Home / Politics / Policy /  Can forex interventions boost growth and development?

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.

Also Read: Real Exchange Rate Policies for Economic Development

Support for globalization is higher in poorer countries compared to richer countries, according to an analysis of attitudes in 40 countries by Nina Pavcnik, professor of economics at Dartmouth College, USA. However, her research also shows that there are considerable differences within developing countries. People in Colombia and Brazil, early adopters of globalization and free trade, are today less optimistic about workers’ prospects compared to newer entrants such as China and Vietnam. Even within countries, people in different regions may be affected differently. For instance, the poorest people in Indian districts which faced the brunt of import competition post-1991 were adversely affected by India’s liberalization program, Pavcnik shows. Similarly, spatial inequality worsened in Vietnam after it signed a bilateral trade agreement with the US in 2001, with better-off provinces racing ahead of others in raising exports and economic growth. The unequal distribution of the gains and losses from trade--which often sows the seeds of discontent--creates an enormous challenge for policymakers.

Also Read more: The Impact of Trade on Inequality in Developing Countries

Entrepreneurs in the start-up world are not necessarily overconfident individuals who fail to grasp the true probability of success, according to Sabrina T. Howell, a researcher with the New York University Stern School of Business. She analysed 4,328 start-ups in the US which participated in various ‘new venture competitions’ between 2007 and 2015. Start-ups receive feedback on their business ideas in such competitions. Her research shows that founders were quite responsive to feedback, and negative comments increased chances of them abandoning their projects by 13%. However, a small subset of these founders--typically males with elite degrees engaged in high-risk ventures--seemed unmoved by negative feedback. It may be worth researching whether the ability to remain unaffected by negative feedback is necessary to build innovative and high-risk-high-reward businesses, the author suggests.

Also Read: Learning from Feedback: Evidence from New Ventures

What determines whether people or companies buy a durable asset or rent it? A new research paper by Cyril Monnet and Borghan Narajabad, researchers with the University of Bern and the US Federal Reserve Board, argues that two factors are most important in determining whether a good is rented or purchased. The first factor is the uncertainty about the future value of the asset: greater the uncertainty, greater the chances of it being rented. The second factor is the extent to which the ‘hold-up problem’ operates. The ‘hold-up problem’ refers to a situation in which buyers and sellers may refuse to cooperate to arrive at an efficient solution for fear of giving the other party too much bargaining power and ending up with lower profits. If it is known that a seller is desperate to get rid of his asset, this will lower the chances of it being sold, and make it more likely to be rented out. However, the authors argue that more patient individuals or firms will prefer to buy over rent, in case they believe that benefits of owning an asset in the long term outweigh the potential losses due to hold-up problems.

Also Read: Why Rent When You Can Buy?

Collusion among traders and middlemen have deprived Indian farmers of fair prices, shows a study of the potato market in rural West Bengal in 2008 by Sandip Mitra, Dilip Mookherjee, Maximo Torero and Sujata Visaria, economists affiliated with the Indian Statistical Institute, Boston University, World Bank and HKUST (Hong Kong) respectively. Eighty percent of the increase in the final retail price of potatoes was pocketed by middlemen, the authors point out in a recent IdeasforIndia article based on their study.

Also Read: Middleman margins and market structure in West Bengal potato supply chains

Economics Digest runs weekly, and features interesting reads from the world of economics.

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