foreign exchange markets, if used in sync with industrial policy, can help promote economic development as well as macroeconomic stability, argues a new research paper by Columbia University economists Martin Guzman, Jose Antonio Ocampo, and Nobel laureate Joseph Stiglitz. Poor countries are often at risk of what economists term as a “resource-curse". This refers to foreign capital generally pouring in to extract and export resources (such as metals or oil). This leads to appreciation in local currency, which hurts the manufacturing sector’s ability to grow and export. Unregulated capital flows and the exchange rate movements such flows cause tend to be pro-cyclical in nature. The authors argue that policymakers in these countries should proactively limit currency appreciation even while ensuring that foreign fund flows are directed towards sectors where spillovers for the domestic economy are high.