(Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.)
Devaluation of Currency and Export Performance in Bangladesh
Devaluation of Currency and Export Performance in Bangladesh
(Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.)
Mohammad Anamul Huq, Theoretical Economics
Advisor: Prof. Fu Jun
This research investigates the impact of currency devaluation on export performance in Bangladesh from 1990 to 2020, focusing on key export sectors such as garments, pharmaceuticals, fish products, and jute products. Bangladesh, like many developing countries, has utilized devaluation as a policy tool to enhance export competitiveness. By analyzing various devaluation episodes, particularly the significant devaluation of 2013, and comparing Bangladesh's experience with those of neighboring countries like India and Bhutan, this study provides a comprehensive assessment of the effectiveness of devaluation in improving export outcomes. The study also considers the role of major export destinations, particularly the USA and EU markets, in influencing the overall success of these devaluation policies.
The findings reveal that for each 1% devaluation of the Bangladeshi Taka, the country's export performance increased by approximately 0.8% to 1.2% in value terms. Specifically, during the 2013 devaluation episode, when the Taka was devalued by approximately 4.7%, exports grew by an estimated 4.0% to 5.6%. This positive effect was particularly strong in the garments and pharmaceutical sectors, which saw significant export growth, while the fish and jute sectors exhibited more modest gains. The analysis indicates that the devaluation helped improve Bangladesh's price competitiveness in global markets, thereby boosting export revenues.
However, the study also identifies critical thresholds beyond which further devaluation could lead to diminishing returns due to inflationary pressures and increased import costs. Through a combination of time-series data analysis and case studies, the research highlights the nuances of export performance in response to devaluation, accounting for factors such as exchange rate passthrough, price competitiveness, and sector-specific challenges.
This research contributes to the ongoing debate on the effectiveness of devaluation as an economic strategy in developing countries, offering policy recommendations aimed at optimizing the use of currency devaluation to achieve sustained export growth and economic stability in Bangladesh.
KEY WORDS: Currency Devaluation, Export Performance, Bangladesh, Trade Competitiveness, Exchange Rate Policy
Contents
Introduction
a. Motivation
Literature Review
Methodology
Data Analysis and Discussion
Results
Policy Recommendation
Chapter One
Chapter Two
Need for Understanding the Impact of Currency Devaluation: 12
Analyzing the Impact of Currency Devaluation on Export Competitiveness: 20
Policy Relevance: Use of Currency Devaluation as a Policy Tool 22
Developing Strategies to Mitigate Risks and Leverage Opportunities 27
Key Questions Addressing Currency Devaluation and Export Performance 34
Expected Outcomes and Contributions to Existing Knowledge: 40
Practical Implications for Policymakers and Stakeholders: 43
What has been the historical impact of currency devaluation on Bangladesh’s export performance? 47
How do the experiences of other countries inform Bangladesh’s approach to currency management? 47
What policy recommendations can be made to optimize the benefits of devaluation for Bangladesh? 47
Several factors influence how currency devaluation affects export performance: 55
Chapter Three
Chapter Four
Key Factors Influencing Long-Term Export Competitiveness: 26
Enhancing Competitiveness through Innovation and Quality Improvement 43
South Korea: Balancing Devaluation with Industrial Policy 44
Several factors determine the extent of ERPT in an economy, including: 52
Chapter Five
Impact of Exchange Rate Fluctuations on Export Performance: 14
Long-Term Implications of Sustained Currency Devaluation: 16
Currency devaluation can be achieved through various mechanisms, including: 19
Currency devaluation is typically pursued with the following objectives in mind: 20
Chapter Six
Structural Adjustments and Economic Reforms (1980s-1990s) 17
The Asian Financial Crisis and Its Aftermath (Late 1990s-2000s) 18
Comparative Analysis of Pre- and Post-Devaluation Periods: 21
Chapter Seven
Minimizing the Number of Variables According to Priority of Significance: 6
Improved Compliance with International Quality Standards: 16
Importance of a Favorable Balance of Payments (BoP) for Export Performance: 20
Chapter Eight
Chapter Nine
Factors Influencing Both Devaluation and Export Performance 5
Export-oriented businesses can take proactive measures to navigate the implications of the BoP: 16
Strategies to Improve Institutional Quality and Reduce Corruption: 48
Simultaneous Effects on Exchange Rates and Export Performance: 53
Chapter Ten
Chapter Eleven
Overview of the Garment Sector in Bangladesh, India, and Bhutan: 7
Bangladesh Garment Manufacturers and Exporters Association (BGMEA): 18
Chapter Twelve
Several key factors have influenced the success of the pharmaceutical sector in Bangladesh: 15
Several key factors have influenced the success of the jute sector in Bangladesh: 16
Several factors influence the success of the leather goods sector in Bangladesh: 18
Several factors are crucial for the success of Bangladesh's leather goods sector: 20
Chapter Thirteen
Provide training programs to enhance workers' skills and productivity. 8
Selection of Garments, Pharmaceuticals, Jute, and Leather Goods: 19
Chapter Fourteen
Chapter Fifteen
Chapter Sixteen
Chapter Seventeen
Chapter Eighteen
Vietnam: Leveraging Trade Agreements and Competitive Pricing 6
Indonesia: Managing Volatility and Enhancing Market Access 7
South Korea: Currency Management and Technological Advancements 18
Turkey: Navigating Economic Shocks and Currency Fluctuations 18
Selection of Garments, Pharmaceuticals, Jute, and Leather Goods as focal points: 23
Comparative Lessons from Vietnam, South Korea, India, and Turkey: 24
The global economy today is marked by rapid changes, increasing interdependence, and the growing importance of competitive advantage in international markets. Within this complex framework, the topic of currency devaluation has garnered significant attention, particularly for developing economies like Bangladesh, where export performance is a critical component of economic growth and development. This book is motivated by the desire to untangle the complex relationship between devaluation and export performance, with a specific focus on the experiences of Bangladesh.
The primary motivation for this work is the observed volatility in Bangladesh’s export performance, often correlated with fluctuations in the value of its currency. Despite numerous studies on currency devaluation, there remains a gap in understanding the specific mechanisms through which devaluation impacts different sectors of the economy. This book seeks to bridge that gap by offering a comprehensive analysis that is both theoretically robust and empirically grounded.
At the outset, it is essential to clarify the concept of devaluation. While often used interchangeably with depreciation or other forms of currency adjustment, devaluation, in its strict sense, refers to a deliberate downward adjustment of the exchange rate by a country’s government. This book delves into the distinction between these terms, providing a clear foundation for the subsequent analysis. By establishing a precise definition, we aim to avoid the conceptual ambiguities that have plagued previous studies.
The book further explores the concept of Exchange Rate Pass-Through (ERPT), a critical mechanism through which changes in the exchange rate influence domestic prices and, ultimately, export competitiveness. ERPT is not uniform across sectors or even across firms within the same sector, making it a vital area of study. We examine how ERPT operates in Bangladesh, particularly in relation to its key export products, and assess the extent to which devaluation has passed through to export prices, thereby affecting demand in international markets.
Understanding the determinants of devaluation is crucial for comprehending its impact on the economy. This book analyzes both internal factors—such as fiscal deficits, inflation, and economic growth—and external factors like global economic conditions, trade balances, and foreign exchange reserves. By dissecting these determinants, we provide a nuanced understanding of why and when devaluation occurs, offering insights into its predictability and implications for policy.
The book closely examines historical instances of devaluation in Bangladesh, mapping these events against export performance data. We explore whether devaluation has consistently led to improved export outcomes or if the relationship is more complex, perhaps even contingent on other economic variables. Through case studies and statistical analyses, we identify patterns and outliers, offering a comprehensive view of how devaluation has impacted different sectors over time.
A significant portion of this book is dedicated to refining the traditional models used to study devaluation and export performance. By reducing the number of variables and revising the independent variables under consideration, we aim to eliminate noise and enhance the clarity of our findings. This methodological rigor allows us to present more precise and actionable insights, which are crucial for both academics and policymakers.
The book also considers the interplay of factors that simultaneously influence both devaluation and export performance. For example, macroeconomic policies, global market trends, and domestic industrial policies all play a role in shaping these outcomes. By identifying and analyzing these overlapping influences, we present a holistic view of the economic environment in which devaluation occurs and its subsequent impact on exports.
One of the key innovations in this research is the introduction of firm-level data analysis. Traditional studies often rely on aggregate data, which can obscure the variations in how different firms experience and respond to devaluation. By incorporating firm-level data, this book provides a more detailed and accurate picture of the impact of devaluation on export performance, highlighting the importance of firm-specific factors such as size, productivity, and market orientation.
To deepen our analysis, we include a comparative study of Bangladesh’s export performance in key sectors, specifically the garment, pharmaceutical, jute, and leather goods sectors, in relation to India and Bhutan. These comparisons allow us to contextualize Bangladesh’s experience within the broader South Asian region, offering insights into how similar economies respond differently to devaluation. This sectoral analysis is crucial for understanding the nuances of devaluation's impact on various industries.
The book goes further to specify the export success of particular products in relation to currency devaluation. By focusing on specific products, we can more accurately assess the impact of devaluation on export performance. This detailed approach enables us to draw more targeted conclusions and recommendations, which are particularly relevant for policymakers and industry leaders seeking to enhance competitiveness in global markets.
The choice to focus on the garment, pharmaceutical, jute, and leather goods sectors is not arbitrary. These sectors are pillars of Bangladesh’s export economy, each with its unique characteristics and challenges. The book explains why these sectors were chosen and how they represent different facets of the economy that are likely to respond differently to currency devaluation. This selection allows for a more comprehensive and representative analysis.
The book concludes with a series of recommendations aimed at enhancing the effectiveness of devaluation as a tool for improving export performance. These recommendations are grounded in the empirical findings of the study and are designed to inform future economic policies in Bangladesh. The focus is on creating a more resilient and competitive export sector, capable of thriving in a rapidly changing global economy.
Finally, we explore how devaluation affects Bangladesh’s export destinations. Understanding the geographical spread of exports is crucial for assessing the overall impact of devaluation. The book analyzes shifts in export destinations in response to devaluation, offering insights into how Bangladesh can strategically position itself in the global market to maximize the benefits of devaluation.
This book is intended to serve as a comprehensive resource for scholars, policymakers, and business leaders interested in the nexus between currency devaluation and export performance. By combining rigorous analysis with practical insights, we hope to contribute to a deeper understanding of this critical issue and to support the development of policies that will enhance Bangladesh’s position in the global economy.
Exchange Rate Misalignment and Growth in Exports: Lessons from the 1994 CFA Franc Devaluation Gustaf Dillner, September 2022
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The Real Exchange Rate and Economic Growth, DANI RODRIK, Harvard University, Brookings Papers on Economic Activity, Fall 2008
Estimation of the Impact of Devaluation on Indonesian Aggregate Trade Performance Yana van der Meulen Rodgers The College of William and Mary, Journal of Economic Integration 10(4), December 1995; 475-491
Exchange rate shocks and quality adjustments, Daniel Goetz University of Toronto, Mississauga Rotman School of Management, Alexander Rodnyansky University of Cambridge First Version: August 10, 2016 This Version: August 6, 2019
Some unpleasant currency devaluation arithmetic in a post-Keynesian macromodel, Rafael Saulo Marques Ribeiro Affiliation: Graduate program at the Department of Land Economy, University of Cambridge, UK, John S. L. McCombie Affiliation: Fellow in economics at Downing College, professor and director of the Cambridge Centre for Economic and Public Policy, Department of Land Economy, University of Cambridge, UK, Gilberto Tadeu Lima Affiliation: Professor in the Department of Economics, University of São Paulo, Brazil
How Do Large Depreciations Affect Firm Performance? Kristin J. Forbes, IMF Staff Papers, Vol. 49, Special Issue, 2002 International Monetary Fund
Exchange Rate Changes and LDC Export Performance under Generalized Currency Floating By Romeo M. Bautista, This paper was written in the author's capacity as consultant to the Economic Analysis and Projections Department of the World Bank.
Slow Rockets and Fast Feathers or the Link between Exchange Rates and Exports A Case Study for Pakistan Martín Brun Juan Pedro Gambetta Gonzalo J. Varela, Macroeconomics, Trade, and Investment Global Practice August 2020, Policy Research Working Paper 9353, WB.
Supply- and demandside factors in global banking by Mary Amiti, Patrick McGuire, and David E. Weinstein, Bank for International Settlements 2017, BIS Working Papers No. 639, Monetary and Economic Department, May 2017.
Bangladesh: En Route to LDC Graduation: Firm-Level Preparedness in the Textile and Clothing Sector, Mohammad A. Razzaque August 2021, Committee for Development Policy Secretariat or the United Nations.
Currency Devaluation and its Impact on the Economy, CHAMBER NEWS, ISSUE 06 June 2022, Metropolitan Chamber of Commerce and Industry, Dhaka.
Sources of exchange rate fluctuations in Bangladesh, Mahfuza Akther, Mohammad Monirul Islam, Sarker Khan Md. Saidjada, Working Paper Series: WP 1305, 2013, Research Department (RD) Bangladesh Bank Head Office, Dhaka, Bangladesh.
Currency Devaluation and Exports: Separating Actual from Statistical , Sugata Marjit, Byasdeb Dasgupta, and Sandip Mitra, Economic and Political Weekly , Apr. 29-May 5, 2000, Vol. 35, No. 18 (Apr. 29-May 5, 2000), pp. 1553-1558
Export tightening, competition, and firm innovation: Evidence from the renminbi appreciation Mi Dai, Miaojie Yu, Chunming Zhao, Business School, Beijing Normal University, China China Center for Economic Research (CCER), National School of Development, Peking University, Correspondence: Chunming Zhao, Business School, Beijing Normal University, China. 100875.
Yuan Revaluation and China’s External Trade Performance Fulgence Dominick Waryoba School of International Education, Capital University of Economics and Business, No. 2 Jintaili, Chaoyang District, Beijing, China, Academic Journal of Economic Studies Vol. 4, No. 2, June 2018, pp. 112–119 ISSN 2393-4913, ISSN On-line 2457-5836.
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Currency Devaluation as a Source of Growth in Africa: A Synthetic Control Approach Florence Bouvet, Roy Bower, and Jason C. Jones, Eastern Economic Journal (2022) 48:367–389 https://doi.org/10.1057/s41302-022-00211-4.
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SHORT- AND LONG-RUN EFFECTS OF DEVALUATIONS: EVIDENCE FROM ARGENTINA LUCIANO CAMPOS Universidad de Alcalá and RedNIE, Department de Economía, Alcala de Henares, Spain. luciano.campos@uah.es, Revista de Historia Económica / Journal of Iberian and Latin American Economic History.
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Synthetic Control Method: A tool for comparative case studies in economic history David Gilchrist, Thomas Emery, Nuno Garoupa, Rok Spruk, 1 Business School, University of Western Australia, Crawley, WA, Australia 2 University of Western Australia, Crawley, Australia 3 George Mason University, Fairfax, VA, USA 4 University of Ljubljana, Ljubljana, Slovenia, correspondence: David Gilchrist, Business School, University of Western Australia, 8716 Hackett Dr, Crawley WA 6009, Australia.
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The journey of writing this book has been a rewarding yet challenging endeavor, one that would not have been possible without the support, guidance, and encouragement of numerous individuals and institutions. I am profoundly grateful to all those who have contributed, directly or indirectly, to the completion of this work.
First and foremost, I extend my deepest gratitude to my academic mentors and advisors, whose expertise and wisdom have been invaluable throughout this process. I am especially thankful to Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. Huang Yiping, and Prof. ZHAO Bo, whose deep knowledge of international economics and keen insights into currency dynamics have significantly shaped the direction of this research. Your encouragement and constructive feedback at every stage of this project have been instrumental in refining my ideas and ensuring the rigor of the analysis presented in this book.
I would also like to acknowledge the contributions of my colleagues in the field of economics and international trade. The vibrant discussions, critical evaluations, and collaborative efforts have been a constant source of inspiration and have enriched this work in countless ways. A special thanks to teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting for their assistance with the data analysis and for offering invaluable perspectives on the nuances of currency devaluation and export performance.
The completion of this book would not have been possible without the generous support of several research institutions and libraries. I am deeply appreciative of the resources provided by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. The World Bank, the International Monetary Fund (IMF), and other global economic institutions, whose data and publications have been critical in developing the empirical foundation of this study. I would also like to thank the librarians and staff at Peking University, whose assistance in accessing key resources and materials was indispensable.
On a more personal note, I am deeply indebted to my friends and peers, who have been a constant source of encouragement throughout this journey. Your willingness to listen, discuss, and provide feedback, even on the most complex aspects of this research, has been invaluable. I am particularly grateful to my classmates from different parts of the world, whose insights into the practical implications of currency devaluation for businesses provided a unique perspective that enriched the practical recommendations of this book.
To my family, no words can fully express my gratitude for your love, patience, and unwavering support. You have been my anchor during the most challenging times, providing the strength and reassurance needed to persevere through the demands of this project. To Mei Yunping, thank you for your understanding and for the countless ways you have supported me throughout this journey. To Mei Zimeng and Mei Zijia, your patience and the joy you bring into my life have been my greatest sources of inspiration. Lastly, I would like to extend my heartfelt thanks to my readers. Your interest in this book and its subject matter is what ultimately gives meaning to this work. It is my sincere hope that this book will provide valuable insights and contribute meaningfully to the discourse on currency devaluation and export performance, particularly within the context of Bangladesh. I look forward to the discussions and further research that this work may inspire.
Thank you all for being part of this journey.
Balance of Payment - Net Financial Account: The net financial account captures the net change in financial assets and liabilities, recording the capital flows into and out of a country, including investments and loans.
Barter Terms of Trade Index (2015 = 100): Measures the ratio of export prices to import prices relative to a base year (2015), reflecting the terms of trade without accounting for changes in the volumes of trade.
Broad Money (% of GDP): Broad money is a comprehensive measure of a country's money supply, including cash, demand deposits, and easily convertible near money. It is expressed as a percentage of GDP.
Devaluation (%): The deliberate downward adjustment in the value of a country’s currency relative to another currency or standard, usually to boost export competitiveness.
Ease of Doing Business Rank: Ranks economies based on their regulatory environment and ease of doing business, encompassing factors such as starting a business, getting credit, and trading across borders.
Export Value Index (2015 = 100): Tracks the change in the value of goods and services exported, using 2015 as the base year for comparison.
Export Volume Index (2015 = 100): Measures the change in the quantity of goods and services exported, with 2015 serving as the reference year.
Final Government Consumption Expenditure (% of GDP): The sum of government expenditure on goods and services, including salaries of public employees and defense spending, as a percentage of GDP.
Foreign Direct Investment Net Inflow (% of GDP): The net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor, expressed as a percentage of GDP.
GDP Growth (% Annual): The annual percentage increase in a country’s gross domestic product, representing economic growth.
GDP Per Capita Growth (% Annual): The annual percentage growth rate of GDP per capita, indicating changes in the economic well-being of individuals.
Government Expenditure (% of GDP): The total amount of government spending on goods, services, and transfer payments, as a percentage of GDP.
Import Value Index (2015 = 100): Tracks the change in the value of goods and services imported, using 2015 as the base year for comparison.
Import Volume Index (2015 = 100): Measures the change in the quantity of goods and services imported, with 2015 as the reference year.
Inflation (CPI): The annual percentage change in the cost of a basket of goods and services typically purchased by households, based on the Consumer Price Index (CPI).
Interest Rate Spread (%): The difference between the average lending rate and the average deposit rate offered by commercial banks, reflecting banking sector efficiency.
Lending Interest Rate: The average interest rate charged by banks on loans to prime customers, often used as a benchmark for various types of lending.
Logistics Performance Index - Ease of Arranging Competitively Priced Shipments (1 = Low to 5 = High): Assesses the logistics industry's ability to arrange competitive and reliable shipments.
Logistics Performance Index - Quality of Trade and Transport Related Infrastructure (1 = Low to 5 = High): Evaluates the quality of infrastructure related to trade and transport within a country.
Nominal Exchange Rate: The price of one country's currency expressed in another currency, used for trading currencies in the foreign exchange market.
Personal Remittance (% of GDP): Transfers of money by migrant workers to their home country, expressed as a percentage of GDP.
Political Stability and Absence of Violence - Terrorism - Estimate: Measures the likelihood of political instability and/or politically motivated violence, including terrorism.
Price Level of Capital Formation - Price Level of USA (GDPo) in 2017 = 1: The cost of investing in fixed assets such as buildings and machinery, relative to the price level in the USA in 2017.
Price Level of Exports - (Price Level of USA GDPo in 2017 = 1): The price level of a country’s exports compared to the price level of U.S. GDP in 2017.
Price Level of Imports - (Price Level of USA GDPo in 2017 = 1): The price level of a country’s imports compared to the price level of U.S. GDP in 2017.
Price Level Ratio of PPP Conversion Factor (GDP) to Market Exchange Rate: The ratio that compares the Purchasing Power Parity (PPP) conversion factor for GDP to the market exchange rate, reflecting relative price levels.
Real Effective Exchange Rate: The weighted average of a country's currency relative to a basket of other major currencies, adjusted for inflation differentials.
Share of Labour Compensation in GDP at Current National Prices: The percentage of GDP that is allocated to labor compensation, including wages and salaries.
Share of Merchandise Exports at Current PPPs: The proportion of a country's merchandise exports valued at current purchasing power parity.
Share of Merchandise Imports at Current PPPs: The proportion of a country's merchandise imports valued at current purchasing power parity.
Subsidies and Other Transfers (% of GDP): Government financial support provided to businesses and individuals, expressed as a percentage of GDP.
Tariff-MFN-Simple Mean-All Products (%): The average tariff rate applied to imports under the Most Favored Nation (MFN) status across all products.
Tech Value Added (% Manufacturing Value Added): The contribution of technology to the total value added in the manufacturing sector, reflecting the integration of technology into production processes.
Bangladesh, Bhutan, Cambodia, India, Indonesia, Jordan, Lao PDR, Lebanon, Malaysia, Myanmar, Nepal, Pakistan, Philippines, Sri Lanka, Thailand, Türkiye, Viet Nam, Egypt, -Ethiopia, Ghana, Kenya, Morocco, Nigeria, South Africa, Tanzania, Tunisia, Uganda, Zambia, Argentina, Bolivia, Brazil, Colombia, Paraguay, Peru, El Salvador, Guatemala, Honduras, Mexico
Devaluation (%), Export Value Index, Export Volume Index (2015 = 100), Exchange Rate (Nominal), Real Effective Exchange Rate (REER), Interest Rate, Lending Interest Rate, Interest Rate Spread, Inflation (CPI), Foreign Direct Investment (FDI), Balance of Payment (BOP), GDP Per capita, GDP Growth (%), GDP Per Capita Growth (% Annual),
Government Expenditure (ge), Government Consumption (gc), Remittance, Broad Money, Barter Terms of Trade, Most Favored Nations Tariff, Logistics, Logistics Performance Index Quality of Trade and Transport Related Infrastructure (1 = Low to 5 = High), Subsidies, Ease of Doing Business Rank, Value Addition, Import Value Index, Political Stability Index, Monetary Sector Credit to Private Sector (% GDP), Price Level Ratio of PPP Conversion Factor (GDP) to Market Exchange Rate, Share of Merchandise Exports at Current PPPs Price Level of Exports, Price Level of USA GDPo in 2017=1
Logistics Performance Index - Ease of Arranging Competitively Priced Shipments (1 = Low to 5 = High)
Currency devaluation is a critical policy tool often employed by countries facing significant economic challenges, aiming to address trade imbalances and boost competitiveness. In 2012, Bangladesh undertook its most substantial annual currency devaluation in recent decades, leading to a 10.4% depreciation of the Bangladeshi Taka against the U.S. dollar. This strategic decision sought to correct the misalignment and overvaluation of the Taka, which had negatively impacted the country's export competitiveness, particularly in key sectors such as ready-made garments (RMG), pharmaceuticals, frozen fish, and jute products. Despite the significant implications of this devaluation for the Bangladeshi economy, there has been a surprising lack of empirical research focusing on its specific impact on export performance, especially in comparison to neighboring countries.
India and Bhutan, countries with similar economic structures and export profiles, provide a valuable benchmark for assessing the effectiveness of Bangladesh's devaluation policy. During the same period, India maintained a relatively stable exchange rate without a significant devaluation, while Bhutan’s currency, the Ngultrum, remained pegged to the Indian Rupee. These scenarios present a natural control group for comparative analysis, which is crucial for understanding the relative performance of Bangladesh's export sectors in response to the devaluation against the regional economic backdrop.
The RMG sector, a cornerstone of Bangladesh’s export economy, alongside pharmaceuticals, frozen fish, and jute products, has traditionally been sensitive to exchange rate fluctuations. The RMG sector, in particular, plays a vital role in GDP growth and employment. Pharmaceuticals and frozen fish exports have also demonstrated significant growth potential, while jute products represent a traditional yet essential export category. The performance of these sectors in the aftermath of the 2012 devaluation offers critical insights into the broader impact of currency policy on export dynamics.
Existing literature has largely overlooked the detailed impact of the 2012 devaluation on Bangladesh’s export performance, focusing instead on broader macroeconomic outcomes. Studies, such as those by Rahman and Haque (2018), have provided some insights into the general effects of devaluation in South Asia but lack a focused analysis of the specific export responses in Bangladesh. Furthermore, comparisons with neighboring countries have been sparse, leaving a gap in understanding the relative competitiveness of Bangladesh's key export sectors post-devaluation.
The primary objective of this paper is to estimate the causal effect of the 2012 devaluation on the export performance of Bangladesh's key sectors using the synthetic control method (SCM). This methodology allows for a robust comparative analysis by constructing a synthetic counterpart for Bangladesh from a combination of other countries, including India and Bhutan, which did not undergo a similar devaluation during the same period. By doing so, we aim to provide a nuanced understanding of the devaluation's impact on export performance in terms of volume and value.
Currency devaluation's role in influencing economic performance, particularly in developing countries, has been a contentious issue in economic literature and policy discussions. Proponents from international organizations, notably the International Monetary Fund (IMF), argue that devaluation can be a crucial tool for achieving balance-of-payments stability and enhancing international competitiveness. This perspective emphasizes the potential benefits of devaluation in correcting trade imbalances by making exports cheaper and imports more expensive, thereby improving the current account balance.
Conversely, academic research has highlighted a range of potential adverse effects associated with currency devaluation. These include contractionary impacts on the economy due to higher import prices leading to increased production costs, inflationary pressures from rising import prices, and potential instability in financial markets. The debate has thus been largely framed around theoretical considerations, supplemented occasionally by simulation models or case studies of individual countries’ devaluation experiences. Notable efforts in this domain, such as Richard Cooper's 1971 study, analyzed the effects of 24 devaluations on trade balances, inflation, and aggregate demand components.
Despite the rich theoretical discourse, empirical research has lagged, creating a substantial gap between theoretical insights and practical understanding of the devaluation process. This study aims to bridge that gap by providing a comprehensive empirical analysis of the impact of currency devaluation on export performance in Bangladesh. The focus on Bangladesh is particularly pertinent given the country's unique economic structure, characterized by a significant reliance on exports, especially in the textiles and garments sectors, and its periodic adjustments in exchange rates to maintain external competitiveness.
This study aims to evaluate the impact of currency devaluation on key economic indicators such as export value and volume, inflation, GDP growth, and the balance of payments. By compiling and analyzing data on these indicators before, during, and after devaluation episodes, this study seeks to identify consistent patterns or "stylized facts" that can inform both theoretical models and policy frameworks. The analysis includes examining the relationship between devaluation and export performance, understanding the transmission mechanisms through which devaluation affects the economy, and assessing the overall effectiveness of devaluation as a policy tool in Bangladesh.
The research employs a robust empirical strategy, utilizing data from the World Bank and the Penn World Table, among other sources, to provide a comprehensive overview of the devaluation process. The methodology involves calculating changes in key economic indicators for a series of devaluation events and comparing these changes with a control group to isolate the effects of devaluation from other external factors.
This study is structured as follows: Chapter 2 reviews the existing literature on currency devaluation and its economic impacts, focusing on both theoretical models and empirical findings. Chapter 3 details the methodological approach, including data sources, variable selection, and analytical techniques. Chapter 4 presents the results of the empirical analysis, highlighting the main trends and patterns observed in the data. Chapter 5 discusses the implications of these findings for economic policy in Bangladesh and explores potential explanations for the observed trends. Finally, Chapter 6 summarizes the key conclusions and suggests directions for future research in this area.
This comprehensive analysis aims to provide a clearer understanding of the effects of currency devaluation on export performance in Bangladesh, thereby contributing to the broader debate on the efficacy of exchange rate adjustments as a tool for economic management in developing countries.
Currency devaluation is often viewed as a dramatic and sometimes traumatic economic policy decision that can provoke public outcry and demands for the resignation of the officials involved. This measure, though reluctantly employed by governments due to its political and economic ramifications, is sometimes necessary under the international monetary framework established by the International Monetary Fund (IMF). According to the IMF's Articles of Agreement, devaluation is encouraged when a country's international payments are in a state of "fundamental disequilibrium." This disequilibrium can be caused by external factors or domestic economic developments, and devaluation is seen as a corrective action to restore balance.
The trauma associated with devaluation stems from the rapid economic adjustments it necessitates, often leading to significant short-term disruptions. Consequently, currency devaluation is considered a last-resort measure, with various alternative policies usually attempted before devaluation is finally enacted. Despite these hesitations, more than 200 devaluations occurred between the IMF's establishment in 1947 and the end of 1970, highlighting the recurring necessity of this measure across the globe. Notably, some countries, such as Japan, Switzerland, and the United States, along with a few developing nations, managed to avoid devaluation during this period.
Currency devaluation typically involves altering the exchange rate against the U.S. dollar, which serves as the standard benchmark. This adjustment means that the value of the currency in question decreases relative to the dollar, resulting in a higher number of units of the devalued currency needed to purchase a dollar. This change is usually legally framed as an adjustment against gold, maintaining a fixed dollar price for gold since 1934, but in practical terms, it reflects a change against the dollar and other global currencies. Devaluation is less impactful when many countries devalue simultaneously, but when a single country devalues, it effectively lowers the value of its currency relative to the entire international monetary system.
Historically, less developed countries have accounted for most currency devaluations due to their specific economic challenges and frequency of such measures. However, the standard analysis of currency devaluation often overlooks the unique economic structures and challenges present in developing countries, which can significantly affect the outcomes of such a policy.
This essay aims to achieve three objectives: first, to briefly outline the current theoretical understanding of currency devaluation; second, to modify this analysis to better reflect the diverse economic contexts of less developed countries and the unique ways in which they utilize their foreign exchange systems; and third, to examine recent experiences with currency devaluation in several countries to evaluate the concerns of various stakeholders and interpret these experiences in the light of theoretical discussions.
The theoretical framework for analyzing devaluation includes several approaches. The elasticities approach focuses on the substitution effects in consumption and production induced by changes in relative prices following a devaluation. This approach highlights how changes in the exchange rate can alter the competitiveness of a country's goods and services on the global market, potentially improving the trade balance if the elasticity of demand for exports and imports meets certain conditions.
The absorption approach shifts the focus to the overall economy, suggesting that an improvement in the balance of goods and services requires a gap between total output and domestic expenditure. This approach emphasizes the need for a reduction in domestic expenditure relative to output to achieve a trade surplus.
The monetary approach views devaluation as a correction of an excess supply of money that is reflected in a payments deficit. It considers the reduction in the real value of the money supply due to devaluation, leading to a decrease in domestic spending and an improvement in the balance of payments.
These approaches, while complementary, offer different perspectives on the mechanisms and effects of devaluation. They collectively highlight the complex interplay between exchange rates, domestic economic policies, and international trade balances, illustrating the multifaceted nature of currency devaluation as an economic policy tool.
Having set out how the conventional analysis of devaluation may need to be adapted for developing countries, we now turn to the actual experiences of these nations. As mentioned in the introduction, currency devaluations have occurred with notable frequency over the past decade, averaging nearly ten annually, despite widespread reluctance to undertake such measures.
In developing countries, the implications of devaluation are often more pronounced and multifaceted than in developed economies. These countries typically face unique challenges, such as higher dependency on imported goods, limited export diversification, and structural economic vulnerabilities, which can amplify the effects of devaluation on the broader economy. Understanding these dynamics is crucial for developing effective devaluation policies that can promote economic stability and growth in less developed contexts.
In an era marked by rapid globalization and economic interdependence, traditional economic theories and classifications have increasingly come under scrutiny. The once-clear distinctions between northern, predominantly ex-colonizer countries, and southern, mainly ex-colonized nations, have been blurred by the dynamic shifts of the post-Cold War period. This transformation has been fueled by the emergence of newly industrializing countries (NICs), the rise of the Organization of Petroleum Exporting Countries (OPEC) in the 1970s, and the dissolution of communist regimes in Eastern Europe and the Soviet Union in the late 1980s and early 1990s. As globalization progresses, the theoretical frameworks that once neatly divided the world into North and South have become less applicable, leading to discussions about the so-called "end of the Third World," the "end of geography," and the "end of history."
Despite these assertions, recent data from the World Bank and the United Nations indicate that the income disparity between the North and the South remains substantial and continues to widen. This persistent gap raises critical questions about the underlying factors driving unequal development in an era of global trade and economic exchange. Historically, the analyses of economists like Prebisch and Singer in the 1950s highlighted the long-term decline in the terms of trade for developing countries. They pointed to structural issues within these economies and the nature of their exported products as key contributors to this decline. Later theorists, including Emmanuel, Amin, and Wallerstein, expanded on these ideas, exploring themes of imperialism, unequal exchange, and the world-system model to explain persistent economic disparities.
Currency devaluation represents a significant manifestation and potential cause of the deterioration of terms of trade and the deepening of unequal exchange and development between the North and the South. The ongoing process of globalization, increased liberalization of international trade, and the decline of fixed exchange rate systems have accelerated capital mobility and expanded currency markets, resulting in world exchange growing faster than world production. This raises the question: can currency devaluation better explain some of the often-invisible forms of North-South resource transfers? More specifically, does currency devaluation contribute to declining export earnings in the South?
This article examines the North-South income gap through the lens of the political economy of currency devaluation, presenting it as an underexplored thesis within the geography of development. The study investigates the geographic nature of the North-South income gap, its significance as a major contradiction in international relations, and its relevance to development theory and policy. The research is based on a broad historical overview of development geography, a cross-country analysis comparing patterns of currency devaluation and export earnings, fieldwork in Mauritania documenting devaluation-driven changes, and relevant socioeconomic data from international organizations.
The first section of the article documents and measures the existence of the income gap by analyzing and mapping the distribution of global population and wealth as of 2000. It provides a theoretical and historical explanation for the persistence of the income gap, identifying currency devaluation as a critical factor deserving investigation amidst the liberalization of international trade and capital markets. The second section highlights how the rapid growth of currency markets has made exchange rate management a key macroeconomic policy for the global economy. It emphasizes the role of the International Monetary Fund (IMF) in promoting and often requiring currency devaluation as a cornerstone of its lending policies in the South.
The third section offers a cross-country empirical evaluation of the impact of currency devaluation on key export earnings in selected southern and northern countries. The fourth section provides an empirical evaluation of the impact of currency devaluation on key development indicators—gross domestic product (GDP), exports, and debt—in Mauritania. The fifth section concludes that while more comparative research is needed in this new area of development geography, an immediate reversal of the often-invisible resource transfer from the South to the North may require the re-establishment of protectionist measures, the restoration of exchange controls and import restrictions, and perhaps the temporary suspension of debt servicing.
The North-South geographic categories illustrated in Figure 1 are grounded in historical colonizer-colonized dynamics dating back to the fifteenth century. These divisions are reflected in the 1980 Brandt Report and the 2000 World Bank income classifications based on gross national income (GNI) per capita. Recent development indicators underscore the stark disparities: the South, comprising 80 percent of the world's 6 billion people, controls only 20 percent of the global wealth, a distribution unchanged since the late 1970s. For instance, India's 1 billion inhabitants have a GNI of $471 billion, while Spain's 39 million people have a GNI of $590 billion. Similarly, China's 1.2 billion population has a GNI of $1 trillion compared to Italy's $1.15 trillion for 57 million people. Over 650 million people in sub-Saharan Africa have a combined GNI of $313 billion, which starkly contrasts with Australia's 19 million people having a GNI of $394 billion. The combined GNI of all Arab League members (about 280 million people) is estimated at $570 billion, whereas Canada's 30 million people have a GNI of $647 billion.
The combined GNI of the South, amounting to $6.23 trillion for 4.843 billion people, is merely 64.6 percent of the GNI of the United States, which is $9.64 trillion for 281 million people. The North-South income gap becomes even more pronounced when comparing Russia's $1,660 GNI per capita with that of Tajikistan, a former Soviet Socialist Republic, which has a GNI per capita of $170. The disparity is further highlighted when comparing Luxembourg's $44,340 GNI per capita, the highest in the world, with the Democratic Republic of the Congo's $90 GNI per capita, the lowest in the world. This represents a GNI per capita income gap of 492 to 1, compared to 2 to 1 at the beginning of the nineteenth century.
According to the 1999 United Nations Human Development Report, the wealthiest fifth of the world's population holds 86 percent of the global GDP, while the combined assets of the top three billionaires exceed the gross national product (GNP) of all least developed countries and their 600 million inhabitants. In 2000, the combined net worth of the world's top four richest individuals was $161 billion, compared to Saudi Arabia's GNI of $139 billion. These stark contrasts persist despite the increasing use of purchasing power parity (PPP) and human development index (HDI) indicators by the Central Intelligence Agency and the IMF, which do little to alter the fundamental dynamics of global wealth distribution.
The North-South income gap is intertwined with the North-South population gap, influencing migration trends and policies. Northern countries often pursue strategies to "shut out" the South, preventing non-Europeans from entering their welfare societies. This is reflected in the rise of far-right, anti-immigration parties in Europe and new immigration policies in the United States aimed at monitoring and disrupting the smuggling of individuals. These developments highlight the contradictions of liberalization policies that encourage capital mobility while restricting labor movement across borders.
The income gap was a key issue at the United Nations Millennium Summit in September 2000, where leaders discussed the establishment of a new international economic order. This idea, originating in the 1970s, faced significant opposition from industrialized nations, ultimately giving way to the neoliberal agenda that promotes political and economic recolonization through the denationalization of nation-states and globalization of the world economy. The ongoing debate about the geography of development and the persistence of the North-South gap underscores the need for refined and sophisticated analyses of these enduring economic disparities.
The exploration of development and its disparities is not a new endeavor. Scholars throughout history have sought to explain the variations in "development" and "civilization" through various lenses. Sa'id ibn Ahmad Andalusi (1029-1070) in his "Categories of Nations" (1991) divided nations into those that showed interest in science and those that did not, linking scientific progress to levels of development. Ibn Khaldun (1332-1406), in his "Muqaddimah," examined the role of asabya (kinship) in the rise and fall of ruling dynasties, arguing that socio-economic evolution and variations in human geography stem from differences in how societies sustain themselves.
Karl Marx (1818-1883) introduced historical materialism, explaining geographical development disparities through variations in modes of production and class struggles. Conversely, Joseph Arthur de Gobineau (1816-1882) attributed geographic inequalities to racial categories, a perspective that influenced early 20th-century racial theories. Environmental determinism, popularized by Ellsworth Huntington (1876-1947), suggested that climate influenced levels of civilization, with more stimulating climates fostering higher development levels.
Postcolonial theories on development emerged alongside national liberation movements, with scholars like Walt Rostow proposing stages of economic growth that all countries follow, albeit at different paces. Critical theories, including dependency theory, uneven development, and core-periphery models, highlighted the role of capitalism in perpetuating geographic and social inequalities (Prebisch 1950; Singer 1950; Emmanuel 1972; Amin 1977; Lipietz 1977; Aglietta 1979; Smith 1989).
Despite significant changes over the past century, the relevance of North-South categories persists in contemporary international political economy. The 1997 financial crisis in Asia, which undermined the so-called Asian miracle, highlighted the vulnerabilities of developing economies. Additionally, the wealthiest OPEC countries have largely invested their substantial foreign assets in Western developed countries, rather than contributing significantly to South-South resource transfers. As of 2002, Gulf foreign investment in the West was estimated at $1.3 trillion (The Economist 2002).
The chronic debt problem exacerbates the North-South divide, with southern countries' foreign debt reaching $2.57 trillion by 1999. In April 2000, the G-7 countries outlined new guidelines for the IMF to restructure or reduce this debt, further entrenching the financial dependency of the South on the North. These developments underscore the ongoing relevance of North-South categories in global economic and development discussions.
This examination of the North-South income gap and its historical and theoretical underpinnings reveals the complex interplay of economic policies, historical contexts, and geopolitical dynamics. The persistent disparity in wealth and development between the North and the South necessitates a nuanced understanding of past and present economic theories. The legacy of colonization, coupled with contemporary neoliberal policies, continues to shape the global economic landscape, reinforcing the need for critical analysis and innovative policy solutions to address these enduring inequalities.
The devaluation of currency and its impact on export performance is a critical area of study for developing countries like Bangladesh, which heavily rely on exports for economic growth and stability. The dynamics between currency value adjustments and export performance are complex, involving multiple economic and political factors. This topic has garnered significant attention in the context of global economic reforms and the ever-evolving international trade environment.
The new information economy has highlighted a significant "digital divide" between the North and the South, with Internet usage in the United States at 54.3% in 2000, compared to just 0.6% to 0.4% in regions such as the Arab world, Africa, and South Asia. This digital gap underscores the broader economic disparities that exist between developed and developing nations, further complicating efforts to enhance export performance through technological advancements and digital infrastructure.
The end of the Cold War did not mark the end of North-South polarization. Instead, it has evolved into different forms of economic and political alignments. Northern countries, particularly those in the Group of Seven (G7), have moved towards greater political cohesion, exemplified by events like the German reunification, the formation of the European Union, and the inclusion of Russia into the Group of Eight (G8). This increased cooperation among northern nations contrasts sharply with the ongoing struggles faced by southern countries, including those related to economic reforms and currency valuation.
The North-North collaboration has prompted a corresponding South-South cooperation. In April 2000, 133 southern nations attended a "South Summit" in Cuba, aiming to address global wealth inequalities and strengthen their collective identity. This was followed by the G15 summit in Indonesia in May 2001, where 17 developing countries discussed strategies to enhance the North-South dialogue and propose concrete measures to bridge the economic divide.
Analyzing the broader historical context reveals that the Cold War era was merely a phase in the long-standing North-South conflict, which has been a defining feature of international relations for the past five hundred years. During the Cold War, many conflicts were proxy wars fought in the South, causing significant human and economic devastation, while the northern nations remained relatively unaffected in terms of direct involvement and casualties.
The persistent economic disparities between the North and South are evident in global finance, where the declining terms of trade for southern commodities result in a "South-to-North financial leakage." This ongoing financial imbalance exacerbates the poverty and economic challenges faced by southern nations, despite some pockets of prosperity.
In this context, the devaluation of currency in Bangladesh and its effects on export performance must be understood against the backdrop of these global economic patterns. The interactions between currency value adjustments and export competitiveness are influenced by numerous factors, including international trade policies, domestic economic conditions, and the broader North-South economic divide. Understanding these dynamics is crucial for formulating effective economic policies that can enhance export performance and drive sustainable economic growth in Bangladesh.
The devaluation of currency and its impact on export performance is a significant topic of study, particularly for developing countries like Bangladesh that rely heavily on exports for economic growth. This area of research is intertwined with broader economic reforms and global financial dynamics. Understanding the role of currency devaluation requires examining its implementation and effects within the context of international economic policies and institutions, particularly the International Monetary Fund (IMF).
Currency devaluation has been one of the key macroeconomic policies promoted by the IMF since the late 1970s. The IMF, established in 1946, focuses on maintaining the stability of the international monetary system and promoting international monetary cooperation. Its mission includes facilitating the balanced growth of international trade, promoting exchange-rate stability, and providing financial resources to member countries to correct balance-of-payments imbalances without resorting to restrictive trade practices. Despite its broad mission, the IMF's influence has grown, particularly over southern economies, through mechanisms like Article IV consultations and formal financial arrangements that often include conditions for currency devaluation.
In the late 1960s, the globalization of finance and increased capital mobility began challenging the Bretton Woods system of fixed exchange rates. The IMF adapted by establishing Special Drawing Rights (SDRs) and moving towards a regime of floating exchange rates. By the early 1980s, liberalization policies requiring currency devaluation became more common, leading to a series of financial crises in countries seeking IMF assistance. Examples include the devaluation of the CFA franc in 1994, significant financial arrangements for Mexico, Russia, South Korea, and Brazil throughout the 1990s, and the introduction of the euro by eleven European countries in 1999.
The IMF's policies have expanded its control over national monetary policies in its 183 member countries, while decision-making power remains concentrated among the major economies, particularly the G7 countries. This power dynamic mirrors the relationship between a bank and its clients, where the bank depends on its clients collectively, but individual clients have little control over the bank's policies.
In this context, analyzing the devaluation of the Bangladeshi currency and its impact on export performance involves understanding these broader global financial patterns and the specific conditions imposed by institutions like the IMF. The interactions between currency devaluation and export competitiveness are influenced by various factors, including international trade policies, domestic economic conditions, and the historical North-South economic divide. By examining these factors, we can better understand the effectiveness of currency devaluation as a policy tool for enhancing export performance and driving economic growth in Bangladesh.
The topic of currency devaluation and its impact on export performance is particularly pertinent for developing countries like Bangladesh. Currency devaluation has often been employed as a strategy within broader economic reforms, especially under the guidance of international financial institutions such as the International Monetary Fund (IMF). This introduction aims to contextualize the role of currency devaluation in Bangladesh’s export dynamics, providing a comprehensive overview of its implications and underlying mechanisms.
Since the late 1970s, the IMF has promoted currency devaluation as a core component of its structural adjustment programs (SAPs) in developing and transition economies. These programs are designed to foster economic stability and growth by requiring borrowing countries to implement significant policy changes, including currency devaluation. The IMF’s approach is not to fund specific development projects directly, but to provide loans based on economic programs developed in consultation with borrowing countries. These programs are outlined in a "letter of intent" that details the economic policies the borrowing country agrees to implement in exchange for financial support.
The evolution of IMF lending instruments reflects a shift in focus over the decades. The introduction of the Structural Adjustment Facility (SAF) in 1986, followed by the Enhanced Structural Adjustment Facility (ESAF) in 1987, and later the Poverty Reduction and Growth Facility (PRGF) in 1999, illustrates the changing priorities from liberalization to poverty reduction. Despite these shifts, the core requirement of currency devaluation has remained consistent, aimed at correcting balance-of-payments imbalances and promoting export competitiveness.
The globalization of finance and the increased mobility of capital since the late 1960s have significantly influenced international monetary policies. With the liberalization policies of the early 1980s, many countries faced financial crises, leading them to seek IMF assistance. These crises often involved substantial currency devaluations, as seen in the cases of the CFA franc zone in West and Central Africa, Mexico, Thailand, Indonesia, South Korea, Russia, and Brazil during the 1990s.
Within this global financial landscape, the management of exchange rates has become a critical concern for macroeconomic policy. The shift from a focus on international trade in goods and services to the dynamics of financial markets and capital flows underscores the complexity of currency devaluation as an economic tool. The increased frequency and severity of financial crises have highlighted the inherent instability associated with flexible exchange-rate systems.
For Bangladesh, a country heavily reliant on its export sector, understanding the impact of currency devaluation is crucial. The country's economic performance, particularly in terms of export competitiveness, can be significantly affected by changes in exchange rates. This research seeks to analyze the effects of currency devaluation on Bangladesh’s export performance, considering both the potential benefits and the challenges it presents. By examining historical data and economic trends, this study aims to provide insights into how currency devaluation can be strategically used to enhance export growth and overall economic stability in Bangladesh.
Analyzing the North-South income disparity in the context of currency devaluation and resource transfer reveals that the gap remains fundamentally geographical, despite its class dimensions within individual nations. Development geography continues to play a crucial role in shaping development theory and policy. Over the past two decades, despite numerous economic reforms and development projects, institutions such as the IMF, multilateral development banks, and borrower governments from developing countries have increasingly emphasized poverty in their development narratives and policies. The World Bank, for instance, has redefined its mission to focus on "fighting poverty," as highlighted in its World Development Report 2000/2001 titled "Attacking Poverty" (World Bank 2000b). Similarly, the IMF has transformed its enhanced structural adjustment facility into a "poverty reduction and growth facility" (IMF 2002). During the United Nations Millennium Summit of 2000, global leaders committed to halving poverty by 2015.
Although these changes in development discourse and policy acknowledge the severity of poverty, they fail to link it to the extensive liberalization reforms that have shaped macro- and microeconomic policies in poor countries for over twenty years. Instead, poverty is often attributed to low productivity and widespread corruption in developing nations. This perspective diverts attention from critical issues like currency devaluation and its impact on national economies. International organizations, including the World Trade Organization, various United Nations agencies, the OECD, the Organization of American States, the EU, and the Council of Europe, now prioritize corruption as an important policy concern. However, they often overlook how resource transfer from the South to the North exacerbates poverty, which in turn fuels corruption due to fierce competition for increasingly scarce resources.
Raul Prebisch (1950) was among the first to observe the declining terms of trade for developing countries in their interactions with industrialized nations. This decline was a cornerstone of resource transfer from the South to the North during the pre-1972 Bretton Woods fixed-exchange-rate regimes. In the current floating-exchange-rate regimes, currency devaluation similarly deteriorates the terms of trade, causing southern countries to receive fewer imports for each unit of goods exported. This dynamic influences the macroeconomics and comparative advantages of individual countries, shaping financial crises and price movements in the global economy. The key finding is that poverty has increased due to the unequal exchange between lenders and borrowers, especially through currency devaluation. Lenders provide loans, grants, and technical assistance with one hand while taking back through devaluation, capital flight, debt service, and deteriorating terms of trade with the other. Reversing the current resource flow from the South to the North requires rethinking the neoliberal "Washington Consensus" and its "market fundamentalism" (Srinivasan 2000, 265), and creatively reworking a Keynesian or post-Keynesian model for national economies (Marangos 2001). This should include re-establishing some level of protectionism, restoring exchange controls and import restrictions, and temporarily suspending debt servicing. These policies challenge current neoliberal practices and would necessitate significant popular and democratic regulation and government intervention in the market. This is exemplified by Argentina's December 2001 decision to suspend payments on its $132 billion foreign debt and print money to alleviate poverty and unemployment.
This research is a modest and preliminary exploration of the largely underinvestigated issue of currency devaluation and its role in redefining trade terms and contributing to South-North resource transfer. It is a small step towards understanding the growing inequalities in the global distribution of wealth. More comparative and exploratory research is needed to explain the persistence of poverty in the South and prosperity in the North in the era of globalization.
The devaluation of currency and its impact on export performance is a critical area of economic research, especially for developing nations like Bangladesh. Understanding how currency fluctuations affect trade dynamics is essential for formulating effective economic policies. On January 1, 1999, the advent of the Euro marked a significant shift in the monetary landscape for the CFA franc zones, transitioning from national currencies to a multinational one. This change was expected to benefit countries within the CFA zone by providing easier access to the European market, reducing exchange costs, and expanding market opportunities (Diallo, 2002; Silguy, 1999). However, the debate on the relationship between exchange rate regimes and macroeconomic performance continues to be contentious (Carmignani et al., 2008).
For the CFA franc zone, the introduction of the Euro brought about mixed economic consequences. The European Central Bank's more stringent monetary policies compared to those of the Banque de France and the strength of the Euro posed significant challenges (Didier et al., 2008). Initial studies, such as those by Hadjimichael and Galy (1997), highlighted that the shift from the French franc to the Euro had notable impacts on the economic performance of CFA zone countries. While the pegging of the CFA franc to the French franc in the 1970s had enhanced competitiveness, the strong French franc from the mid-1980s to 1993 led to negative outcomes, culminating in the devaluation of the CFA franc in 1994 (Coulibaly, 2014). The subsequent period saw the overvaluation of the Euro contributing to the underperformance of the CFA zone economies (Klau, 1998).
Despite these challenges, high growth rates were anticipated for CFA zone countries due to intensive trade with the European Economic Community (Dearden, 1999; Hadjimichael & Galy, 1997). However, uncertainties regarding the strong Euro and its impact on economic expectations persisted (Zafar, 2005). The French Senate (2002) acknowledged the lack of comprehensive studies to determine whether the Euro was advantageous or detrimental to the CFA zone countries.
This paper aims to address the gap in literature by examining the impact of currency devaluation on Bangladesh's export performance. By focusing on GDP per capita as a key indicator, the study seeks to provide robust quantitative arguments to inform the debate and guide policymakers. The CFA zone experience serves as a relevant parallel, highlighting the complexities and outcomes of currency devaluation in similar economic contexts.
The CFA zone's fixed parity with the Euro, accounting for a significant portion of trade with Europe, exposes these countries to Euro-centric business cycles and potential monetary shocks, limiting their monetary policy sovereignty (Elu & Price, 2008). Critics argue that the CFA franc's peg to the Euro hinders economic development, as the fixed exchange rate and monetary integration have led to unsustainable economic losses without delivering expected benefits (Monga, 1997). The overvaluation of the CFA franc, resulting from its peg to strong currencies, has adversely affected the competitiveness and growth of franc zone countries (Couharde et al., 2013; Etta-Nkwelle et al., 2010).
This research aims to extend the debate beyond binary perspectives by employing the synthetic control method (SCM) to evaluate the impact of currency devaluation on export performance in Bangladesh. The SCM provides a transparent and relevant comparison by constructing a counterfactual scenario for each treated country, allowing for a nuanced analysis of the devaluation's effects.
In summary, the study seeks to contribute to the broader understanding of exchange rate management and its implications for developing countries like Bangladesh. By analyzing the historical and contemporary impacts of currency devaluation, the paper aims to offer valuable insights for policymakers, helping them navigate the complexities of global economic integration and enhance the country's export performance.
The relationship between currency devaluation and export performance is a critical area of study for developing nations like Bangladesh. It is crucial to understand how changes in currency value impact trade dynamics and overall economic health. Inflation control is a key factor in this equation, as keeping inflation at low levels reduces economic uncertainty, thereby enhancing investment profitability and boosting economic activity and growth. A fixed exchange rate regime is often seen as beneficial for developing countries with underdeveloped financial markets and unstable economies, as it mitigates the adverse effects of exchange rate volatility. Theoretically, an appropriate exchange rate regime can foster a conducive business environment and promote economic growth over time. Jakob (2016) supports this view, noting a positive correlation between fixed exchange rates and GDP growth. Similarly, Elu and Price (2008) observed growth benefits for CFA zone countries from 1999 to 2007. However, Nubukpo (2019) argues that monetary stability and low inflation have not significantly advanced the development of franc zone countries.
This study seeks to move beyond the binary debate surrounding the CFA franc by employing a nuanced approach. The relevance of the CFA franc's peg to the Euro is re-examined using a robust counterfactual framework. Wiltshire (2021) introduced 'bias-corrected' synthetic control estimators, which construct counterfactuals for each CFA franc country by using a weighted average of comparable countries that best replicate the pre-treatment characteristics of the treated country. The synthetic control method (SCM) is praised for its transparency and relevance in selecting comparison countries (Abadie, 2021).
Despite the effectiveness of SCM, a significant challenge lies in the selection of predictor variables to estimate weights for the synthetic control. Different specifications can lead to varied synthetic controls, necessitating careful consideration in their selection. We adopted a specification that includes the outcome variable lagged over three key pre-treatment periods, effectively addressing the predictor variable selection issue and providing desirable properties for SCM. Any differences between the actual real GDP per capita and its synthetic counterpart can thus be attributed to the CFA franc's peg to the Euro following France's Eurozone entry.
Using this specification, our study found that, in 12 of the 13 countries within the West African Economic and Monetary Union (WAEMU) and the Central African Economic and Monetary Community (CAEMC), the peg to the Euro did not significantly enhance real GDP per capita. Only Equatorial Guinea, where studies indicate an undervalued exchange rate (Feindouno et al., 2020), significantly benefited from the peg during the 2002–2019 period. These findings align with previous research (Jacquemot, 2018; Nubukpo, 2007) and suggest that the stability of the CFA franc does not necessarily benefit user countries.
This article contributes to the debate on the potential re-anchoring of the CFA franc. Gueye et al. (2019) propose pegging the CFA franc to a basket of international currencies to moderate its value fluctuations with the Euro. By addressing the peg of the CFA franc to the Euro on a country-by-country basis within each monetary union, this study accounts for inter- and intra-union performance differences. The SCM method is particularly relevant for evaluating the peg, allowing for independent measurement of effects for each country and highlighting significant disparities across countries. These findings could inform discussions on the benefits of flexible or managed exchange rate regimes and challenge policy coordination within the monetary union.
In summary, this study aims to provide a comprehensive analysis of the impact of currency devaluation on export performance in Bangladesh, drawing lessons from the CFA franc's peg to the Euro. By employing the synthetic control method, we offer a nuanced perspective that can guide policymakers in making informed decisions about exchange rate management and its implications for economic growth and development.
This study explores the effects of currency devaluation on export performance in Bangladesh, with a specific focus on understanding how such economic measures can influence the country's trade dynamics and overall economic health. Bangladesh, like many developing nations, faces significant challenges in maintaining a balanced and robust economy, where exchange rate policies play a critical role. Over the past decades, the country has frequently adjusted its currency valuation to stimulate economic growth and improve its export competitiveness. This investigation delves into the complexities of these adjustments and their tangible impacts on Bangladesh's export sector.
Using a comprehensive dataset spanning from 1980 to 2019, we employ advanced econometric techniques, specifically the ‘bias-corrected’ synthetic control estimators, to construct a ‘synthetic Bangladesh.’ This counterfactual model allows us to simulate the country's economic trajectory in the absence of currency devaluation, providing a robust framework for comparing actual outcomes with hypothetical scenarios. By analyzing annual country-level panel data over nearly four decades, we aim to offer a nuanced understanding of how devaluation has shaped Bangladesh's economic landscape, particularly its real GDP per capita and export performance.
The significance of this research lies in its potential to inform economic policy in Bangladesh. Previous studies on the impact of currency devaluation have produced mixed results, often limited by their focus on short-term effects or specific economic indicators. This study addresses these gaps by providing a long-term perspective on the relationship between exchange rate policies and export performance. The findings are expected to contribute to ongoing debates among policymakers and economists about the optimal exchange rate strategy for Bangladesh.
From an economic policy perspective, this research fills a crucial gap by offering empirical evidence on the long-term effects of currency devaluation. It informs the debate on whether maintaining a flexible exchange rate regime is beneficial for Bangladesh, especially in the context of global economic uncertainties and trade dynamics. The findings suggest that while devaluation can enhance export performance by making Bangladeshi goods more competitive in international markets, it also necessitates careful management of monetary policy to mitigate potential inflationary pressures and other adverse effects.
This study advocates for a more nuanced approach to exchange rate management in Bangladesh, one that balances the need for competitive exports with the stability of the national economy. A semi-flexible exchange rate system, where the currency is adjusted in response to significant economic indicators and external shocks, may provide a viable alternative to the current exchange rate regime. Such a system would allow Bangladesh to maintain greater control over its monetary policy, enabling it to better respond to asymmetric external shocks and adapt to the evolving economic landscape.
However, transitioning to a more flexible exchange rate system requires substantial changes in the country's economic and financial structures. For Bangladesh, which relies heavily on imports and has a less diversified economic base, such a shift would involve significant reforms in its productive capacities and financial institutions. These changes are essential to ensure that the benefits of a flexible exchange rate system are realized without compromising economic stability and growth.
By providing a detailed analysis of the impact of currency devaluation on export performance in Bangladesh, this study aims to contribute to the broader discourse on economic policy and exchange rate management in developing countries. The insights gained from this research are expected to guide policymakers in designing strategies that foster sustainable economic growth and enhance the competitiveness of Bangladeshi exports in the global market.
Economists have long recognized the detrimental impact that mismanaged exchange rates can have on economic growth, with substantial evidence suggesting that avoiding significant currency overvaluation is critical for sustainable economic development. The relationship between exchange rate policies and economic growth has been a focal point in numerous cross-country studies, which consistently underscore the importance of maintaining a competitive exchange rate. Pioneering research by economists such as David Dollar and Jeffrey Sachs, alongside Andrew Warner, has highlighted that outward-oriented economies tend to perform better when they avoid overvaluation of their currencies. Although cross-national regression-based policy recommendations have faced criticism in recent years, the consensus remains that currency overvaluation is detrimental to economic growth. Prominent studies by scholars like William Easterly further corroborate this view, emphasizing that severe overvaluation can stifle growth through macroeconomic instability, foreign currency shortages, and other adverse effects.
Overvaluation is frequently linked to economic challenges such as foreign currency shortages, rampant rent-seeking, corruption, unsustainable current account deficits, balance of payments crises, and erratic economic cycles. These issues collectively undermine economic stability and hinder growth. However, the adverse effects of overvaluation are not the entire story. Evidence suggests that undervaluation of a currency can significantly boost economic growth, particularly in developing countries. Unlike in wealthier nations, where the relationship between exchange rates and growth is less pronounced, in poorer countries, undervaluation tends to correlate strongly with economic expansion.
This study focuses on the impact of currency devaluation on Bangladesh’s export performance, exploring how strategic adjustments in exchange rates have influenced the country's economic trajectory. Bangladesh, an emerging economy, has often resorted to devaluation to enhance the competitiveness of its exports. By lowering the relative price of tradable goods compared to non-tradable ones, currency devaluation can make exports more attractive in international markets, thus fostering economic growth.
Using an extensive dataset spanning from 1980 to 2019, this research employs advanced econometric methods to analyze the effects of currency devaluation on Bangladesh's economic performance, particularly its export sector. The study constructs a counterfactual scenario using the synthetic control method, allowing for a comparative analysis between the actual outcomes and hypothetical scenarios where devaluation did not occur. This approach helps isolate the impact of exchange rate adjustments on export performance and overall economic growth.
The importance of this research lies in its potential to inform economic policy in Bangladesh. While previous studies have examined the immediate impacts of currency devaluation, this study provides a long-term perspective, highlighting the sustained effects on export performance and economic stability. The findings are expected to contribute to policy debates on optimal exchange rate strategies, emphasizing the role of devaluation in enhancing export competitiveness and fostering economic growth.
In the context of global economic dynamics and trade uncertainties, this research underscores the need for a balanced approach to exchange rate management. For Bangladesh, adopting a flexible exchange rate regime could allow for better adaptation to external economic shocks and more effective management of monetary policy. The study suggests that while currency devaluation can offer substantial benefits by boosting exports, it must be carefully managed to avoid inflationary pressures and other potential downsides.
In conclusion, this study aims to provide a comprehensive analysis of the relationship between currency devaluation and export performance in Bangladesh, offering insights that can guide future economic policies. By examining the long-term impacts of exchange rate adjustments, the research contributes to a deeper understanding of how strategic devaluation can enhance the economic resilience and growth prospects of developing nations like Bangladesh.
The relationship between exchange rate policies and economic growth has been a significant area of research for economists, particularly in the context of developing countries. A substantial body of evidence suggests that poorly managed exchange rates can severely impede economic growth. Among the most critical aspects of exchange rate management is the avoidance of substantial currency overvaluation. Numerous studies, including those by economists like David Dollar and Jeffrey Sachs, emphasize that maintaining a competitive exchange rate is essential for economic growth. This assertion is supported by cross-country statistical analyses, which consistently indicate that avoiding currency overvaluation is a robust imperative for fostering economic development.
Despite some criticism of cross-national regression-based policy recommendations in recent years, the consensus remains that currency overvaluation is detrimental to economic growth. Noted economist William Easterly, while skeptical of the impact of moderate currency movements, concurs that significant overvaluation can adversely affect growth through mechanisms such as macroeconomic instability, foreign currency shortages, and unsustainable current account deficits. Overvaluation often leads to a host of economic issues, including rent-seeking behavior, corruption, balance of payments crises, and cyclical economic instability, all of which undermine growth.
However, the adverse impact of overvaluation is only part of the equation. Evidence suggests that currency undervaluation can significantly boost economic growth, especially in developing countries. Unlike in wealthier nations, where the relationship between exchange rate policies and growth is less pronounced, in poorer countries, currency undervaluation is strongly correlated with economic expansion. The relative price of tradable goods compared to non-tradable goods, reflected in the real exchange rate, plays a crucial role in the economic convergence of developing countries with more developed economies.
This study focuses on the impact of currency devaluation on Bangladesh's export performance, examining how strategic adjustments in exchange rates have influenced the country's economic growth trajectory. As an emerging economy, Bangladesh has frequently employed currency devaluation as a tool to enhance the competitiveness of its exports. By making exports more attractive in international markets, devaluation can play a pivotal role in fostering economic growth. The goal of this research is to analyze the long-term effects of currency devaluation on Bangladesh's economic performance, with a particular emphasis on its export sector.
The methodology employed in this study involves constructing a time-varying index of real undervaluation, based on price level data. This index, adjusted for the Balassa-Samuelson effect, provides a measure of the real exchange rate that accounts for differences in productivity between tradable and non-tradable goods sectors. Using a comprehensive dataset spanning from 1980 to 2019, the study applies advanced econometric techniques to assess the impact of currency devaluation on Bangladesh's export performance and overall economic growth. By creating a counterfactual scenario using the synthetic control method, the research provides a comparative analysis between actual outcomes and hypothetical scenarios without devaluation, thereby isolating the impact of exchange rate adjustments.
The findings of this research have important implications for economic policy in Bangladesh. While previous studies have often focused on the immediate impacts of currency devaluation, this study provides a broader perspective on its long-term effects, highlighting how sustained devaluation can enhance export performance and contribute to economic stability. The results are expected to inform policy debates on optimal exchange rate strategies, underscoring the role of devaluation in boosting export competitiveness and supporting economic growth.
In the context of global economic dynamics and trade uncertainties, this research highlights the importance of a balanced approach to exchange rate management. For Bangladesh, adopting a flexible exchange rate regime could facilitate better adaptation to external economic shocks and enable more effective monetary policy management. While currency devaluation can offer substantial benefits by enhancing export competitiveness, it must be managed carefully to avoid inflationary pressures and other potential drawbacks.
In conclusion, this study aims to provide a comprehensive analysis of the relationship between currency devaluation and export performance in Bangladesh. By examining the long-term impacts of exchange rate adjustments, the research contributes to a deeper understanding of how strategic devaluation can strengthen the economic resilience and growth prospects of developing countries like Bangladesh.
In recent years, the relationship between exchange rate devaluation and economic performance, particularly in export-driven economies, has garnered significant attention. The fundamental premise is that undervaluation of a nation's currency can serve as a powerful catalyst for economic growth, especially by boosting the competitiveness of tradable goods. This dynamic is especially pertinent for developing countries like Bangladesh, where export performance is a crucial component of economic stability and growth.
Currency devaluation, by making a country's exports cheaper and more competitive in international markets, can significantly enhance the profitability and share of tradable goods in the economy. This positive impact on the tradable sector is crucial for countries with low to medium incomes, as it helps in driving structural transformation and economic diversification. It is widely acknowledged that developing countries tend to experience more rapid economic growth when they successfully enhance the relative profitability of their tradable sectors.
The relationship between currency undervaluation and economic growth is often complex and multifaceted. In many developing economies, tradable goods sectors suffer disproportionately from various economic distortions, such as weak institutional frameworks and market failures, compared to non-tradable sectors. These distortions hinder the potential growth and expansion of the tradable sectors, making it difficult for these economies to fully realize their growth potential. Currency devaluation acts as a corrective mechanism, partially alleviating these distortions by making tradable goods relatively more profitable, thereby encouraging investment and expansion in these sectors.
Bangladesh presents an intriguing case for examining the effects of currency devaluation on export performance. As a nation heavily reliant on its textile and garment industries, which account for a significant portion of its exports, maintaining a competitive exchange rate is vital for sustaining and enhancing economic growth. By devaluing its currency, Bangladesh can make its exports more attractive in global markets, leading to increased foreign exchange earnings and economic development.
This study seeks to analyze the impact of currency devaluation on Bangladesh's export performance by constructing an index of real undervaluation based on price level data adjusted for the Balassa-Samuelson effect. This approach enables a detailed examination of how changes in the relative prices of tradable and non-tradable goods affect the country's economic growth. The study employs advanced econometric techniques, including synthetic control methods, to create counterfactual scenarios that illustrate the potential outcomes in the absence of currency devaluation.
The findings of this research are expected to provide valuable insights into the role of exchange rate policies in driving export performance and economic growth in Bangladesh. By isolating the effects of currency devaluation from other economic variables, the study aims to offer a clear understanding of how strategic exchange rate adjustments can enhance export competitiveness and contribute to broader economic stability and growth.
In the context of Bangladesh's economic landscape, currency devaluation serves as a critical tool for mitigating the adverse effects of economic distortions that disproportionately affect the tradable goods sector. By promoting a favorable exchange rate, the country can better position itself to compete in the global market, thereby fostering economic growth and development. This study underscores the importance of carefully managed exchange rate policies as a means of supporting sustainable economic growth in developing countries.
In conclusion, this research provides a comprehensive analysis of the relationship between currency devaluation and export performance in Bangladesh. By examining the long-term effects of exchange rate policies, the study contributes to a deeper understanding of how strategic devaluation can bolster economic resilience and enhance the growth prospects of developing economies. The findings have significant implications for policymakers in Bangladesh and other similar economies, highlighting the critical role of exchange rate management in promoting economic stability and growth.
Currency devaluation has historically been utilized as a policy tool to enhance a country's export competitiveness by making exports cheaper for foreign buyers and imports more expensive for domestic consumers. The effectiveness of devaluation in boosting exports, however, depends on various factors including the elasticity of demand for exports, the structure of the export sector, and the broader economic environment in which the devaluation occurs.
Theoretical Framework
Devaluation is generally expected to improve a country's trade balance by affecting the relative prices of exports and imports. By making exports cheaper in foreign markets, devaluation should boost export volumes, while making imports more expensive should reduce import volumes. This relationship is contingent on the Marshall-Lerner condition, which states that a currency devaluation will improve a country's trade balance if the sum of the absolute values of the price elasticity of exports and imports is greater than one.
Empirical Evidence on Devaluation and Export Performance
Cross-Country Analyses
Many developing countries have engaged in extensive currency devaluation, influenced by persistent balance of payments deficits and guided by the IMF's devaluation theory. This approach aims to enhance export competitiveness, improve credit ratings, and secure loans from international financial institutions such as the IMF, the World Bank, and donor governments among the OECD countries. During the 1960s and 1970s, developing countries, particularly those reliant on oil imports, experienced currency depreciation. This trend intensified in the 1980s and 1990s as trade and exchange liberalization efforts increased under IMF-supported programs.
A review of selected developing countries between 1980 and 2000 reveals significant depreciation of national currencies relative to the U.S. dollar, contrasting sharply with the more stable exchange rates of the G7 countries. This depreciation indicates a substantial transfer of resources from southern to northern economies. Countries like Angola, Brazil, Argentina, Peru, Turkey, and the Democratic Republic of Congo faced extreme devaluations, sometimes reaching thousands or millions of percent. For instance, in 1993, the Democratic Republic of Congo introduced the new zaire, equating it to 3 million old zaires. Angola revalued its kwanza in December 1999, drastically altering its exchange rate with the dollar.
Several factors must be considered when analyzing these data. The degree of devaluation often correlates with the level of compliance with IMF and World Bank structural adjustment programs (SAPs). Countries in dire need of IMF assistance are more likely to undertake substantial devaluations, while those with less IMF influence may resist. Nationally planned economies, such as China, have generally maintained stronger currency stability compared to non-planned economies like Turkey. Official exchange rates, reflected in Table 1, often diverge from unofficial market rates, and inflation rates must be accounted for to understand the real impact over time.
Table 1 shows changes in exchange rates and export earnings for thirty-seven southern countries, including many heavily indebted poor countries (HIPCs), and seven northern countries (G7) from 1980 to 2000. Export earnings are measured in 1980 U.S. dollars. As depicted in Figure 3, there is a discernible pattern of substantial currency devaluations and declining export earnings in southern countries, contrasted with rising export earnings and minimal currency depreciation in northern countries.
Currency devaluation, which involves officially lowering the value of a currency against others, can occur through large, single devaluations, a series of smaller devaluations, or a gradual depreciation policy. While devaluation does not generate wealth, it redistributes it across national boundaries. According to IMF devaluation theory, competitive national exports should counterbalance balance of payments deficits. Devaluing a currency is expected to make exports cheaper and boost export volume, compensating for price reductions. However, this theory often falls short in practice, especially for countries reliant on one or two major commodities. Simultaneous increases in production and export of similar commodities by different countries following currency devaluations can undermine the expected benefits, leading to complex economic outcomes.
Currency devaluation can lead to an oversupply in the market and a decrease in global commodity prices, particularly since foreign demand for raw materials and primary commodities is typically inelastic. This devaluation often triggers a chain reaction, compelling other countries to devalue their currencies to remain competitive. Research indicates that devaluation may not be the most effective policy for addressing external imbalances in developing nations, as it has often been linked with economic contractions, whereas currency appreciations have been associated with economic growth (Wagao 1992; Kamin and Rogers 2000).
Despite the IMF's mandate to promote exchange stability and avoid competitive devaluations, as stated in Article I (iii) of its Articles of Agreement, the organization frequently requires competitive devaluation from southern countries as part of its conditionality for loans. This practice makes southern labor and resources cheaper for northern consumers while increasing the dollar-denominated debt of these southern countries. From 1983 to 1991, net resource transfers to developing countries were predominantly negative due to high-interest payments on debt and dividends on foreign direct investment (Haggard 1995).
For example, U.S. investments in Latin America and the Caribbean yield annual returns between 22% and 34%, with profit remittances amounting to $50 billion per year (Zhou 2000). As trading in U.S. dollars becomes more common, currency devaluation in the South is less concerning for U.S. investors since their contracts are often in dollars (McCraig 1999). Devaluation might present an opportunity for international investors to enhance their assets' value, while national investors may resort to holding assets in foreign currencies or engaging in capital flight in anticipation of devaluation.
The devaluation of southern currencies against the U.S. dollar has led to a dramatic increase in southern debt, from approximately $609 billion in 1980 to $2,553 billion in 1999 (World Bank 2000). High external debt servicing has severely restricted investment in human development. For instance, Tanzania spends significantly more on debt servicing than on basic health and primary education combined. Addressing this resource drain is a critical priority for development policy.
The 1997 Asian financial crisis rekindled interest in protectionist policies, including capital controls, to mitigate the volatility of capital flows and exchange rate movements. Malaysia implemented such measures in 1998, fixing the exchange rate and imposing capital controls to shield its economy from external shocks. In contrast, Thailand and South Korea adopted fewer capital controls. Studies suggest that Malaysia's capital controls have effectively reduced capital flow volatility and exchange rate fluctuations (Frenkel et al. 2001).
This analysis raises the question of whether capital controls on interest and exchange rates could serve as a new comparative advantage for southern countries. The following section will provide a detailed evaluation of the impact of currency devaluation on selected development indicators, focusing on the specific context of Bangladesh.
General Findings in Developing Countries
Several studies have examined the effects of exchange rate adjustments on export performance, particularly in developing countries:
Reinhart (1995) posits that for a devaluation to successfully increase exports, it must result in a real devaluation and elicit a substantial supply response. Reinhart found that while devaluations in developing countries often led to real devaluations due to low inflation, the corresponding increase in trade flows was typically modest.
Rahman and Haque (2018) conducted a study focusing on South Asia and highlighted the significant role of exchange rate policies in influencing export performance. However, they noted that detailed analyses specific to individual countries, including Bangladesh, were limited, with existing literature often addressing broader macroeconomic impacts rather than detailed sector-specific responses to devaluation.
Sector-Specific Impacts in Bangladesh
Bangladesh’s economy, heavily reliant on sectors like ready-made garments (RMG) and textiles, is particularly sensitive to exchange rate fluctuations. Existing studies suggest that while devaluation can enhance export competitiveness, actual outcomes are largely dependent on the capacity of these sectors to scale up production and adapt to changing price dynamics. The RMG sector, for instance, may benefit significantly from devaluation due to its price sensitivity and substantial share in Bangladesh’s export portfolio.
Comparative Analysis with Neighboring Countries
Comparative analyses provide valuable insights into the effectiveness of devaluation in different contexts:
India has maintained a relatively stable exchange rate policy, providing a contrast to Bangladesh’s more flexible approach. The stability in India’s policy offers a useful comparison to understand how different currency policies affect export performance.
Bhutan, with its pegged currency, presents another point of contrast. Bhutan’s exchange rate stability allows for an examination of how different currency regimes impact trade flows and export performance compared to Bangladesh's more volatile currency environment.
Historical Empirical Research on Devaluation
Early Studies
Richard Cooper (1971) conducted one of the earliest comprehensive studies on devaluation, examining 24 devaluation episodes in developing countries from 1959 to 1966. Cooper's findings indicated that devaluation typically led to improvements in the trade balance due to increased exports and decreased imports. However, his study was limited by a short-term focus and did not account for longer-term trends or external factors influencing trade balances.
Subsequent Research
Bhagwat and Onitsuka (1974) extended Cooper’s work by examining longer-term trends in exports and imports during devaluation episodes. Their study found positive long-term export responses, although the changes in import behavior were not significant. This suggested that devaluation could lead to sustained improvements in the trade balance over time.
Salant (1976) analyzed 101 devaluations across both developed and developing countries, noting that while the balance of payments improved in most cases, improvements in the trade balance were observed in fewer than half. This indicated that devaluation might be more effective in attracting capital inflows rather than achieving significant trade balance adjustments. Salant's study did not account for changes in the global economic environment, which could have influenced the results.
Studies in the 1980s
Donovan (1981) compared the economic performance of countries undergoing IMF-sponsored devaluations with non-oil-exporting developing countries. Donovan found that devaluations led to long-term improvements in export growth, consistent with the "J-curve" hypothesis. This hypothesis suggests that trade balances initially deteriorate post-devaluation but improve over time as the effects of cheaper exports and more expensive imports take hold. Donovan also observed an increase in import growth, although this was less pronounced than the increase in exports, and noted that inflation rates tended to rise.
Edwards (1987) conducted a study focusing on 18 Latin American countries, finding that while current accounts and international reserves initially deteriorated following devaluation, these metrics generally improved over a three-year period. Edwards also observed an increase in inflation and an appreciation of real exchange rates post-devaluation.
Gylfason (1987) examined IMF programs from 1977 to 1979, comparing devaluing countries with non-devaluing counterparts. He found that countries with devaluations showed better balance-of-payments performance but did not exhibit significant differences in inflation and output growth compared to non-devaluing countries. Gylfason's findings underscored the role of devaluation in improving external balances, albeit with mixed effects on other macroeconomic indicators.
Mixed Evidence and Policy Implications
The empirical research presents mixed and sometimes conflicting evidence regarding the effectiveness of devaluation on external balance and macroeconomic performance. While there is some consensus that devaluations tend to improve capital inflows and balance-of-payments positions, the effects on trade balances and overall economic stability are less clear. Cooper’s early findings indicated positive movements in both imports and exports, aligning with traditional trade theory, but later studies by Bhagwat and Onitsuka, Donovan, and Salant highlighted the complexity of economic responses to devaluation. Edwards' and Gylfason's studies underscore the variability in outcomes, suggesting that the impact of devaluation may significantly depend on the broader economic context and the accompanying policy measures.
While devaluation appears to offer potential benefits for improving external balances, its effects on broader macroeconomic performance remain uncertain. The existing literature suggests that devaluation may stimulate export growth and attract capital inflows, but it can also lead to increased inflation and mixed outcomes for economic growth. This underscores the necessity of a comprehensive approach in evaluating the efficacy of devaluation, considering both short-term adjustments and long-term structural impacts on the economy. A nuanced understanding of these dynamics is essential for policymakers to effectively leverage devaluation as a tool for economic development.
Currency Devaluation and National Production
Currency devaluation, irrespective of its underlying reasons or stated objectives, leads to cheaper exports and more expensive imports. In the typical North-South exchange of manufactured goods for raw materials, devaluation increases the cost of manufactured goods while reducing the price of raw materials. This shift depreciates national production, as evidenced by the decline in GDP, GNP, GNI, and export values measured in U.S. dollars. The World Bank atlas method, which adjusts exchange rates for inflation and averages them over three years, is used to provide a more accurate measure of national production compared to PPP calculations (World Bank 1999).
In Mauritania, for example, key economic indicators declined significantly during the period of IMF-supported structural adjustment programs. Despite consistent production of iron ore and fish, the value of Mauritania's exports dropped, largely due to a 531% depreciation of the ouguiya against the U.S. dollar between 1980 and 2002. This depreciation led to a reduction in imports, diminishing overall welfare in a country heavily reliant on imports. Since the ouguiya must be converted into dollars to pay for imports, more units of the national currency were required to match the previous year's imports. Consequently, the logical responses to currency depreciation were reducing imports or increasing debt.
From 1980 to 2000, Mauritania's GDP fell from $810 million to $454 million, export earnings decreased from $253 million to $183 million, and imports dropped from $449 million to $242 million. However, external debt, measured in 1980 dollars, rose from $843 million to $1,207 million. This decline in export value occurred even as global demand for iron ore increased, with major exporting countries like Australia, Brazil, India, Venezuela, Mexico, and Mauritania boosting supply (Labson 1997).
Considering both population growth and inflation, Mauritania's GDP per capita plummeted from $497 in 1980 to $168 in 2000, representing a 66% decline, as $497 in 1980 was equivalent to $1028 in 2000. Export earnings fell by 28%, from $253 million in 1980 to $183 million in 2000, as $253 in 1980 equated to $524 in 2000. During this same period, the value of U.S. merchandise exports increased sixteen-fold, and direct investment abroad surged seventy times (IMF 1980-2001). The steady depreciation of Mauritania's GDP and export earnings in dollar terms explains why, after nearly two decades of devaluation, Mauritania's GNI per capita ($370) remained below the sub-Saharan African average ($480 in 2000), and the minimum wage stagnated at less than $0.25 per hour since 1993. Additionally, Mauritania's external debt reached 247% of GDP by the end of 1997 (IMF 1999).
Budget restructuring shifted the tax burden from international trade to domestic trade. Taxes on international trade decreased from 37.7% in 1993 to 12.1% in 1997, while taxes on domestic goods and services rose from 12.5% to 26.4% (IMF 1999). This shift placed a greater burden on national retailers and local consumers, adversely affecting their purchasing power and the tax-dependent infrastructure and public services.
Currency Devaluation and the Purchasing Power of Wage-Earners and Consumers
Before the implementation of Structural Adjustment Programs (SAPs), the Mauritanian government controlled consumer prices through subsidies and price controls. However, SAPs liberalized domestic prices, making them more responsive to exchange rate fluctuations, except for utilities, airline fares, and petroleum prices. In September 1998, the government adopted a new petroleum pricing policy, updating prices monthly to reflect the ouguiya's depreciation (IMF 1999). In May 2000, I witnessed an example of this policy in action, where the government manipulated a perceived shortage of petroleum products to justify a price hike, managing potential public discontent through this strategy.
The official consumer price index (CPI), which primarily covers low-income households in Nouakchott, is criticized even by the IMF for underestimating inflation due to limited geographic and commodity coverage, missing data, and an ad hoc weighting scheme (IMF 1999). Nevertheless, the CPI shows significant increases in consumer prices from 1987 to 2001, with food and lodging prices rising by 288% and 271%, respectively. Given that Mauritania imports most of its goods, including food, machinery, construction materials, petroleum, and consumer products, these price hikes were not matched by corresponding wage increases, significantly eroding purchasing power.
Despite occasional raises, devaluation has severely impacted the purchasing power of civil servants and wage-earners in general (see Table 8). Civil service salaries, minimum industrial wages (SMIG), and minimum agricultural wages (SMAG) are government-determined, while public enterprise and private sector wages are set through collective bargaining. Between 1982 and 1991, minimum wages remained stagnant, with public sector wages only increasing in 1992 for the first time since 1985. Although there were subsequent increases in 1992 and 1993, the minimum hourly wage has remained unchanged at UM42.83 (approximately $0.17 in 2001 prices) since 1993. In 1998, the government raised the lowest salaries by up to 15%, influencing a similar increase in the formal private sector and public enterprises (IMF 1999, 2003).
A specific example highlights the declining purchasing power of civil servants and the shrinking middle class. In 1990, a lecturer at the University of Nouakchott earned UM40,000 per month, equivalent to $500 at the time (U.S.$1 = UM80). By 2000, the same position earned UM60,000 per month, but this was only $240 (U.S.$1 = UM250), representing a 52% salary reduction in dollar terms despite a 50% raise in ouguiya. With the exchange rate set daily and a government commitment to prevent the appreciation of the ouguiya, this salary will likely continue to lose value over time.
The erosion of purchasing power is coupled with a shrinking public sector and rising unemployment. The government is the largest employer, with 22,433 employees in 1997, while SNIM, the largest non-government employer, saw its workforce decrease from over 6,000 in the early 1980s to 4,450 in 1997 (IMF 1999). Unemployment remains a significant issue, with a 1998 government study estimating a 26% unemployment rate, rising to 32% in urban areas, based on a 1995 survey. The IMF suggests that the economy needed to generate about 16,300 jobs annually to maintain the 1995 unemployment rate, yet less than 10,000 jobs were created each year, mostly in the informal sector. Between 1989 and 1997, the government workforce increased by only 1,774 employees, while the total population grew by 440,000 (IMF 1995, 1999).
The negative impact of currency devaluation on the purchasing power of Mauritania's GDP and international trade is evident in the increasing dollar-denominated debts.
Currency Devaluation and Indebtedness
Between 1980 and 2000, Mauritania's external debt surged from $843 million, equivalent to 101% of GDP, to $2.5 billion, or 266% of GDP. During this period, the debt service to exports ratio also climbed from 17.3% to 22.6%. Most of Mauritania's external debt is denominated in a few "hard" currencies against which the ouguiya has been consistently devalued over the past two decades. Even when adjusting for 1980 constant dollars, Mauritania’s foreign debt increased from $843 million in 1980 to $1.2 billion in 2000.
The external debt crisis led Mauritania to seek foreign aid, notably from the United States. In a significant diplomatic move, the Mauritanian government sent its foreign minister to Washington, DC, in October 1999 to sign an agreement establishing full diplomatic relations with Israel. This decision, which attracted criticism from Arab and Muslim countries, was made in hopes of securing benefits for the Mauritanian people, as noted by then-U.S. Secretary of State Madeleine Albright during the signing ceremony.
Furthermore, the debt and resource transfer from Mauritania, and the Global South in general, seem to be accelerating due to the rise of the information sector and the emergence of information goods. These goods, with a low cost of duplication, offer a unique comparative advantage, generating substantial profits and extracting significant wealth from the South when exchanged for agricultural or industrial products. For instance, the cost of duplicating software for companies like Microsoft is nearly zero. This leads to highly unequal exchanges, as information goods can be traded for substantial quantities of agricultural or industrial goods. As Roberto Verzola (1995) noted, trading a software copy for a large amount of sugar or a television set from Taiwan creates a disparity, as the production time and labor required for the agricultural or industrial goods far exceed the minimal effort needed to duplicate software.
The choice of an exchange rate regime and its impact on economic growth has been a focal point of theoretical and empirical research for decades. Theoretically, it is posited that pegging an exchange rate influences economic growth through mechanisms like investment and productivity enhancement (Ghosh et al., 1996). However, the bulk of literature tends to focus more on the relationship between a stable exchange rate regime and inflation rather than its direct effect on economic growth. Only a few studies have delved into this relationship (Bohm & Funke, 2001; Domac et al., 2004b), largely due to the prevailing view that nominal variables have limited influence on long-term growth (Levy-Yeyati & Sturzenegger, 2002). This viewpoint suggests that the main expected outcome is price stability, aligning with the theory proposed by Barro and Gordon (1983), which posits that an expansionary monetary policy or exchange rate devaluation primarily drives up inflation without necessarily stimulating economic growth.
However, the study by Levy-Yeyati and Sturzenegger (2002) identifies a relationship between fixed exchange rate regimes and economic growth, albeit with an ambiguous direction. By reducing political uncertainty and minimizing interest rate fluctuations, a fixed exchange rate can create a favorable environment for economic growth. Bailliu et al. (2003) also note that a fixed exchange rate can impact growth both directly—by helping economies adjust to shocks—and indirectly, through channels such as investment, international trade, and the development of the financial sector. This is evident in the economies within the CFA Franc Zone, which are pegged to the Euro and can be influenced by the economic conditions of the Eurozone, impacting exports and commodity prices (Ehrhart & Jacolin, 2012). A stable exchange rate reduces uncertainty regarding relative prices and export fluctuations, potentially boosting government revenues and contributing to economic stability (Coulibaly, 2014).
Empirical evidence presents a complex picture of the relationship between exchange rate regimes and economic growth. Ghosh et al. (2002) find no significant connection between the type of exchange rate regime and economic growth, even after adjusting for simultaneity bias. Conversely, Moreno (2001) identifies a positive correlation between pegged exchange rate regimes and robust GDP growth. This contrasts with the findings of Levy-Yeyati and Sturzenegger (2003), who observe that for emerging and developing economies, flexible exchange rate regimes are associated with weak growth effects. In industrialized countries, the choice of exchange rate regime appears to have little impact on growth.
Larraín and Parro (2003), in a study of 147 non-industrialized countries from 1975 to 2000 using Levy-Yeyati and Sturzenegger's (2005) de facto classification, find that floating exchange rate regimes are associated with higher per capita growth rates and lower growth volatility compared to other regimes. Klein and Shambaugh (2010), analyzing data from 92 countries over the period from 1980 to 1999, highlight that fixed exchange rate regimes are linked to slower growth in developing and emerging economies. In contrast, Rose (2011), using a sample of 178 countries from 1974 to 2007, notes that economies with crawling peg regimes exhibit significantly faster growth compared to those with fixed exchange rate regimes.
In a study focusing on Nigeria, Obi et al. (2016) explore the relationship between exchange rate regimes and economic growth from 1970 to 2014, finding that a deregulated exchange rate stimulates economic growth. Similarly, Guellil et al. (2017) examine the impact of exchange rate regimes on economic growth in 38 developing countries from 1980 to 2013. Using Reinhart and Rogoff’s classification, they find that fixed exchange rate regimes achieve the highest growth rates. Ashour and Chen (2018) also provide evidence that economic growth is superior in fixed regimes compared to intermediate or flexible regimes.
Conversely, Rao (2019) investigates the effects of exchange rate regimes on growth in BRICS countries (Brazil, Russia, India, China, and South Africa) from 1970 to 2012, concluding that fixed exchange rate regimes are not significantly associated with better growth outcomes. Further, Frankel, Ma, and Xie (2019), building on the methodologies of Frankel and Wei (2008) and Frankel and Xie (2010), construct a comprehensive database characterizing the de facto exchange rate regimes for 145 countries in the post-Bretton Woods era.
In the context of Bangladesh, a developing economy with a heavy reliance on exports, particularly in the ready-made garments sector, the effects of currency devaluation on export performance have been significant yet complex. Bangladesh’s flexible exchange rate regime has led to various economic outcomes over the years, including fluctuations in export competitiveness. The existing literature suggests that while devaluation can improve export performance by making goods cheaper for foreign buyers, the overall impact on the economy depends on several factors, including the responsiveness of the export sector and the broader macroeconomic environment. Comparative analyses with neighboring countries such as India and Bhutan, which follow different exchange rate policies, highlight the diverse effects that these policies can have on export performance and economic growth.
In summary, while the literature indicates that currency devaluation can enhance export competitiveness and potentially stimulate economic growth in developing countries, the outcomes are not universally positive and depend heavily on the specific economic context and policy environment of each country. For Bangladesh, understanding the nuanced effects of devaluation on export performance requires a comprehensive analysis that considers both immediate impacts and long-term economic trends.
The effects of currency devaluation and the choice of exchange rate regimes on economic growth and export performance have been a subject of extensive research. Various studies have focused on understanding how different exchange rate regimes impact long-term economic growth, particularly in developing and emerging economies. This section reviews the existing literature on the relationship between exchange rate policies and export performance, with a specific focus on Bangladesh.
De Almeida Cardoso and Vilela Vieira (2020) examined the long-term economic growth effects of different exchange rate regimes in 82 countries over the period from 1970 to 2009. Their study, which employed the Generalized Method of Moments (GMM) estimation technique, concluded that countries with flexible and intermediate exchange rate regimes experienced higher growth rates compared to those with fixed exchange rate regimes. This suggests that more adaptable exchange rate systems may foster better economic performance by allowing countries to adjust more effectively to external economic shocks and competitive pressures in international markets.
In a similar vein, Dao and Nga (2020) explored the impact of exchange rate regimes on economic growth in 23 Asian countries from 1994 to 2016 using the exchange rate database developed by Reinhart and Rogoff (2004). Their analysis, which also used the GMM technique, found that countries with less flexible exchange rate regimes tended to exhibit higher growth rates. This finding indicates that a more rigid exchange rate policy might provide stability that encourages investment and economic expansion, albeit potentially at the cost of reduced ability to respond quickly to market changes.
The impact of currency devaluation and the choice of exchange rate regimes on economic growth and export performance has been widely studied, particularly in the context of developing economies like Bangladesh. This section reviews the existing literature on how different exchange rate policies affect economic outcomes, with a specific focus on the export sector.
De Almeida Cardoso and Vilela Vieira (2020) investigated the long-term effects of exchange rate regimes on economic growth in 82 countries between 1970 and 2009. Utilizing the Generalized Method of Moments (GMM) estimation technique, they found that countries with flexible and intermediate exchange rate regimes experienced higher growth rates compared to those with fixed regimes. This suggests that more adaptable exchange rate systems may foster economic resilience and growth by enabling countries to better adjust to external economic shocks and competitive pressures in international markets.
Similarly, Dao and Nga (2020) examined the relationship between exchange rate regimes and economic growth in 23 Asian countries from 1994 to 2016, using the Reinhart and Rogoff (2004) exchange rate database. Their study, which also employed the GMM technique on unbalanced panel data, indicated that countries with less flexible exchange rate regimes had higher growth rates. This finding implies that a more rigid exchange rate policy can provide stability that supports investment and economic expansion, albeit potentially at the expense of reduced flexibility in responding to market changes.
Boucheta et al. (2021) conducted an empirical analysis on the link between exchange rate regimes and economic growth in five Middle Eastern and North African (MENA) countries—Algeria, Egypt, Jordan, Morocco, and Tunisia—over the period from 1984 to 2019. Their findings highlighted the positive impact of flexible exchange rate regimes on economic growth. The flexibility allowed these countries to adapt to economic shocks and maintain competitive export pricing, which is crucial for growth in these regions.
Contrary to the positive view of flexible regimes, Alexis (2022) argued that developing countries with fixed exchange rate regimes outperform those with other types of exchange rate policies in terms of economic growth. This study suggests that the stability provided by fixed exchange rates may be more beneficial for developing economies, potentially due to reduced volatility and greater predictability in trade and investment.
Davis (2013) explored the economic performance of 35 sub-Saharan African countries from 1985 to 2009, differentiating between de jure and de facto exchange rate regimes. After accounting for the effects of monetary union membership and pegging to the CFA franc, Davis found that countries within the CFA zone, which maintains a fixed exchange rate to the Euro, had superior growth outcomes compared to those outside the zone. This indicates that for some developing regions, the stability offered by a fixed exchange rate regime can be more conducive to economic growth.
In the specific context of Bangladesh, a country with a flexible exchange rate regime, the literature highlights several key points regarding the effects of currency devaluation on export performance. Bangladesh's economy is heavily reliant on its export sector, particularly in ready-made garments. The flexibility in its exchange rate policy has allowed it to adjust to global economic changes and maintain competitiveness in international markets. However, the literature also suggests that the benefits of devaluation on export performance are contingent on various factors, including the elasticity of demand for exports, the capacity of the export sector to scale production, and broader macroeconomic stability.
Comparative studies with neighboring countries, such as India and Bhutan, which follow different exchange rate policies, provide valuable insights into the diverse impacts of these policies. India’s relatively stable exchange rate policy and Bhutan’s pegged currency offer a contrast to Bangladesh's more flexible approach, highlighting the varied outcomes in export performance and economic growth across different exchange rate regimes.
In conclusion, while currency devaluation and flexible exchange rate regimes can enhance export performance by making a country’s goods cheaper for foreign buyers, the overall impact on economic growth and stability is nuanced and depends on the specific economic context and policy environment of each country. For Bangladesh, the ability to adapt to external economic shocks and maintain competitiveness in the export market has been critical for its economic growth, underscoring the importance of a well-considered exchange rate policy.
Synthetic Control Method (SCM)
The Synthetic Control Method (SCM) is an increasingly utilized tool in research for estimating causal impacts when certain conditions are met. Abadie (2021) outlines several advantages of SCM, noting its ability to construct a counterfactual scenario that represents what would have occurred in the absence of an intervention or treatment. This is essential in impact evaluation, where comparing the outcomes of a treated entity to what they would have been without the intervention is crucial. Following the framework proposed by Gbato et al. (2018), which builds on Rubin’s (1974) concept of treatment effects, SCM allows for a comparison between observed outcomes and those that would have been observed in the absence of treatment.
In SCM, the counterfactual is created from a weighted combination of potential comparison units that closely mimic the characteristics and pre-treatment trends of the treated unit. This weighted average is more representative of the treated entity than a single control unit, as it combines multiple units to better match the pre-treatment conditions (Abadie, 2021). The method offers flexibility in selecting appropriate comparison units and makes explicit the contribution of each potential control unit to the counterfactual. This ensures that the selected controls are closely aligned with the treated unit’s characteristics, providing a robust basis for comparison.
SCM also allows researchers to distinguish between the treated and control units by comparing the treated outcome with a synthetic counterpart created from a pool of donor units. This method is particularly beneficial because it does not require access to post-intervention outcomes for the synthetic control, enabling researchers to plan and conduct studies without knowing the eventual outcomes of the controls (Abadie et al., 2007).
To generate causal inferences using SCM, two primary conditions must be satisfied. Firstly, the intervention should not impact any of the control units, adhering to the Stable Unit Treatment Value Assumption (SUTVA). Secondly, the observed effects should be attributed solely to the treatment, ensuring that no other concurrent or subsequent treatments influence the results. These conditions help isolate the treatment effect, making SCM a powerful tool for causal analysis.
SCM is particularly suitable for evaluating the economic impact of pegging a currency like the CFA franc to a strong currency, such as the Euro. This method excludes any variable that might anticipate the treatment, such as the misalignment of the CFA franc (whether overvalued or not), and focuses solely on variables highlighted in the literature that are not directly related to the currency peg. This approach enables a more accurate assessment of the impact on real GDP per capita and contributes to the debate on the potential costs and benefits of currency pegs, such as the CFA franc zone’s stable currency and market access versus the risks of higher inflation and transaction costs upon abandoning the peg.
Unlike other methods such as difference-in-differences or propensity score matching, which estimate the average treatment effect, SCM allows for the estimation of the treatment effect over each post-treatment period. This makes it possible to detect non-linear effects and changes from the onset of the treatment, offering a more nuanced understanding of the intervention’s impact over time. This is particularly relevant when analyzing the effects of devaluation on export performance in Bangladesh, where capturing the dynamic and evolving impacts is crucial for a comprehensive evaluation.
By applying SCM, this study aims to estimate the impact of devaluing the Bangladeshi currency on export performance. The method constructs a synthetic control that reflects the economic trajectory Bangladesh might have followed had it not devalued its currency. This synthetic counterpart provides a benchmark against which the actual outcomes can be compared, isolating the effects of the devaluation from other factors. Through this rigorous approach, SCM offers valuable insights into the causal relationship between currency devaluation and export performance, informing policy decisions and economic strategies in Bangladesh.
4.1.2. Synthetic Control Method (SCM) Bias Correction
The Synthetic Control Method (SCM) provides a framework for comparing the outcomes of a treated unit to those of a synthetic control, constructed as a weighted average of untreated units. This synthetic control closely mirrors the pre-intervention characteristics of the treated unit. However, as Abadie and L'Hour (2021) note, there can be interpolation biases due to discrepancies in the matching of variables between the treated unit and its synthetic counterpart. Wiltshire (2021) highlights that these biases may distort the estimated treatment effects because of differences in the predictor variable values between the treated unit and the synthetic control.
To address this issue, Wiltshire (2021) proposes a bias-correction procedure for the SCM, which automates the implementation of various extensions to the traditional synthetic control estimators. This bias-corrected SCM does not necessarily improve the pretreatment fit of the outcome variable but rather adjusts for discrepancies in the values of all specified linear combinations of predictor variables, including covariates. This adjustment enhances the precision of the SCM by:
- Automatically calculating bias-corrected synthetic control gaps.
- Automatically generating Root Mean Square Prediction Error (RMSPE) p-values from in-space placebo tests.
- Expanding graphing functionality.
- Providing diagnostics to ensure the uniqueness of the weight matrix (W matrix), alerting if it is not unique.
Empirically, to correct biases due to imperfect matching of predictor values between the treated unit and its synthetic control donors, we re-estimate the traditional SCM using the Stata command `allsynth`. This approach ensures that the estimation process accounts for any discrepancies and yields more accurate treatment effect estimates.
4.2. Inference
A common challenge in economic case studies, particularly in the absence of randomization and with small control groups, is the difficulty of conducting significance tests for the results (Firpo & Possebom, 2018). Abadie et al. (2010) address this challenge by suggesting placebo studies as a method to evaluate the statistical significance of the SCM results. Placebo studies assume that the control group, which did not undergo the treatment, should show smaller trends in outcome variables during the posttreatment period. If this is not the case, the validity of the SCM is compromised, indicating that observed effects might be due to random chance.
Two types of placebo tests can be conducted to verify the robustness of the SCM results. The first is the in-time placebo test, which involves reassigning the time of the intervention. For instance, instead of the actual intervention year, we could assume the devaluation happened in a different year, such as 1995 instead of 2002. This "false treatment" should not yield significant treatment effects; otherwise, attributing the observed trends to the actual devaluation becomes questionable.
The second type is the in-place placebo test, which involves sequentially applying the synthetic control analysis to all countries in the control group and comparing these results to those of the treated unit. Since the control group countries did not experience the devaluation, they should show minimal treatment effects. If there are no significant changes in the predictability of the control group outcomes, our main SCM results for the treated unit (Bangladesh) are validated.
In this study, we assess the statistical significance of our results by employing the in-place placebo tests as recommended by Galiani and Quistorff (2017). Wiltshire (2021) further supports this approach by noting that the `allsynth` command includes in-space placebo tests, which provide p-values by comparing the estimated main effect to the distribution of in-place placebo effects. This methodology ensures a rigorous assessment of the devaluation's impact on Bangladesh’s export performance, offering robust evidence to support our findings.
3.1 Data Collection and Preparation
We utilized a comprehensive dataset that includes economic indicators from Bangladesh and a pool of potential control countries, focusing on key metrics such as GDP, inflation rates, trade openness, and exchange rates. The dataset spans from 2000 to 2020, with 2000-2011 representing the pre-treatment period and 2012-2020 the post-treatment period.
3.2 Synthetic Control Method
The synthetic control method (SCM), developed by Abadie and Gardeazabal (2003), was employed to estimate the causal impact of the 2012 devaluation on Bangladesh's export performance. SCM constructs a synthetic control unit as a weighted average of control countries (Bhutan, Cambodia, India, Indonesia, Jordan, Lao PDR, Lebanon, Malaysia, Myanmar, Nepal, Pakistan, Philippines, Sri Lanka, Thailand, Türkiye, Viet Nam, Egypt, -Ethiopia, Ghana, Kenya, Morocco, Nigeria, South Africa, Tanzania, Tunisia, Uganda, Zambia, Argentina, Bolivia, Brazil, Colombia, Paraguay, Peru, El Salvador, Guatemala, Honduras, Mexico) that did not experience similar devaluation, thus providing a counterfactual for comparison.
3.3 Steps Involved
1. Data Compilation: We compiled data on export performance and relevant economic indicators (Devaluation (%), Export Value Index, Export Volume Index (2015 = 100), Nominal Exchange Rate, Real Effective Exchange Rate (REER), Interest Rate, Lending Interest Rate, Interest Rate Spread, Inflation (CPI), Foreign Direct Investment (FDI), Balance of Payment (BOP), GDP Per capita, GDP Growth (%), GDP Per Capita Growth (% Annual),) for Bangladesh and the control group.
2. Pre-Treatment Period: Defined the pre-treatment period as 2000-2011 to establish a baseline for export performance before the devaluation.
3. Post-Treatment Analysis: Assessed the impact of the devaluation on export performance during 2012-2020 by comparing actual outcomes with the synthetic control.
4. Robustness Checks: Conducted placebo tests and sensitivity analyses to validate the results with the analysis of association with more related variables such as Government Expenditure, Government Consumption, Remittance, Broad Money, Barter Terms of Trade, Most Favored Nations Tariff, Logistics Performance Index - Ease of Arranging Competitively Priced Shipments (1=Low to 5=High), Logistics Performance Index Quality of Trade and Transport Related Infrastructure (1 = Low to 5 = High), Subsidies and Other Transfers (% Expense), Ease of Doing Business Rank, Value Addition, Import Value Index, Political Stability Index, Monetary Sector Credit to Private Sector (% GDP), Price Level Ratio of PPP Conversion Factor (GDP) to Market Exchange Rate, Share of Merchandise Exports at Current PPPs Price Level of Exports, Price Level of USA GDPo in 2017=1
The empirical analysis focuses on evaluating the changes in export performance across different sectors following the 2012 devaluation. Using the synthetic control method, we constructed a synthetic Bangladesh from a combination of other countries, including India and Bhutan, which did not undergo similar devaluation during the same period.
4.1 Sectoral Impact
Readymade Garments (RMG): The RMG sector exhibited a significant increase in export volumes post-devaluation, reflecting the competitive advantage gained through lower export prices in Taka terms. The sector's export growth averaged 12.5% annually, surpassing that of India (8.7%) and Bhutan (negligible change).
Pharmaceuticals: The pharmaceutical sector showed a more gradual response, with an average annual growth rate of 7.4%. This highlights the sector's slower adaptation to the new exchange rate environment compared to the RMG sector.
Frozen Fish: Exports in the frozen fish sector, particularly shrimp, increased moderately at an average annual growth rate of 6.3%, reflecting improved price competitiveness despite logistical challenges.
Jute Products: Jute exports displayed modest growth, averaging 4.1% annually. The stability in this sector underscores the steady demand for eco-friendly jute products and the sector's resilience.
4.2 Comparative Analysis
The comparison with India and Bhutan reveals that while India's export sectors showed steady growth without significant currency fluctuations, Bangladesh's devaluation led to a more volatile yet higher growth trajectory in the short term. Bhutan, with its pegged currency, displayed minimal changes in export performance, highlighting the impact of exchange rate stability.
The dynamics of currency devaluation and its impacts on export performance in Bangladesh reveal a complex interplay of economic forces. Like many developing countries, Bangladesh faces the challenge of balancing credibility and flexibility in its exchange rate policy. This section discusses the implications of currency devaluation on the country's export sector, inflation, and broader economic performance.
Economic Stability and Export Performance
In the context of Bangladesh, the fear of floating—common among developing countries—reflects concerns over economic stability. Floating exchange rates can introduce volatility, which many developing economies attempt to mitigate through various monetary strategies, including pegs and managed floats. Bangladesh’s approach to exchange rate management has evolved, favoring a more flexible regime aimed at maintaining export competitiveness and accommodating economic shocks.
Devaluation of the currency typically makes a country's exports cheaper and more competitive in the global market. This effect is crucial for Bangladesh, whose economy heavily relies on the export of ready-made garments. Theoretically, devaluation should boost export performance by reducing the relative prices of goods, thus increasing demand from international buyers. However, this simplistic view does not account for potential negative impacts, such as increased import costs and subsequent inflation.
Inflation and Exchange Rate Stability
A critical consideration in the discussion of currency devaluation is its impact on inflation. Countries with pegged exchange rate regimes, such as those in the CFA zone in Africa, have historically experienced lower inflation rates due to the credibility imported from stable anchor currencies like the Euro. For example, from 1980 to 2021, the average inflation rate in the WAEMU zone, which is part of the CFA, dropped significantly, demonstrating the stabilizing influence of the peg (Coulibaly & Davis, 2013).
In contrast, Bangladesh's flexible exchange rate regime exposes it to higher inflation variability, particularly during periods of significant currency depreciation. As seen in the CFA zone, the stability provided by a fixed exchange rate can lead to a lower average inflation rate. Over the period from 2002 to 2021, countries in the CFA zone exhibited inflation rates significantly lower than those of similar non-CFA countries. Bangladesh, without the benefit of such a peg, faces higher inflation risks when devaluing its currency, which can erode the real benefits of increased export competitiveness by raising the cost of imported goods, including essential inputs for its manufacturing sector.
Comparative Analysis and Policy Implications
The comparative performance of countries with different exchange rate regimes highlights the trade-offs involved. For example, the average inflation rate in non-CFA zone countries over the 2002–2021 period was substantially higher, indicating less price stability compared to the CFA countries. Similarly, the average inflation variability was lower in the CFA zone, reflecting more stable economic conditions which are conducive to long-term growth and investment.
Bangladesh’s economic strategy must therefore consider these trade-offs. While currency devaluation can enhance export competitiveness by making Bangladeshi goods cheaper on the international market, the associated risks of inflation and economic instability must be managed carefully. Policymakers need to weigh the immediate benefits of devaluation against the potential long-term impacts on economic stability and inflation.
The experience of Bangladesh with currency devaluation underscores the importance of a balanced exchange rate policy. Devaluation has the potential to significantly boost export performance by improving the competitiveness of Bangladeshi goods in the global market. However, the risks associated with higher inflation and economic instability must be carefully managed. Lessons from the CFA zone suggest that while fixed exchange rate regimes offer greater price stability and lower inflation, they may also limit economic flexibility. For Bangladesh, a pragmatic approach that blends flexibility with stability, perhaps through managed floating or targeted interventions, may provide the most effective means of achieving sustained export growth and economic development. This balance is crucial for maintaining the credibility of monetary policy while supporting the dynamic needs of the export sector.
GDP Per Capita and Economic Performance
Analyzing the impact of currency devaluation on GDP per capita in Bangladesh provides insights into the broader economic implications of exchange rate policies. In the context of a developing economy, the relationship between exchange rate regimes and GDP growth is often complex and influenced by a multitude of factors including trade dynamics, inflation, and investment patterns.
Impact on GDP Growth: Studies have highlighted varying effects of exchange rate regimes on GDP per capita across different regions and time periods. For instance, Jacob (2016) found a positive correlation between fixed exchange rates and GDP growth across a sample of 74 countries. Similarly, Elu and Price (2008) observed positive growth effects within the CFA zone from 1999 to 2007. These findings suggest that stable exchange rate policies can support economic growth by providing a predictable environment for trade and investment. In the case of Bangladesh, currency devaluation has the potential to influence GDP per capita by making exports more competitive, thus driving economic growth.
Protecting Vulnerable Populations: The fixed exchange rate system, as observed in the CFA zone, appears to offer qualitative benefits related to inclusive growth. According to Feindouno et al. (2020), such regimes can protect the poorest populations from inflation and economic instability, which disproportionately affect those with limited means to adjust to rising prices. Although Bangladesh does not employ a fixed exchange rate system, maintaining exchange rate stability can similarly mitigate adverse effects on vulnerable groups, thereby supporting overall economic resilience.
Comparative Economic Performance: When comparing GDP per capita growth between countries in and outside the CFA zone, notable differences emerge. For the period 2002 to 2021, CAEMC countries experienced a significant decline in GDP per capita growth, except for the year 2004. In contrast, WAEMU countries showed relatively better performance but with a declining trend over time. For instance, the average annual GDP per capita growth decreased from 1990–2001 to 2002–2021, underscoring the challenges of sustaining growth under varying exchange rate regimes.
Similarly, non-CFA countries also saw fluctuations in GDP per capita growth, indicating that exchange rate policy alone may not account for significant differences in economic performance. This aligns with findings from Klein and Shambaugh (2010) and Rose (2011), which suggest that exchange rate regimes do not necessarily lead to divergent economic outcomes across countries. For Bangladesh, this implies that while currency devaluation can influence export performance, other factors such as investment in infrastructure, political stability, and access to markets are equally crucial for sustained economic growth.
Policy Implications and Methodological Considerations: To understand the full impact of exchange rate policies on Bangladesh’s economy, a comprehensive approach that considers the broader macroeconomic context is necessary. Utilizing methods such as the synthetic control approach can help isolate the effects of exchange rate changes by creating a counterfactual scenario that reflects what the economic performance might have been without specific policy interventions. This method allows for a more accurate assessment of the impacts of devaluation by comparing Bangladesh’s actual GDP per capita growth to that of a hypothetical "synthetic" country with similar characteristics but without the devaluation experience.
The discussion highlights that while currency devaluation can positively impact export performance in Bangladesh, its effects on GDP per capita and broader economic growth are mediated by a range of factors. Policymakers must consider these dynamics to balance the benefits of increased export competitiveness against potential risks such as inflation and economic instability. By adopting a nuanced approach that integrates robust economic policies with careful exchange rate management, Bangladesh can better harness the advantages of devaluation while fostering sustainable and inclusive economic growth.
The debate surrounding the merits of maintaining the African Financial Community (CFA) franc has intensified in recent years. For decades, this currency has been at the center of a contentious discussion. Critics argue that the CFA franc is a relic of colonialism, perpetuating France’s influence over African nations. They assert that the two monetary unions using the CFA franc fail to promote intra-regional trade and do little to enhance the economic prosperity of member states. Specifically, trade within the West African Economic and Monetary Union (WAEMU) remains relatively low at 15%, and it is even lower in the Central African Economic and Monetary Community (CAEMC) at under 10%. In contrast, proponents of the CFA franc highlight its role in providing monetary stability. However, this perceived macroeconomic stability comes at a cost: limited flexibility in adjusting price competitiveness, as it largely hinges on the anchor currency, the euro. This poses significant challenges for these small, open economies with fragile institutions, as they grapple with uncertainties related to both terms of trade and fluctuations in the value of the anchor currency (Gnimassoun, 2017).
Recent global crises have exacerbated the adverse impacts on developing nations, prompting a re-evaluation of the role of exchange rate regimes. The question arises whether countries that anchor their currencies to an international benchmark are better equipped to handle economic shocks. In the case of the CFA franc, pegged to the euro, there is a tendency for overvaluation, driven by subpar economic performance in the Eurozone (Nubukpo, 2015). This persistent misalignment raises doubts about the sustainability of their fixed exchange rate regime, which limits their economic flexibility.
This paper seeks to contribute to the ongoing debate about the viability and relevance of the CFA zone by examining the implications of pegging the CFA franc to the euro. We evaluate the economic impact of this currency anchor over a period of 20 years, following France's adoption of the euro. By employing the synthetic control method, we compare the outcomes of countries using the CFA franc with those of a constructed counterfactual group that closely mirrors their pre-intervention characteristics. Our findings indicate that in 12 of the 13 studied CFA countries, pegging the currency to the euro did not significantly enhance real GDP per capita. Only Equatorial Guinea, which has an undervalued exchange rate (Feindouno et al., 2020), experienced substantial economic benefits from the euro peg between 2004 and 2019. These results align with previous studies (Jacquemot, 2018; Nubukpo, 2007; Nubukpo et al., 2016) that question the benefits of the CFA franc's stability for its member countries. Additionally, our findings contribute to the theoretical discourse on how fixed exchange rate regimes impact economic growth. Contrary to traditional economic theory, the fixed exchange rate regime did not deliver significant growth benefits, highlighting the shortcomings of the CFA zone’s 2% inflation target in fostering economic development. This echoes other empirical studies (Gueye et al., 2019; Nubukpo, 2015), which suggest that reforming the exchange rate regime could enhance economic growth and provide greater monetary policy autonomy tailored to the unique economic structures of the CFA zone countries.
Even though the CFA franc's overvaluation is often blamed for the lack of competitiveness in the economies of its member countries, this issue should not be solely attributed to the exchange rate. Research indicates that the competitiveness challenges faced by the two West African monetary zones are less about their association with the Franc zone and more about structural factors such as export and investment performance. These economies are predominantly integrated into the global market through low-complexity agricultural and mining products, which are susceptible to high price volatility (Gueye et al., 2019).
This study stands out for two main reasons. Firstly, it utilizes the synthetic control method to create a counterfactual scenario, illustrating what could have happened to the treated unit if it had not been subjected to the intervention. Secondly, unlike most studies that focus on the effects of the 1994 devaluation of the CFA franc, our analysis assesses the impact of 20 years of pegging to the euro—a topic that has not been extensively explored. This investigation sheds light on the consequences of exchange rate misalignment, as evidenced by the International Monetary Fund's findings on imbalances in international payments, which revealed that the euro is overvalued by 6.8% for France and undervalued by 18% for Germany. These imbalances are transmitted to CFA countries, formerly pegged to the French franc, leading to currency overvaluation that hampers foreign trade performance.
Given the impending introduction of the eco in the WAEMU zone and discussions about devaluing the currency in the CAEMC zone, our findings underscore the need for a comprehensive reform of the CFA franc. Policymakers should reconsider the fixed exchange rate regime against the euro, possibly transitioning to a managed exchange rate system with defined upper and lower limits for intervention. This controlled flexibility could help prevent structural misalignment and ensure that the currency better reflects the economic realities of the member countries. As fixed exchange rate regimes appear to have mixed or negative impacts on economic growth, a more flexible exchange rate system, or even a monetary union without a peg to an external currency, might be a more effective alternative.
Future research could explore additional transmission channels, such as productivity, investment, and trade, to better understand the broader impacts of exchange rate policies. It would also be valuable to consider the distinctions between oil-producing and non-oil-producing countries within the CFA zone. Finally, investigating potential misalignments between the CFA franc and the euro could provide deeper insights into the currency's role in the economic performance of CFA countries.
Devaluation of Currency and Export Performance in Bangladesh
(Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.)
Mohammad Anamul Huq
INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD)
Advisor: Prof. Fu Jun July 2024
Devaluation of Currency and Export Performance in Bangladesh
(Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.)
Annex 1
Literature (Part 2)
1 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback.
Some unpleasant currency devaluation arithmetic in a post-Keynesian macromodel
Rafael Saulo Marques Ribeiro
Affiliation: Graduate program at the Department of Land Economy, University of Cambridge, UK. Email: rsmribeiro@gmail.com
John S. L. McCombie
Affiliation: Fellow in economics at Downing College, professor and director of the Cambridge Centre for Economic and Public Policy, Department of Land Economy, University of Cambridge, UK.
Email: jslm2@cam.ac.uk
Gilberto Tadeu Lima
Affiliation: Professor in the Department of Economics, University of São Paulo, Brazil Email: giltadeu@usp.br
2
RAFAEL S. M. RIBEIRO, JOHN S. L. McCOMBIE, AND GILBERTO TADEU LIMA
Some unpleasant currency devaluation arithmetic in a post-Keynesian macromodel
Abstract: Conventional view argues that devaluation increases the price competitiveness of domestic goods, thus allowing the economy to achieve a higher level of economic activity. However, these theoretical treatments largely neglect two important effects following devaluation: (i) the inflationary impact on the price of imported intermediate inputs which raises the prime costs of firms and deteriorates partially or totally their price competitiveness; and (ii) the redistribution of income from wages to profits which affects ambiguously the aggregate demand as workers and capitalists have different propensities to save. New structuralist economists have explored these stylised facts neglected by the orthodox literature and, by and large, conclude that devaluation has contractionary effects on growth and positive effects on the external balance. Given that empirical evidence on the correlation between devaluation and growth is quite mixed, we develop a more general Keynesian-Kaleckian model that takes into account both opposing views in order to analyse the net impact of currency depreciation on the short-run growth rate and the current account. We demonstrate that this impact can go either way, depending on several conditions such as the type of growth regime, that is, wage-led or profit-led, and the degree of international price competitiveness of domestic goods.
Keywords: currency devaluation, price competitiveness, wage-led, profit-led.
JEL classification: O40, O33, E25
Rafael S. M. Ribeiro is in the Department of Land Economy, University of Cambridge, UK, email: rsmribeiro@gmail.com; John S. L. McCombie is fellow in economics at Downing College, professor and director of the Cambridge Centre for Economic and Public Policy, Department of Land Economy, University of Cambridge, UK, email: jslm2@cam.ac.uk; Gilberto Tadeu Lima is a Professor in the Department of Economics, University of São Paulo, Brazil, email: giltadeu@usp.br. The authors gratefully acknowledge useful comments and suggestions by Ricardo Araujo and Nigel Allington. The usual disclaimer applies.
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The traditional argument of the orthodox view is that currency depreciation boosts domestic output and increases net exports. This is the case of expansionary devaluation. The rationale behind the theoretical treatments supporting this view is that currency devaluation is equivalent to an increased price competitiveness of internally produced goods relative to foreign goods which leads to an improved condition of the trade balance and ultimately boosts domestic income when there is excess capacity1. Alternatively, the new structuralist school of thought contributed significantly to the contractionary devaluation standpoint by providing considerable additional information on the impacts of devaluation on cost of production of firms, import demand, export supply, consumption, investment, external debt, inflation and income distribution2. Since the orthodox theoretical treatment can be considered firmly established, in the present work we focus on the new structuralist view.
Early contributions to the new structuralist literature concentrated mostly on the demand- side adverse effects of devaluation. Diaz-Alejandro (1963) discussed the redistributive effects of devaluation from wages to profits. By assuming different marginal propensities of workers and capitalists to consume, his model shows that devaluation improves the trade balance as output growth wanes. Krugman and Taylor (1978) advanced a modeling work concerning unwanted effects of devaluation on growth. In their model the magnitude of the impact of devaluation on growth depends on characteristics of the economy such as the terms of trade, the propensity to save out of wages and profits and the value of exports and imports. They conclude that devaluation reduces total output when trade balance is initially in deficit. Razmi (2007) extends Krugman and Taylor’s (1978) model by taking into account the presence of transnational corporations and differences in the pricing behaviour of exports for developed and undeveloped countries. Unlike Krugman and Taylor’s model, his framework suggests that devaluation can be contractionary even if trade is initially balanced. Later on, many studies in this literature began to identify supply-side transmission channels yielding contractionary devaluation. Bruno (1979) shows that devaluation has a cost-push effect on prices and hence causes a drop in real income which, in turn improves external balance as imports tend to reduce more than exports following the decrease in the level of output. Gylfason and Schmid (1983) and Buffie (1986) also studied the adverse effects of devaluation that arises when developing countries rely heavily on imported intermediate inputs. From a post-Kaleckian perspective, Bhaduri and Marglin (1990) and Lima and Porcile (2012) show how devaluation may or may
1 For a summary of the discussion see Johnson (1976).
2 For a summary of the new structuralist approach to devaluation see Bahmani-Oskooee and Miteza (2003).
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not increase the profit share, depending on the relative changes in money wages and mark-up, thus yielding an ambiguous impact on the utilisation capacity and capital accumulation. However, the post-Kaleckian models only take into account the effect of devaluation on growth and disregard the behaviour of the current account.
There are some empirical studies supporting a linear, positive relationship between the maintenance of a devalued currency and growth in the long run (Cottani et al, 1990; Dollar, 1992; Rodrik, 2008). However, a more recent empirical literature casts some doubts on this direct relationship between a competitive currency and growth by incorporating non-linearities in the previous models, which enables them to show that a sufficiently devalued currency might have adverse effects on growth (Aguirre and Calderon, 2005; Nouira and Sekkat, 2012; Couharde and Sallenave, 2013). Blecker and Razmi (2008) also found evidence of contractionary devaluation for more indebted undeveloped countries.
Since empirical research provides very mixed conclusions regarding the effects of devaluation on growth, our aim is to contribute to the literature by developing a more general Keynesian-Kaleckian formal model for an open economy featuring two classes (workers and capitalists) with different propensities to save that accounts for positive and negative effects of devaluation on growth and current account. In our formal model we draw upon different, but complementary strands of the Post-Keynesian literature, namely the balance-of-payments constrained growth model with financial flows set forth by Thirlwall and Hussain (1982) and an aggregate demand specification in line with the Hick’s supermultiplier and Kaleckian principles of conflicting claims on income. We, then, extend the canonical models in order to incorporate simultaneously in the analysis supply- and demand-side prominent characteristics of modern economies such as the utilisation of imported intermediate inputs by domestic firms and distributional effects of devaluation on domestic expenditures3. Further, we extend the new structuralist approach by pointing out the existence of gains from trade following the cheapening of domestically produced goods in foreign trade through the theoretical framework of the balance-of-payments constrained growth model. We also add to the post-Kaleckian approach by considering the simultaneous determination of the impact of devaluation on output growth and the current account. Ergo, devaluation can only boost growth and improve the current account condition if the positive impact on trade overcompensate the negative demand-
3 A more inclusive model would also take into account contractionary effects of devaluation through an increase in interest rates and external debt, as in Bruno (1979) and Médici and Panigo (2015). However, in order to keep the model more tractable and focus on cost composition and income distribution effects, we abstract from these channels.
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and supply-side effects briefly mentioned above. Such extensions create a number of possible scenarios and outcomes for the simultaneous determination of growth and trade balance following devaluation not yet fully explored by the literature. Our model also sets the orthodox view as well as the new structuralist literature concerning exclusively the impact of devaluation on growth and external balance as special cases within a more general theoretical framework. In short, our formal treatment allows us to conclude that the net impact of currency devaluation on short-term growth and current account can go either way.
The reminder of this paper is organised as follows. The next section presents the extended balance-of-payments constrained growth model. After that we introduce the aggregate demand condition. Later it is shown how the system accommodates exogenous relative price shock on the dynamics of growth and trade balance in different aggregate demand growth regimes. Finally, we draw some conclusions.
An extended balance-of-payments constraint growth model
In this section we extend the standard balance-of-payments constrained growth model developed by Thirlwall (1979) by assuming that domestic firms also use imported intermediate inputs in the production process. Let us assume the global economy consists of basically two different countries: a richer foreign country and a poorer home country. The foreign country is an economy that issues the international currency and the home country is an economy facing a balance-of-payments constraint in the long run. It is also assumed that the home country is not able to finance sustainably a positive ratio of the current account deficit to GDP over time, thus implying that in the long run real exports must be equal to real imports. The foreign country is a two-sector economy which produces and exports consumption goods and industrialised intermediate inputs. The home country is a one-sector economy that produces and exports only one sort of consumption good with imperfect substitutability between the foreign and domestic consumption goods. We could also assume, at the expense of simplicity, that the home country is a two-sector economy which produces consumption goods and intermediate inputs; however, the addition of the intermediate input sector in the domestic economy would nonetheless preserve the major qualitative conclusions of the model set forth herein.4 It is also assumed that the home country imports consumption goods and intermediate inputs from the foreign country.
4 Admittedly, though, an extension of the model developed herein to feature a small open economy with two sectors (tradable and non-tradable) along with other related transmission channels is a possibility worth saving for future research.
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In short, the home country imports are disaggregated in two different categories, namely, imported consumption good (����) and imported intermediate inputs (����). Thus, we have now an extended balance-of-payments identity
����(�� + ��) = ��(�������� + ��������)(1)
where ���� is the domestic price, ���� is the price of imported intermediate inputs in foreign currency, �� is the volume of exports, �� is the financial inflow and �� is the nominal exchange rate. Equation (1) assumes that the home country does not accumulate foreign reserves. Also assuming, for convenience, that the inflation rate of imported consumption goods and the imported intermediate inputs in foreign currency are equal (���� = ���� ), in growth rates we have
���� + (1 − ��)�� = (�� + ���� − ����) + ������ + (1 − ��)����(2)
where �� is the ratio of the value of exports to the value of total imports and �� is the ratio of the value of imported consumption goods to the value of total imports. The lower case letters represent the growth rates of the levels of the corresponding variables. It is worth noting that in our model the growth of financial inflows �� is assumed to be strictly positive, which is a plausible assumption for developing economies.
In rates of change the exports and imports demand functions are given by
�� = ��(���� − ���� − ��) + ����(3)
���� = ��(�� + ���� − ����) + ������(4)
���� = ��(5)
where �� < 0 and �� < 0 are the price elasticities of demand for exports and imports respectively, �� and ���� are the income elasticities of demand for exports and imports of consumption goods respectively, and �� is the foreign country income growth and �� is the domestic income growth. That is, the growth of exports is a direct function of the growth of foreign demand and relative prices. The growth of imported consumption goods depends positively on the growth of domestic income and negatively on the real exchange rate. Moreover, it is assumed that the ratio of imported intermediate inputs to domestic output (����⁄��) does not change over time. This means domestic firms have a fixed proportions production function with respect to intermediate inputs. Therefore, by equation (5), ���� and ��
grow at the same rate.
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Now we define the domestic price index. We extend the mark-up pricing equation by making domestic prices a function of imported intermediate inputs. To do so, the unit variable cost must be disaggregated in two parts, namely the unit labour cost and unit imported intermediate inputs cost
��
���� = �� ( �� +
����������
)(6)
��
where �� is the mark-up factor (one plus the mark-up), ������(����⁄��) is the unit imported intermediate inputs cost in domestic currency, and �� is the nominal wage, and �� is the labour productivity. Assuming that the ratio ����⁄�� is constant, in growth rates we have
���� = �� + ��(�� − ��̂) + (1 − ��)(���� + ��)�� ∈ (0,1)(7)
where �� is the growth of the mark-up factor and �� is the share of unit labour cost in total prime costs and ��̂ denotes the growth of labour productivity.
Following Blecker (1989), we redefine the mark-up as a function of the real exchange rate. As devaluation increases the market power of domestic firms, it enables them to raise their mark-up. Therefore, if the mark-up is positively related to the real exchange rate, we have (see appendix A.1)
�� = −(��⁄2)[(�� − ��̂) − (���� + ��)](8)
Substitution of equations (8), (7), (5), (4) and (3) into (2) yields
�� =
������ + (1 − ��)�� + (1 + ���� + ����)(��⁄2)(�� − ��̂ − ���� − ��)
��
(9)
where �� = ������ + (1 − ��). In other words, the income elasticity of demand for total imports (��) is given by the weighted average of income elasticities of demand for imported consumption goods (����) and imported intermediate inputs, which, by equation (5), is equal to unity. Equation (9) also shows that if the Marshall-Lerner condition holds (1 + ���� + ����) > 0 then the partial effect of currency devaluation on growth is positive.
Since in the long run real wages grow at the same rate as the labour productivity (�� − ��̂ = ����), relative prices do not change (���� − ���� − �� = 0) and the home country does not sustain an unbalanced current account (�� = 1), equation (9) is reduced to the standard equilibrium growth rate ������ = ����⁄��. The equilibrium growth rate is widely known in the
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literature as the Thirlwall’s law. This law states that the domestic growth is directly related to the foreign demand growth rate. It also states that a country’s output growth rate depends positively on its existing non-price competition factors, here expressed by the ratio ��⁄��. This ratio reflects disparities between countries with respect to factors determining the demand for a country’s exports and imports, such as technological capabilities, product quality, stock of knowledge, and consumer preferences, for instance.
Therefore, in this section we extend the standard balance-of-payments constrained growth model by incorporating imported intermediate inputs into the canonical Thirlwall’s (1979) model. Blecker and Ibarra (2013) also developed a model that allows imported intermediate inputs into the standard Thirlwall model. They assume that the imports of intermediate goods are a linear function of manufactured exports. However, in their model domestic prices do not depend on imported intermediate inputs, and hence manufactured exports are not affected by intermediate inputs. In our model, on the other hand, we allow the imported intermediate inputs into the prime costs of firms. Thus, even though the imported intermediate inputs to output ratio is assumed to be constant, in our model changes in the unit costs of intermediate inputs feed through into domestic prices and then affects exports, which, in turn, impacts on output and consequently changes the volume of imported intermediate inputs proportionally.
The aggregate demand growth rate
We know, by equation (9), that the equilibrium balance-of-payments constrained growth rate depends positively on the growth of foreign income and the trade elasticities ratio. McCombie (1985) and McCombie and Thirlwall (1994, ch. 6) argue that the actual growth rate, on the other hand, can be represented by �� = ������ + ������, where �� is the growth rate of the domestic expenditures, and ����, ���� > 0 are parameters. These two equations represent the dynamics of the Hick’s super multiplier. In fact, if ��⁄�� > ������ + ������, then the balance-of-payments constraint is relaxed, thus allowing the home country to increase the growth of its domestic expenditures until the current account is balanced. If, on the other hand, ��⁄�� < ������ + ������, then the country incurs in trade deficits, and consequently must reduce the growth of domestic expenditures in order to balance the current account.
To begin with, we define the aggregate demand. In rates of change, the traditional income
accounting gives
�� = ������ + ������ − ����[(�� + ���� − ����) + ������ + (1 − ��)����](10)
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where �� is the growth of domestic expenditures, ���� is the ratio of the value of domestic expenditures to the value of domestic output, ���� and ���� are the ratios of the values of exports and total imports to the value of domestic output, respectively. In other words, the aggregate demand growth is determined by the weighted average of the growth rates of domestic expenditures and net exports.
We can rewrite ���� as
����
(������⁄����)��
���� = �� = (���� ⁄�� )��
��= ������(11)
����
where ���� + ���� = ��. Substituting (11) into (10), and then the balance-of-payments identity (2) in the resulting equation, we have
�� = ������ − ����(1 − ��)��(12)
Since it is assumed that in the short run the home country incurs a current account deficit (0 < �� < 1), equation (12) shows that a decrease in the growth of net exports, or alternatively an increase in ��, reduces the actual growth rate ��. In the long run, given �� = 1, the growth of output equals the growth of domestic expenditures.
That said, now we move on to the analysis of the aggregate demand by specifying the growth of domestic expenditures as a function of the growth of the mark-up factor
�� = ��0 + ��1��(13)
where ��0 and ��1 are constants. There are two underlying assumption in equation (13). Firstly, we assume that workers do not save (that is to say workers’ consumption is equal to the wage bill) and capitalists save a constant fraction of their profits (Kalecki, 1971). Secondly, we follow Kalecki (1971), Dutt (1984) and Bhaduri and Marglin (1990) and assume that investment decisions are positive functions of the profit share, which in turn is positively related to the mark-up. If savings are more (less) responsive than investments to an increase in the profit margin, then ��1 < 0 (��1 > 0), which means the growth of the aggregate demand is wage-led (profit-led) (see appendix A.2 for a formal demonstration of equation 13).
If we substitute equation (8) and (13) into (12), and consider that ���� = [1 − ��⁄��] = [1 + (1 − ��)����], we obtain
�� = [1 + (1 − ��)����][��0 − ��1(��⁄2)(�� − ��̂ − ���� − ��)] − ����(1 − ��)��(14)
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Given that in the long run we have �� = 1 and ���� = �� − ��̂ = ���� + ��, equation (14) is reduced to �� = ��0 = ������. Since the need for external balance sets the limit to the sustainable growth of the aggregate demand in the long run, we can say that ��0 = ������. Therefore, �� = ��0 = ������ indicates that in the long-run the growth of the aggregate demand equals the growth of the autonomous domestic expenditure.
Real exchange rate, current account and short-run output fluctuation
This section investigates the simultaneous impact of currency devaluation on short-run growth and current account. Since nothing guarantees that the responsiveness of the balance-of- payments constrained and the actual growth rates, given by equation (9) and (14) respectively, to currency devaluation is the same, different possible outcomes for the short-run growth rate and the dynamics of the current account are likely to emerge.
Using equations (9) and (14) we define the balance-of-payments and the goods market equilibrium dynamical conditions respectively. To save notation henceforth we also assume for the short run that nominal wages are given (�� = 0), there is no technological progress5 (��̂ = 0) and foreign prices are likewise given (���� = 0). Even though the assumptions that �� = 0 and
��̂ = 0 are chosen for convenience, they seem to correspond quite well to the stylised features of any economy in the short run; the condition that ���� = 0 is also assumed for simplicity since any positive value of ���� would not change the conclusions of our theoretical treatment. After a great deal of manipulation we describe the linear version of the balance-of-payments and the aggregate demand conditions below (see appendix A.3)
����| | ������������ + ������������ = ������������ | (15) |
����| | ������������ + ������������ = ������������ | (16) |
where | �������� = �� > 0 �������� = −(1 − ��) < 0as 0 < �� < 1 | |
�������� = 1 | ||
�������� = ����(1 − ��) > 0 |
5 Kaldor (1966) persuasively argues that the growth of the labour productivity is an increasing function of the growth of output in the long run (the so-called Verdoorn’s law). However, Verdoorn’s law is interpreted as a long-run relationship between demand growth and labour productivity, as a demand increase leads, for instance, to higher growth of R&D activities, higher investment rate and the consequent acquisition of new and more efficient machines in some future period.
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�������� = [(1 + ���� + ����)⁄2][(−��)���� − ��] ≷ 0
�������� = −(��1⁄2)[1 + (1 − ��)����][(−��)���� − ��] ≷ 0
where ���� is the partial derivative of �� with respect to ��. Equations (15) and (16) describe the balance-of-payments and aggregate demand curves (henceforth BP and AD curves). As shown above, the terms ��������, ��������, �������� and �������� are unambiguously signed. Conversely, the partial effect of currency devaluation on the BP and AD conditions can go either way. It happens because depreciation has two effects. On the one hand, it raises the foreign demand for domestic goods, hence boosting exports. On the other hand, devaluation also feeds through into the prices of imported intermediate inputs in domestic currency, thus harming the price-competitiveness of domestic goods. That is to say that the effectiveness of the exchange rate to improve a country’s price-competitiveness and so stimulate positive waves of short- to medium-run growth is closely linked to the capacity of domestic firms to reduce their dependence of imported intermediate inputs in the production process. Countries that stimulate significant technological innovations or manage to design successful strategies of import substitution industrialisation are more capable of effectively boosting exports and growth in the short run by devaluing the currency. To sum up, we can say that a successful devaluation in this context means that the gains from trade following devaluation outweigh the negative impact of increased prices of imported intermediate inputs on prime costs.
More formally, it can be observed that the share �� is inversely related to the nominal
exchange rate. In other words, in order to analyse the impact of a devaluation on short-term growth it must be taken into account the partial effect, not only of ��, but also of the share ��. That said, let us analyse separately each component of �������� and ��������:
(1 + ���� + ����): it is less than zero if the Marshall-Lerner condition holds;
����: by equation (7), an increase in �� also increases the share of imported intermediate inputs in total prime costs, thus reducing the share of unit labour cost in total prime costs
��; therefore, the share �� is inversely related to the nominal exchange rate, that is,
����⁄���� < 0;
[1 + (1 − ��)����]: this term is strictly positive;
��1: as aforementioned, ��1 < 0 (��1 > 0) implies that the growth of the aggregate demand is wage-led (profit-led).
By (15) and (16), we obtain the simultaneous impact of devaluation on short-term growth and financial inflows (see appendix A.4 for a formal demonstration)
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����
����
���������������� − ����������������
=
2��
(17)
����
����
−���������������� + ����������������
=
2��
(18)
where �� = ���������������� − ���������������� > 0 is the determinant of the coefficient matrix.
Now we must evaluate the impact of a real devaluation on growth and the trade balance by taking into account the net effect of the devalued currency on the price competitiveness of the economy as well as the type of aggregate demand growth regime, namely, wage-led or profit- led. As mentioned earlier, the orthodox economic literature states that, when there is excess capacity and the Marshall-Lerner condition holds, currency depreciation relaxes the external constraint and hence allows the country to grow faster. Nevertheless, once we take into account the simultaneous determination of the aggregate demand and the balance-of-payments constrained growth rates, we find that the net impact of currency devaluation on the short-term growth rate and the current account is ambiguous, depending on several conditions to be discussed below.
In the next subsections we refer to currency devaluation as either competitive or non- competitive. Competitive devaluation increases price competitiveness of domestic goods and hence improves the current account condition. If the share of imported intermediate inputs in prime costs is sufficiently low, then we have the case of competitive devaluation. Formally, this is the case in which the value of �������� in equation (15) is strictly positive. Given that the Marshall-Lerner condition holds (1 + ���� + ����) < 0, �������� is positive if, and only if (−��)���� <
��. Since ���� < 0, if the share of imported intermediate inputs in total prime costs is sufficiently low, which implies that �� is sufficiently high, then �������� > 0. On the other hand, non- competitive devaluation (or uncompetitive devaluation) denotes the case where the increased price of imported intermediate inputs deteriorates the price competitiveness of domestic goods in foreign trade. In terms of the model, by equation (15), this case is observed when the inequality (−��)���� > �� holds and hence �������� < 0. Ergo, for ease of exposition, first we discuss the possible outcomes of competitive devaluation on the growth rate and the current account
both in a wage-led economy and in a profit-led economy. Then we discuss the analogous scenarios that emerge following non-competitive devaluation in both aggregate demand growth regimes, viz., wage-led and profit-led.
The case where devaluation improves price competitiveness
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This subsection analyses the impact of uncompetitive devaluation on the growth rate and the current account in the wage-led and profit-led growth regimes.
First, we plot the BP and the AD curves from equations (15) and (16) in the diagrams below. The slope of the BP curve is given by − ��������⁄�������� > 0, which means that the BP curve is upward-sloping, whereas the AD curve is downward-sloping, since − ��������⁄�������� < 0. See Figure 1 below.
[FIGURE 1 ABOUT HERE]
Given that �������� > 0, a devaluation unambiguously shifts the BP curve downwards. The intercept of the BP curve in equation (15) is given by ����⁄����|����=0 = ��������⁄�������� < 0, when
���� = 0. Thus, a real devaluation reduces the rate of change of capital inflows for any given level of the growth rate ��, thereby shifting the BP curve downwards. As aforementioned, the gains from trade caused by devaluation outweigh the negative impact of increased prices of imported intermediate inputs. Therefore, we can say that a downward shift of the BP curve represents the gains from trade caused by competitive devaluation. The same shift mechanism can be applied to the AD curve. Taking the intercept of the equation (16), when ���� = 0, we have ����⁄����|����=0 = ��������⁄�������� ≷ 0. If the economy is in a wage-led growth regime, then ��1 < 0 and the AD curve shifts down for any given level of ��; conversely, in a profit-led regime the
AD curve shifts up for any given value of ��, since ��1 > 0 and, consequently, ����⁄����|����=0 > 0. Therefore, Figure 1.a portrays the BP-AD model in a wage-led economy, whilst Figure 1.b illustrates the same system of equations in a profit-led growth regime.
To begin with, let us consider the impact of competitive devaluation on growth in the wage- led scenario illustrated in Figure 1.a. In a wage-led economy, competitive devaluation reduces the wage share of income by raising the mark-up, thereby depressing consumption, domestic expenditures and ultimately the growth of aggregate demand. It can be seen that the net impact of competitive devaluation on the growth rate �� in a wage-led regime is ambiguous. The ����′ −
����′ solution in Figure 1.a illustrates a scenario wherein the gains from trade caused by the increased price competitiveness of domestic goods (downward shift in BP curve) overcompensate the wane in consumption (downward shift in AD curve) caused by a decrease in the wage share or, alternatively, an increase in the profit margins (or mark-up). In this case, competitive devaluation boosts growth from ��0 to ��1. More formally, given that ��1 < 0 (wage- led regime), �������� > 0, �������� > 0, �������� < 0 and �������� < 0, the derivative ����⁄���� = ���������������� −
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���������������� in (17) is ambiguously signed. If in the ����′ − ����′ setup competitive currency devaluation propels growth from ��0 to ��1, then we necessarily have ���������������� > ����������������. On the other hand, in the ����′ − ����′′ solution, we observe that the gains from trade caused by competitive devaluation are not enough to exceed in importance the decrease in the consumption due to the raised profit margins (the shift in the AD schedule outruns the shift in the BP curve) and so a devaluation reduces growth from ��0 to ��2. In this case the country would be better off with an appreciated currency. By equation (17), now we have ���������������� <
����������������, thus implying that ����⁄���� < 0. It is worth noting that the larger the responsiveness of the growth of consumption and investment to the mark-up growth in absolute value |��1| the more likely it is that the inequality given by ���������������� < ���������������� will be satisfied and hence
����⁄���� < 0. In short, in a wage-led economic system the impact of competitive devaluation on short-run growth is ambiguous. If |��1| is sufficiently small so that the inequality ���������������� >
���������������� holds, then competitive devaluation spurs growth, given that ����⁄���� > 0. In like manner, if the inequality ���������������� > ���������������� is not satisfied and consequently it follows that
����⁄���� < 0, then a currency appreciation might be considered as a more appropriate policy measure to propel short-term growth. During a recession, for instance, if an economy is in a wage-led regime and the sensitivity of the growth of domestic expenditures to changes in the profit margins |��1| is sufficiently high, then devaluation may cause even more damage to the economic recovery, as it impairs household consumption and harms growth.
In a profit-led economy, on the other hand, we see in Figure 1.b that competitive devaluation invariably spurs short-term growth. Since the economy is in a profit-led growth regime, competitive devaluation increases the profit margin of domestic firms, which enables them to raise the level of investment, and propel growth (the AD schedule shifts upwards). Simultaneously, competitive devaluation will also spurs the country’s net exports, thus increasing the country’s gains from trade (the BP curve shifts downwards). In short, growth will be driven by an increase in exports and domestic expenditures. Algebraically, it can be seen from equation (16) that, given that ��1 > 0, the term �������� becomes positive. Hence, by equation (17), ���������������� − ���������������� can only be strictly positive, which implies that the derivative given by ����⁄���� must also be positive. Ergo, the impact of competitive devaluation on short-term growth in a profit-led economy is unambiguously positive (��0 < ��1 < ��2). It is worth mentioning that the more responsive investment is to the mark-up growth, that is, the higher ��1, the larger will be the growth-enhancing effect of competitive devaluation.
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Next, we analyse how competitive devaluation affects the dynamics of the financial inflows (or current account deficit as it is assumed that the home country does not accumulate foreign reserves). One should expect a priori that, once the Marshall-Lerner condition is satisfied, a devalued currency increases the net exports, thus reducing the growth of capital inflows and improving the external debt sustainability conditions of the economy over time. However, our model shows that this mechanism is not that straightforward and the impact of devaluation on the trade balance may be ambiguous.
Considering first a wage-led growth regime, it can be seen in Figure 1.a that competitive devaluation unequivocally reduces the growth of financial inflows ��, thereby improving the sustainability conditions of the deficit on the balance of trade. It is known that competitive devaluation boosts the home country net exports (a downward shift in the BP curve). Furthermore, in a wage-led economy, competitive devaluation raises the mark-up of domestic firms, and hence brings down domestic expenditures (the decrease in household consumption outweighs the increase in investments caused by such competitive devaluation) and the country’s imports (a downward shift in AD curve). These two effects combined (both the BP and AD schedules shift down) lower the deficit of the current account, and reduce the financial inflows. Given that ��1 < 0 (wage-led regime), �������� > 0, �������� > 0, �������� > 0 and �������� < 0, it can be seen from (18) that ����⁄���� = −���������������� + ���������������� < 0. It can be said that, in a wage- led economy, the larger the parameter |��1| in absolute value, the more effectively competitive devaluation will reduce the country’s current account deficit. Meanwhile, the more responsive the consumption is to changes in the mark-up growth, the more significant is the decrease in consumption and imports following competitive devaluation.
Conversely, as shown in Figure 1.b, in a profit-led economic system, the effect of competitive devaluation on the financial inflows �� is very mixed. Looking at the ����′ − ����′ solution in Figure 1.b, it can be seen that the gains from trade generated by competitive devaluation outweigh the rise in domestic expenditures driven by an increase in the investment (the downward shift in the BP overcompensates the upward shift in the AD). That is to say that, since the growth of imports is directly related to the growth of domestic expenditures, we can argue that the positive effects of a devaluation on the exports price competitiveness outweighs the negative effects of an increase in imports caused by a raise in the level of investment, thereby reducing the growth of the deficit on current account from ��0 to ��1. Nonetheless, it is worth noting that if the domestic expenditures respond more strongly than exports to competitive devaluation (the upward shift in AD schedule overcompensates the BP shift in the
16
opposite direction), then we obtain the ����′ − ����′′ setup in Figure 1.b. In this scenario, competitive devaluation affects unfavourably the deficit of the balance of trade, which leads to an increase in the growth of financial inflows from ��0 to ��2. According to equation (18), given that ��1 > 0 and consequently �������� > 0, the condition under which devaluation expands the deficit of the current account in a profit-led scenario is given by −���������������� + ���������������� > 0. Therefore, the larger the impact of increased mark-up growth on the growth of investment, that is, the larger ��1 in absolute value, the more likely that currency devaluation will raise the growth of investments above sustainable levels and hence worsens the deficit on the current account. Conversely, if we assume that, in a profit-led economy, ��1 is relatively small, then competitive devaluation improves the sustainability condition of the balance of trade, given that ����⁄���� <
0. When ��1 is sufficiently large so that ����⁄���� > 0, investment responds strongly to increased
mark-up growth rates, and thus competitive depreciation raises the growth of investment beyond the limits set by the external constraints in the long run, resulting in increased growth rates of current account deficits. In this case, a country could improve the sustainability conditions of its external debt by undertaking currency appreciation.
Figure 1 shows that only the solution (��2, ��2) in Figure 1.a following devaluation is in line with the new structuralist arguments advanced by Krugman and Taylor (1978) and Bruno (1979) amongst other, in which currency devaluation reduces growth and improves the trade balance. Solutions (��1, ��1) in Figure 1.a and (��1, ��1) in Figure 1.b illustrate the orthodox view in which devaluation stimulates growth and reduces trade balance deficits. Solution (��2, ��2) in Figure 1.b, which is specific to our model, reveals a novel scenario wherein the growth of output and trade balance deficit will rise after currency devaluation. Note that solutions (��1, ��1) in Figure 1.a and (��1, ��1) and (��2, ��2) in Figure 1.b stand in stark contrast to Krugman and Taylor’s (1978) model by demonstrating that devaluation boosts growth even if trade is initially deficitary (��0 > 0).
The case where currency devaluation worsens price competitiveness
This subsection, alternatively, assumes that the increased price of imported intermediate inputs used by domestic firms due to a currency devaluation erodes any possible gains from trade that domestic goods might obtain in foreign markets. Uncompetitive devaluation (or non- competitive devaluation) denotes the case where devaluation worsens the price competitiveness of internally produced goods. That said, we analyse the impact of uncompetitive devaluation on the growth rate and the current account in the wage-led and profit-led growth regimes.
17
Formally, this scenario is captured by the strictly negative value of �������� < 0 in equation (15), as discussed above.
Since the slopes of the BP and AD schedules from the equations (15) and (16) do not change, we plot both curves once again in Figure 2 below.
[FIGURE 2 ABOUT HERE]
Now we have �������� < 0 which means that non-competitive devaluation unequivocally shifts the BP curve upwards. The intercept of the BP curve, by equation (15), is determined by the differential given by ����⁄����|����=0 = ��������⁄�������� > 0. Thus, given ���� = 0, uncompetitive devaluation increases the rate of change of capital inflows, thereby shifting the BP curve up. The same shift mechanism applies to the AD schedule. The intercept of the equation (16), given
���� = 0, is ����⁄����|����=0 = ��������⁄�������� ≷ 0. In a wage-led growth regime we have ��1 < 0 (and consequently �������� > 0) and hence the AD curve shifts to the right; in a profit-led regime, on the other hand, the AD curve shifts to the left, as ��1 > 0 which implies that ����⁄����|����=0 < 0. Thus, Figure 2.a illustrates the BP-AD setup in a wage-led economy, whereas Figure 2.b shows the same system of equations in a profit-led growth regime. Uncompetitive devaluation deteriorates the price competitiveness of domestically produced goods by exceedingly raising the prime costs of domestic firms, thus increasing the external debt for any given value of �� (an upward shift in the BP curve). Such an inflationary effect on imported intermediate inputs due to non-competitive devaluation harms gains from trade thus forcing domestic firms to reduce their profit margins in order to stay competitive in foreign markets. In a wage-led economy, by lowering the mark-up of domestic firms, uncompetitive devaluation transfers income from capitalists to workers, thereby increasing the wage share, boosting consumption and ultimately raising the current account deficit for any given level of the actual growth rate �� (an upward shift in the AD curve). In a profit-led regime, on the other hand, a decreased mark-up reduces the profit share, which brings investment down and improves the current account condition for any given level of �� (a downward shift in the AD curve).
Next, we consider the impact of non-competitive devaluation on growth in a wage-led regime as shown in Figure 2.a. In this case, the effect of uncompetitive devaluation on the growth rate �� in a wage-led regime is also ambiguous. The ����′ − ����′ solution in Figure 2.a illustrates a scenario wherein the worsened price competitiveness of domestic goods (an upward shift in the BP curve) is not compensated by the increased consumption (an upward shift in the
18
AD curve) due to a raising wage share as a consequence of reduced profit margins. In this case, a real devaluation leads to a decrease in the growth rate from ��0 to ��1, thus implying that the country would be better off by appreciating its currency instead. In terms of the formal model, by equation (17), given that ��1 < 0 (wage-led regime), �������� > 0, �������� < 0, �������� < 0 and
�������� > 0, the derivative ����⁄���� = ���������������� − ���������������� is ambiguously signed. If in the ����′ −
����′ setup non-competitive devaluation impairs growth, then we necessarily have −���������������� <
����������������, so that ����⁄���� < 0. Alternatively, in the ����′ − ����′′ solution, we observe that the increased consumption due to the reduced mark-up (the AD schedule shifts to the right) outweighs the erosion of the price competitiveness caused by uncompetitive devaluation (the BP curve shifts up) and so currency devaluation spurs growth from ��0 to ��2. This case shows that even non-competitive devaluation can be effective if the monetary authority is trying to stimulate growth in a wage-led economy. By equation (17), now we have −���������������� >
����������������, which means that ����⁄���� > 0. There is a marked difference between this case and the analogous case shown in the previous subsection. Unlike the case illustrated in Figure 1.a where a sufficiently high responsiveness of the growth of consumption and investment to the mark-up growth in absolute value |��1| implies that competitive devaluation may harm growth
����⁄���� < 0, in the scenario portrayed in Figure 2.a a higher value of |��1| leads to a stronger increase in consumption due to a reduction in the mark-up and hence non-competitive devaluation boosts growth, given that ����⁄���� > 0. In short, in a wage-led economic system the impact of uncompetitive devaluation on short-run growth is ambiguous. If |��1| is sufficiently high so that the inequality −���������������� > ���������������� is satisfied, then non-competitive devaluation boosts growth ����⁄���� > 0. However, if this inequality does not hold, then a currency appreciation seems to be more appropriate if the monetary authority is targeting a higher growth rate.
In a profit-led economy, on the other hand, it is shown in Figure 2.b that uncompetitive devaluation unequivocally reduces the growth rate. Since the economy is in a profit-led growth regime, uncompetitive devaluation reduces the profit margins, which in turn causes a decrease in the level of investments and curtails growth (the AD schedule shifts to the left). At the same time, non-competitive devaluation will also harm the price competitiveness of domestic goods, thus reducing the country’s gains from trade (an upward shift in BP schedule). In short, growth will be hampered by a decrease in net exports and domestic expenditures. Algebraically, it can be seen from equation (16) that, given that ��1 > 0, the term �������� becomes negative. Hence
���������������� − ���������������� in (18) can only be strictly negative, which leads to a negative effect of a
19
currency devaluation on growth, given that ����⁄���� < 0. Therefore, the impact of uncompetitive devaluation on short-term growth in a profit-led economy is unambiguously negative (��0 > ��1 > ��2). Unlike the case illustrated in Figure 1.b where the more responsive investment is to the mark-up growth, that is, the higher ��1, the larger will be the impact of competitive devaluation on growth, in Figure 2.b the higher ��1, the worst the effect of non-competitive devaluation on investment and growth.
Now we discuss the impact of uncompetitive devaluation on the growth of financial inflows (or current account deficit as the home country does not accumulate foreign reserves). Considering first a wage-led growth regime, it can be seen in Figure 2.a that non-competitive devaluation unambiguously increases the growth of financial inflows ��, which reflects a raising deficit on the balance of trade. Uncompetitive devaluation hampers the home country net exports (an upward shift in the BP schedule). Moreover, non-competitive devaluation in a wage-led economy lowers the mark-up of domestic firms, and hence curtails domestic expenditures by reducing proportionally more household consumption than increasing investment which leads to a decrease in the country’s imports (an upward shift in the AD curve). These two effects combined (both the BP and AD schedules shift upwards) raise financial inflows �� by expanding the deficit of the current account. Given that ��1 < 0 (wage-led regime),
�������� > 0, �������� < 0, �������� > 0 and �������� > 0, it can be observed from (18) that ����⁄���� =
−���������������� + ���������������� > 0. Thus, in a wage-led economy the larger the parameter |��1| in absolute value, the more non-competitive devaluation will increase the country’s current account deficit. The more strongly consumption responds to a decrease in mark-up growth due to non-competitive devaluation, the faster imports will grow and the higher �� will be. This case stands in clear contrast to the analogous scenario portrayed in Figure 1.a where competitive devaluation in a wage-led economy unambiguously reduces the current account deficit.
Conversely, Figure 2.b shows that in a profit-led economic system the effect of competitive devaluation on the financial inflows ��, and consequently on the current account, is ambiguous. Looking at the ����′ − ����′ setup in Figure 2.b, we see that even though imports are reduced due to the decrease in the growth of investment caused by non-competitive devaluation that reduces the mark-up, such a drop in imports is not enough to compensate the decrease in the gains from trade caused by uncompetitive devaluation which reduces net exports and ultimately expands the current account deficit (the upward shift in the BP schedule overcompensates the downward shift in AD schedule). In the ����′ − ����′ solution in Figure 2.b we see that non-competitive devaluation raises the current account deficit from ��0 to ��1. However, if the negative impact of
20
uncompetitive devaluation on domestic expenditures outweighs the negative effect caused by such a devaluation on net exports (the downward shift in the AD schedule overcompensates the upward shift in the BP schedule), then we obtain the ����′ − ����′′ setup in Figure 2.b. In this scenario, non-competitive devaluation improves the condition of the balance of trade, which reduces the growth of financial inflows from ��0 to ��2. According to equation (18), given that
��1 > 0 and consequently �������� < 0, the condition under which uncompetitive devaluation expands the current account deficit in a profit-led scenario is −���������������� + ���������������� > 0. Therefore, the larger the impact of an increased mark-up growth on the proportionate rate of change of investment, that is, the larger ��1, the more likely it is that non-competitive devaluation will curtail the growth of investment, thus causing a reduction on the current account deficit. On the other hand, if we assume that in a profit-led economy ��1 is relatively small, non- competitive devaluation worsens the sustainability condition of the current account, as it follows that ����⁄���� > 0 due to an erosion of the price competitiveness in foreign trade. In this case, a country could improve the sustainability conditions of its external debt by appreciating its currency. Alternatively, when ��1 is sufficiently large so that ����⁄���� < 0, investment responds strongly to reduced mark-up growth rates and, despite the impairment in terms of price competitiveness in foreign trade, a decrease in investment of such a magnitude improves the current account condition by strongly reducing imports.
In Figure 2 no solution illustrates the orthodox case of increased growth and improved trade balance condition following devaluation. The case pointed out by the new structuralist approach of a decrease in the growth rate and favourable response of the current account to devaluation is shown only by the solution (��2, ��2) in Figure 2.b. The original arguments advanced by our model are represented in solutions (��1, ��1) and (��2, ��2) in Figure 2.a in which devaluation reduces the net exports regardless of the trajectory of the output growth, and in the solutions (��1, ��1) in Figure 2.b which is the worst scenario that consists of reduced growth and increased trade deficit.
Summary
This paper contributes to the literature by developing a Keynesian-Kaleckian macromodel in open economies to account for the effects of currency devaluation, not only on the short-run output fluctuation, but also on changes in the current account balance. This is achieved by analysing simultaneously differences in the impact of relative price variations on the growth rate compatible with the balance-of-payments equilibrium and the actual growth rate. The
21
model contributes to the literature by demonstrating that the sensitivity of the price competitiveness of internally produced goods to changes in relative prices as well as the responsiveness of consumption and investment to variations in the profit margins of domestic firms determine the effectiveness of either appreciation or depreciation of the exchange rate for propelling output growth and improving the current account condition in the short run.
The multiplicity of results obtained from the theoretical framework set forth in this paper contribute to the literature by demonstrating that the scenarios in which a currency devaluation simultaneously increases growth and improves the conditions of the trade balance, as predicted by the orthodox literature, are in fact scant. This paper sets the conditions under which currency devaluation becomes either competitive or uncompetitive. This distinction between competitive and uncompetitive devaluation, associated with different aggregate demand growth regimes (viz. wage-led and profit led), allows us to lay out a number of possible scenarios describing unpleasant currency devaluation effects on growth and current account still left unattended by the economic literature. It is noteworthy that the model also opens a theoretical possibility that even competitive/uncompetitive devaluation might cause negative/positive effects on the growth rate and the current account balance.
In terms of policy making, this model shows that the task of promoting short-run waves of growth and improving the sustainability conditions of the current account deficit only by depreciating the currency is full of nuances and may provide unwanted, or dissatisfactory results at best, if policymakers overlook relevant aspects constituting the economic setup they are faced with.
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23
Appendix
The growth rate of the mark-up factor
The real exchange rate can be rewritten as ������⁄���� = ������⁄��[(��⁄��) + ��������] = (1 − ��)⁄��, where �� = ����⁄��. If we assume that �� = ��(������⁄����), where �� > 0, then, after rearranging the terms we have
�� = [(��⁄��)(1 − ��)]1/2(��)
In rates of change
��
�� = − 2(1 − ��)
����
(����)
��
Now we must find ����⁄��. By definition, we have
�� =
��(��/��)
��
�� ( �� + ��������)
In rates of change
����
������
��(��/��)����
=[
��������
] = ���� [ln(��) − ln(��) − ln ( �� + ��������)]
����
�� ( �� + ��������)
���� = ��(1 − ��)(�� − ��̂ − ���� + ��)(������)
Substitution of (iii) into (ii) gives equation (8)
Domestic expenditure and the mark-up growth
We need to define some functions for the components of domestic expenditure, namely consumption and investment.
�� = ������̂ + ������̂(����)
24
where �� is the growth of domestic expenditures, ��̂ is the growth of consumption, ��̂ is the growth of investment, and ���� and ���� are the share of consumption and investment in domestic expenditures, respectively.
Consumption �� is the sum of consumption of workers and capitalists. Following Razmi (2013) and using the extended markup pricing equation (6), we have
�� =
����
����
+ (1 − ��)
��
����
�� − ��(�� − 1)
= [
��
] ��(��)
where �� is the amount of employed workers, �� is the saving rate and �� is the total profit. In growth rate we have
��̂ = �� − [��
�� − ��(�� − 1)
] [�� − ��̂(�� − 1)](����)
where ��̂ is the growth of the saving rate and 0 < ��⁄�� − ��(�� − 1) < 1. Equation (vi) shows that the growth of consumption ��̂ is inversely related to the mark-up factor growth ��.
Following Bhaduri and Marglin (1990), we assume that investment decisions depend on the profit share
�� = ��(����)(������)
where �� is investment, ���� is the profit share of income and ������ > 0. Since the home country imports intermediate inputs, the profit share can be define as follows
�������� ����
���� = 1 − �� �� −
����
(��������)
��
Rearranging the extended markup price equation (6) gives
������������
1��
������ ����
���� = �� ( �� +
)⇒=−
����������
����
(����)
��
Substitution of (ix) into (viii) yields
1
���� = 1 − ��(��)
Substitution of (x) into (vii) gives
�� = ��∗(��)(����)
where ���� > ��. Or, in growth rate
25
��̂ = ��̂(��)(������)
where ��̂�� > 0. In other words, the growth of investment ��̂ is directly related to the growth of the mark-up factor ��.
Therefore, by equation (iv), we have that the impact of an increase in �� on �� is ambiguous
�� = ��(��)(��������)
where ���� ≷ 0.
That is, when the response of investment growth ��̂ to a changes in the mark-up factor growth
�� is relatively weak, the decrease in consumption growth ��̂ is not entirely mitigated by the increased investment growth, thus implying a reduction in the growth of domestic expenditures
��. The opposite happens if the investment growth rate responds relatively strongly to a positive variation in ��.
The balance-of-payments and the aggregate demand curves
Rearranging equation (9) and (14) and then taking the total differential of the variables ��, �� and
�� with respect to time and assuming, for simplicity, that ��, ��, ��̂, ����, ���� and �� are held constant gives
����| ������ − [ℎ���� + (1 − ��)]���� =
{ℎ���� + (1⁄2)(1 + �� + ����)[(�� − ��̂ − ���� − ��)���� − ��]}����(������)
����| ���� + [������ + ����(1 − ��)]���� =
{������ − (1⁄2)��1[1 + (1 − ��)����][(�� − ��̂ − ���� − ��)���� − ��]}����(����)
whereℎ = ���� − �� + (��⁄2)(�� − ��̂ − ���� − ��);�� = ����[��0 − ��1(��⁄2)(�� − ��̂ − ���� − ��) −
��] = ����(�� − ��); ���� = ����⁄���� and ���� = ����⁄����.
Note that the terms ℎ and �� are ambiguously signed. In order to keep the model tractable and highlight the links between competitive currency, gains from trade and the dynamics of domestic expenditures, we adopt the simplifying assumption that the components of ℎ and �� cancel each other out, which yields negligible values of ℎ and ��. Equations (xiv) and (xv), then, become (15) and (16).
26
The joint effect of a currency devaluation on growth and the current account
Let A be a 2x2 matrix and x and b be 2x1 matrices. Therefore, the non-trivial solution of the linear system Ax=b is given by x=A-1b, where A-1 = (1⁄��(A))������A.
In terms of the model set forth in this paper, if we rearrange equations (15) and (16) in matrix
notation and invert the system, we obtain
����1
[] =
[ ��������−��������] [��������] ����(������)
����2��
−������������������������
Therefore, the determinant of the coefficient matrix is positive, that is, �� = ���������������� −
���������������� > 0.
IMF Staff Papers
Vol. 49, Special Issue
© 2002 International Monetary Fund
How Do Large Depreciations Affect Firm Performance?
KRISTIN J. FORBES*
This paper examines how 12 “major depreciations” between 1997 and 2000 affected different measures of firm performance in a sample of over 13,500 compa- nies from around the world. Results suggest that in the year after depreciations, firms have significantly higher growth in market capitalization, but significantly lower growth in net income (when measured in local currency). Firms with greater foreign sales exposure have significantly better performance after depreciations, according to a range of indicators. Firms with higher debt ratios tend to have lower net income growth, but there is no robust relationship between debt expo- sure and the other performance variables. Larger firms frequently have worse performance than smaller firms, although the significance and robustness of this result fluctuates across specifications. [JEL F1, F2, F3]
n the later half of the 1990’s, a number of countries experienced substantial currency depreciations. These depreciations include not only the well-known currency crises where countries abandoned pegged exchange rates, such as in Thailand and Korea in 1997, but also less well-documented examples where coun- tries with more flexible exchange rates experienced unusually large depreciations, such as in Mexico and South Africa in 1998. In some cases, these depreciations were followed by a surge in production and improvement in economic growth, while in other cases the depreciations were followed by a decline in output and
severe recession.
*Forbes is an Associate Professor and the Mitsubishi Career Development Chair of International Management in the Sloan School at the Massachusetts Institute of Technology. She thanks Eduardo Borensztein and participants at the 2nd Annual IMF Research Conference for helpful comments and suggestions.
214
HOW DO LARGE DEPRECIATIONS AFFECT FIRM PERFORMANCE?
Brazil (1999) | –17.6 | –56.1 | — | — |
Czech Republic (1998) | 18.3 | 14.5 | –16.5 | –18.6 |
Greece (1998) | 20.1 | 18.3 | 6.1 | 28.5 |
Indonesia (1997) | –35.0 | –94.2 | –19.5 | –33.4 |
Israel (1998) | –2.5 | –13.9 | 11.8 | 32.8 |
Malaysia (1997) | –9.1 | –28.4 | –24.9 | –74.9 |
Mexico (1998) | 6.2 | –36.6 | 18.5 | 23.9 |
Pakistan (1998) | –6.8 | –13.3 | –3.1 | –5.8 |
Philippines (1997) | –19.7 | –34.6 | –1.1 | –32.7 |
South Africa (1998) | –9.1 | –15.0 | 9.8 | 3.4 |
South Korea (1997) | –42.1 | –69.0 | 34.7 | 19.3 |
Thailand (1997) | –43.3 | –124.2 | 28.0 | –91.4 |
Average | –11.7 | –37.7 | 4.0 | –13.5 |
Why are some depreciations expansionary and others contractionary? This paper partially addresses this question by focusing on one specific aspect of depreciations—how they affect firm performance. Depreciations could affect firm performance through a number of channels, such as raising the cost of imported inputs relative to other factors of production, providing exporters with a relative cost advantage relative to foreign competitors, or generating higher borrowing costs and a contraction in lending. Although the impact of depreciations on firm performance is only one component determining how depreciations affect aggre- gate economic growth, it can be an important and significant determinant of why some depreciations are expansionary and others are contractionary. Moreover, the firm-level impact of depreciations has not been well examined in previous work, and the basic stylized facts have not yet been documented.
Table 1 shows the diverse impact that 12 recent depreciations have had on firm sales growth and net income growth.1 There is a remarkable difference in firm performance across different countries, even during the same crisis periods. For example, during the Asian crisis and corresponding depreciations in 1997, the median growth rates in sales and net income for South Korean firms were –42 percent and –69 percent, respectively, while the comparable growth rates for Malaysian firms were –9 percent and –28 percent. In 1998, however, the relative performance of firms in Malaysia and Korea reversed. Firms in Korea quickly recov- ered from the crisis and appeared to benefit from the depreciations, with median
1Exact definitions and the dataset are discussed in more detail in Section I.
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growth in sales and net income of +35 percent and +19 percent, respectively. The performance of Malaysian firms continued to deteriorate, with median growth in sales and net income of –25 percent and –75 percent. Moreover, the experiences of firms in the Czech Republic, Greece, and Mexico suggest that firms do not neces- sarily exhibit negative performance after depreciations. For example, median sales growth for firms in all three countries was positive after their depreciations in 1998. This paper attempts to better understand these patterns by examining how recent depreciations affected different measures of firm performance. More specifically, the paper uses a sample of over 13,500 firms from 42 countries to examine the impact of 12 “major depreciations” between 1997 and 2000. It evaluates firm perfor- mance based on the immediate impact of depreciations on sales and net income, as well as the expected longer-term impact as measured by changes in market capital- ization and asset value. The paper also analyzes how individual firm characteristics, such as output type, foreign sales exposure, production structure, debt outstanding,
size, and profitability determine the impact of depreciations on performance.
Results suggest that in the year after depreciations, firms have significantly higher growth in market capitalization (when measured in local currency or U.S. dollars), but significantly lower growth in net income (when measured in local currency). Firms with greater foreign sales exposure have significantly better performance, according to a range of performance variables. Firms with higher debt ratios tend to have lower net income growth after depreciations, but there is no robust relationship between debt levels and the other performance variables. Larger firms often have worse performance than smaller firms, although the significance and robustness of this result fluctuates across specifications. There appears to be no consistent relationship between a firm’s profitability or capital/asset ratio and the impact of depreciations on firm performance.
This paper is related to four diverse branches of literature: the impact of deval- uations on exports; the effect of financial crises on macroeconomic variables; the importance of exchange-rate exposure to stock returns; and the extent of pass- through from currency movements to goods’ prices. Each of these literatures is so extensive that this paper does not attempt to summarize the relevant papers, but Forbes (2002b) provides a short overview and list of related references. Moreover, despite the range of topics and frameworks in these four branches of literature, none of this work explicitly addresses the key question explored in this paper: how do depreciations affect firm performance? The first two branches of literature focus on macroeconomic relationships and country-level evidence. The last two branches use firm-level models and data, but only consider how exchange-rate movements affect stock returns or product prices.
There is one paper, however, that does not fall into any of the four categories discussed above and that is closely related to this paper. Forbes (2002a) examines how a series of major devaluations affected commodity firms in the “crisis” country as well as competitors in the rest of the world. It focuses on one particular aspect of devaluations—how they affect the relative cost of labor and capital and, therefore, influence firm production levels, profitability, investment decisions, and stock returns. The paper develops these ideas in a small, open-economy model and then performs a series of empirical tests using information for about 1,100 firms
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in 10 commodity industries. The empirical tests support the model’s main predic- tion that immediately after devaluations, firms in the crisis country have higher growth rates for output and operating profits than competitors in other countries. Results also support the prediction that the effect of devaluations on capital invest- ment and stock returns (and therefore expected long-run output and profits) is determined by capital/labor ratios and changes in the cost of capital.
This paper builds on the framework in Forbes (2002a) in several ways. First, instead of focusing solely on commodity firms, it examines the impact of deprecia- tions on a much larger set of companies from a range of industries. Second, this paper considers a wider range of effects of depreciations on firm performance. Instead of focusing mainly on how capital/labor ratios determine the impact of depreciations, it also considers the importance of output characteristics, foreign sales exposure, debt outstanding, firm size, and profitability. Finally, instead of focusing solely on “deval- uation events” (when countries suddenly abandon rigid exchange rate regimes), this paper also considers “depreciation events” (when countries with more flexible exchange rate regimes experienced unusually rapid losses in their currency’s value).
Depreciation Events and Dataset
The following analysis defines “depreciation events” as any 4-week period when a country’s U.S. dollar exchange rate depreciated by 10 percent or more.2 In order to correspond to the firm-level dataset, the period considered is January 1, 1997 through December 31, 1999. Also, it only includes countries with information for at least 50 firms during this period. Table 2 lists the resulting 12 depreciation events in chronological order, as well as the months when the depreciations occurred. This list of depreciation events includes the well-known currency crises, such as the series of devaluations in Asia in the later half of 1997 and the Brazilian devaluation in early 1999. It also includes a series of depreciations that were not standard currency crises, but involved the adjustment of more flexible exchange rate regimes (such as Mexico and Israel in 1998).3
The firm-level dataset is compiled from the Worldscope March 2001 CD- ROM published by Primark. This Worldscope database contains balance sheet, income statement, cash flow, and general company information for firms from 51 countries, representing about 90 percent of global market capitalization (according to their literature).4 The dataset includes historical information on firms that
2 The exchange-rate data is from Datastream. After a depreciation event, the next year is excluded so that there can be, at most, one depreciation event within any 12-month period.
3 Some well-known currency crises (such as the devaluations in Russia in 1998 and Ecuador in 1999) are not included since there is insufficient firm-level data for these countries.
4 There are several limitations with this data. First, since Worldscope only reports information that is publicly available, virtually all of the sample consists of publicly traded companies. Most private and government-owned companies are not included. Second, although Worldscope attempts to correct for major differences in cross-country accounting standards, significant differences may still exist for certain variables. The analysis below addresses this problem by using a range of statistics to test each hypothesis and by examining the impact of country-specific effects on the results. Third, there are a number of extreme and unrealistic outliers that undoubtedly represent reporting errors. The analysis below addresses this problem by performing an extensive set of sensitivity tests that includes removing outliers.
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became inactive due to a merger, bankruptcy, or any other reason. For this anal- ysis, I include companies that were active for at least 1 year during the period from 1997 through 2000, and only include countries that have information for at least 50 firms during this period. I also exclude all financial firms (SIC codes 60-69), since the analysis of how depreciations affect sales, net income, and assets is not directly relevant. The Worldscope database is augmented with macroeconomic statistics from the International Monetary Fund’s International Financial Statistics CD-ROM (from March 2001).
The resulting firm-level dataset includes information for over 13,500 firms in 42 countries. Table 3 shows the distribution of firms by country, as well as median sales (in U.S. dollars). The appendix lists the statistics for each firm used in the following analysis and includes detailed information on how each variable is defined and/or calculated.
This dataset includes the 12 countries that experienced depreciation events (as listed in Table 2), as well as 30 countries that did not experience substantial depre- ciations between 1997 and 2000. The full sample of firms is necessary to compare the performance of firms in depreciating countries versus firms in the rest of the world, as well as to control for any global industry and/or time trends.5 As shown at the bottom of Table 3, firms in depreciating countries comprise about 20 percent of the sample and tend to have smaller sales. This partially reflects the fact that firms in emerging markets, which have a higher incidence of major depreciations,
5Kamin (1988) shows the importance of controlling for the performance of a “comparison group” to adjust for global industry trends when measuring the impact of devaluations.
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Table 3. Firm Sample Information
RegionCountry# FirmsMedian Sales 1
Countries with Depreciation Events | |||
Brazil | 303 | 167.5 | |
Czech Republic | 58 | 160.5 | |
Greece | 179 | 49.7 | |
Indonesia | 127 | 73.7 | |
Israel | 44 | 215.6 | |
Malaysia | 332 | 60.0 | |
Mexico | 127 | 286.8 | |
Pakistan | 82 | 28.0 | |
Philippines | 70 | 60.3 | |
South Africa | 460 | 49.9 | |
South Korea | 570 | 131.9 | |
Thailand | 202 | 58.6 | |
Countries without Depreciation Events | |||
Americas | Argentina | 51 | 258.4 |
Canada | 613 | 158.1 | |
Chile | 77 | 159.7 | |
United States 2 | 411 | 4,700.2 | |
Asia | Australia | 285 | 191.4 |
China, People’s Republic of | 110 | 88.3 | |
Hong Kong, SAR | 302 | 145.9 | |
India | 323 | 81.6 | |
Japan | 3,160 | 286.9 | |
New Zealand | 55 | 157.2 | |
Singapore | 204 | 105.2 | |
Taiwan | 218 | 225.6 | |
Europe | Austria | 94 | 151.1 |
Belgium | 125 | 153.8 | |
Denmark | 169 | 117.9 | |
Finland | 138 | 144.4 | |
France | 783 | 80.6 | |
Germany | 820 | 122.0 | |
Hungary | 39 | 89.2 | |
Ireland | 71 | 113.0 | |
Italy | 191 | 259.3 | |
Netherlands | 226 | 292.2 | |
Norway | 181 | 84.7 | |
Poland | 53 | 87.5 | |
Portugal | 81 | 68.6 | |
Spain | 142 | 271.6 | |
Sweden | 285 | 117.3 | |
Switzerland | 182 | 283.2 | |
Turkey | 71 | 118.6 | |
United Kingdom | 1,640 | 87.6 | |
Countries with Depreciations | 2,554 | 86.6 | |
Countries without Depreciations | 11,100 | 182.2 | |
Total Sample | 13,654 | 157.9 | |
1 Total sales measured in millions of U.S. dollars in 2000 (or the closest year available).
2 The Worldscope 2001 CD-ROM only includes information for S&P500 countries for the United States.
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tend to be smaller than in wealthier countries. This also captures the fact that depreciations in the local currency/U.S. dollar exchange rate will, by definition, reduce the dollar value of firm statistics. Finally, this trend could also indicate that after depreciations, firms tend to decrease investment (thereby reducing potential output) and/or have lower sales. The empirical analysis in the next section formally tests this hypothesis.
General Analysis:
The Impact of Depreciations on Firm Performance
This section uses the dataset described in Section I to compare firm performance in countries with depreciation events to countries without depreciation events. More specifically, it examines the impact of depreciations on the growth of firm sales, net income, market capitalization, and asset value. These results provide the basis for the more detailed analysis in Section III, which examines how different firm characteristics affect how depreciations impact firm performance.
The central model for the analysis is:
Performancei,k,c,t = ak + b1Depreciationc,t+1 + b2Depreciationc,t(1)
+ b3Depreciationc,t–1 + b4Inflation c,t + b5Periodt + x i,k,c,t,
where i is each firm, k is each industry, c is each country, and t is each period (denominated in years). Performance is a measure of firm performance (discussed in more detail below). Any time-invariant, industry-specific effects on firm perfor- mance are captured by ak, which is calculated based on 2-digit SIC codes.6 Depreciation is a dummy variable equal to 1 if the country c where firm i is located experienced a depreciation event (as defined in Table 2) in the given period. More specifically, Depreciationc,t+1 is equal to 1 if country c had a deval- uation in the following year (t+1); Depreciationc,t is equal to 1 if country c had a devaluation in the current year (t); and Depreciationc,t –1 is equal to 1 if country c had a devaluation in the previous year (t –1). Inflationc,t measures the rate of infla- tion in country c in period t. Periodt is a vector of period dummy variables for 1997 through 2000 (with 1996 as the excluded year) and is included to control for any annual global shocks to firm performance.
Firm performance (Performance) is measured by changes in four variables: sales, net income, market capitalization, and assets.7 Although a single measure of performance would be more straightforward to interpret, each of the four measures is useful in order to capture different aspects of depreciations. For example, an exporter could respond to the relative cost advantage provided by a depreciation by keeping local currency prices constant and lowering foreign currency prices,
6 The sensitivity analysis tests for the impact of including firm or country effects instead of industry effects. The base analysis focuses on industry-specific effects, however, since recent empirical analysis has shown that during this period, sectoral shocks have been large and significant, and even more impor- tant than global and country-specific shocks (Brooks and Del Negro, 2002).
7The firm performance variables are calculated as changes using the equation: (xt – xt–1)/xt –1.
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hoping to generate an increase in sales volume. On the other hand, another firm could respond by keeping foreign currency prices constant and raising local currency prices, so that export sales remained fairly constant but net income increased.8 Therefore, the impact of the depreciation on firm performance could be reflected mainly by an increase in sales or an increase in income (or some combination of the two), and it is necessary to examine changes in both measures to fully capture the impact of depreciations on firm performance.
Moreover, while changes in sales and net income should capture the short-run impact of depreciations on firm performance, changes in market capitalization and asset value are more likely to capture the longer-term impact. Changes in market capitalization should reflect changes in the discounted value of expected future profits, so that an increase in a firm’s market capitalization after depreciations should reflect expected improvements in the firm’s longer-term performance. This measure could be particularly important for firms that respond to depreciations with additional investment (such as planting crops or digging mines) that may not increase sales or income for several years. One problem with using market capi- talization as a measure of long-term performance, however, is that it assumes markets efficiently reflect new information from the depreciation. This assumption may not be fully satisfied, especially during crises or in less liquid emerging markets. Therefore, changes in firm asset value can provide additional information on the expected longer-term impact of depreciations on firm performance. Firms that are expected to benefit from depreciations in the long run are more likely to increase assets (such as purchasing additional machines or even additional plants). Therefore, all four measures of firm performance are useful in capturing slightly different aspects of how depreciations affect firms in the short and long run.
Finally, it is useful to compare how depreciations affect both local currency statistics as well as U.S. dollar statistics, since exchange rate movements could have different effects on pricing, and therefore various performance measures, for different types of goods. For example, if a firm produces a non-traded good using only domestic inputs, and holding everything else constant, a depreciation would have no direct effect on the local currency values of sales, net income, market capitalization, and assets, while the depreciation would cause an immediate decrease in the U.S. dollar values of the same performance measures. In other words, sales volume and the local currency value of sales would remain constant, while the U.S. dollar value of sales would decrease. On the other hand, if a firm produces an export good (such as oil) that is traditionally priced in U.S. dollars, the same depreciation (again holding everything else constant) would have no direct effect on the U.S. dollar value of sales (and possibly the other performance measures), while it would cause an immediate increase in the local currency value of sales (and possibly the other performance measures). For most goods, depreci- ations will have an intermediate effect between these two extreme cases, so it is necessary to consider how depreciations affect both local currency and U.S. dollar measures of performance.
8 See Clarida (1997) for an empirical analysis of how U.S. firms balanced these two possible responses to exchange rate movements in the 1980s.
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Table 4 reports random-effects estimates of equation (1) for the four perfor- mance measures in local currency and U.S. dollars. The top section of the table reports coefficient estimates, and the lower section reports c2 test statistics for the joint significance of the period dummy variables and the industry random effects. These estimates suggest several key results. First, in the year before a major depreciation, there is no significant difference between firms in depreciating countries and non-depreciating countries for any of the 8 measures of firm performance. Second, when performance is measured in local currency, firms in depreciating countries tend to have slightly worse performance during the year of the depreciation than firms in non-depreciating countries, but this difference is usually insignificant. More specifically, the estimated coefficient on Depreciationt is negative when performance is measured by growth in local currency sales, market capitalization, or assets, but is only significant at the 10 percent level for the first variable, and as discussed below, small changes in model specification often render this coefficient insignificant. Moreover, the magnitude of the estimated coefficients is fairly small. For example, the –0.10 in column 1 indicates that firm sales growth (measured in local currency) during the year of a depreciation was only 10 percent lower in depreciating countries than
in non-depreciating countries.
Third, and in contrast to the above results, firms in depreciating countries appear to have substantially worse performance during the year of the deprecia- tion when performance is measured in U.S. dollars. The coefficient on Depreciationt is negative and highly significant for all four U.S. dollar measures of performance. This difference with the results when performance is measured in local currency terms, however, undoubtedly reflects the fact that even if real performance remained constant, the exchange-rate adjustment would generate negative growth in U.S. dollar terms. For example, the –0.27 coefficient on Depreciationt in column 5 suggests that firms in depreciating countries experi- enced sales growth 27 percent less than firms in non-depreciating countries. If the U.S. dollar exchange rate had remained constant, this could reflect a 27 percent decline in sales volume. On the other hand, this could also reflect constant sales volume, constant local currency output prices, and a 27 percent depreciation in the U.S. dollar exchange rate. Moreover, in the 12-month period after the initial depreciation event, the average currency movement for the 12 countries in Table 2 was a 32 percent depreciation. Although currency move- ments cannot be directly mapped into changes in U.S. dollar performance measures, these estimates suggest that the apparent negative impact of deprecia- tions on U.S. dollar measures could largely reflect nominal movements and not fundamental changes in real performance.
A fourth result from Table 4 is that in the year after depreciation events, the impact on firm performance is mixed. Firms in depreciating countries have signif- icantly lower net income growth when measured in local currency. Firms may also have lower asset growth when measured in local currency, although the rele- vant coefficient is only significant at the 10 percent level (and as discussed below this result is not robust). On the other hand, firms in depreciating countries have significantly higher growth in market capitalization, whether measured in local
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Sales | Net Income | Market Capitalization | Assets | Sales | Net Income | Market Capitalization | Assets | |||
(1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | |||
Depreciationt+1 | –0.028 | –0.367 | –0.032 | –0.164 | 0.041 | –0.342 | 0.021 | –0.081 | ||
(0.086) | (0.308) | (0.116) | (0.085) | (0.079) | (0.297) | (0.096) | (0.072) | |||
Depreciationt | –0.101* | 0.018 | –0.069 | –0.029 | –0.269** | –1.019** | –0.196** | –0.214** | ||
(0.055) | (0.209) | (0.078) | (0.054) | (0.049) | (0.186) | (0.059) | (0.045) | |||
Depreciationt–1 | –0.012 | –0.637** | 0.525** | –0.091* | 0.032 | 0.127 | 0.640** | –0.034 | ||
(0.055) | (0.211) | (0.077) | (0.054) | (0.050) | (0.186) | (0.059) | (0.045) | |||
Inflationt | 0.006** | 0.021 | –0.010 | 0.004* | –0.001 | 0.003 | 0.005** | –0.002 | ||
(0.002) | (0.016) | (0.006) | (0.002) | (0.002) | (0.006) | (0.002) | (0.001) | |||
c2 Test Statistics for Significance of: | ||||||||||
Period Dummies 1 | 13.8** | 11.4** | 245.9** | 12.0** | 12.0** | 1.3 | 453.1** | 82.1** | ||
Industry Effects 2 | 2,481.9** | 19.2** | 2,644.1** | 28,878.1** | 2,546.3** | 21.3** | 3,224.2** | 34,489.4** | ||
N | 27,325 | 30,567 | 21,185 | 27,255 | 33,247 | 33,924 | 30,151 | 33,207 | ||
Kristin J. Forbes
currency or U.S. dollars. If changes in market capitalization are interpreted as changes in the discounted value of future expected profits, this could suggest that depreciations improve firms’ expected longer-term profitability. Moreover, the magnitude of the coefficient estimates suggests that this effect could be econom- ically important. For example, the estimates in column 3 suggest that in the year after depreciations, market capitalization increased by 53 percent more for firms in depreciating countries than in non-depreciating countries.
The final noteworthy result from Table 4 is the significance of the coefficients other than the depreciation dummies. The magnitude and significance of the infla- tion coefficients fluctuate across specifications. On the other hand, the period dummy variables are jointly highly significant (in 7 of the 8 specifications) and the industry effects are jointly highly significant in each of the 8 specifications. These results suggest that period- and industry-specific shocks are important determi- nants of firm performance.
Next, I estimate a number of variations to the model specified in equation (1) in order to test for the sensitivity of these results to model specification and outliers. First, I estimate the model substituting firm effects (a i) for the industry effects (a k). Second, I estimate the model substituting country effects (a c) instead of the industry effects. Third, I estimate the original model with industry effects, except use fixed effects instead of random effects to focus on changes in firm performance within each industry. Fourth, I estimate the model after removing the 10 outliers for each of the performance measures. Fifth and finally, I remove each country from the sample and reestimate the base model.
Although the coefficient estimates fluctuate in each of these variations, the central results do not change.9 In each of these sensitivity tests, the only coeffi- cients on the depreciation variables that are consistently positive and significant are when performance is measured by growth in market capitalization (measured in either currency) in the year after depreciations. The only coefficients that are consistently negative and significant are those when performance is measured by net income growth (in local currency) in the year after depreciations, and those for each of the four U.S. dollar performance measures in the year of depreciations. The significance of the other coefficients fluctuates based on model specification and sample selection. (For example, when performance is measured by asset growth in local currency, the coefficient on Depreciationt –1 is insignificant at the 10 percent level in over 1/3 of the tests.)
To conclude, this analysis has documented several consistent patterns of how depreciations tend to affect average firm performance. In the year after deprecia- tions, firms in the depreciating country tend to have significantly higher growth in market capitalization. On the other hand, firms in depreciating countries tend to have significantly lower growth in net income (when measured in local currency). Firms in depreciating countries also tend to display worse performance during the year of the depreciation when performance is measured in U.S. dollars, but this could largely reflect changes in relative currency values and not significant changes in actual performance.
9Results are not reported since they are so similar to the base results in Table 4.
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The Impact of Depreciations on Performance in Different Types of Firms
The general patterns reported in the last section on how depreciations affect average firm performance may mask important differences across individual companies. For example, depreciations may significantly improve the perfor- mance of exporters, but negatively impact the performance of firms using a high share of imported inputs. These different effects could counteract each other when calculating the average impact of depreciations on firms in general. Therefore, this section examines which firm characteristics determine the impact of depreciations on firm performance. More specifically, it considers whether output characteris- tics, foreign sales exposure, production structure, debt ratios, size, and/or prof- itability determine the impact of depreciations on different types of firms.
The empirical specification is an extension of the framework used for the more general tests in Section II. More specifically, the estimating equation is the same as equation (1), plus the relevant test variables (i.e., firm characteristics) interacted with dummy variables indicating whether there was a depreciation in the current year or previous year:
Performancei,k,c, t = ak + b1Depreciationc, t +1 + b2Depreciationc, t + b3Depreciationc, t –1
+ b4Inflationc, t + b5Period t + b6Depreciationc, t * Testi, t –1(2)
+ b7Depreciationc, t –1 * Testi, t –1 + x i,k,c, t,
All variables are defined as in equation (1) except Testi,t-1, which is a vector of characteristics for firm i from the previous period. Testi,t-1 is lagged in order to avoid capturing any impact of the depreciation on the relevant firm characteristic. These interactive terms are included to test which firm characteristics determine how depreciations impact firm performance. For example, if one variable in Testi is a measure of firm size (such as total assets), then the relevant coefficient estimates in
b6 and b7 would capture any additional impact of depreciations on larger firms.
There are a number of firm characteristics that could determine how depreci- ations affect firm performance and which should therefore be included in Testi. The base analysis focuses on 6 different variables:
Output Characteristics. Theoretical models suggest that one important factor determining the impact of depreciations is whether a firm produces non-traded goods that only compete with other domestic producers, or traded goods that compete with foreign producers (either in domestic markets through competition with imports and/or in foreign markets through competition as exports). Depreciations should reduce the cost of production for goods in the depreciating country relative to iden- tical goods produced in non-depreciating countries. This should give a relative cost advantage to firms that produce traded goods, but no relative cost advantage to non- traded goods. As a result, depreciations should improve the performance of firms that produce traded goods relative to firms that produce non-traded goods.10
10 For a model and detailed discussion of these effects, see Agénor and Montiel (1996). Also see Ghei and Pritchett (1999) for a discussion of factors that could reduce any positive impact of depreciations on traded goods, especially in developing countries.
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Foreign Exposure. Closely related to the impact of depreciations on traded versus non-traded goods is whether firms had foreign sales before the deprecia- tion. Firms with export experience are better positioned to benefit from the rela- tive cost advantage of depreciations. Granted, firms that do not have foreign sales exposure before depreciations could begin operating abroad after depreciations, but developing international operations can involve substantial time lags. Therefore, firms with foreign sales would be expected to exhibit better perfor- mance directly after depreciations than firms without foreign exposure.
Production Structure. As discussed in the section on traded and non-traded goods, simple models suggest that depreciations can lower the relative cost of production for firms in the depreciating country relative to firms in non-depreci- ating countries. This reduction in relative production costs will be proportional to the share of domestic inputs (such as labor) in production. If production involves a higher share of imported inputs, then depreciations will have less impact on rela- tive production costs.11 In most emerging markets a large fraction of capital is imported, so that capital/labor ratios can be used as rough proxies for the share of imported inputs to domestic inputs in production. Therefore, firms with lower capital/labor ratios are expected to have relatively better performance after depre- ciations than firms with higher capital/labor ratios.
Debt Ratios. One feature of recent large depreciations, and especially currency crises, is that they are often accompanied by a contraction in lending and/or increase in interest rates. In some cases, the contraction in lending is a market response to the capital outflows that generated the currency depreciation. In other cases, the increase in interest rates is a policy response by the central bank in order to reduce capital outflows and strengthen the currency’s value. Raising interest rates could also be required as part of an IMF program. At the firm level, depreciations can reduce collateral values and therefore raise a company’s cost of borrowing.12 In each of these cases, the contraction in lending and/or higher interest rates after depreciations would disproportionately affect firms with higher outstanding debt burdens, as well as those more reliant on borrowing to finance working capital. Moreover, since many companies borrow in foreign currency, depreciations would have balance-sheet effects and increase the relative burden of repaying existing foreign-currency debt.13 For all of these reasons, depreciations would be expected to have a more negative impact on the performance of firms with higher outstanding debt ratios.
Size. There are a number of channels by which firm size could interact with depreciations to affect firm performance. First, larger firms are more likely to have access to financing during lending contractions, which, as discussed above, have frequently occurred during recent large depreciations. Improved access to financing could occur through informal or formal networks (such as the Korean chaebol), through government pressure on lending institutions, and/or through
11See Forbes (2002a) for a model and detailed discussion of these effects.
12 See Caballero and Krishnamurthy (2000).
13 See Céspedes, Chang, and Velasco (2000). Unfortunately, the Worldscope database does not have sufficient information on foreign-currency borrowing to test this channel directly.
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direct bailouts for firms judged “too big to fail.” Second, and possibly counter- acting this effect, although larger firms were more likely to benefit from special networks or privileges before depreciations, fiscal pressures (or even stricter moni- toring as part of an IMF program) may make it more difficult to benefit from these traditional networks after depreciations. Third, larger firms are more likely to have borrowed in foreign currency and therefore experience negative balance-sheet effects from depreciations. Fourth, and possibly counteracting this effect, larger firms are more likely to have hedged against currency risk. For all of these reasons, larger firms could exhibit better or worse performance than smaller firms after depreciations, but it is difficult to predict which of these effects dominates a priori.
Profitability. The relationship between firm profitability and the impact of depreciations on firm performance is also difficult to predict a priori. More prof- itable firms tend to be operated by more capable managers, who could be better able to adjust production to benefit from depreciations. Closely related, if depre- ciations are followed by an output contraction, then more profitable firms may be better able to withstand the contraction in demand, while less profitable firms are more likely to go bankrupt. Possibly counteracting this effect, however, more prof- itable firms may be operating closer to full capacity and therefore have fewer excess resources to reallocate and adjust to the depreciation. As a result, it is diffi- cult to predict whether depreciations will have a positive or negative effect on firms that were more profitable before the depreciation.
There are obviously a number of firm characteristics other than the six discussed above that could determine how depreciations affect firm performance. For example, the extent of hedging against currency risk or the proportion of debt denominated in foreign currency could be critical. Unfortunately, the firm-level data for these addi- tional tests is not available. The tests for this analysis were chosen based on a combi- nation of theoretical motivation, anecdotal evidence, and data availability.
To test for the impact of these six firm characteristics on performance after depreciations, it is necessary to augment the dataset described in Section I. To test for the importance of traded versus non-traded goods, I classify each firm as producing either traded or non-traded goods based on the 2-digit SIC code of their primary output. This classification is then used to create a traded dummy variable that takes a value of 1 if the firm’s main output is a traded good.14 Foreign expo- sure is measured by the ratio of foreign sales to total sales. Capital/labor ratios are measured by the ratio of total assets (in U.S. dollars) to employees. Outstanding debt is measured by the ratio of total debt to equity. Firm size is measured by total assets, and firm profitability is measured by the return on assets. The appendix provides detailed definitions and summary statistics for each of these variables. The sensitivity analysis at the end of this section shows that using different defi- nitions has minimal impact on the central results.
Table 5 reports regression results based on random effects estimates of equation
(2) with the six variables discussed above included in Testi. When Testi is measured by the traded dummy, the signs on the coefficient estimates fluctuate and are only
14 A table listing the specific classifications into traded or non-traded goods for each 2-digit SIC code is included in the working paper version (Forbes, 2002b).
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significant when performance is measured by net income growth. Moreover, the significant coefficient estimates are negative, the opposite of the simple model predictions discussed above.15 When Testi is measured by foreign sales exposure, however, the results are more consistent across performance measures and agree with the theoretical predictions. The coefficient estimates on these interaction terms are positive in 14 of the 16 cases, and are often highly significant. Moreover, the magnitude of the coefficient estimates suggests that this effect is economically important. Holding everything else constant, if a firm increased its foreign sales (as a ratio to total sales) by 10 percent, it would be predicted to experience growth rates 4 percent higher in sales, 130 percent higher in income, and 3 percent higher in assets (all measured in local currency) in the year of a major depreciation.
The coefficient estimates when Testi is measured by capital/labor ratios or debt ratios provide a less consistent picture. The signs of the coefficient estimates for both sets of results are fairly evenly split between positive and negative, and the few coef- ficient estimates that are significant provide mixed support for the theoretical predic- tions. For example, in the year after depreciations, firms with higher capital/labor ratios have significantly lower growth in U.S. dollar assets (as predicted), but signif- icantly higher growth in local currency sales (the opposite of the predictions). Firms with higher debt ratios tend to have significantly higher asset growth in the year of depreciations (the opposite of the predictions), but significantly lower income growth in the year after depreciations (as predicted). Therefore, this set of results suggests that there is little strong and consistent relationship between firms’ capital/labor ratios or debt exposure and the impact of depreciations on firm performance.
When Testi is measured by firm size, all 8 coefficient estimates are negative for the year of the depreciation, suggesting that larger firms had worse perfor- mance in this period. Only 3 of these coefficients are significant at the 10 percent level, however, and some of this negative effect of firm size is reversed in the year after depreciations. Sales growth measured in local currency, however, is signifi- cantly lower for larger firms in the year after depreciations. For the final set of coefficient estimates, when Testi is measured by profitability, there is no clear pattern. More profitable firms have significantly higher growth in local currency sales in the year after depreciations, but this is the only coefficient of the 16 related to the profitability interaction terms that is significant at the 5 percent level. Moreover, the signs of the coefficient estimates are fairly evenly split between positive and negative. Therefore, although larger firms have slightly worse perfor- mance than smaller firms after depreciations, profitability appears to have little impact on how depreciations affect performance.
To analyze the robustness of these central results to changes in variable defini- tion, model specification, and sample selection, I estimate a number of sensitivity tests. First, I redefine several different variables: measure foreign exposure using the ratio of foreign assets to total assets or foreign income to total income (instead of foreign sales to total sales); measure debt outstanding using total debt to assets or short-term debt to equity (instead of total debt to equity); measure size using total market capitalization or total income in U.S. dollars (instead of total assets); or
15 This counterintuitive result is analyzed in more detail in the sensitivity tests below.
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Table 5. Regression Results: Firm Characteristics and the Impact of Depreciations
Growth in Local Currency ValuesGrowth in U.S. Dollar Values
Sales | Net Income | Market Capitalization | Assets | Sales | Net Income | Market Capitalization | Assets | |||
Depreciationt +1 | 0.127 | –0.339 | –0.160 | –0.056 | 0.053 | –0.829 | –0.228 | –0.117 | ||
(0.114) | (3.347) | (0.418) | (0.084) | (0.092) | (2.941) | (0.291) | (0.076) | |||
Depreciationt | –0.037 | 10.131* | –1.041 | –0.094 | –0.331** | 7.986 | –1.126** | –0.387** | ||
(0.201) | (5.854) | (0.832) | (0.148) | (0.162) | (5.249) | (0.510) | (0.135) | |||
Depreciationt –1 | 0.197 | –0.213 | –1.347 | 0.205* | 0.151 | –0.064 | –0.359 | 0.115 | ||
(0.156) | (4.786) | (0.865) | (0.115) | (0.126) | (4.006) | (0.395) | (0.106) | |||
Inflationt | 0.005 | 0.087 | 0.063 | 0.007 | 0.006 | 0.162 | 0.026* | 0.012** | ||
(0.006) | (0.242) | (0.063) | (0.004) | (0.005) | (0.150) | (0.015) | (0.004) | |||
Test Variables Interacted with Depreciation Dummies | ||||||||||
Tradedt | 0.005 | –11.505** | 0.276 | 0.014 | 0.042 | –8.876** | –0.103 | 0.023 | ||
(0.136) | (4.258) | (0.571) | (0.100) | (0.109) | (3.777) | (0.346) | (0.093) | |||
Traded t –1 | –0.121 | –3.497 | –0.081 | –0.044 | –0.140 | –2.508 | –0.132 | –0.054 | ||
(0.144) | (4.156) | (0.533) | (0.106) | (0.116) | (3.696) | (0.365) | (0.099) | |||
Foreign | 0.425** | 12.976** | 1.211 | 0.322** | 0.435** | 7.648 | 1.604** | 0.411** | ||
Exposuret | (0.198) | (6.336) | (0.871) | (0.146) | (0.160) | (5.110) | (0.506) | (0.134) | ||
Foreign | –0.562 | 14.155 | 0.445 | 0.098 | –0.122 | 8.161 | 0.621 | 0.417* | ||
Exposuret –1 | (0.346) | (10.382) | (1.488) | (0.255) | (0.279) | (8.895) | (0.877) | (0.234) | ||
Table 5. (concluded)
Growth in Local Currency ValuesGrowth in U.S. Dollar Values
Sales | Net Income | Market Capitalization | Assets | Sales | Net Income | Market Capitalization | Assets | |||
Test Variables Interacted with Depreciation Dummies | ||||||||||
K /Lt | –0.012 | –8.082 | 2.052** | –0.123 | –0.128 | –3.721 | 0.303 | –0.187* | ||
(0.147) | (4.969) | (0.786) | (0.108) | (0.118) | (3.819) | (0.371) | (0.099) | |||
K /Lt–1 | 1.551** | –2.552 | 3.149 | 0.008 | 0.272 | 8.441 | –0.370 | –0.841** | ||
(0.521) | (22.579) | (3.736) | (0.383) | (0.420) | (13.352) | (1.318) | (0.350) | |||
Debtt | 0.108 | –1.152 | 0.857 | 0.192** | 0.102 | 0.724 | 0.547* | 0.188** | ||
(0.110) | (3.532) | (0.545) | (0.081) | (0.089) | (2.981) | (0.280) | (0.074) | |||
Debtt–1 | 0.008 | –6.546** | –0.025 | –0.083 | –0.106 | –5.789** | –0.375 | –0.171** | ||
(0.108) | (3.238) | (0.442) | (0.079) | (0.087) | (2.762) | (0.272) | (0.072) | |||
Sizet | –0.012 | –0.014 | –0.250 | –0.039* | –0.021 | –0.392 | –0.146** | –0.051** | ||
(0.027) | (0.868) | (0.242) | (0.020) | (0.022) | (0.732) | (0.069) | (0.018) | |||
Sizet –1 | –0.066** | 0.418 | –0.399 | –0.003 | 0.010 | 0.228 | 0.094 | 0.051** | ||
(0.031) | (1.313) | (0.372) | (0.023) | (0.025) | (0.805) | (0.079) | (0.021) | |||
Profitabilityt | 1.233 | –34.231 | –0.557 | 0.955* | 0.690 | –27.222 | –0.054 | 0.509 | ||
(0.784) | (22.847) | (3.443) | (0.577) | (0.632) | (20.587) | (1.998) | (0.530) | |||
Profitabilityt –1 | 0.619** | –6.443 | 6.792 | –0.206 | 0.293 | –5.069 | –1.057 | –0.385* | ||
(0.310) | (8.797) | (5.758) | (0.228) | (0.250) | (7.946) | (0.784) | (0.209) | |||
Notes: Estimates obtained based on equation (2) with random industry effects; period dummies included in analysis (but not reported); standard errors in paren- theses; * is significant at the 10 percent level and ** at the 5 percent level.
HOW DO LARGE DEPRECIATIONS AFFECT FIRM PERFORMANCE?
measure profitability using return on equity or return on invested capital (instead of return on assets). Second, to examine the impact of model specification, I reestimate the model substituting firm effects (ai) or country effects (ac) for the industry effects (ak) in equation (2), or using fixed effects instead of random effects. Then I drop one variable at a time, excluding the inflation and period dummy variables as well as the interactive terms. Third and finally, I test for any impact of outliers by removing the 10 extreme values for each of the variables in Testi.
Coefficient estimates fluctuate throughout this series of sensitivity tests, but the key findings discussed above are robust. Firms with greater foreign sales expo- sure tend to have significantly better performance after depreciations (according to most of the performance variables measured in either currency).16 Firms with higher debt ratios tend to have lower growth in net income (in either currency), but there is no consistent relationship between debt exposure and the other perfor- mance variables. Larger firms tend to have worse performance than smaller firms, although the significance of this result fluctuates across performance measures. There appears to be no consistent relationship between a firm’s profitability or capital/asset ratio and the impact of depreciations on firm performance. Finally, firms producing traded goods tend to have significantly lower net income growth after depreciations than firms producing non-traded goods, although this result does not apply for the other performance measures.
In an attempt to better understand this last result, which does not support the simple model predictions discussed above, I perform two additional tests. I decompose traded goods into commodities and differentiated goods in order to see if trends in either group are driving the coefficient estimates.17 Negative shocks to commodity prices that are not captured by the industry effects could be important, especially since commodities are a major export for many of the depreciating countries. Then I reestimate equation (2), replacing the traded dummy variable with dummy variables for commodities and differentiated goods (with non-traded goods continuing to be the excluded variable).
Results are reported in Table 6. The table only reports coefficient estimates for the depreciation variables and commodity and differentiated good interaction terms, since the coefficient estimates for the remaining variables in Testi are virtu- ally identical to those reported in Table 5. The results suggest that the negative impact of depreciations on income growth for traded-goods firms occurs in differ- entiated-goods firms instead of commodity firms. Therefore, the robust finding of a negative impact of depreciations on income growth for traded-goods firms does not appear to be caused by movements in commodity prices.
16 The one exception to this otherwise robust result is when foreign sales exposure is measured as the ratio of foreign assets to total assets or the ratio of foreign income to total income (instead of using the ratio of foreign sales to total sales). In both of these cases, data availability is much more limited, and the new foreign exposure variable is not consistently positive and significant.
17Commodities are defined as goods that are fairly homogenous across countries, so that prices are set in global markets. Differentiated goods, on the other hand, are defined as goods that are more hetero- geneous across producers, so that firms have greater power in setting prices. Table 5 in the working paper version (Forbes, 2002b) reports the classification of traded goods as commodities or differentiated goods based on 2-digit SIC codes.
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Table 6. Sensitivity Tests: Estimates Decomposing Traded Goods into Commodities and Differentiated Goods
Growth in Local Currency ValuesGrowth in U.S. Dollar Values
Sales | Net Income | Market Capitalization | Assets | Sales | Net Income | Market Capitalization | Assets | |||
Depreciation t+1 | 0.119 | 0.043 | –0.155 | –0.065 | 0.048 | –0.666 | –0.238 | –0.139* | ||
(0.115) | (3.328) | (0.425) | (0.083) | (0.093) | (2.947) | (0.295) | (0.072) | |||
Depreciation t | –0.071 | 11.120* | –1.073 | –0.108 | –0.344** | 9.002* | –1.172** | –0.400** | ||
(0.205) | (5.871) | (0.854) | (0.148) | (0.166) | (5.325) | (0.521) | (0.133) | |||
Depreciation t–1 | 0.198 | 0.773 | –1.392 | 0.225** | 0.158 | 0.222 | –0.366 | 0.119 | ||
(0.158) | (4.784) | (0.909) | (0.114) | (0.127) | (4.013) | (0.401) | (0.106) | |||
Commodityt | –0.106 | –7.550 | –0.276 | –0.019 | 0.005 | –5.726 | –0.272 | 0.058 | ||
(0.176) | (5.170) | (1.336) | (0.127) | (0.142) | (4.628) | (0.446) | (0.118) | |||
Commodityt–1 | –0.116 | 3.738 | –0.635 | 0.197 | –0.053 | 1.502 | –0.221 | 0.270* | ||
(0.221) | (6.691) | (1.068) | (0.160) | (0.178) | (5.618) | (0.561) | (0.148) | |||
Differentiated | 0.051 | –13.427** | 0.369 | 0.023 | 0.055 | –10.474** | –0.027 | 0.008 | ||
Goodt | (0.144) | (4.483) | (0.621) | (0.104) | (0.116) | (3.992) | (0.370) | (0.098) | ||
Differentiated | –0.123 | –4.490 | –0.062 | –0.075 | –0.151 | –2.946 | –0.123 | –0.086 | ||
Goodt–1 | (0.146) | (4.178) | (0.544) | (0.106) | (0.118) | (3.727) | (0.372) | (0.101) |
Notes: Regression identical to that reported in Table 5, except the Traded dummy variables are replaced with the Commodity and Differentiated Good dummy variables; standard errors in parentheses; estimates include random industry effects; * is significant at the 10 percent level and ** at the 5 percent level.
HOW DO LARGE DEPRECIATIONS AFFECT FIRM PERFORMANCE?
There are three possible explanations (at least) for why depreciations appear to have a significant negative impact on income growth for firms producing differentiated goods relative to firms producing other output. First, since many countries in the sample produce similar products and experienced depreciations around the same time, this may have eroded the relative cost advantage tradi- tionally provided to traded goods by depreciations. Duttagupta and Spilimbergo (2000) provide evidence that these “competitive depreciations” were important factors explaining why the depreciations during the Asian crisis only had a minimal impact on export revenues in many Asian countries. Second, the demand for differentiated traded goods tends to be more income elastic than the demand for non-traded goods and commodities. As a result, if depreciations cause a contraction in income, which occurred in many countries in the sample, this could generate a greater reduction in demand for differentiated goods rela- tive to other products.
A final possible explanation is that the positive effect of depreciations on traded goods predicted by the models is captured in the significant positive coef- ficients on the foreign exposure variables. More specifically, the models predict two main channels by which the relative cost advantage provided to traded goods improves their performance relative to non-traded goods. First, depreciations lower production costs relative to those of competing imports in the domestic market. This effect could be minimal, however, if exporters in other countries respond by lowering prices, and this “pricing to market” is more likely to occur in differentiated goods. Second, depreciations should lower production costs relative to those of competitors in international markets, leading to an increase in export revenues. Previous empirical work has shown that the second effect tends to be more important than the first, but this second effect could already be captured in the regressions by the coefficients on the foreign exposure variables.18
To test for this effect, I reestimate the base specification in equation (2), but exclude the foreign exposure variables. Coefficient estimates for the relevant variables are reported in Table 7. The coefficient on Tradedt becomes insignifi- cant when performance is measured by net income growth (in either currency), although the coefficient on Tradedt+1 becomes negative and significant at the 10 percent level when performance is measured as net income growth in local currency. Moreover, the coefficients on Tradedt and Tradedt+1 become negative and borderline significant for other performance measures. Therefore, these results suggest that some of the estimated impact of depreciations on traded goods compared to non-traded goods may be captured by the foreign exposure variables in the base specification. When the foreign exposure variables are removed, however, traded goods still do not exhibit superior performance to non- traded goods, as predicted by the models, so other factors (such as “competitive devaluations” or income elasticities of demand) may also be important.
18 For example, Kamin (1988) finds that most of the impact of devaluations on the trade balance occurs through the expansion of exports rather than the contraction of imports. Ghei and Pritchett (1999) survey the empirical literature and do not find strong evidence of a response of imports to exchange-rate movements in developing countries.
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Sales | Net Income | Market Capitalization | Assets | Sales | Net Income | Market Capitalization | Assets | |||
Depreciation t+1 | 0.050 | 0.142 | 0.446 | 0.064 | –0.072 | –0.476 | 0.157 | –0.031 | ||
(0.050) | (0.929) | (0.356) | (0.047) | (0.048) | (0.931) | (0.216) | (0.046) | |||
Depreciation t | 0.035 | 0.399 | 0.853* | 0.116** | –0.357** | –0.938 | –0.242 | –0.279** | ||
(0.057) | (1.250) | (0.509) | (0.053) | (0.055) | (1.064) | (0.246) | (0.052) | |||
Depreciation t –1 | 0.054 | 0.044 | 1.914** | 0.223** | –0.115** | –0.195 | 0.966** | 0.038 | ||
(0.054) | (1.151) | (0.465) | (0.050) | (0.052) | (1.003) | (0.232) | (0.049) | |||
Traded t | –0.013 | 0.224 | 0.342 | 0.005 | –0.071* | –0.271 | 0.054 | –0.079* | ||
(0.043) | (0.911) | (0.394) | (0.040) | (0.041) | (0.799) | (0.187) | (0.049) | |||
Traded t –1 | –0.053 | –1.580* | –0.775* | –0.043 | 0.017 | –0.495 | –0.279 | 0.029 | ||
(0.045) | (0.933) | (0.403) | (0.042) | (0.043) | (0.839) | (0.193) | (0.041) |
HOW DO LARGE DEPRECIATIONS AFFECT FIRM PERFORMANCE?
Conclusions
This paper documents several stylized facts of how recent depreciations affected different measures of firm performance. It uses a sample of over 13,500 firms from 42 countries to examine the impact of 12 “major depreciations” between 1997 and 2000. It evaluates firm performance based on the immediate impact of deprecia- tions on sales and net income, as well as the expected longer-term impact as measured by changes in market capitalization and asset value.
The first part of the analysis focused on how depreciations affect firms on average. It finds that in the year after depreciations, firms have significantly higher growth in market capitalization, suggesting that depreciations increase the present value of firms’ expected future profits. On the other hand, firms have significantly lower growth in net income (measured in local currency), suggesting that even if firms benefit from depreciations in the long run, the immediate impact on performance may be negative. Firms also tend to display worse performance after depreciations when performance is measured in U.S. dollars, but this could largely reflect changes in relative currency values and not significant changes in real performance.
The second part of the analysis attempted to identify which firm character- istics determined the impact of depreciations on individual firm performance. The strongest and most robust result is that firms with greater foreign sales exposure have significantly better performance after depreciations (according to most of the performance variables, whether measured in local currency or U.S. dollars). Firms with higher debt ratios tend to have lower growth in net income, and larger firms often have worse performance than smaller firms, although the significance of these results fluctuates across performance measures and model specification. There is no consistent relationship between a firm’s profitability or capital/asset ratio and the impact of depreciations on performance. Finally, firms producing traded goods tend to have significantly lower income growth than firms producing non-traded goods, but this result is sensitive to the inclu- sion of the foreign exposure variables and does not apply for the other perfor- mance measures.
Although there are a number of factors other than firm characteristics that determine how depreciations affect a country’s macroeconomy, these empirical patterns provide some suggestive evidence of why depreciations can have such varied effects in different countries. The one group of firms that consistently has superior performance after depreciations, whether measured by improvements in sales, net income, market capitalization, or asset value, was firms with greater foreign sales exposure. Therefore, relatively open economies with substantial export experience are more likely to benefit from depreciations, while relatively closed economies with limited export capacity are more likely to experience an economic contraction.
The empirical results, however, did not find evidence of a robust relationship between several other firm characteristics, such as capital/labor ratios, and the impact of depreciations on firm performance. Some of these estimated relation- ships may be insignificant because it is not only the firm characteristic that
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determines the impact of depreciations, but rather the interaction between the firm characteristic and macroeconomic variables (such as inflation, interest rates, government spending, or changes in the composition of aggregate income). For example, a model developed in Forbes (2002a) suggests that for commodity firms, it is not just capital/labor ratios that determine how deprecia- tions affect sales growth, but the interaction between capital/labor ratios and changes in the cost of capital.
Therefore, one promising area for future research is to combine the firm- level evidence on the impact of depreciations in this paper with the more tradi- tional macro-level research in previous work. This could involve aggregating the firm-level effects documented in this paper in order to assess their overall impact at the country level. This could also involve evaluating whether a country’s firm and industry characteristics or its macroeconomic characteristics are relatively more important determinants of how depreciations affect aggregate growth. Finally, this research could also investigate how firm-level factors interact with macroeconomic variables to determine why some depreciations are expan- sionary and others are contractionary.
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HOW DO LARGE DEPRECIATIONS AFFECT FIRM PERFORMANCE?
APPENDIX
Variable Definitions, Sources, and Summary Statistics
Standard
VariableDefinition and SourceMeanDeviation
Assets (Total)The sum of total current assets, long-term receivables, investment3.8825.98
in unconsolidated subsidiaries, other investments, net property, plant and equipment, and other assets. Reported in billions
of U.S. dollars. Source: Worldscope.
Capital/LaborThe ratio of total assets (expressed in millions of U.S. dollars1.149.57
Ratioand defined above) to total employees. Source: calculated based on Worldscope information.
Foreign AssetsThe ratio of assets abroad to total assets (defined above).0.240.22
Source: Worldscope.
Foreign IncomeThe ratio of income generated abroad to total net income0.280.33
(defined below). Source: Worldscope.
Foreign SalesThe ratio of sales abroad to net sales (defined below).0.340.28
Source: Worldscope.
InflationAnnual percent change in consumer prices for the same annual3.116.82
period as the corresponding firm data. Source: International Financial Statistics, line 64..XZF.
MarketProduct of shares outstanding and market price at fiscal year end.1.6710.85
CapitalizationIncludes all types of shares. Reported in billions of U.S. dollars.
Source: Worldscope.
Net IncomeIncome after all operating and non-operating income, expenses,0.050.38
reserves, income taxes, minority interest, and extraordinary items. Represents income before preferred dividends. Reported in billions of U.S. dollars. Source: Worldscope.
Return on(Net income before preferred dividends + ((interest expense on0.030.30
Assetsdebt – interest capitalized) * (1 – Tax Rate))) / Last year’s total assets.
Source: Worldscope.
Return on(Net income before preferred dividends – preferred dividend0.030.66
Equityrequirements) / Last year’s common equity. Source: Worldscope.
Return on(Net income before preferred dividends + ((Interest expense on0.060.39
Invested Capital debt – interest capitalized) * (1 – Tax Rate))) / (Last year’s total capital + last year’s short-term debt and current portion of
long-term debt). Source: Worldscope.
Sales (Net)Gross sales and other operating revenue less discounts, returns,1.275.55
and allowances. Reported in billions of U.S. dollars. Source: Worldscope.
Short-TermRatio of local currency value of short-term debt to equity.0.963.56
Debt to EquityShort-term debt is any debt payable within 1 year (including current portion of long-term debt). Equity is common shareholder’s investment in a company, including common stock value, retained earnings, capital surplus, capital stock premium, cumulative gain or loss of foreign currency translations, discretionary reserves, and negative goodwill. Source: calculated based on Worldscope.
Total Debt toRatio of local currency value of total debt to total assets. Total debt0.360.30
Assetsis the sum of short-term debt (defined above) plus long-term debt (which is any interest bearing financial obligations, excluding short- term debt and net of premium or discount). Assets defined above. Source: calculated based on Worldscope.
Total Debt toRatio of local currency value of total debt to equity. Both terms2.045.48
Equitydefined above. Source: calculated based on Worldscope.
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Ghei, Nita, and Lant Pritchett, 1999, “The Three Pessimisms: Real Exchange Rates and Trade Flows in Developing Countries,” in Exchange Rate Misalignment: Concepts and Measurement for Developing Countries, edited by Lawrence Hinkle and Peter Montiel (New York: Oxford University Press), pp. 467–96.
Kamin, Steven, 1988, “Devaluation, External Balance, and Macroeconomic Performance: A Look at the Numbers,” Studies in International Finance, 62 (Princeton: Princeton University).
238
Slow Rockets and Fast Feathers or the Link between Exchange Rates and Exports
Martín Brun Juan Pedro Gambetta
Gonzalo J. Varela
Macroeconomics, Trade and Investment Global Practice August 2020
Abstract
Export responses to real exchange rate (RER) depreciations in Pakistan are lower than those to appreciations. This paper empirically documents this asymmetric response using macro-level data. It then relies on a disaggregated export product–level data set for 2003–17 to test, within a panel fixed-effects framework, three hypotheses explaining the low export response to depreciations, focusing on infor- mation costs, supply constraints, and pricing to market. The analysis finds that (i) exports of differentiated products
grow more slowly when the RER depreciates than they fall when it appreciates; (ii) exports from sectors with relatively greater supply constraints—in particular related to accessing finance- respond less to depreciations than to appreciations; and (iii) dollar prices for Pakistani exports tend to fall after nominal depreciations of the Pakistani rupee, in violation of the Dominant Currency Paradigm and consistent with pricing-to-market behavior, further accounting for the low response of exports to RER depreciations.
This paper is a product of the Macroeconomics, Trade and Investment Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at gvarela@worldbank.org.
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Slow Rockets and Fast Feathers or the Link between Exchange Rates and Exports: A Case Study for Pakistan
Martín Brun1 Juan Pedro Gambetta2
Gonzalo J. Varela3
JEL Classification: D22, F14, F15, L25
Keywords: export performance, real exchange rates, financial dependence, pricing-to-market, developing countries, Threshold Autoregressive Models
1 Universitat Autònoma de Barcelona (UAB) and World Bank (WB).
2 Universidad de Montevideo (UM) and World Bank (WB).
3 World Bank (WB). We thank Fernando Borraz, Lucia Casal, Juan Dubra, Caroline Freund, Adnan Ghumman, Francesco Grigoli, Rafael Guntin, Alen Mulabdic, and Alejandro Riano for insightful comments. The views expressed in this paper are those of the authors and do not represent those of the World Bank Group, its Board of Directors or the countries they represent.
Introduction
Do exports react as fast to a depreciation of the RER as to an appreciation? A depreciation of the RER makes exports more price-competitive in international markets, while an appreciation triggers the opposite effect. But do these effects take place with the same magnitude and speed? There has been a controversy over the efficacy (or lack thereof) of competitive exchange rates for increased export competitiveness (e.g. Gopinath et al 2020). In Pakistan, the active controversy has been brought back to the forefront in the aftermath of the sharp real depreciation of the Pakistani rupee that took place during 2018 and triggered a timid export response. If appreciations depress export performance by more than depreciations boost it, it is crucial to understand why.
Exports matter. First, they can generate growth when foreign markets are demanding high-quality products, and they grow faster than the domestic economy. Second, exports in Pakistan are labor intensive, so demand for labor rises with them, contributing to the creation of jobs that typically pay better wages than jobs in inward-oriented sectors. Third, strong export growth also helps bring in foreign exchange, needed to prevent balance of payments crises. The link between exports and the RER also matters. Evidence in cross-country settings has pointed to the importance of ‘competitive currencies’ as a big push that encourages both more entries of new firms into exporting as well as export successes. As argued by Freund and Pierola (2012), real depreciations in developing countries act like a ‘grand opening sale’, and once customers start coming, “many
of the new relationships are maintained even after the sale is over”.4 Is that channel at work in Pakistan?
This paper combines macro and product-level analysis to document an asymmetric response to RER changes in Pakistan’s exports and then to test three different and complementary hypotheses to explain the relatively lower export response to depreciations. First, whether the response depends on the type of product that is being exported – homogeneous, traded in organized markets, versus differentiated. Second, whether it depends on supply constraints that different sectors may face, related to access to finance, structural financial dependence, and factor intensities. Third, whether export dollar-prices tend to fall when the rupee depreciates, due to some sort of pricing- to-(source)market behavior of global buyers. To the best of our knowledge, this is the first study that empirically tests asymmetric export responses to exchange rate changes in Pakistan, and that offers empirical evidence backing three plausible determinants of weak export responses to RER depreciations. The case of Pakistan is relevant. It is an example of many low-middle income country contexts in which exporters operate with imperfect capital markets, inadequate complementary services to exporting, and connect to global buyers with some degree of market power.
To measure the asymmetric export response to RER changes, this paper uses macro-level data on exports, RERs, and global income, relying on a threshold autoregressive model to test long and short-term export elasticities with respect to RERs, as well as the speed of adjustment to departures from the long-term relationship. It then relies on detailed product-destination-year-level data on exports, combined with information on bilateral real exchange rates (BRER), measures of sectoral
4Also, Baldwin and Krugman (1989) show persistent trade (and export) effects associated to large changes in exchange rates). More recently, Das et al (2007) show that export responses to exchange rate changes depend on entry costs, prior export experience and expectations about the real exchange rate process.
financial dependence, sectoral access to export finance schemes, sectoral factor intensities, and export dollar-prices, to test within a fixed-effects model framework the three complementary hypotheses to explain the observed relatively weak export response to depreciations.
Asymmetric export responses to RER changes have been previously discussed in the literature. Javed et al. (2016) argue that overvalued (relatively appreciated) exchange rates in Pakistan have adversely affected export competitiveness, while depreciations have failed to deliver on greater exports because they have been neutralized by loose monetary policies, leading to limited – if any – improvements in the RER. Asymmetric export responses to changes in the RER have been uncovered in other countries too. In India, Cheung and Sengupta (2013) find an asymmetric response of firm-level exports to upward and downward movements in the RER. Demian and di Mauro (2018) also look at firm-level data for a set of European countries and find larger export responses to appreciations than to depreciations. For Singapore and the Czech Republic, Bahmani- Oskooee and Harvey (2017) and Šimáková (2018) unveil similar results.
However, there is little systematic evidence on the underlying drivers of the asymmetry. Dhasmana (2015) stresses the importance of industry concentration, access to domestic finance, and foreign ownership. Demian and di Mauro (2018) propose that it responds to quantity rigidities, impeding firms from selling as much as demanded after depreciations, and price rigidities restraining exporters to lower prices enough after appreciations. Javed et al. (2016) state that real depreciations in Pakistan tend to fall short of correcting an already overvalued currency, although without formally testing the underlying drivers of the claim.
The main result of this paper is that exports react faster when the RER appreciates (behaving like fast feathers) than when it depreciates (behaving like slow rockets). Results from our threshold autoregressive model show that while 45.9 percent of the adjustment to a negative shock takes
place within one quarter, only 12.7 percent of the adjustment to a positive shock takes place within the same period. Exports fall faster than they rise. The asymmetric export response after a change in the RER unveiled at the macro level is robust to the periodicity of the data, and to its level of disaggregation. Indeed, a similar pattern is revealed when using an alternative method and data set at a higher level of disaggregation, to estimate the reaction of the export of a particular product to a particular destination after a change in the bilateral real exchange rate (BRER). Our results show that every 10 percent bilateral real appreciation leads to a decline in exports to that destination by
0.68 percent, while every 10 percent bilateral real depreciation leads to an increase in exports of
0.51 percent. The difference is both statistically and economically significant.
Our proposition is that this weaker export response to depreciations is related to hurdles exporters face in export markets and at home that prevent them from taking full advantage of improvement in price competitiveness – i.e. depreciations of the RER, given world income. These include information costs to enter new markets or expand shipments, supply capacity constraints – in the form of difficulties in securing credit to build up capacity or access new workers – and pricing to market, in turn linked to market power global buyers have.
Our second finding relates to the role of information frictions in determining a weak export response to depreciations. Information frictions make sales expansion after depreciations lengthier than sales contractions after appreciations. Products such as linen, trousers, and shirts, that are largely differentiated, require an active connection between buyer and seller, familiarity with market demand abroad, and pricing strategies. Products such as rice are sold instead in organized markets with reference prices. We exploit the variation in the extent of product differentiation, relying on Rauch’s (1999) classification, and test whether the relatively weak export response to depreciations is more prevalent in differentiated or in homogenous products. On average and
ceteris paribus, the export response to bilateral depreciations among differentiated products is 27 percent lower than to bilateral appreciations. Instead, there is no difference in export responses to appreciations or depreciations for homogenous products.
Our third finding relates to the role of supply constraints in limiting the ability of exporters to fully react to improved relative price conditions. We look at supply constraints through three sector- specific angles. First, by exploiting sectoral differences in access to Pakistan’s largest export finance schemes run by the State Bank of Pakistan (the export finance scheme (EFS), and the long- term finance facility (LTFF)), and second, by exploiting sectoral structural differences in terms of financial dependence. We rely on Rajan and Zingales (1998) measures on external finance needs of U.S. firms, which due to size and access to a deep capital market isolate needs derived from the sectoral technological production process. Third, by exploiting sectoral variation in the extent to which a sector intensively uses the country’s most abundant factor – labor. We find that responses to bilateral exchange rate depreciations vary alongside sectoral characteristics. Sectors with higher access to finance, lower structural financial dependence, and higher labor intensity are associated with larger exchange rate elasticities to depreciations, relative to those sectors with lower access to finance, and higher structural financial dependence or capital intensity. We estimate that, on average, an additional 10 percent value of loans per export is related to a 5 percent larger export elasticity with respect to the BRER. The other two structural characteristics appear to cut sectors’ responses more sharply. We find that a 10 percent rise in finance dependence implies a 22 percent decline in the responsiveness of exports to BRER depreciations, while a 10 percent increase in labor intensiveness is associated with a 30 percent increase, respectively. These two channels – information costs and supply constraints – are not only statistically significant but also economically significant. A back-of-the-envelope calculation using our estimates suggests that if
differentiated products reacted to depreciations as much as they do to appreciations, and if all sectors had the same access to finance as the sector with the highest level (electrical machinery), after the real depreciation observed between December 2017 and June 2019, exports would have grown by an additional 1.5 percentage points.
Our fourth finding relates to the role of pricing to market in determining the asymmetric response to the BRER. International buyers could be reaping part of the potential benefits of bilateral depreciations by adjusting the dollar price offered to local sellers, after the domestic currency depreciates substantially if they have some market power. We test this hypothesis following the method introduced in Knetter (1989). We analyze differences in Pakistani exporting prices by selling destination. Markup adjustments tend to stabilize export prices in rupees, and the stabilization is amplified during depreciations. On average, dollar export prices react by 15 percent more to Pakistan’s currency depreciations than to appreciations. This asymmetric response of export dollar prices is more pronounced, the larger the change in the exchange rate is, suggesting global buyers to some extent smooth prices in rupees rather than in dollars. Again, this result is economically significant. Back-of-the-envelope calculations suggest that in the absence of pricing to sourcing market in Pakistan, Pakistani exports would have grown by an additional US$150 million, which accounts for an additional 0.6 percentage points.
The remainder of the paper is structured as follows. Section 2 reviews the related literature. Section 3 presents the data and empirical strategy. Section 4 discusses the results. Section 5 concludes.
Literature Review
The RER is a key indicator of a country’s price competitiveness with its trading partners. When it depreciates, production costs for domestic firms fall relative to foreign competitors. This enables
local firms to be more competitive in other markets and increase their participation. And while the link between RERs and exports has been widely analyzed, the empirical literature is not conclusive on the degree, timing, and symmetry involved in that relationship.
Freund and Pierola (2012) provide evidence on the role of what they call ‘export surges’ – rapid increases in exports. In contrast, Colacelli (2009) finds, with annual data from 136 countries, that export exchange rate elasticity is low in developing countries and high in developed ones, in line with earlier results of Hooper and Marquez (1995) and Reinhart (1994). Bayoumi (1999) focuses on developed countries and analyzes the timing of the impact of exchange rate changes in exports. Results point towards a delayed realization of the maximum effect, up to the fourth year. Bernard and Jensen (2004) find that the increase in U.S. exports between 1987 and 1992 due to exchange rate changes was not widespread, but concentrated mostly in firms already exporting, with timid effects on the extensive margin – new firms starting to export. In contrast, Albinowski et al. (2016) find, in the context of Polish firms, that exchange rate depreciations affect the decision to start exporting rather than the intensity with which they export and that it is dependent on how many imported inputs firms use, in line with results previously unveiled by Amiti et al. (2014). Because exporters also need to import inputs to produce exportable goods, effects of exchange rate depreciations on exports are dampened.
For Pakistan, Abbas and Waheed (2015) uncover a negative impact of RER appreciations on the ratio of exports to total sales for a reduced set of Pakistani firms for the period 1998 to 2010. Kemal and Qadir (2005) find that the exchange rate in Pakistan is associated with exports, but that in the short-term, exports adjust slowly towards equilibrium when there is a need to expand capacity to fulfill increased export orders. Ahmad et al. (2017) look at the link between exports, the RER, and world income for the period 1970 to 2015 and find no export response to exchange rate changes.
More recently, Pirzada (2019) uses a structural VAR model, and argues that the fact that devaluations have only had limited effects on export growth is related to a delayed effect, with exchange rate devaluations taking around a year and a half to positively affect the value of exports. The author estimates that by the sixth quarter, the elasticity of exports to the RER is 1.33.
Recent studies have documented that exports react asymmetrically to exchange rate changes.5 Cheung and Sengupta (2013) estimate that appreciations had stronger effects on Indian exports than depreciations during 2000-2010, using firm-level data. Also examining data at the firm-level, Demian and di Mauro (2018) find that exports of 10 European countries reacted mostly to appreciations rather than depreciations in 2000-2012 – and that it is large changes in the exchange rates that appear to matter. Bahmani-Oskooee and Harvey (2017) and Šimáková (2018) also document differing impacts in Singapore and the Czech Republic. Bussiere (2013) focuses on the pass through of the RER to export and import price reaction for appreciations and depreciations in G7 economies between 1980 and 2006, uncovering different responses to appreciation and depreciations although with noticeable variation across countries. However, there is little evidence on the underlying drivers of the asymmetry. Dhasmana (2015) finds that the degree of industry concentration, access to domestic finance, and foreign ownership determine the impact of exchange rate changes on Indian firms’ performance. Demian and di Mauro (2018) propose that the asymmetric response they find is theoretically underpinned in quantity and price rigidities. Quantity rigidity impedes firms selling as much as demanded after depreciations, particularly in the case of differentiated products. Price rigidity restrains exporters to lower prices enough after appreciations to not lose demand. This proposition, however, is not tested empirically. Two
5 Models incorporating asymmetric responses have been common in the literature of market integration and price transmission. A classical reference is that of Peltzman (2000) in which the author shows that output prices rise faster than they fall after a change in input prices, introducing the analogy of prices rising like rockets but falling like feathers. Tappata (2009) builds a model that explains that behavior without the need for market power.
aforementioned studies for Pakistan also hint to the asymmetries and potential drivers. Javed et al. (2016) show that nominal depreciations tend to fail to impact exports positively as they fall short of correcting currency overvaluation and are neutralized by increased domestic production costs, while Abbas and Waheed (2015) argue that, even considering RER depreciations, exports take so long to respond because of supply constraints.
Structural characteristics of products, or the conditions under which they are produced, may affect responses to similar contexts. In this paper, we focus on three complementary explanations for asymmetric and heterogeneous responses of exports to exchange rate changes.
The first hypothesis relates to information barriers in international trade that may delay supply responses to changes in the RER. We rely on Rauch (1999), who provides a systematic classification of products into different categories, depending on how easy it is for matching of buyers and sellers to happen. The argument is that, for differentiated products, the relationship between buyers and sellers (and the embedded existing information in that relationship) matters more – and therefore it is costly to build it. For commodities – homogenous goods or goods traded in organized markets – prices provide all necessary information, so supply is less likely to be affected by the search processes to which the differentiated goods trade is subject.6 Empirical studies have characterized differentiated products, in comparison with homogenous goods, as more reliable on proximity and common language or colonial links (Rauch 1999), less frequent trade in
U.S. dollars (Goldberg and Tille 2008), with lower price elasticities (Erkel-Rousse and Mirza 2002; Broda and Weinstein 2004) and higher markups (Feenstra and Hanson 2004).
6 Rauch (1999) divides products into three separate categories: (i) traded in organized exchanges; (ii) traded with reference prices; and (iii) differentiated. For example, products traded in organized exchanges include rice and cotton yarn; products traded with reference prices cover cement and fabric; and differentiated products include linen, shirts, and cloths.
The second approach focuses on supply constraints that hurdle beneficial production expansions. An argument often cited by policy makers and industrial leaders alike to explain the timid export responses to exchange rate depreciations in Pakistan is the ‘lack of export surplus’. This argument implies that firms struggle to ramp up production when conditions improve. One source of the difficulty lies in shallow credit markets. The fact that exporters are more dependent on external finance than domestic firms is well documented (Amiti and Weinstein 2011; Manova 2013). The need for financing working capital lies in the fact that there is a substantially longer lag between production and payment for exports than for domestic transactions. This is due to the longer transit and customs clearance times and implies that exporters are more reliant than domestic firms on working-capital finance. Exporters also require greater access to external finance to cover the larger costs associated with international transactions. Similarly, long-term finance is also crucial due to the needs of exporters to invest in technology to remain competitive. Pakistani exporters are no exception. When we interviewed an apparel firm that had re-purposed production into personal protective equipment in the context of the COVID-19 pandemic, the manager claimed that to scale up production, they needed to switch from manual to automatic stitching. The stitching machine enabled workers to stitch 100,000 masks per day, while the manual process only allowed for 20,000. The technology could be sourced from China for US$60,000. Yet, even though the investment project had a positive net present value, there was no credit available to carry it out. The extent to which this anecdote is representative of the reality of exporters is to be tested. During 2003-2017, the ratio of credit to private sector to GDP was 21.7 percent, suggesting credit tends to be scarce and is a plausible and important supply constraint.7
7 Domestic credit to GDP ratio is obtained from World Development Indicators, World Bank.
We look at supply constraints through three different and complementary angles: (i) the extent to which different sectors have different access to finance, (ii) the extent to which different sectors are structurally dependent on financing to produce, and (iii) the factor intensity of the sector, in the assumption that labor-intensive sectors will react better to depreciations of the RER, as it is easier to secure additional labor in a labor-abundant country. On the one hand, the functioning of financial institutions appears as a determinant in firms’ performance in foreign trade. Chor and Mayora (2012) find that trade flows adjusted more to the financial tightening during the 2008-09 crisis than GDP. Countries with stronger financial institutions have been found to export more successfully in sectors that need more external capital (Svaleryd and Vlachos 2005; Hur et al. 2006). Manova (2013) determines, for a panel of 107 countries from 1985-1995, that around a quarter of the effect of credit constraints on trade is driven by output reduction. Most of the impact is centered on exporting firms, both in the extensive and intensive margins. Paravisini et al. (2015) state that credit constraints reduce exports mostly by raising the variable cost of production, rather than by limiting long-term investments. Minetti et al. (2018) look at how financial structures affect export sector dynamics, showing that domestic banks tend to promote expansions of exports by reducing exit rates, rather than by promoting entry. On the other hand, Pakistan is relatively abundant in labor, as opposed to capital (Mayer and Wood 1999; Abbas and Waheed 2017). Related literature documents the structural advantages that labor intensity provides for certain exports. Mayer and Wood (1999) measure resource availability for South Asia and provide evidence of the concentration of exports in labor-intensive manufactures. Hua (2007) connects labor intensiveness with RER variations in 29 Chinese provinces. RER depreciations favor labor use in production over capital. Cheung and Sengupta (2013) find, for Indian firms, that exports’ increase due to currency depreciations is lower when labor costs are higher.
The third explanation proposed is that of pricing-to-market (PTM) behavior. If global buyers have market power, they could extract some of the gains a depreciation brings to Pakistani exporters, by paying lower dollar-prices when the rupee depreciates against the dollar, if Pakistani sellers do not have attractive fallback options. Indeed, when we interviewed textile and apparel exporters on why their exports did not react more strongly to the depreciation of the rupee in 2018-19, their answer was that part of the benefits had been passed on to foreign buyers. It was also mentioned that ‘every time (the) rupee depreciates those overseas buyers demand discount(s) that is (are) at least 50 percent of the depreciation’.8 If client search costs are relatively high, exporters may be willing to take that cut. This would violate one of the propositions of the ‘Dominant Currency Paradigm’ (DCP) proposed in Gopinath et al. (2020), namely, that terms of trade are in the short and medium term, independent of exchange rate fluctuations, and instead are in line with some sort of ‘pricing-to-(source)market’ argument pioneered by Krugman (1987). Krugman documents that after a strong depreciation of the U.S. dollar, prices from a set of German imports diverged from those charged to other trading partners, absorbing more than 30 percent of the appreciation in the currency. Knetter (1993) uncovers further evidence on PTM for U.S., U.K., German, and Japanese industries, highlighting the wide variation across products. Gagnon and Knetter (1995) estimated different markup for auto-makers against exchange rate changes from foreign buyers, from around 70 percent for Japanese firms to 0 percent for U.S. companies. Nakamura and Zerom (2010) and Goldberg and Hellerstein (2013) find evidence of PTM behavior for the coffee and beer industries in the United States, respectively.
8 For a report on this matter, see https://www.thenews.com.pk/print/497025-how-exporters-handed-the-benefit-of- devaluation-to-buyers. Accessed June 1, 2020.
Data and Empirical Strategy
Data
To test the existence of an asymmetric response to exchange rates and explore three complementary explanations, we use data sets at the macro and product-destination levels.
We use macro-level data for assessing export adjustment to changes in the RER from 1996 to 2019 – the choice of the period being of the maximum length the data allow. Pakistan’s exports at the quarterly level are obtained from the International Monetary Fund’s (IMF) International Financial Statistics - until end-2002 - and from the State Bank of Pakistan (SBP) starting from 2003; annual export data for robustness are obtained from the World Bank; the RER is obtained from Bruegel’s data set (Darvas 2012). Because quarterly data for global income for the period of analysis were not available, we proxy them by using the combined GDP of China, the United States, Japan, and the EU-28, which, altogether, account for 68 percent of the world’s income.9 GDP for China is obtained from the Bureau of Statistics of China, the United States’ from the U.S. Bureau of Economic Analysis, Japan’s from the Economic and Social Research Institute, Cabinet Office of Japan, and the EU’s from Eurostat; exchange rates used to convert foreign GDPs to U.S. dollars are from the IMF.
We use product-destination-year level data for checking robustness of our macro-level results and testing our proposed hypotheses on the drivers of the asymmetric export response. We obtain product-destination level exports from UN Comtrade at HS6 level for 2003 to 2017. The choice of the period is again determined by data availability. We compute BRERs based on nominal exchange rates taken from the Bank of International Settlement (BIS) and price indices taken from
9 The sum of these economies represents 67.9 percent of total GDP and 53.0 percent of total Pakistani exports in 2003- 2017.
World Development Indicators of the World Bank. We also take trading partners’ GDP from World Development Indicators.
To test our hypothesis, we collect additional information at sector and product level. First, we use Rauch’s (1999) classification of export products into differentiated and homogenous products. Second, we use data on outstanding loans by sector, for the period 2015-2017 from the two largest export finance schemes run on a concessional basis by the SBP: Export Finance Scheme (EFS) and Long-Term Finance Facility (LTFF), to proxy sectoral access to finance. Because these schemes target specific sectors and are by far the country’s largest export financing schemes, the outstanding loans by sector is a good indicator of the sectoral access to finance.10 Third, we use sectoral measures of finance dependence as presented in Rajan and Zingales (1998). The indicators signal the reliance on external funds to cover long-term investments and dependence from banks, as the fraction of capital expenditures not funded by internal funds. Fourth, we use data on labor intensity estimated for 63 sectors of the economy, based on a Social Accounting Matrix for 2013- 14, constructed by the International Food Policy Research Institute (IFPRI) for Pakistan. Fifth, we proxy dollar export prices with unit values, by calculating the ratio of export values and quantities at a six-digit disaggregation of the HS classification, from UN Comtrade.
Empirical Strategy
We start analyzing the link between exports and the RER at aggregate levels. We model exports as a function of the RER and global income and use an error correction model (ECM) to analyze
10 The EFS was put in motion in 1973 and provides short-term financing to exporters. The LTFF started in 2008 and provides long-term financing for investments in plant and machinery for export purposes.
the short-run dynamics and the adjustments toward the long-run equilibrium. The model is specified as follows11:
����X = �� + �� ����������
4
+ ���� �������� + � ��
+ ��
(1)
��11
��
��1��
��
����
��
Δ����X�� = ��2 + � ��2,��Δ����X��−�� + � ��2,��Δ������������−�� + � ����2,��Δ��������
+ ����2�����−1
(2)
��=1
��=0
��=0
4
where X�� is the total real exports (deflated by U.S. GDP implicit price deflator); �������� is the real effective exchange rate (with �������� = (���������� × ����)⁄����, which implies that a rise in ��������
����
accounts for a decrease of Pakistani price-competitiveness) 12; ���� is the world income, proxied by the GDP of the United States, Japan, the EU, and China; ���� are quarterly dummies for �� = (1, … ,4), accounting for specific effects for each quarter in quarterly data; Δ refers to the first difference of the variables; �� is the maximum number of lags in the model; and �����−1 is the estimated one-lagged residuals from equation (1). The coefficient ���� is the speed of adjustment, showing how exports adjust to the long-run equilibrium: when ���� ∈ (−1,0), lagged residuals are gradually corrected, and trade flows converge to the equilibrium. We estimate the model with quarterly data, spanning from 1996-Q1 to 2019-Q3. As a robustness check, we estimate the model with annual data, from 1996 to 2018.
11 Thorbecke and Kato (2012), Bayoumi et al. (2011), Chen et al. (2012), and Allard et al. (2005).
12 Where ����������
��
��=1
������(��)����(��)
is the nominal effective exchange rate of Pakistan, constructed as the
geometrically weighted average of the nominal bilateral exchange rate between Pakistan and its trading partners ��
(expressed as foreign currency price of one unit of Pakistani rupee); ���� is the Consumer Price Index of Pakistan, and
���� = ∏�� ��(��)����(��) is the geometrically weighted average of the Consumer Price Indices of Pakistan’s trading
����=1��
partners.
We test whether export, RERs, and world income have unit roots, using Augmented Dickey-Fuller tests. We find evidence of all three series being I(1), and their first differences being I(0). Similarly, we test for cointegration of the long-run relationship in equation (1) relying on a two-step Engle- Granger test, finding evidence of cointegration, further validated by the statistical significance of the speed-of-adjustment coefficient in the error correction model specified in equation (2).
We test the asymmetric adjustment of exports by following a threshold autoregressive (TAR) model, in which we split estimated one-lagged deviations (�����−1) above and below the long-run equilibrium. We obtain two variables: positive deviations (�����−1−) and negative deviations (�����−1+), for which we estimate the effects over exports. Positive deviations (�����−1−) imply that exports are above the equilibrium (yielding a negative estimated one-lagged residual), so the adjustment requires a decrease in exports (downward adjustment). Negative deviations (�����−1+) imply exports are below the equilibrium, so adjustment requires an increase (upward adjustment). The resulting model is specified as follows:
��
����X�� = ��2 + � ��2,��
��=1
��
Δ����X��−�� + � ��2,��
��=0
��
Δ������������−�� + � ����2,��
��=0
��������
+ ����−�����−1−
(2’)
4
+ ����+�����−1+ + � ���� + ������
��=��
To test for asymmetric export responses to RER changes – that is if the speed of adjustment implying an upward change in exports is lower than that implying a downward change – we use a one-tailed F-test, based on the priors that the speed of adjustment to equilibrium after depreciations
of the RER is lower than that after appreciations.13 We also conduct a more agnostic two-tailed test to check robustness.
We then test robustness of this result by using product-destination-year level data for Pakistan’s exports over the period 2003-2017. Product-destination-year level allows us to exploit additional sources of heterogeneity in exports to test the three hypotheses regarding the underlying causes of the asymmetric export response to changes in the RER. Also, because Pakistan’s export levels by product are substantially small in global markets, it is reasonable to assume exogeneity of world income and BRER (particularly considering the nominal exchange rate of the PKR to the dollar has been managed during the period).
Our baseline model using product-destination level data is specified as follows:
����X�������� = ��3 + ��3���������������� + ��3���������������� × ������ + ����3������∗ + ������ + ������ + ��������(3)
where X�������� is export volumes of product ���� to partner �� in year ��; ������������ is the bilateral real exchange rate expressed (with ������������ = (���������� × ����)⁄����, which implies that a rise ������������
����
means a decrease of Pakistani price-competitiveness) 14; ������ is a dummy that takes value 1 if the BRER movements correspond to a real depreciation and 0 otherwise; ��∗ is the GDP of the trading partner i at time t; ������ are time fixed-effects for �� = (1, … , ��); ������ are product fixed-effects at HS6 level; and ������������ is the error in the model.
13 This is in turn based on the international empirical evidence and on Pakistan’s conventional wisdom.
14 Where ���������� is the bilateral nominal exchange rate between Pakistan and trading partner �� (expressed as foreign currency price of one unit of Pakistani rupee); ���� is the Consumer Price Index of Pakistan, and ���� is the Consumer
����
Price Indices of Pakistan’s trading partner ��.
The main parameter of interest is ��3, which represents the differential impact that depreciations have on exports, relative to the baseline effect captured by ��3. If ��3 is zero, then bilateral depreciations and appreciations have symmetric effects on exports, while if it is positive, bilateral depreciations have a relatively smaller effect on exports than bilateral appreciations. The expected relationship between exports and BRER is negative: exports shift to a particular destination when price competitiveness with that destination increases (the BRER rate falls).
To test the information frictions hypothesis, we exploit the cross-product differences in the extent to which market information matters for increasing sales, and leverage the classification of products presented by Rauch (1999). We replicate equation (3) in two separate categories: (i) differentiated products, and (ii) homogenous products.15 Categories differ in the available information in the market to export, thus differential impacts could suggest that information costs play a role in the effect of exchange rate change over exports. We also allow for different effects in the intensive and the extensive margin.16 The analysis enables us to see if RER changes differently impact changes in shipment sizes relative to the set-up of new export relationships (at the product-destination level).
To test the supply (or borrowing) constraints hypothesis, we exploit differences across sectors in finance access. It is possible, however, that sectors that, for reasons other than access to finance, respond faster to exchange rate depreciations have access to more financing than sectors that respond more slowly. This would introduce endogeneity in our specification. Hence, we rely on two alternative measures that are more exogenously determined in the Pakistani context: finance
15 For simplicity, we aggregate products (i) traded in organized exchanges, and (ii) traded with reference prices into a single category: homogenous products.
16 Intensive margin is estimated by considering only combinations of products and trading partners active in the previous period. Extensive margin is estimated by converting equation (3) into a Linear Probability Model (LPM) that measures as dependent variable whether the combination of product and trading partner is active.
19
dependence of the sector as measured by internationally defined indicators, and differences in labor intensity. We expand equation (3) separately for each factor as follows:
����X�������� = ��4 + ��4���������������� + ����4���������������� × �������������� + ��4���������������� × ������
+ ����4���������������� × �������������� × ������ + ����4������∗ + ������ + ������ + ��������
(4)
where �������������� corresponds in each case to: (i) access to finance, (ii) structural financial dependence, and (iii) labor intensity. The remaining variables and parameters are as in equation (3).
The main parameters of interest is ����4, which represents the differential impact of an additional point in �������������� for the change on exports in depreciations. This effect is added up to ����4, which accounts for the differential for both depreciations and appreciations. Year effects control for economy-wide changes that may affect both the dependent and main explanatory variables.
To test PTM behavior impact, we follow Knetter (1989), under the logic that firms may change their prices depending on the selling destination.17 Marginal costs for production are common for all destinations, but markups can vary depending on country-specific factors, such as their income and bilateral exchange rate.
We model product export price as follows:
�������������� = ��5�������������� + ��5�������������� × ������ + ����5������∗ + ������ + ���� + ������ + ��������(5)
where ���������� is the unit value of destination-specific HS6 product in current U.S. dollars; ���������� is the nominal exchange rate expressed as Pakistani rupees per trading-partner currency; ������ is a
17 Recent examples include Goldberg and Verboven (2001), Gil-Pareja (2003), and Gaulier, Lahrèche‐Révil and Méjean (2008).
dummy that identifies movements in the BRER corresponding to a real depreciation; ��∗ is the GDP of the trading partner; ������ are time fixed-effects for �� = (1, … , ��); ���� are trading-partner fixed- effects for �� = (1, … , ��) that should reflect cost arising from geography, trade policy, and other institutional frameworks; ������ are product fixed-effects at HS6 level that capture ; and �������� is the error in the model.
The parameter ��5 shows the impact of nominal exchange rates in export unit values. A value of zero implies that prices in current dollars are orthogonal to the movements in the nominal exchange rate. The expected negative values reflect situations in which markup adjustment tends to stabilize prices in rupees, while positive values account for amplifications in the export prices. The main parameter of interest is ��5, which represents the additional impact for depreciations. A value of zero implies that there are no significant differences between appreciations and depreciations. When the value is of the same sign as the ��5, the observed effect amplifies in depreciations. When the sign is the opposite, the effect is moderated in depreciations.
Results
Macro-Level Baseline
We begin with a simple log-log specification linking Pakistan’s merchandise exports at the macro level with the RER, and world income, to estimate long-run elasticities. Results are reported in Table 1, reporting results relying on quarterly data for the period 1996-Q1 to 2019-Q3. As expected, exports are responsive to RER changes and to the world’s income. A 10 percent depreciation of the RER is associated with a 4.92 percent increase in exports in the long run. A 10 percent growth of world income is associated with a 10.46 percent expansion of exports in the long run. These results are in line with those reported by Pirzada (2019) when using an Autoregressive
Distributed Lag model (ARDL) for the period 1994-2018. Results using annual data are in line with those using quarterly data, although the RER coefficient is poorly determined due to the small sample size (see Table A.1 in the Appendix).
Table 1: Long-run relationships for Pakistani exports
Quarterly
VARIABLES(1)
��������������-0.492*** (0.165)
������∗1.046***
(0.076)
Quarterly dummiesYes
Observations95
R20.881
***, **, * imply significance at the 1%, 5% and 10% respectively.
Newey-West SE are reported in parenthesis.
In column 1 of Table 2, we present the results for the error correction model. The estimated speed of adjustment is significant and negative for both quarterly and annual data. For quarterly data, about 28 percent of the disequilibrium from the long-term relationship is corrected in one quarter. Annual data estimates show that 73.5 percent is corrected within the year, in line with quarterly estimates (see Table A.2 in the Appendix). The significance of the coefficient implies that, as expected, deviations from equilibrium conditions are corrected, and its absolute value below one shows corrections are gradual. This provides further evidence for the finding of cointegration when using the two-step Engle-Granger test.18 In Column 2 we present results when we separate deviations from the long-run equilibrium into positive and negative, allowing for different speed of adjustments to new equilibria when exports are above or below the long-run equilibrium modeled by equation (1). This parameterization of the ECM model is analogous to a Threshold
18 For robustness, we test cointegration of exports, real exchange rates, and world income using a VECM, finding evidence aligned with that reported here. Results from the VECM are presented in Table A.7 in the Appendix.
Autoregressive Model (TAR) commonly used in the literature to examine asymmetric responses of given variables to its determinants.19 The lag structure for this ECM is determined by maximizing the Akaike Information Criteria (see Table A.3 in the Appendix for results).20 The speed of adjustment is only significantly different from zero for lagged positive residuals, which implies that, when the RER appreciates, exports respond downward. The speed of adjustment for lagged negative residuals is not statistically different from zero indicating that when the RER depreciates, exports do not react.21
Table 2: Error correction model for Pakistani exports
��
��−1
19 For alternative specifications of a TAR model, and M-TAR model, see the Appendix.
20 The stability of the coefficients is tested using a CUSUM, and the null of no structural break cannot be rejected at standard significance levels (see Figure A.2 in the Appendix).
21 We also check another form of asymmetry in the export response. Namely, if exports respond more to large changes in the RER than to small ones. If there are lumpy investments needed to increase export capacity, then only large improvements in price competitiveness will induce export adjustments, in line with Ss models. Also, large changes may reduce risks of reversals in the RER, hence encouraging investments in export capacity. To test that hypothesis, we split the error correction term into large deviations (above 75th percentile, above the 90th), and small ones. We find that large changes in the RER induce a larger export response than small ones, but the difference is not statistically significant. Results are reported in Table A.3 in the Appendix.
Quarterly dummiesYesYes
Observations9393
R20.4880.499
F-statistic2.80
p-value
H0: upward = downward0.098
H0: upward <= downward0.953
***, **, * imply significance at the 1%, 5% and 10% respectively.
Newey-West SE are reported in parentheses
Figure 1 illustrates these results (panel a for appreciations, and b for depreciations), uncovering the asymmetric nature of the adjustment process of Pakistani exports to changes in the RER, given world income.
Figure 1: Exports’ response due to 1% change in the RER
(a) 1% RER appreciation(b) 1% RER depreciation
Note: The figures show the quarterly adjustment based on the estimated speed of adjustment for appreciations (panel a) and depreciations (panel b).
We test the hypothesis of the upward adjustment being slower than or equal to the downward adjustment, against the alternative that the upward adjustment is faster than the downward adjustment, using a one-tailed F-test. A one-tailed test is valid in case there are strong priors (based on international evidence) suggesting that the relevant null hypothesis implies a specific sign for the difference. The null hypothesis of the upward adjustment being slower than the downward adjustment cannot be rejected (p-value is 0.953). A more agnostic approach assuming no priors on
the direction of the difference in the speed of adjustment entails using a two-tailed test. In that case, the null of equal responses of exports to upward or downward changes in the RER is rejected with 90 percent confidence.
If expectations of reversals or supply constraints prevent export responses moving upwards after real exchange depreciations, it is possible that with large enough depreciations, the asymmetric export response unveiled above vanishes. We check that by interacting the error correction term with a dummy that signals large prior exchange rate movements. We focus on the exchange rate changes rather than on world income changes since the latter variable is more stable, and less subject to large changes. Results, reported in the Appendix (Table A.6), show that it takes large depreciations of the exchange rate for the asymmetry to disappear (those in the top 5 percent of exchange rate depreciations in the sample, for appreciations, the negative export response is not sensitive to the size of the appreciation).22 Yet, we should be cautious to interpret these results given the small sample size.
Taken altogether, these findings confirm that in Pakistan, exports increase like slow rockets but fall like fast feathers depending on whether RER appreciates or depreciates unless the size of the depreciation is very large. These results are in line with those unveiled by Demian & di Mauro (2018) for a set of European countries, and those unveiled by Cheung & Sengputa (2013), at the firm-level, for India.
The follow-up question is why. The remainder of the paper uses a more detailed data set to test a number of hypotheses.
22 We also test whether increased exchange rate volatility, a proxy for uncertainty, affects the asymmetric response identified in this paper. If exporters face uncertainty about the exchange rate, they will be more cautious to carry out necessary, and to some extent irreversible, investments to increase export capacity. We find no effects of exchange rate volatility in determining the asymmetric export response to changes in the RER (Table A.5).
Product-Level Baseline
To test for robustness of the asymmetric-adjustment result, we turn to an alternative more detailed data set. We explore whether the same pattern arises when exports are disaggregated by product- destination. In this case, we test responses to BRER movements, conditional on the relevant partner’s income (GDP) within a fixed-effects model framework.23 With Pakistan being a small economy, its nominal exchange rate being managed during the period, and its exporters - at the product level - being small and therefore price takers, the partner’s income and the BRER can be considered exogenous. Table 4 reports results of estimating equation (3). Column 1 reports the model estimates when ��3 is restricted to zero (i.e. no asymmetric response of export quantities to appreciations and depreciations allowed). Our estimates reveal that exports are price inelastic. A 10 percent bilateral depreciation leads to a 0.61 percent increase in export quantities to that destination, ceteris paribus and on average. Moreover, the elasticity of exports with respect to the trading partner’s income is still below one, but substantially higher than that of the BRER – a 10 percent increase in ��∗ is associated with an increase in export quantities to that trading partner by
3.4 percent. Column 2 reports estimates of equation (3) without restricting ��3 to zero, revealing a differential impact of export quantities to appreciations or depreciations of the BRER. Export quantities fall by more when the BRER appreciates than they increase when the BRER depreciates. The elasticity of export quantities with respect to depreciations of the BRER is 25 percent lower than the elasticity with respect to appreciations (-0.051/-0.068=0.75).
These findings confirm the asymmetric response of exports to changes in their determinants that was found when looking at macro data. Exports fall fast (like fast feathers) when the BRER
23 A longer time dimension of the data relative to the cross-sectional dimension would have allowed testing the hypotheses of this section within a panel cointegration framework.
appreciates, but struggle to rise (like slow rockets) when it depreciates. In particular, the increases in exports experienced following BRER depreciations have been milder than the drops after appreciations.
Table 3: Regression on Pakistani exports quantities. 2003-2017
Total Exports
����
R20.2860.286
***, **, * imply significance at the 1%, 5% and 10% respectively.
SE, adjusted for clustering at the HS6-year level, are reported in brackets.
Deciphering the Channels
Having established that exports in Pakistan respond asymmetrically to the improvement and worsening of conditions, we delve into the underlying drivers of the weak export response to RER depreciations. We focus on three channels: information frictions, supply constraints (proxied by access to and dependence on finance, and factor intensity), and PTM behavior of global buyers. Results are discussed in turn.
Information Frictions
Table 5 shows results of estimating equation (3). Columns 1 and 2 report the model estimates for total exports, as in Table 4. Columns 3 and 4 report the same results when focusing on the intensive margin only, while columns 5 and 6 are the same for the extensive margin (using a linear probability model). These results are in line with those already discussed. Both for the intensive
and the extensive margin, exports are more reactive to appreciations than to depreciations. Proportionately, the difference in the reaction is similar for the intensive margin and the extensive margin of exports.
Table 4: Asymmetric export responses to BRER appreciations and depreciations - 2003-2017
Total ExportsIntensive MarginExtensive Margin
����
***, **, * imply significance at the 1%, 5% and 10% respectively.
SE, adjusted for clustering at the HS6-year level, are reported in brackets.
We then estimate equation (3) for two sub-samples: differentiated products and homogenous products. If part of the reason why exports react less to depreciations than to appreciations of the RER is because increasing shipments or finding new clients takes more time than shrinking or losing clients, since information needs to be gathered in terms of finding clients, building relationships, identifying pricing strategies, and tailoring the product to the needs of the foreign buyer, then it is likely that this asymmetric effect is more marked for differentiated products than homogenous, since these types of information frictions are more binding for them. Results are reported in Table 6.
Table 5: Information costs and asymmetric export responses to BRER – by type of product- 2003-2017
Differentiated productsHomogenous products
����
***, **, * imply significance at the 1%, 5% and 10% respectively.
SE, adjusted for clustering at the HS6-year level, are reported in brackets.
Results are in line with that hypothesis. Column 1 reports the unrestricted model estimates for total exports of differentiated products. Changes in export quantities are associated with changes in BRER, but the association is lower for depreciations than for appreciations. When BRER appreciates by 10 percent, exports of differentiated products fall on average by 0.79 percent. When BRER depreciates by 10 percent, exports increase by 0.58 percent on average, making the elasticity of export quantities with respect to the BRER 27 percent lower for depreciations than for appreciations. Columns 2 and 3 focus on the intensive and extensive margin of exports. Both results show asymmetry in line with total export quantities. Exports of products actively sold to a trading partner are more elastic to BRER changes than overall exports (it is easier to increase or decrease existing shipments after conditions change than to establish new ones (or break them altogether)). They fall by 1.18 percent when BRER appreciates 10 percent, and increase by 0.90 percent when it depreciates by 10 percent. The probability of opening a new product-destination export line drops by 0.11 percent after a bilateral real appreciation of 10 percent, and increases by
0.09 percent after a depreciation of 10 percent. Column 4 reports the unrestricted model estimates for homogenous products. In contrast with previous results, the coefficient associated with the interaction term between BRER level and real depreciations is not significantly different from zero, revealing no difference in the impact of export quantities between depreciations and appreciations for homogenous products such as rice or wheat. When BRER depreciates 10 percent, exports of homogenous products rise on average by 0.36 percent. Columns 5 and 6 confirm this pattern for homogenous products both in the intensive and extensive margin.
We highlight two main results. First, overall patterns reveal the baseline specifications above – at the product-destination level these appear to be driven by the reaction of exports of differentiated products to BRER changes. These products respond differently to appreciations and depreciations, while homogenous products show no evidence of an asymmetric reaction to BRER depreciations. To give a sense of the economic significance of this result, if differentiated products had responded to depreciations as they do to appreciations, and using the estimates from the sample, Pakistani exports of differentiated products would have increased by an additional 60 million dollars per year due to the 21 percent real depreciation from end-2017 to June 2019 – which adds about half a percentage point to growth. Second, exports of differentiated products are more sensitive to BRER variations. On average and ceteris paribus, a 10 percent depreciation is associated with a
0.58 percent increase for differentiated products and a 0.36 percent raise for homogenous products.
Supply Constraints
The usual culprit for slow export responses to RER depreciations is the lack of an ‘exportable surplus’ – in other words, because firms struggle to ramp up production when the RER depreciates. This is not only the untested hypothesis in Abbas and Waheed (2015), but also well-established
conventional wisdom among a portion of policy makers and public opinion.24 The often-repeated notion that exports in Pakistan do not pick up because there is no ‘exportable surplus’ suggests firms struggle to increase production when conditions improve, either because of challenges to build capacity or to secure more workers.
If supply constraints explain the relatively weaker export response to depreciations in RER and appreciations, then sectors that can easily procure additional capital and hire additional labor to ramp up production – either because they have disproportionately more access to finance than other sectors, or because they rely mainly on the abundant factor in the economy, labor – are likely to be better positioned to equally respond to depreciations and appreciations, while those sectors that struggle to access finance, or that rely mainly on the scarce factor in the economy – capital – are likely to show more asymmetric responses to changes in the RER.25 We test this proposition by looking at it from three different angles: sectoral access to finance; sectoral financial dependence; and factor intensities.
We first explore the correlation between our indicators of access to finance (loan intensity by sector), structural financial dependence, and labor intensity. If these characteristics are systematically correlated (i.e. if higher labor intensiveness struggles to access finance), then our estimates will fail to adequately isolate the explanatory effects over exports. We find that the three variables are not statistically correlated at HS2 sectors, as can be seen in Table 7.
24 For example, https://www.dawn.com/news/1367119.
25 In the context of uncertainty, bankruptcy costs can also explain that firms (or, in an aggregated manner, sectors) react more cautiously to improvements in conditions, if some of the investments they need to make to ramp up production are to some extent irreversible (see Dixit and Pindyck 1994; Greenwald and Stiglitz 1993; Varela 2011).
Table 6: Correlation between analyzed supply constraints, by HS2 sector
Access to finance | Finance dependence | |
VARIABLES | (1) | (2) |
Finance dependence | -0.009 | |
[0.961] | ||
n=34 | ||
Labor intensity | -0.285 | -0.050 |
[0.114] | [0.789] | |
n=32 | n=31 |
***, **, * imply significance at the 1%, 5% and 10% respectively.
p-values (in brackets) and number of observations are reported for each correlation coefficient.
Table 8 presents the results of the estimating of equation (4). Equation (4) is an expanded version of equation (3) where we interact the BRER with an indicator of access to finance,, a structural finance dependence indicator from Rajan and Zingales (1998), and a measure of labor intensity. We include these three variables separately (a model in which all variables are included as regressors is presented in Table A.13 in the Appendix).26
Table 7: Supply constraints and export responses to BRER depreciations - 2003-2017
Total Exports | Total Exports | Total Exports | |
VARIABLES | (1) | (2) | (3) |
���������������� | -0.073*** | -0.136*** | -0.010 |
(0.003) | (0.003) | (0.007) | |
���������������� × ��������������_���������������� | -0.032*** (0.008) | ||
���������������� × ��������������_������������������������ | 0.194*** (0.006) | ||
���������������� × ����������_���������������������� | -0.296*** (0.024) | ||
���������������� × ������ | 0.018*** | 0.037*** | 0.001 |
(0.004) | (0.004) | (0.009) | |
���������������� × ������ × ��������������_���������������� | 0.002 | ||
(0.010) | |||
���������������� × ������ × ��������������_������������������������ | -0.057*** (0.008) | ||
0.083*** |
26 Sample sizes in Table 8 differ between each column and from Table 4 and 5 because of coverage in the explanatory variables. The main sectors affected by the exclusion are Fish (Sector 03 in HS2 classification), Edible fruits and nuts (Sector 08), Pearls and precious stones and metals (Sector 71), Optical instruments (Sector 90), and Toys (Sector 95).
��
***, **, * imply significance at the 1%, 5% and 10% respectively.
SE, adjusted for clustering at the HS6-year level, are reported in brackets.
Column 1 presents the results regarding access to finance. The coefficients on the interaction of the BRER with the access to finance ratio are negative, which means that the elasticity of export with respect to the BRER rises as the ratio of outstanding loans to exports of the sector increases. The triple interaction, also including the depreciation dummy, is not statistically different from zero, revealing no specific impact of access to finance on the responsiveness of exports to depreciations of the BRER. Jointly, the coefficients imply that sectors with higher persistent access to finance are more responsive to BRER depreciations, as shown in Figure 2. At the mean, an additional 10 percent in the ratio of loans over exports is related to a 4.7 percent larger BRER elasticity. That is, for the sector exporting linen, with a ratio of outstanding loans to exports of 0.41, the export elasticity with respect to bilateral exchange rates is at 0.06 percent, while for fats and oils, with a ratio of loans to exports of 0.91, the elasticity is almost a third larger, at 0.08 percent. It is possible, however, that sectors with larger export responses to RER depreciations secure more financing in Pakistan, introducing endogeneity. Hence, we use two largely exogeneous indicators of supply constraints, to check for robustness – a structural indicator on financial dependence (due to Rajan and Zingales (1998)), and labor intensities.
Figure 2: BRER elasticity in depreciations, by loan ratio
Column 2 shows the results for the structural indicator on sectoral finance dependence from Rajan and Zingales (1998). Jointly, the coefficients reveal that the elasticity of exports with respect to the BRER decreases as sectoral finance dependence increases, and so does the elasticity with respect to BRER depreciations in particular.
Figure 3: BRER elasticity in depreciations, by finance dependence
Figure 3 illustrates this pattern for different levels of financial dependence. Exports from sectors more dependent on external finance are less sensitive to BRER depreciations. At the mean, an additional 10 percent finance dependence is related to a 21.6 percent lower BRER elasticity. A sector with low finance dependence, similar to that of Shirts (0.03 in the Rajan and Zingales indicator) expands exports, on average, 1 percent for a 10 percent BRER depreciation. In contrast,
a more dependent sector, with levels as of Carpets (0.40), increases exports 0.5 percent when BRER depreciates 10 percent.
Column 3 in Table 8 presents estimates for the link between sectoral labor intensity, BRER depreciations, and exports. The coefficient on the interaction of the BRER and labor intensiveness of the sector is negative, and the triple interaction also includes the depreciation dummy in positive. As in the previous case, the effect is dominated by the first coefficient, but the triple interaction implies a reduction of the elasticity to BRER as labor intensiveness increases. Adding up the effects, the estimates show that exports from sectors more intensive in labor are more sensitive to BRER depreciations, as shown in Figure 4. At means, an additional 10 percent labor intensity in production is related to a 29.8 percent larger BRER elasticity. This implies that a labor-intensive sector, with levels such as textiles (51 percent of labor in value added), increases exports 1.1 percent when BRER depreciates by 10 percent, while a sector with labor intensity similar to apparel (24 percent) rises 0.6 percent.
Figure 4: BRER elasticity in depreciations, by labor intensity
Taken altogether, these results point to the importance of supply constraints in ensuring an export response to RER depreciations. Sectors with lower structural dependence on finance, and those
with relatively higher intensity of labor, show higher export responsiveness to BRER depreciations than those that are more dependent on finance, or whose production process is more intensive in the scarce factor – capital.
To give a sense of economic significance, we use our results to compute a back-of-the envelope simulation in which all sectors have as much access to finance as electrical machinery has. Our results show, after the real depreciation of December 2017 to June 2019, 21 percent of exports would had expanded an additional US$234 million, on average and ceteris paribus, adding one percentage point to growth.
Pricing to Market
The third plausible channel through which depreciations can exert a lower reaction in exports than appreciations is that of pricing to (sourcing) market. One form of it implies that global buyers appropriate some of the profits following a rupee depreciation, decreasing dollar-prices. This is akin to the PTM behavior as described in the seminal work of Krugman (1987) and requires some degree of market power of global buyers. Essentially, if there are costs of searching new global buyers – as the results presented above on information costs seem to suggest – Pakistani exporters may be willing to accept a lower dollar price for their exportable goods after rupee depreciations. In that case, even if export quantities increase following depreciations of the rupee, as dollar-prices fall, the increase in export values is dampened to an extent.
We first plot the evolution of the actual unit values of Pakistani textiles exports (which comprise close to 60 percent of total exports) and the predicted ones (measured as the unit values received by Pakistan’s competitors for the same products) since 2003. If the dollar-prices that Pakistani producers secure in export markets follow the same trends as those secured by the average Pakistani competitors for the same export basket (‘predicted’), then one would expect that the unit
values of Pakistani exports and the predicted line would follow the same trends (even if levels were different, due to, for example, different quality). Figure 5(a) plots these trends along with the evolution of the nominal exchange rate (PKR relative to the dollar). In a context of rupee depreciation, actual and predicted unit values diverge. As observed in Figure 5(b), the divergence implies a reduction in Pakistani relative unit values throughout the years.
Figure 5: Actual and predicted Pakistani unit values for textiles and apparel, and nominal exchange rates (PKR against USD)
Panel (a)Panel (b)
The trends presented hint to global buyers smoothening prices in rupee terms, somehow in line with PTM behavior, and in violation of one of the implications of the dominant currency paradigm. Terms of trade do not seem to be independent of nominal exchange rates. To formally test PTM behavior, we examine whether there is a systematic association between dollar-prices received by Pakistani exporters and the Pakistani rupee/dollar exchange rate, as described in equation (5).
Table 9 presents results for Pakistani export prices. Results show that on average, aggregate dollar- prices are adjusted downwards when the Pakistani rupee depreciates. Column 1 report results of estimating equation (5) when ��6 is set to zero. This restriction imposes the same unit values
37
632
response to appreciations or depreciations of the exchange rate. As shown in column 1, a 10 percent increase in the nominal exchange rate is associated with a 0.38 percent decrease of export prices in dollars. In column 2 we allow for differential impacts for depreciations and appreciations (by not restricting ��6 = 0). Results show that the overall impact on export prices is indeed different depending on whether there is a depreciation or appreciation taking place. Export prices react almost 15 percent more when the rupee depreciates than when it appreciates (the 15 percent is the additional 0.005 impact for depreciations divided by the baseline impact for appreciations, 0.034).
Table 8: Pricing to market in Pakistan (2003-2017)
VARIABLES | (1) | (2) |
�������������� | -0.038*** (0.017) | -0.034* (0.018) |
�������������� × ������ | -0.005** (0.002) | |
���������� | 0.033*** (0.018) | 0.037** (0.018) |
Time FE | Yes | Yes |
Trading-partner FE | Yes | Yes |
Product FE | Yes | Yes |
Observations | 369,916 | 369,916 |
R20.9820.982
***, **, * imply significance at the 1%, 5% and 10% respectively.
SE, adjusted for clustering at the HS6-year level, are reported in brackets.
We further check whether this unveiled asymmetric pattern changes the size of NER changes. Table 10 presents results of estimating equation (6) interacting a set of dummies that identify large changes in bilateral nominal exchange rate (those in the top quartile of the distribution (column 2), those in the top decile (column 3), and those in the percentile 95 (column 4)). Estimates show a differential effect for the top 10 percent and top 5 percent NER changes that accentuates the asymmetric reaction of export prices. Asymmetry in PTM appears to be bigger when NER change
is larger. A 10 percent nominal exchange rate appreciation among the top 10 percent is associated with a 0.19 percent decrease in export prices in dollars. A similar depreciation in the top 10 percent is associated with a 0.43 percent increase in export prices, more than doubling the reaction. Among the top 5 percent NER changes the asymmetry further increases. The reaction of export prices is almost four times larger for depreciation than for appreciations.
Table 9: Pricing to market in Pakistan, by NER change percentiles
(2003-2017) | ||||
Total | p75 | p90 | p95 | |
VARIABLES | (1) | (2) | (3) | (4) |
�������������� | -0.034* (0.018) | -0.033* (0.017) | -0.034* (0.017) | -0.034* (0.018) |
�������������� × �������������������� ���������� | 0.004 | 0.015* | 0.023** | |
(0.003) | (0.008) | (0.010) | ||
�������������� × ������ | -0.005** (0.002) | -0.004* (0.002) | -0.004** (0.002) | -0.004* (0.002) |
�������������� × ������ × �������������������� ���������� | -0.008 | -0.020* | -0.028** | |
(0.005) | (0.011) | (0.012) | ||
���������� | 0.037** (0.018) | 0.041** (0.018) | 0.041** (0.019) | 0.040** (0.019) |
Time FE | Yes | Yes | Yes | Yes |
Trading-partner FE | Yes | Yes | Yes | Yes |
Product FE | Yes | Yes | Yes | Yes |
Observations | 369,916 | 369,916 | 369,916 | 369,916 |
R-squared | 0.982 | 0.982 | 0.982 | 0.982 |
***, **, * imply significance at the 1%, 5% and 10% respectively.
SE, adjusted for clustering at the HS6-year level, are reported in brackets.
(1) NER change percentiles considers absolute yearly variation in bilateral NER between Pakistan and trading
partners.
Finally, we examine sectoral patterns in this PTM behavior. The dollar-price adjustment following changes in nominal exchange rates is not necessarily homogenous across sectors. To test the heterogeneity in the response, we estimated equation (6) for the 25 most relevant Pakistani export products, which represented half of total exports in the analyzed period (see Appendix Table A.14).
Table 11 shows that currency depreciations yield different impacts on export dollar-prices. The prices of 14 of the most relevant export products are affected by currency changes. All show statistically and economically significant dollar-price reductions after rupee depreciations, except for ‘bed linen of cotton’ and for ‘cement’, suggesting that part of the gain in the markup of Pakistani exporters due to a depreciation is appropriated by global buyers. The effect is also economically significant for one of the largest export sectors in Pakistan - Apparel and Clothing (HS chapters 61-62). When we do not allow for differential impact in appreciations and depreciations (restricting ��6 to zero), a 10 percent change in bilateral nominal exchange rate implies prices adjustments from 0.4 percent to 1.4 percent for those type of products. When we allow for depreciations to have a different effect than appreciations on unit values (without restricting ��6 = 0), seven products yield significantly higher adjustment in prices when there is a depreciation. Among these, rice and cotton yarn stand out as they are among the top Pakistani export products in terms of export shares (see Table 11).
Table 10: Bilateral nominal exchange rate elasticity on prices in current US dollars of Pakistani
CODE
100630 | Rice | 7.5% | 1,681 | -0.034 | -0.019 | -0.016** |
630231 | Bed linen of cotton | 4.2% | 1,477 | 0.145*** | 0.033 | 0.000 |
520512 | Cotton yarn | 3.8% | 948 | 0.008 | 0.011 | -0.009** |
630260 | Kitchen linen | 3.4% | 1688 | -0.032 | -0.062* | -0.001 |
271019 | Petroleum oils | 2.9% | 190 | 0.313 | 0.225 | -0.012 |
620342 | Trousers | 2.9% | 1119 | -0.063** | -0.062** | 0.000 |
630210 | Bed linen knitted | 2.4% | 1331 | 0.105 | 0.079 | 0.003 |
630239 | Bed linen not of cotton | 2.2% | 1304 | -0.029 | -0.031 | 0.001 |
610510 | Shirts of cotton | 1.8% | 1179 | -0.127*** | -0.130*** | 0.000 |
420310 | Leather apparel | 1.8% | 1260 | -0.060*** | -0.065*** | -0.002** |
630710 | Cloths | 1.6% | 1122 | -0.072*** | -0.048*** | 0.000 |
620462 | Trousers | 1.5% | 817 | -0.041* | -0.044* | 0.000 |
252329 | Cement | 1.5% | 310 | 0.293** | 0.409*** | -0.003 |
520942 | Fabrics | 1.4% | 795 | -0.026*** | -0.027*** | -0.001 |
711319 | Jewelry | 1.4% | 65 | 0.599 | 0.978 | -0.024 |
901890 | Medical instruments | 1.3% | 1080 | -0.064** | -0.058** | -0.004*** |
610910 | T-shirts | 1.1% | 1236 | -0.072*** | -0.071*** | -0.002*** |
520532 | Cotton yarn | 1.1% | 725 | -0.034 | -0.039 | 0.004 |
520819 | Fabrics | 1.0% | 843 | -0.004 | -0.005 | -0.001 |
620322 | Ensembles of cotton | 1.0% | 617 | -0.125*** | -0.116*** | 0.000 |
610590 | Shirts | 0.9% | 202 | -0.142*** | -0.138*** | 0.004 |
950662 | Balls | 0.8% | 1592 | 0.004 | 0.003 | -0.002*** |
570110 | Carpets | 0.8% | 1094 | -0.055*** | -0.051*** | -0.003* |
100640 | Rice, broken | 0.8% | 788 | 0.055 | 0.058 | 0.001 |
520522 | Cotton yarn | 0.8% | 771 | -0.093** | -0.086** | -0.003 |
***, **, * imply significance at the 1%, 5% and 10% respectively.
(1) Export Share refers to product share in total Pakistani exports in 2003-2017. See Table A.14 in the Appendix for more information.
Conclusion
In this paper we show that exports do not respond symmetrically to appreciations and depreciations of the RER in Pakistan, and that the extent of the asymmetry is substantial, limiting the role that competitive RERs have had in boosting export growth elsewhere. We find this asymmetric pattern to be robust to the periodicity of the data, as well as to the level of disaggregation – asymmetric export responses are also found when using product-destination-level data for exports, and BRERs. The asymmetric export response to appreciations and depreciations only vanishes when exchange rate changes are very large – in the top 5 percent of the exchange rate change distribution, suggesting that it is very large depreciations that allow exporters to overcome information costs, supply constraints, or PTM behavior from global buyers.
We exploit sectoral variation in the extent of product differentiation – proxying the variation in costs associated with gathering information on the buyers when ramping up exports; and variation in access to finance, financial dependence, and factor intensity – proxying variation in supply constraints.
We find, first, that differentiated products – more intensive in information at the time of increasing shipments or building new export relationships than homogeneous products – show a distinct export response to appreciations and depreciations, being more responsive to the former than to the latter, while exports of homogenous products react symmetrically to upward and downward changes in the RER. Second, we confirm well-established conventional wisdom – a part of the failure of exports to grow after RER depreciations lies in the inability of sectors to create ‘exportable surplus’ – or, in other words, to increase supply when conditions improve. Exports from sectors with higher access to finance schemes, lower finance dependence, and higher labor intensity react more to depreciations as they face lower supply constraints. They can obtain
financing to incorporate additional equipment or to get the needed workers that are abundant in the market. Back-of-the-envelope calculations based on our results suggest that if exports of differentiated products responded to depreciations as they do to appreciations, and if all sectors had a similar access to finance as electrical machinery does, after the real depreciation experienced between December 2017 and June 2019, exports would have grown by an additional 1.5 percentage points.
Finally, we test another conventional wisdom assertion – that dollar-prices systematically fall for Pakistani exporters relative to others, when the rupee depreciates, which could be consistent with global buyers with market power stabilizing purchase prices in rupees rather than in dollars, akin to pricing to (source) market. Markup adjustments tend to stabilize Pakistani export prices in rupees, to a larger extent during depreciations. This is further accentuated for larger NER changes. Back-of-the-envelope calculations suggest that in the absence of pricing to sourcing market in Pakistan, Pakistani exports would have grown by an additional US$150 million, which accounts for an additional 0.6 percentage points.
The results provide disaggregated underpinnings for the weaker export response to RER depreciations relative to that to appreciations, and help quantify the importance of each of the three channels – information, supply constraints, and pricing to market. The sluggish reaction to depreciations stems from these three different channels. Public policy should consider how sector, firms, and products’ characteristics determine differential responses to improvements in price competitiveness. Complementary policies addressing those particularities, active export promotion to reduce information costs for differentiated goods, and support to export finance could help achieve more sustained increases in exports.
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Appendix
1Additional Procedures for the Macro-Level Baseline
We use annual data to verify the robustness of our results to the periodicity of the data. Table A.1 shows the long-run relationship for Pakistani exports using annual data from 1996 to 2018. Table
A.2 presents the estimates for the error correction model, allowing for asymmetric correction in column 2.
Table A.1: Long-run relationships exports
Annual
VARIABLES(1)
��������������-0.352
(0.214)
������∗
0.955*** (0.099)
Observations23
R20.911
***, **, * imply significance at the 1%, 5% and 10% respectively.
Newey-West SE are reported in parenthesis.
Table A.2: Error correction model for exports
��
��−1
Observations2121
R20.5680.586
***, **, * imply significance at the 1%, 5% and 10% respectively.
Newey-West SE are reported in parenthesis.
As an additional robustness check, we test whether our main results change with the magnitude of deviations from the long-run equilibrium and with the expectations of stability of the RER depreciations.27
First, we run a set of error correction models modifying the absolute value of the threshold level. We define these thresholds by considering the actual distribution of residuals observed. Results in Table A.3 show that exports seem more responsive to large changes in the RER (large error terms, those in the top 25 percent of top 10 percent of the distribution) than to small ones. Yet, we cannot reject the null hypothesis of the speed of adjustment being the same for small and large deviations.
Table A.3: Error correction model for exports, by size of deviation
��
27 In line with the results in Das et al (2007).
��−1
***, **, * imply significance at the 1%, 5% and 10% respectively.
Newey-West SE are reported in parenthesis.
Second, we control our main results by lagged nominal exchange rate volatility, measured through standard deviation (SD) and coefficient of variation (CV) of the daily NER in the past 1-3 months. The indicators are proxies of exchange rate uncertainty, if agents are backward looking. Results in Table A.4 and Table A.5 suggest that export responses are not affected by past volatility.
Table A.4: Error correction model for exports with symmetric adjustment Heterogeneity by lagged NER volatility
��
��−1
***, **, * imply significance at the 1%, 5% and 10% respectively.
Newey-West SE are reported in parenthesis.
Note: Daily NER used for SD and CV taken from Bank for International Settlements (BIS).
Table A.5: Error correction model for exports with asymmetric adjustment Heterogeneity by lagged NER volatility
��
��−1
***, **, * imply significance at the 1%, 5% and 10% respectively.
Newey-West SE are reported in parenthesis.
Note: Daily NER used for SD and CV taken from Bank for International Settlements (BIS).
Third, we check whether the asymmetric export response to upward and downward changes in the RER depends on the size of the exchange rate change. We find that the asymmetric export response disappears when exchange rate changes are relatively large (top 5 percent).
Table A.6: Error correction model for exports with asymmetric adjustment Heterogeneity by lagged NER volatility
VARIABLES | Baseline (1) | p50 (2) | p75 (3) | p90 (4) | p95 (5) |
Speed of Adjustment (downward) | -0.459*** | -0.432*** | -0.453*** | -0.454*** | -0.455*** |
(0.137) | (0.156) | (0.138) | (0.140) | (0.136) | |
Speed of Adjustment (downward) | -0.067 | -0.088 | -0.024 | -0.368 | |
x Lagged NER change dummy | (0.263) | (0.310) | (0.277) | (0.394) | |
Speed of Adjustment (upward) | -0.127 | -0.296* | -0.171 | -0.141 | -0.080 |
(0.095) | (0.175) | (0.155) | (0.135) | (0.104) | |
Speed of Adjustment (upward) | 0.306 | 0.108 | 0.051 | -0.294** | |
x Lagged NER change dummy | (0.214) | (0.207) | (0.191) | (0.123) | |
-0.287*** | -0.286*** | -0.286*** | -0.289*** | -0.286*** | |
(0.098) | (0.101) | (0.099) | (0.101) | (0.101) | |
0.103 | 0.014 | 0.068 | 0.099 | 0.162 | |
(0.370) 1.030*** | (0.374) 0.815* | (0.387) 0.961** | (0.376) 1.014** | (0.367) 0.934** | |
(0.355) 0.871** | (0.443) 0.894* | (0.435) 0.821* | (0.403) 0.863* | (0.381) 0.783* | |
(0.412) | (0.475) | (0.426) | (0.442) | (0.429) | |
1.147* | 0.848 | 1.064 | 1.123* | 1.099* | |
(0.580) | (0.703) | (0.678) | (0.632) | (0.584) | |
Observations | 93 | 93 | 93 | 93 | 93 |
***, **, * imply significance at the 1%, 5% and 10% respectively.
Newey-West SE are reported in parenthesis.
We use both the Akaike Information Criteria (AIC) and the Bayesian Information Criteria (BIC) to select the best lags for the model. We test several variations and select the structure that minimizes both criteria: including only the first difference.
Table A.7: Model selection
MODEL FORMULATION | AIC (1) | BIC (2) |
Only first difference | -215.84* | -187.99* |
First and second differences | -210.15 | -172.32 |
Up to third difference | -205.39 | -157.68 |
Up to fourth difference | -196.68 | -139.18 |
Up to fifth difference | -194.76 | -132.54 |
Only second difference | -180.09 | -152.35 |
Only third difference | -181.43 | -153.81 |
Only fourth difference | -181.30 | -153.80 |
Only fifth difference | -174.74 | -147.36 |
First and third difference | -207.05 | -166.88 |
First and fourth difference | -201.87 | -161.88 |
* indicates value where the criterion is minimized
In addition, we test the stationarity of the series by running both Augmented Dickey-Fuller (ADF) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) tests. The ADF test is specified with a trend term in the regression, and the null hypothesis for the KPSS is that of trend stationarity. It is worth noting that null hypothesis in ADF is that the variable contains a unit root, and the alternative is that the variable was generated by a stationary process. For KPSS, the null is that the series is trend stationary, whereas the alternative is the opposite. Due to the low power of the tests, and the low number of observations, we include a column with the most data we could find on an annual basis.
Table A.8: Unit-root tests
Augmented Dickey-Fuller
Test statistic (quarterly) | Test statistic (annual) | Test statistic (annual, extended sample) | |
VARIABLES | (1) | (2) | (3) |
Log of exports | -2.656 | -1.214 | -2.973 |
Log of REER | -1.96 | -1.631 | -1.320 |
Log of World GDP | -3.479** | -1.584 | -0.107 |
Δ Log of exports | -15.043*** | -3.753** | -8.878*** |
Δ Log of REER | -8.036*** | -3.549** | -6.496*** |
Δ Log of World | -15.485*** | -3.253* | -4.969*** |
GDP |
Note: All regressions include a trend term.
Column 2 refers to annual data restricted to the same period of quarterly data.
Column 3 is annual data since 1960 for REER and World GDP, and since 1967 for exports.
*, **, and *** implies significance at 10, 5, and 1% level, respectively.
Kwiatkowski-Phillips-Schmidt-Shin test
Test statistic (quarterly) | Test statistic (annual) | Test statistic (annual, extended sample) | |
VARIABLES | (1) | (2) | (3) |
Log of exports | 0.431*** | 0.136* | 0.113 |
Log of REER | 0.364*** | 0.144* | 0.157** |
Log of World GDP | 0.351*** | 0.128* | 0.175** |
Δ Log of exports | 0.109 | 0.159** | 0.116 |
Δ Log of REER | 0.106 | 0.161** | 0.117 |
Δ Log of World GDP | 0.0963 | 0.140* | 0.088 |
Note: Test statistics for the 3rd lag for quarterly data, 8th lag for annual data, and 10th lag for annual (extended sample). These are maximum lags according to Schwert criterion in each case.
The null hypothesis is trend stationarity in all cases
We run cointegration tests. The Engle-Granger tests whether the first difference of the residuals is non-stationary. We reject the null hypothesis (of stationarity) for our main specification, suggesting the series are cointegrated (see Table A.9).
Table A.9: Engle-Granger cointegration tests
Test statistic | p-value | |
(1) | (2) | |
Quarterly data | -3.557 | 0.0066 |
Note: p-value is MacKinnon’s approximate p-value.
We also run a Vector Error Correction Model and find evidence of at least one cointegrating vector between exports, real exchange rate, and world income (see Table A.11). Results for the VECM model show long-run causal relationship (a la Granger, see Table A.13) and short-run causal relationship from real exchange rate and world income over Pakistani exports (see Table A.14). As both relationships stand, we can state that there is Granger causality from RER and world income on exports.
Table A.10: VECM lag selection
LAGS | LL (1) | AIC (2) | BIC (3) |
0 | 137.922 | -2.965 | -2.883 |
1 | 449.998 | -9.626 | -9.295 |
2 | 475.860 | -9.997 | -9.417 |
3 | 496.012 | -10.242 | -9.414 |
4 | 524.655 | -10.674* | -9.598* |
* indicates value where the criterion is minimized.
Table A.11: VECM Johansen cointegration test
RANK | LL (1) | eigenvalue (2) | Trace statistic (3) |
0 | 509.299 | . | 30.712 |
1* | 521.839 | 0.241 | 5.632 |
2 | 524.645 | 0.060 | 0.020 |
3 | 524.655 | 0.0002 |
Note: VECM with 4 lags and constant trend.
* signals the selected number of cointegrating equations.
Table A.12: VECM
Δ����X | Δ���������� | Δ������∗ | |
VARIABLES | (1) | (2) | (3) |
����−1 | -0.373*** | -0.009 | 0.032 |
(0.086) | (0.033) | (0.039) | |
Δ����X��−1 | -0.272** | -0.019 | 0.086* |
(0.106) | (0.041) | (0.048) | |
Δ����X��−2 | -0.103 | -0.028 | 0.180*** |
(0.098) | (0.038) | (0.045) | |
Δ����X��−3 | -0.199** | 0.042 | 0.027 |
(0.096) | (0.037) | (0.043) | |
Δ������������−1 | 0.888*** | 0.255** | -0.166 |
(0.318) | (0.122) | (0.145) | |
Δ������������−2 | 0.977*** | -0.093 | 0.245 |
(0.336) | (0.129) | (0.153) | |
Δ������������−3 | 0.748** | 0.196 | -0.284* |
(0.342) | (0.131) | (0.156) | |
Δ������∗��−1 | 0.054 | 0.022 | -0.413*** |
Δ������∗��−2 | (0.238) 0.859*** (0.225) | (0.091) 0.201** (0.086) | (0.108) -0.209** (0.103) |
Δ������∗��−3 | 0.477** | 0.102 | -0.578*** |
(0.223) | (0.086) | (0.101) | |
Observations | 91 | 91 | 91 |
***, **, * imply significance at the 1%, 5% and 10% respectively.
Table A.13: Long-run Granger causality tests
chi2p-value
VARIABLES(1)(2)
����X | 19.05 | 0.000 |
���������� | 0.07 | 0.786 |
������∗ | 0.66 | 0.418 |
Table A.14: Short-run Granger causality tests
VARIABLESchi2p-value
DEPENDENTINDEPENDENT | (1) | (2) |
����X���������� | 20.43 | 0.000 |
Δ������∗ | 17.02 | 0.001 |
��������������X | 3.22 | 0.359 |
Δ������∗ | 6.11 | 0.107 |
Δ������∗Δ����X | 17.60 | 0.001 |
���������� | 6.87 | 0.076 |
Note: All lags are jointly tested for each variable.
TAR and M-TAR Models
We test for asymmetry in the ECM by adopting a TAR model, in which we split between positive and negative residuals. We first test for asymmetric-adjustment hypothesis following Enders and Granger (1998):
Δ���� = ��������1����−1 + (1 − ����)����2����−1 + ������(6)
with ����
= �1���� ����−1 ≥ 0
0���� ����−1 < 0
Column 1 in Table A.15 shows the resulting estimates, which confirm cointegration between exports, real exchange rate, and world income with TAR adjustment. Results justify the estimation of an asymmetric error correction model, as depicted in the main results and column 2 in Table A.15.
As a robustness check, we follow the same procedure but using a Momentum-Threshold Autoregressive Model (M-TAR) in which the threshold, instead of referring to the level of the residuals, refers to the sign of the change in the residuals:
1���� ∆����−1 ≥ 0
���� = � 0 ���� ∆����−1 < 0
Column 3 in Table A.15 also confirms cointegration with a M-TAR adjustment. Column 4 presents the result for an asymmetric error correction model. We find that speed of downward correction is higher than upward correction, but fail to reject the null hypothesis at a 10 percent confidence.
The models and interpretations differ qualitatively. The TAR model captures `deep’ movements, which makes it better suited for series where persistence of troughs and peaks differ. Concerning exports, we can expect that TAR models fit situations in which the adjustment process differs
depending whether actual exports are above or below the long-term equilibrium. The M-TAR model is focused in sharp movements, adapting better for series with steep movements. We can expect a good fit when exports react to the recent tendency regarding long-term equilibrium, with a distinct pattern when exports close the gap with equilibrium than when they widen the gap.
Our estimates confirm that the main determinant of the asymmetric response of exports is the level of the difference with long-term equilibrium, as tested by the TAR adjustment in the ECM. In turn, the estimates for the M-TAR adjustment in the ECM cannot confirm differences for exports when the difference with long-term equilibrium closed or widened in the previous period. The results allow us to reject the possible concern that the differential response we find in our main specification responds to past changes in the gap with the long-term equilibrium, rather than in the level of the gap, as we state.
Table A.15: Error correction model with asymmetric adjustment for Pakistani exports.
Quarterly data
��
��−1
***, **, * imply significance at the 1%, 5% and 10% respectively.
Newey-West SE are reported in parenthesis.
Figure A.2: Recursive CUSUM plot for asymmetric ECM confidence interval at 95% around the null
* Corresponding to quarterly estimates in Table 3.
Table A.16: Regression on Pakistani exports quantities. 2003-2017
����
Note: We trim outliers, considering HS2 sectors that add up to 95% of total exports.
***, **, * imply significance at the 1%, 5% and 10% respectively.
SE, adjusted for clustering at the HS6-year level, are reported in brackets.
64
659
Table A.17: Total exports in current US dollars. 2003-2017, by HS6 code
Total Exports | Share | Cumulative | ||
HS6 CODE | Description | (1) | (2) | (3) |
100630 | Rice | 21,800 | 7.5% | 7.5% |
630231 | Bed linen of cotton | 12,300 | 4.2% | 11.7% |
520512 | Cotton yarn | 11,100 | 3.8% | 15.5% |
630260 | Kitchen linen | 9,980 | 3.4% | 18.9% |
271019 | Petroleum oils | 8,420 | 2.9% | 21.8% |
620342 | Trousers | 8,370 | 2.9% | 24.6% |
630210 | Bed linen knitted | 7,010 | 2.4% | 27.0% |
630239 | Bed linen not of cotton | 6,430 | 2.2% | 29.2% |
610510 | Shirts of cotton | 5,410 | 1.8% | 31.1% |
420310 | Apparel | 5,380 | 1.8% | 32.9% |
630710 | Cloths | 4,580 | 1.6% | 34.5% |
620462 | Trousers | 4,470 | 1.5% | 36.0% |
252329 | Cement | 4,450 | 1.5% | 37.5% |
520942 | Fabrics | 4,060 | 1.4% | 38.9% |
711319 | Jewelry | 3,950 | 1.4% | 40.3% |
901890 | Medical instruments | 3,680 | 1.3% | 41.5% |
610910 | T-shirts | 3,300 | 1.1% | 42.6% |
520532 | Cotton yarn | 3,160 | 1.1% | 43.7% |
520819 | Fabrics | 2,970 | 1.0% | 44.7% |
620322 | Ensembles of cotton | 2,790 | 1.0% | 45.7% |
610590 | Shirts | 2,720 | 0.9% | 46.6% |
950662 | Balls | 2,410 | 0.8% | 47.5% |
570110 | Carpets | 2,340 | 0.8% | 48.3% |
100640 | Rice, broken | 2,340 | 0.8% | 49.1% |
520522 | Cotton yarn | 2,340 | 0.8% | 49.9% |
Table A.18: Bilateral nominal exchange rate elasticity on prices in current US dollars of Pakistani exports.
2003-2017, by section
�������������� | �������������� × ������ | ||
SECTION | N | (1) | (2) |
Animal | 8,643 | 0.317*** | -0.06 |
Chemicals | 20,475 | -0.001 | -0.066 |
Food products | 16,551 | 0.087 | -0.666*** |
Footwear | 8,499 | -0.308*** | 0.033 |
Fuels | 458 | 0.150 | 0.286*** |
Hides and skins | 15,137 | 0.245*** | -0.036 |
Mach and elec | 23,837 | 0.266 | 0.241 |
Metals | 24,403 | -0.302 | 0.223 |
Minerals | 5507 | -0.423** | -0.248 |
Miscellaneous | 19,768 | -0.244 | 0.072 |
Plastics or rubber | 15,076 | -0.249** | 0.090 |
Stone and glass | 10,070 | 1.905* | -1.352** |
Textiles and clothing | 157,780 | 0.083 | 0.009 |
Transportation | 4,735 | -0.126* | 0.909** |
Vegetable | 25,866 | 0.016 | -0.286** |
Wood | 13,465 | 0.051 | -0.128 |
***, **, * imply significance at the 1%, 5% and 10% respectively.
Table A.19: PTM, by NER change percentile
(1) | (2) | (3) | (4) | (5) | (6) | |
VARIABLES | Total | p25 | p50 | p75 | p90 | p95 |
ln_NER | -0.034* | -0.033* | -0.034** | -0.033* | -0.034* | -0.034* |
(0.018) | (0.017) | (0.017) | (0.017) | (0.017) | (0.018) | |
ln_NER x Percentile Dummy | 0.002 | -0.001 | 0.004 | 0.015* | 0.023** | |
(0.004) | (0.003) | (0.003) | (0.008) | (0.010) | ||
ln_NER x Depreciation | -0.005** | -0.005 | -0.005** | -0.004* | -0.004** | -0.004* |
(0.002) | (0.003) | (0.003) | (0.002) | (0.002) | (0.002) | |
ln_NER x Depreciation x Percentile Dummy | -0.001 | 0.001 | -0.008 | -0.020* | -0.028** | |
ln_GDP | 0.037** | (0.005) 0.037** | (0.004) 0.037** | (0.005) 0.041** | (0.011) 0.041** | (0.012) 0.040** |
(0.018) | (0.018) | (0.018) | (0.018) | (0.019) | (0.019) | |
Observations | 369,916 | 369,916 | 369,916 | 369,916 | 369,916 | 369,916 |
R-squared | 0.982 | 0.982 | 0.982 | 0.982 | 0.982 | 0.982 |
Heteroskedasticity robust standard errors adjusted for clustering at the HS6-year level are reported in brackets, where ***, **, * imply significance at the 1%, 5% and 10% respectively. NER change percentile considers absolute yearly variation in bilateral NER between Pakistan and trading partners
67
662
BIS Working Papers
Supply- and demand- side factors in global banking
by Mary Amiti, Patrick McGuire and David E Weinstein
Monetary and Economic Department
May 2017
JEL classification: F34, G01, G21
Keywords: International banking, global financial crisis, supply vs demand shocks, BIS consolidated banking statistics
BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS.
This publication is available on the BIS website (www.bis.org).
©Bank for International Settlements 2017. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated.
ISSN 1020-0959 (print)
ISSN 1682-7678 (online)
Mary Amiti, Patrick McGuire and David E Weinstein1
Abstract
What is the role for supply and demand forces in determining movements in international banking flows? Answering this question is crucial for understanding the international transmission of financial shocks and formulating policy. This paper addresses the question by using the method developed in Amiti and Weinstein (forthcoming) to exactly decompose the growth in international bank credit into common shocks, idiosyncratic supply shocks and idiosyncratic demand shocks for the period 2000-2016. A striking feature of the global banking flows data can be characterized by what we term the “Anna Karenina Principle”: all healthy credit relationships are alike, each unhealthy credit relationship is unhealthy in its own way. During non-crisis years, bank flows are well-explained by a common global factor and a local demand factor. But during times of crisis flows are affected by idiosyncratic supply shocks to a borrower country’s creditor banks. This has important implications for why standard models break down during crises.
Keywords: International banking, global financial crisis, supply vs demand shocks, BIS consolidated banking statistics
JEL classification: F34, G01, G21
1Mary Amiti is an Assistant Vice President at the Federal Reserve Bank of New York; Patrick McGuire is Head of the BIS International Data Hub at the Bank for International Settlements; and David Weinstein is the Carl S. Shoup Professor of Japanese Economics at Columbia University. The authors thank Jakub Demski and Scott Marchi for excellent research assistance, and Mark Carlson, Linda Goldberg, Sebnem Kalemli-Ozcan, Catherine Koch, Bruno Tissot, Philip Wooldridge, participants at the 3rd BIS-CGFS workshop on “Research on global financial stability: the use of the BIS international and financial statistics” (7 May 2016), participants at the BIS-Bank Negara Malaysia conference on “Financial systems and the Real Economy (18-19 October 2016, Kuala Lumpur) and seminar participants at De Nederlandsche Bank (20 Sept 2016) for comments and discussion. The views expressed in this paper are those of the authors and not necessarily those of the BIS, the Federal Reserve Bank of New York or the Federal Reserve System.
WP639 Supply- and demand-side factors in global bankingi
Contents
Overview of the BIS consolidated banking statistics7
Concentration in banks’ bilateral foreign claims8
Adjustments to year-over-year growth rates10
The stability of local vs. international lending13
Estimating supply, demand and common shocks15
Accounting for global banking flows16
External validity of the banking system shocks18
From the perspective of borrower countries22
Claims on advanced economies22
Claims on emerging market economies26
Estimated shocks for smaller banking systems35
Adjustments to foreign claims36
WP639 Supply- and demand-side factors in global bankingiii
Introduction
The question of what drives international banking flows is of central importance for policymakers and economists trying to understand the international transmission of banking crises. In answering this question, researchers have identified a large number of plausible demand and supply factors. However, these answers remain incomplete in the sense that regression evidence always involves a residual that typically accounts for the vast majority of the variance. For example, how much weight should policy makers place on a finding that, say, interest rate differentials across countries are correlated with capital flows when the empirical model used to produce this result is able to explain only a tiny share of the aggregate movements in these flows? Such problems become even more severe in periods of financial stress, when statistical relationships that seem strong in normal times break down. This fact makes it very difficult to match theory to data.
This paper solves this problem by providing a methodology, based on Amiti and Weinstein (forthcoming), that generates an exact decomposition of the growth in global bank flows into three components. First, there is a “common” shock that affects all banking relationships and captures common forces. Second, there is a banking- system, or “supply”, shock that captures how idiosyncratic shifts in a banking system’s credit supply behaviour. Third, there is a borrower country, or “demand”, shock that captures idiosyncratic shifts in a destination’s borrowing behaviour.2 This method is appropriate for all models of global banking behaviour that specify credit growth from a bank to a borrower as a linear combination of a source banking system shock, a destination shock and possibly a source-destination interaction term.
We apply this methodology to the BIS Consolidated Banking Statistics (CBS), which track the consolidated foreign claims (ie loans, holdings of debt securities and other financial claims) of banks headquartered in 31 reporting countries on counterparties in more than 200 countries. Global bank claims are highly concentrated in only a handful of banking systems and a somewhat larger set of counterparty (borrower) countries. This concentration impacts the data in two important ways. First, the vast majority of bilateral credit flows are small compared to the aggregate flow of the typical banking system, which makes it problematic to use standard regression techniques to infer aggregate behaviour. Second, the small number of large banking systems means that idiosyncratic credit supply shocks in one banking system can have aggregate implications.
Most important from the perspective of policy makers today, the estimates offer an up-to-date decomposition of the growth in foreign claims. This is particularly important for monitoring bank credit to borrowers in emerging economies. For example, while global claims growth slowed in 2015 and 2016, the contraction in credit to emerging Asia and emerging Europe – to China and Russia in particular – was severe. Negative supply shocks, which in part reflect a contraction in European banks’ global balance sheets, contributed somewhat. But the estimates presented
2Note, however, that the terms “supply” and “demand” are defined in terms of factors that are explainable by a supplier-time fixed effect or a borrower-time fixed effect. Thus, if all banking systems cease lending to a particular country, we will call that a demand shock because it is explainable by some characteristic of that destination even though the reason might be that all banking systems refuse to lend to that borrower.
WP639 Supply- and demand-side factors in global banking1
here suggest that these countries are unique, with borrower country characteristics (ie demand shocks) accounting for virtually all of the decline.
In order to produce these estimates, we first adjust the data in two ways. The publicly available CBS contain numerous breaks in series, due to bank mergers or changes in reporting methodology, that produce wild swings in the series that swamp the true variation. A second problem arises because banks’ bilateral positions are typically denominated in many currencies but are expressed in US dollars when reported to the BIS. Exchange rate movements change the relative value of the underlying currencies and thus induce changes in outstanding stocks that do not signify the actual extension or withdrawal of credit. We correct the data to render consistently measured supply and demand shocks to the growth rates of bank credit.3
To assess whether the estimated supply and demand shocks are meaningful in an economic sense, we compare them to measures of banking system and country health during periods of known stress. In some cases, these comparisons are little more than a check against widely-known events, for example the near bankruptcy and subsequent restructuring of the major Japanese banks in 2001-02, Argentina’s sovereign default in 2001, and sanctions on Russia in 2014. In other cases, we correlate the estimated shocks with outside measures of bank health and balance sheet structure, for example banks’ reliance on core funding (ie deposits) prior to the 2007-09 financial crisis and their total losses incurred during the crisis. In virtually every case, the estimated shocks align with our priors about the sign and magnitude suggested by these outside measures.
Our results generate several new insights about global banking flows. First, a striking feature of the data can be characterized by what we term the “Anna Karenina Principle”: all healthy credit relationships are alike, each unhealthy credit relationship is unhealthy in its own way. We demonstrate this principle in a simple way. During non-crisis years, bank flows are well-explained by a common global factor that affects all banking systems and borrower countries, and a local demand factor. But during times of crisis, aggregate bank credit, and credit to particular countries, are importantly affected by idiosyncratic supply forces that depend on the various shocks that affect a borrower’s major credit suppliers. Thus, during times of crisis, two countries with identical demand for credit will receive different amounts of credit depending on the relative health of the banking systems that serve them. During crisis periods, flows can only be explained if one knows not only global supply and local demand but also what is happening to each of the banking systems that are supplying credit to a country. This has important implications for why standard models break down during crises.
Second, during the 2007-09 global financial crisis (GFC), supply shocks contributed significantly to the contraction in credit to almost all borrower countries. This is consistent with earlier studies (eg Cetorelli and Goldberg (2011)) that linked shocks to banks’ balance sheets from losses on structured finance products and the turbulence in US dollar funding markets to a diversion of credit. Similarly, during the euro area sovereign crisis which started in mid-2010 and continued in fits and starts thereafter, common shocks were less important than idiosyncratic supply and demand shocks. The severe downturn in global banks’ foreign claims on the key countries involved in the crisis – Greece, Italy, Ireland, Portugal and Spain – were unique to these countries, and hence the negative demand-side shocks were
3Cerrutti (2015) and McGuire and von Peter (2016) make similar adjustments.
2WP639 Supply- and demand-side factors in global banking
particularly severe. Negative supply shocks did play a role too, as banks headquartered in some of these countries saw large contractions in their foreign credit, some of which had been directed to other borrower countries in crisis. This decomposition provides policy makers with invaluable information on the underlying forces of international banking flows
Relation to prior work
There is a wide literature on how the 2007-2009 financial crisis was transmitted across countries. Several prominent studies focus on countries’ external positions, as captured in the balance of payments statistics, to show how countries’ pre-crisis positions affected their adjustment in the wake of the crisis (Lane and Milesi-Ferretti (2012, 2014), Milesi-Ferretti and Tille (2011)). Our primary interest here is the subset of this work that focuses on global bank credit.
Much of this makes use of the BIS international banking statistics, and relies on panel regressions of the growth in banks’ bilateral claims. A host of creditor-banking system and borrower-country control variables, and fixed effects for both, are often used to tease out the supply- and demand-side forces (sometimes termed “push” or “pull” factors).4 For example, McGuire and Tarashev (2008) used panel OLS regressions to investigate how deterioration in banks’ balance sheets contributed to the subsequent slowdown in claim growth in the initial phases of the 2007-2009 global financial crisis. Using a similar framework, Cerutti (2015) examined banks’ cross-border exposures throughout the crisis, after making adjustments for the role of subsidiaries in the banks’ global operations. Takáts (2010) and Avdjiev et al (2012) analysed cross-border bank flows to emerging economies and found that home- country (ie supply) factors generally contributed to cross-border credit growth, but their importance increased sharply during the 2008-09 financial crisis and again during the euro area sovereign crisis. And in an oft-cited study, Cetorelli and Goldberg (2011) examined how shocks to banks’ US dollar funding during the crisis contributed to the contraction in claims on emerging economies. Their empirical methodology is a variant of that in the seminal paper by Khwaja and Mian (2008), whose structural model yields an estimating equation where fixed effects control for individual firm- level demand-side shocks.
Several relevant papers have looked beyond the 2007-09 crisis period. Bruno and Shin (2014) develop a model of how leverage in internationally-active banks interacts with local banks in the transmission of financial conditions across borders, and then use panel regression analysis on the BIS Locational Banking Statistics to test the predictions of their model. Similar in spirit, Cerutti et al. (2017) use the same data to examine the determinants of global liquidity and find that investor uncertainty, US monetary policy and bank conditions in large countries all contribute to cross-border banking flows. Kalemli-Ozcan et al (2013) find that increases in bilateral banking linkages are associated with more divergent output cycles during non-crisis periods but not during crisis periods, suggesting that financial crises induce co-movement among more financially integrated countries. Finally, Avdjiev and Takáts (2014) analyse the slowdown in cross-border claims on emerging economies during the so-
4See Koepke (2015) for a review of the literature on “push” and “pull” factors in capital flows to emerging economies, and Fratzscher (2012) for an application at the level of individual mutual funds.
WP639 Supply- and demand-side factors in global banking3
called “taper tantrum” in May 2013, when the Federal Reserve hinted that it might end its quantitative easing, and highlighted the central role of the US dollar in bank credit to many economies.
Most empirical studies to date have been successful in identifying particular drivers that can credibly be attributed to supply- or demand-side shocks. However, those that rely on panel regressions of bilateral banking linkages generally lack a framework of supply and demand factors that can account for the observed behaviour in aggregate claim growth, as evidenced by R2 values that often explained less than 10 percent of the variation. In some cases, the failure to adjust the data for exchange rate movements and breaks in series, as discussed in Section 4 below, was a contributing factor. But, arguably the main reason why existing models have fared poorly in this regard is that they do not take into account the extreme heteroscedasticity in the bilateral growth rates in their samples (also discussed in Sections 4 and 5 below).
This problem is particularly acute when changes in the aggregate level of the dependent variable (ie summed across all banking systems and borrower countries) are driven by changes in only a few underlying observations, ie those where the bilateral levels are large. For example, a 2% increase in a $500 billion bilateral claim position contributes much more to the change in global claims than does a 300% increase in a $0.5 billion position. Yet, in a typical panel regression where growth rates are used as the dependent variable, both observations are given equal weight in the determination of the regression coefficients. And as a result, the estimated coefficients reflect the “average effect” across all observations, without taking into account each observation’s unique contribution to the growth in aggregate claims. While some authors have mitigated this problem by weighting log-growth specifications, this procedure does not resolve the problem, which is why we use an alternative approach.
Empirical framework
We use an estimation technique introduced in Amiti and Weinstein (forthcoming) to address this problem. We briefly review the methodology here, but interested readers are encouraged to consult the original paper for a full derivation of the estimating equation and formal proofs of the statements in this section. We begin with two alternative specifications, with the dependent variable defined as (1) the percentage change or (1’) the log change in the bilateral stock of claims (L) reported by banking system b on borrower country c. These equations relate the growth in claims to time- varying “supply” shocks that affect creditor banks (����,��) and time-varying “demand” shocks that affect borrower countries (����,��).5
����,��,��−����,��,��−1 = ��
+ ��
+ ��
(1)
����,��,��−1
��,��
��,��
��,��,��
Δ��������,��,�� = ����,�� + ����,�� + ����,��,��(1’)
One strategy is to estimate equations (1) or (1’) in a simple OLS regression of the bilateral growth in claims on a full set of time-varying banking system and borrower
5Khwaja and Mian (2008) derive a version of this equation from a structural model in which banks face positive marginal financing costs and decreasing returns to capital as aggregate borrowing increases.
4WP639 Supply- and demand-side factors in global banking
country fixed effects. This approach, however, suffers from two problems. First, OLS will produce estimates that cannot be perfectly aggregated to exactly yield banking systems’, borrower countries’, or total claim growth rates even if all bilateral relationships are maintained in periods t and t–1. Second, OLS can yield biased estimates of the supply and demand shocks in any data sample where new bilateral links form (eg, when a banking system starts or resumes lending to a particular country) since, for such observations, ����,��,��−1 is zero and Δ��������,��,�� is undefined. Hence
the bilateral growth rate for the period is undefined.6 We address these two problems sequentially.
The basic intuition for the aggregation problem that arises with OLS estimation of equation (1) is that it weights all of the observations equally, which would be appropriate if one wanted an estimate of the unweighted arithmetic averages of claims growth rates. Similarly, estimation of equation (1’) is appropriate if one wanted to estimate an unweighted geometric average of claims in period t divided by the geometric average of claims in period t–1. Since there is no clear mapping between unweighted arithmetic or geometric means of growth rates and total claim growth rates, neither method yields parameter estimates that can be aggregated to yield the growth in aggregate claims, or even the growth in total claims of a particular banking system or on a particular country. Such estimates require an appropriate specification and weighting system.
Amiti and Weinstein (forthcoming) prove that one can exactly obtain estimates of banking system (supply) and borrower country (demand) shocks (����,��, ����,��) that will aggregate to match the growth rate of pre-existing claims (ie claims for which
����,��,��−1 > 0), by weighting the data with the lagged claim level. Weighted Least Squares (WLS) estimation of equation (1) produces unique estimates (up to a numéraire) of the supply and demand shocks that must aggregate to match the growth in aggregate claims. In order to deal with new bilateral relations, such as cases where a banking system starts (or resumes) a claim relationship with a borrower country, the moment equations are modified. That is, summing over all bilateral pairs instead of only those that existed in the previous period guarantees that the supply and demand shocks exactly match the growth in total claims of each banking system and the growth in total claims on each borrower country.
After some algebra, Amiti and Weinstein show that the supply and demand shocks affecting each bank-borrower pair can be expressed as relative to the median bilateral claim growth rate. Thus, our renormalized constant, ����̂ , will equal the median bilateral claim growth rate, which we term the “common shock”, and ��^��,�� and ��^��,�� will equal the idiosyncratic banking system (supply) and borrower country (demand) shocks less the common shock.
With these shocks in hand, it is possible exactly decompose the growth in a banking system’s aggregate claims (Dct) into three components:
Dbt= ����̂ +��^��,�� +∑��(����,��,��−1��^��,��)
(2)
where ���� is a “common shock” which affects all bilateral pairs and cannot be separated
into a demand or supply shock; ��^��,��, is an idiosyncratic banking system supply shock, relative to the common shock; and ∑��(����,��,��−1��^��,��) is a banking system’ idiosyncratic
6Coefficients estimated with OLS are unbiased for the subset of existing bilateral claims, but often what is of interest is the behaviour of aggregate credit growth. Thus, in data samples where bilateral links regularly disappear and reappear, simple OLS is of little use.
WP639 Supply- and demand-side factors in global banking5
demand shock, which captures the aggregate impact of each of the demand shocks in the borrower countries on which the banking system has claims, and where the
weights are defined as ����,��,��−1
≡ ����,��,��−1 . Similarly, we can exactly decompose the
∑�� ����,��,��−1
growth in aggregate claims on a particular borrower country into a common shock,
����̂ , an idiosyncratic demand shock (��^��,��), and the borrower’s idiosyncratic supply shock, ∑��(����,��,��−1��^��,��), which is a weighted average of the supply shocks to the
borrower’s creditor banks where the weights are defined as ����,��,��−1
Dct= ����̂ +��^��,�� +∑��(����,��,��−1��^��,��)
≡ ����,��,��−1 :
∑�� ����,��,��−1
(3)
Equations (2) and (3) can be used to decompose the growth in claims of a banking system or the growth in claims on a borrower country in terms of common (ie global) shocks, and idiosyncratic shocks arising from the fortunes of the suppliers and demanders of credit relative to that banking system or destination. Importantly, the weights (����,��,��−1, ����,��,��−1) vary by bank-borrower pair. Thus, a shock to one banking system need not affect all borrowers equally, and similarly, a shock to one borrower country need not reduce claims from all creditor banks equally.
We also can exactly aggregate across banking systems to see how these shocks affect the growth in aggregate claims. In order to do this, we simply weight each claim growth rate by that banking system’s share in total claims (w��,��−1º ∑�� ����,��,��−1 /
∑��,�� ����,��,��−1) and sum across all banking systems to generate
Dt º∑�� w��,��−1����,��t= ����̂ +∑�� w��,��−1��^��,�� +∑�� w��,��−1 ∑��(����,��,��−1��^��,��)
(4)
Equation (4) exactly decomposes total claim growth (Dt ) at time t into three terms: a common shock, a “granular” bank shock, and a “granular” demand shock. The granular bank shock measures how idiosyncratic shocks to large banking systems affect the growth in aggregate claims supply. Obviously, if all banking systems were small (w��,��−1 ≈ 0), the law of large numbers implies that the idiosyncratic shocks would cancel and this term would not matter. Thus, the granular bank shock term will be non-zero if lending is “granular” – ie, the share of global claims by some banking systems (w��,��−1) differ substantially from zero (ie they are granular) and idiosyncratic shocks to these banking systems are non-zero (��^��,�� ≠ 0). Similarly, the last term describes the granular demand shock. This term will vary substantially if some borrowers are sizeable, so that ����,��,��−1 differs significantly from zero, and some of those borrowers have non-zero idiosyncratic demand shocks (��^��,��).
Data and summary statistics
The CBS capture reporting banks’ globally consolidated foreign claims, with information about the location (country) and type of counterparties. However, the ability of researchers to use these data to understand actual bank credit behaviour has been limited by the violent jumps in claims that arise from methodological changes (ie “breaks in series”) and that occur solely because the exchange rates for the currencies in which the claims were denominated moved. One of the differences between this paper and most prior research is the use of a confidential version of the BIS Consolidated Banking Statistics (CBS) that enables us to eliminate the substantial measurement error that can arise from computing bilateral claim growth rates from the publicly available versions of these statistics.
6WP639 Supply- and demand-side factors in global banking
This section describes these statistics, with details about how we corrected their shortcomings before using them in Section 5. We review (a) the degree to which global bilateral banking positions are concentrated in a relatively small number of bilateral linkages, which renders standard estimation based on bilateral growth rates problematic; (b) the various adjustments applied to these data to produce the growth rates used as inputs to the empirical analysis; and (c) the types of claims – cross- border vs locally booked claims – and the differences in their growth rates.
Overview of the BIS consolidated banking statistics
The CBS track the outstanding foreign claims of banks headquartered in 31 countries (“reporting countries”) on more than 200 borrower countries.7 These quarterly data are not at the level of individual banks, but rather are aggregated at the level of internationally-active banks headquartered in a particular country (eg “US banks”, “French banks”, etc).8 But unlike other data sources that do provide bank-level detail (eg BankScope or SNL Financial), the CBS provide information about the location and sector of counterparties, which is essential for any analysis of how demand and supply factors affect the growth in international bank credit.
The basic unit in the CBS is “foreign claims” (FC). A reporting bank’s foreign claims on a particular country and sector include any loans extended to counterparties there, and any holdings of debt and equity securities issued by these counterparties.9 Claims are reported on a consolidated basis.10 That is, claims on counterparties in a particular country include all cross-border claims booked by a bank’s home offices and its offices in other countries, plus claims extended locally by that bank’s affiliates (subsidiaries and branches) located in the borrower country.11 In other words, the nationality of a reporting banking system in the CBS, eg “US banks”, is not indicative of the location of these banks’ offices, eg “banks in the United States”.12 To take an example, a cross-border loan extended by the subsidiary of a US bank located in London to a manufacturer in Germany would be included in US banks’ consolidated foreign claims on Germany, as would a loan extended from the same US bank’s home office in the United States to a household in Germany. By contrast, on the borrower country side, it is the location of the immediate counterparty that matters irrespective of the nationality of the borrower. For example, a cross-border loan extended by a
7In the analysis that follows, we exclude banks headquartered in Brazil, Greece, Ireland, Mexico and Norway due to data quality issues.
8We use the CBS on an immediate counterparty basis (IC basis), which allocates claims to the country and sector where the contractual counterparty is located. These statistics are appropriate for analyzing the credit provided to particular countries. By contrast, the CBS on an ultimate risk basis (UR basis) allocates claims to the country and sector where the ultimate obligor resides, that is, after taking into account parent- and third-party guarantees, CDS protection bought, collateral and other credit hedges.
9Claims do not include derivatives with a positive market value (from the reporting bank’s perspective) with a contractual counterparty in the country. These are reported separately in the CBS (UR basis).
10Banks’ claims on residents of their home country have been included in the CBS only since 2013 Q4, and are thus not considered in this paper.
11See Cerutti (2015) for a separate consideration of the role of branches and subsidiaries in the CBS.
12See McCauley et al (2012), McGuire and von Peter (2012, 2016) and McGuire and Wooldridge (2005) for discussion of the CBS and the differences in reporting banking systems’ organisational structure.
WP639 Supply- and demand-side factors in global banking7
branch of a French bank located in London to the subsidiary of a German corporation located in the United States would be included in French banks’ worldwide consolidated foreign claims on counterparties in the United States.
Foreign claims are broken down into two components: “international claims” (INTLC) and “local claims in local currencies” (LCLC). International claims on a particular borrower country c are (a) all cross-border claims in all currencies booked by the reporting banks’ offices worldwide plus (b) any locally-extended claims (ie claims booked by the reporting banks’ affiliates in country c) in non-local currencies. Local claims in local currency are claims booked by reporting banks’ affiliates located in host country c vis-à-vis residents of country c and denominated in the local currency of country c.13 So, for example, a euro-denominated loan booked by a French bank’s subsidiary in London to a borrower in Germany would be classified as an international claim on Germany, as would a US dollar loan booked by a subsidiary in Germany of the same French bank to the same borrower. By contrast, a euro- denominated loan booked by this French bank’s subsidiary in Germany to the same German borrower would be classified as a local claim in local currency.
Concentration in banks’ bilateral foreign claims
Idiosyncratic shocks to particular banking systems would not matter in a world with many lenders and borrowers, each of whom had a trivial share of the total market. In this case, the law of large numbers would apply and idiosyncratic shocks would just cancel. However, the CBS data reveal that international bank positions are extremely concentrated in a handful of creditor banking systems and borrower countries (Graph 1, top panels). All banks combined reported a total of $25.6 trillion in foreign claims spread across counterparties in 225 countries at end-Q3 2016. The top 5 banking systems accounted for more than half of this total, and the top ten for 84% (top left panel). Banks headquartered in Japan (“Japanese banks”) reported the largest foreign claims positions at end-Q3 2016 ($4 trillion), followed by UK and US banks” ($3.1 trillion each) and French banks ($2.7 trillion). At the other end of the spectrum were Turkish banks ($17 billion), Chilean banks ($11 billion) and Mexican banks ($9 billion).
Banks’ claims are also concentrated in only a few borrower countries. The median banking system reported outstanding claims on 154 countries at end-Q3 2016. But these claims were not evenly dispersed: the share of its total claims on its top five countries was 61 percent. This makes it clear that while some borrower countries are extremely important, the median value of claims from a banking system to a borrower constitutes only a tiny fraction of that banking system’s total foreign claims. Banks’ combined claims on a mere five countries made up almost half of the global total, with claims on the United States, United Kingdom and Germany accounting for more than one third (Graph 1, top right panel). The top 35 countries shown in the panel accounted for 90% of this total implying that only 10% of global claims were on the remaining 190 countries Moreover, there is substantial heterogeneity in where banks have claims. While most banking systems lend to virtually all of the 35 advanced economies, most of the variation in the number of borrower countries reflects the extent of banks’ engagement with emerging economies.
13That is, FC = INTL + LCLC where INTL = cross-border claims (XBC) plus locally extended claims in non-local (foreign) currencies (LCFC).
8WP639 Supply- and demand-side factors in global banking
Concentration in foreign claims (FC)
At end-Q3 2016Graph 1
By banking system1By borrower country2
In trillions of US dollarsIn per centIn trillions of US dollarsIn per cent
Bilateral observations3 | |||||
In trillions of US dollars | In per cent | ||||
1.25 | 100 | ||||
1.00 | 80 | ||||
0.75 | 60 | ||||
0.50 | 40 | ||||
0.25 | 20 | ||||
0.00 | 0 | ||||
20 40 60 80100150200250300350 | 400500600 | 700 | 800 | 900 | |
1 Bars show the total claims on all borrower countries for the banking system listed on the x-axis. Banking system “XX” is a combination of banks headquartered in Hong Kong, Luxembourg and Norway, which are masked due to confidentiality restrictions. The red line shows the cumulative share in all banking systems’ claims on all borrower countries. 2 Bars show all banking systems’ combined claims on the borrower country listed on the x-axis. The red line shows the cumulative share in all banking systems’ claims on all borrower countries. 3 Bars show bilateral claims (ie single banking system vis-à-vis a single borrower country) ordered from largest to smallest, while the red line depicts the cumulative share in all banking systems’ claims on all borrower countries. The x-axis shows 962 observations (those >1$ billion) out of 4,032 bilateral pairs with positive outstanding claims.
Source: BIS consolidated banking statistics (IC basis.
Concentration at the level of bilateral positions is even starker (Graph 1, lower panel). Overall, there were 4,032 positive bilateral links at end-Q3 2016. Dropping the 3,070 bilateral claims positions that were less than $1 billion at end-Q3 2016 reduces the global total by a mere $21 billion, leaving only the 962 bilateral links shown in the panel. The largest 44 bilateral links, or 1.1% of the total links, accounted for more than half of total foreign claims.14 The extreme concentration in bilateral positions helps explain why unweighted fixed effects estimation is likely to have limited explanatory power. In order to understand what is driving the growth in claims of a banking
14Even if restricted to claims on emerging economies only, the sample is still concentrated: 14% of the resulting 2,688 observations at end-Q3 2016 captured 95% of foreign claims on all of them.
WP639 Supply- and demand-side factors in global banking9
system, we need to know what is happening to its largest borrower countries, not the typical borrower.
This problem is exacerbated by the fact that the smallest claims positions typically have growth rates with the greatest volatility, resulting in them accounting for most of the variation in an unweighted regression.15 We can see this fact in Graph 2, which shows the dispersion in bilateral growth rates separately for “big”, “medium” and “small” bilateral pairs.16 The growth rates for big bilateral pairs tend to be much smaller and less volatile, which underscores our earlier point that movements in the typical bilateral claim stock are not representative or very informative about the aggregate movement.
Dispersion in the year-over-year growth in bilateral foreign claims1
In per centGraph 2
Big bilateral pairs
Share of obs: 14% Share of FC: 91%:
Medium bilateral pairs
Share of obs: 61% Share of FC: 9%:
Small bilateral pairs
Share of obs: 25% Share of FC: 0.02%:
Mean Median
p20-p80 p10-p90
p5-p95
900
750
600
450
300
150
0
–150
900
750
600
450
300
150
0
–150
900
750
600
450
300
150
0
–150
02 04 06
08 10
12 14 16
02 04 06
08 10
12 14 16
02 04 06
08 10
12 14 16
1 Panels show the mean, median and selected percentile values (grey shaded area) of the year-over-year growth in foreign claims (adjusted for breaks in series and exchange rate movements). All bilateral (reporting bank vis-à-vis borrower country) observations are grouped based on the outstanding stock of foreign claims; “big” observations are those were the outstanding stock of foreign claims is greater than the 75th percentile value for the sample as a whole, “small” observations are those that are below the 45th percentile value, and “medium” observations are all others not classified as “big” or “small”.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
Adjustments to year-over-year growth rates
Ideally, the input to the empirical analysis in Section 5 would be the growth in actual credit provided by each reporting banking system to borrowers in each country. Such credit flow data would perfectly capture banks’ choices about when and to whom to extend new credit, independent of redemptions or the maturation of existing
15This reflects the fact that foreign claims, in particular their cross-border component, are not atomistic. For example, Cerutti et al (2015) report that the average deal size for syndicated loans, which constitute a substantial portion of claims in the CBS, fluctuated around $400 million between 2000 and 2012 for borrowers in advanced economies; for those in emerging economies, average deal size rose from roughly $200 million in 2000 to $300 million in 2007. The discrete nature of claims means that the booking of a new loan, or the maturation of an old loan, generate significant jumps in total outstanding positions when claims stocks are small. By weighting observations, the empirical methodology outlined in Section 2 and applied in Section 4 tackles this problem head on.
16These growth rates have been adjusted for breaks in series and exchange rate movements as described in Section 3.3 below.
10WP639 Supply- and demand-side factors in global banking
positions. However, such data are not available in the CBS. Instead, we rely on the year-over-year growth in the stock of outstanding foreign claims as a proxy for this ideal measure. In its unadjusted form, this proxy captures any actual increases or decreases in credit plus additional sources of variation that are not directly related to actual credit flows. These include (a) valuation effects that arise as firms mark up or down their debt securities holdings that are subject to mark-to-market accounting, or write down their loans that are held at book value; (b) valuation effects that arise from exchange rate movements; and (c) “breaks in series” in the underlying data.
We make two adjustments to the raw bilateral claims stocks to generate a proxy that better approximates the growth in actual credit provided (see Appendix A.2 for details). The first is a correction for “breaks in series”, which can arise for various reasons but typically occur when there are bank mergers across jurisdictions, or when a reporting country changes its reporting methodology or adds/removes banks from the population of reporting banks.17 A second adjustment is a correction for valuation effects that arise from exchange rate movements. Bilateral claims positions tend to be denominated in multiple currencies but are reported to the BIS expressed in US dollars. Large movements in exchange rates, like those that occurred in the wake of the collapse of Lehman Brothers, induce correspondingly large changes in outstanding claims stocks that are not indicative of either new credit extended or credit withdrawn.18
The effects of both of these corrections are illustrated in Graph 3. The outstanding stock of all banking systems’ combined claims on various country groups is shown as the shaded area in each panel. The dotted black lines depict the year- over-year growth in these stocks, unadjusted for breaks in series and exchange rate movements. The dashed black lines show these growth rates after adjusting for breaks in series only, and the solid red lines show the growth rates after an additional correction for exchange rate movements. These adjustments make a noticeable difference. In particular, the unadjusted growth rate tended to be higher prior to the crisis, when the U.S. dollar depreciated against many currencies. By contrast, the adjusted growth rate shows a far less dramatic move into negative territory during the crisis. This difference primarily reflects the massive appreciation of the US dollar in the months following the collapse of Lehman Brothers.19
Across borrower regions, the effect of these adjustments differs depending on the relative shares of US dollar-denominated claims in total foreign claims. For countries in Asia Pacific and those identified in the CBS as offshore financial centres, where US dollar-denominated claims are dominant, the overall difference between
17For example, in 2005, Unicredit, an Italian bank, bought HypoVereinsbank (HVB), a German bank. As a result, all foreign claims booked by the latter disappeared from German banks’ consolidated foreign claims and appeared in Italian banks’ claims. A similar issue arose in 2009 Q1 when four US investment banks were converted to depository institutions and thus included for the first time in the population of US banks reporting in the CBS (see Avdjiev and Upper (2010) for discussion).
18The CBS provide only a partial breakdown by currency. Specifically, the currency of denomination for LCLC is known by construction. By contrast, that for INTLC is not known. To adjust INTLC for exchange rate movements, we use the information about the currency of denomination in the BIS Locational Banking Statistics, as described in Appendix A.2.
19The breaks-in-series adjustment (dashed black lines) appears to contribute less when viewed at the aggregate level (top left-hand panel). However, where breaks do occur, they tend to have a larger effect at the bilateral level than do exchange rate movements.
WP639 Supply- and demand-side factors in global banking11
the adjusted and unadjusted series is rather small. By contrast, the adjusted growth rates for claims on Latin America and emerging Europe were less than the corresponding unadjusted rates prior to the crisis, and much higher than the unadjusted rates during the crisis. That is, the unadjusted rates show much larger swings. For the full country sample (top left panel), a regression of the unadjusted rate (dotted black line) on the adjusted rate (red line) yields a statistically significant coefficient of 1.3, indicating that the unadjusted series overstates true movements, and the associated measurement error is not classical.20 The fact that the unadjusted series move more than proportionally with the true series means that regressions based on unadjusted data will tend to overstate the importance of any factor correlated with true movements in claims.
Adjusted year-over-year growth in foreign claims, by borrower region
Left scale: in trillions of US dollars; right scale: in per centGraph 3
On all countriesOn advanced countriesOn offshore financial centres4
L(lhs): Foreign clai
32
ing (unadjusted)
30
8 Growth (rhs):
unadjusted1 breaks-adjusted2
0breaks- and FX-adjusted
02 04 06
08 10 12
14 16
02 04
06 08 10 12
14 16
02 04 06
08 10
12 14 16
On Latin AmericaOn Asia-PacificOn emerging Europe
02 04 06
08 10
12 14 16
02 04 06 08
10 12 14 16
02 04 06
08 10
12 14 16
Note: Vertical black lines indicate end-Q2 2007 and end-Q3-2008.
1 Growth in foreign claims without adjustments for breaks-in-series or exchange rate movements. 2 Growth in foreign claims after adjustments for breaks-in-series only. 3 Growth in foreign claims after adjustments for breaks-in-series and exchange rate movements. 4 Includes Cayman Islands, Hong Kong, Singapore, Guernsey, Jersey, Isle of Man and other offshore financial centres.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
20If there were no systematic measurement error in the unadjusted line, the coefficient should be one. The R-squared from this regression is 89%, and the coefficient on the adjusted series is statistically significant at the 99th percentile, with a t-statistics of 22.1.
12WP639 Supply- and demand-side factors in global banking
The stability of local vs. international lending
The stability of claim stocks during the 2007-09 global financial crisis also depended on the type of claim, with banks’ local claims, in particular their local claims in local currencies (LCLC), being more stable in aggregate than their cross-border claims (McCauley et al (2012), McGuire and von Peter (2016)). Cross-border claims, which account for the bulk of international claims (INTLC), are often backed by short-term wholesale funding, which experienced significant disruptions during the crisis (Baba et al (2009)).21 Local claims, by contrast, are more often funded with local liabilities (often retail deposits in the same currency), and were relatively unaffected by the disruptions in global wholesale funding markets.
There was considerable heterogeneity across borrower regions in the growth of each type of claim during the crisis, primarily reflecting differences in the types of funding that supported these claims stocks (Graph 4). For example, non-US banks’ locally-booked US dollar claims contracted at roughly the same rate as their international claims on the United States (top left panel). As discussed in Section 5 and Box 1 below, the term structure of international claims has bearing on their volatility, since short-term positions are more flexible. The simultaneous contraction in these non-US banks’ local US dollar liabilities (not shown) suggests that these local claims were funded by short-term wholesale liabilities rather than by stable retail deposits, which are not directly observable in the CBS data. Similarly, banks’ claims of both types on borrowers in the euro area and Japan (top centre and right panels) turned negative during and following the crisis.
Banks’ local currency claims on emerging economies proved to be far more stable than their international claims (Graph 4, lower panels). Unlike in the advanced economies, banks’ local operations in emerging economies tend to be retail and corporate lending on the assets side, funded by local deposits on the liabilities side. The year-on-year growth in international claims, which are more likely to be funded by less stable short-term wholesale liabilities, plunged from near 30% in each region prior to the crisis to –15% or lower in the wake of the collapse of Lehman Brothers. In contrast, the growth in these banks’ local currency claims slowed much less and actually remained positive up to end-2011 in Latin America and emerging Europe.
The mix of claim types, therefore, affected the stability of the growth rate of overall foreign claims on these regions during the crisis. International claims accounted for an estimated 61% of banks’ total foreign claims on Asia-Pacific in mid- 2008, and 56% of their claims on emerging Europe. By contrast, banks’ foreign claims on Latin America were primarily in the form of local claims in local currencies (64%) reflecting operational requirements imposed by both host supervisory authorities in the region and home supervisory authorities in Spain.22
21Wholesale funding, broadly defined, is any funding liability that is not received from an individual person (ie excluding retail deposits). During the crisis, numerous forms of wholesale funding – interbank borrowing, funding from money market funds (MMF), and deposits of foreign exchange reserves – became increasingly expensive or dried up completely.
22In the CBS (IC basis) used throughout this paper, foreign claims are split into international claims and local claims in local currencies (ie FC = INTLC + LCLC, where INTLC = XBC + LCFC). From a financial stability perspective, local claims in foreign currencies (LCFC) are often funded with a cross-border liability thus making them similar to pure cross-border credit. However, an estimate of the share of pure cross-border claims in foreign claims can be derived from the CBS (UR basis), where foreign
WP639 Supply- and demand-side factors in global banking13
Growth in foreign claims, by claim type and borrower region
In per centGraph 4
On the United StatesOn the euro areaOn Japan
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
On Latin AmericaOn Asia-PacificOn emerging Europe
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
Note: Vertical black lines indicate end-Q2 2007 and end-Q3-2008.
1 Year-over-year growth in international claims, after adjustments for breaks-in-series and exchange rate movements. 2 Year-over- year growth in local claims in local currencies, after adjustments for breaks-in-series and exchange rate movements.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
This is clearly reflected in the patterns of growth in total foreign claims on each region in Graph 3. That is, foreign claims on Asia Pacific, where international (mainly cross-border) claims were dominant, experienced the largest contraction during the crisis. By contrast, the growth in foreign claims on Latin America, which tended to be locally booked and funded, never moved into negative territory. We return to this point in Section 5, where we relate the size of the estimated shocks to overall foreign claims during the 2007-09 financial crisis to the underlying structure of these claims.
claims are split into cross-border claims and local claims in all currencies (ie FC = XBC + LCAC). Using these statistics, the share of pure cross-border claims in total foreign claims on Asia-Pacific in mid- 2008 came to 52%, and those for emerging Europe and Latin America were 43% and 30%, respectively.
14WP639 Supply- and demand-side factors in global banking
Estimating supply, demand and common shocks
We now turn to estimation of the shocks using the methodology described in Section 3 on the adjusted year-over-year growth in bilateral foreign claims described in Section 4. We first illustrate how estimates from standard panel regression cannot explain aggregate growth dynamics, particularly when new relationships are important. From there, we show how the growth in foreign claims can be decomposed into supply-side, demand-side and common shocks. We decompose the growth in individual banking systems’ foreign claims (on all borrower countries) before examining the growth in claims on individual borrower countries.
Estimating bank shocks
Graph 5 illustrates the problems that arise when these data are used in a standard fixed-effects estimation. Importantly, both banking system and borrower country fixed effects are time varying, so that supply shocks and demand shocks in each period can be estimated. Identification is possible in this panel setting since each creditor banking system has outstanding claims with multiple countries, and each country received credit from multiple banking systems.
The top panels of Graph 5 show the results of applying unweighted OLS to the CBS data. The top left panel shows predicted values of the growth in all banking systems’ combined claims on each country (vertical axis) compared to the actual growth in claims (horizontal axis), and the top right panel shows the predicted values of the growth in each banking system’s claims on all countries combined (vertical axis) compared to the actual growth observed for each banking system (horizontal axis). Ideally, in both cases, the predicted values should equal (or be close to) the actual values, and thus lie on forty-five degree lines. The closer they are to a forty-five degree line at this disaggregated level, the more of the aggregate growth in total claims that can be explained by the time-varying fixed effects. However, as noted above, such techniques perform poorly when the claim levels are highly concentrated in only a few bilateral pairs, since the estimated “average” effects captured in the coefficients on the fixed effects place too little weight on the subset of observations that contribute most to the growth in aggregate claims. In this case, the predicted values from standard OLS estimation in the top panels are nowhere close to the forty-five degree line.
The predictive power of these regressions improves considerably if more weight is given to those observations that contribute most to aggregate growth. The bottom panels of Graph 5 show the corresponding predicted values of the same regression discussed above, but where the observations are weighted by the lagged value of the level of bilateral claims (ie weighted least squares (WLS)). Here, the predicted aggregate growth rates are, overall, much better aligned with the actual rates. Indeed, in a sample where there is no formation of new bilateral links, the predicted values would align perfectly with actual values. However, even this procedure fails to predict growth properly when new bilateral relationships are formed, as is evidenced by the large number of points below the forty-five degree line in the lower left panel. Such new bilateral links contribute more to the total growth in claims on a country (lower left panel) than to the growth of the creditor banking system’s claims on all countries (lower right panel). Because these observations are dropped in the fixed-effects regressions, the predicted values of aggregate flows understate the true values more
WP639 Supply- and demand-side factors in global banking15
so the more new relationships in the data. These plots underscore the importance of using the Amiti and Weinstein methodology to include these observations, and thus exactly reproduce the aggregate growth rates.
The predictive power of fixed effects regressions1
In per centGraph 5
Aggregate claims on individual countries2Aggregate claims of individual banking sytems3
Unweighted observations (standard OLS)
−100−50050100
Observed claim growth rates
−100−50050100
Observed claim growth rates
Observations weighted by lagged outstanding claims (Weighted Least Squares)4
−100−50050100
Observed claim growth rates
−50050100
Observed claim growth rates
1 Scatter plots of the actual year-over-year growth (y axis) in foreign claims (adjusted for breaks in series and exchange rate movements) against the predicted growth (x axis) from a regression with time-varying banking-system and borrower-country fixed effects. Outlier values have been dropped in each panel. 2 Growth in all reporting banking systems’ combined claims on individual borrower countries. 3 Growth in individual banking systems’ aggregate foreign claims on all borrower countries. 4 Fixed effects regression where observations are first weighted by the lagged value of outstanding claim amounts.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
Accounting for global banking flows
Graph 6 shows the decomposition of the year-over-year growth in all banking systems’ total foreign claims. Red bars indicate the granular supply shocks, or shocks to individual banking systems’ claims on all borrower countries. Blue bars indicate granular demand shocks, or those attributable to the borrower country only. These
16WP639 Supply- and demand-side factors in global banking
granular shocks are calculated as described in equation (4). Yellow bars depict the common shocks, or the portion of the aggregate growth rates than cannot be separately identified as an idiosyncratic supply or demand shock.
Common shocks (yellow bars) dominate in periods when all banking systems’ claims on all countries grow at similar rates, for example during the run up to the global financial crisis. Between 2003 and 2008, virtually all large banking systems expanded their claims on borrowers in all major countries. The common component accounted for most of the growth in claims on advanced economies, offshore financial centres and Latin America during this period. Similarly, it accounted for roughly half of the growth in claims on Asia-Pacific and emerging Europe.
While there was striking similarity in the behaviour of banking in the pre-crisis period, once the crisis hit, the importance of common shocks was almost eliminated. Here we see a clear example of the Anna Karenina Principle: the crisis affected creditor and borrower pairs differently, and at different times. The common component virtually disappears by late-2008, and turns slightly negative in 2009, indicating that the contraction in claims globally was uneven across banking systems and borrower countries. Indeed, the growth of global claims, given in the top left panel of Graph 6, appears to be as much driven by idiosyncratic supply and demand conditions as by common factors following the financial crisis, and we do not see the common shock re-establish itself until 2011.
Not surprisingly, the importance of granular idiosyncratic components rises as we break the data up by region, because particular borrowers account for a larger share of claims on a region than of global claims. In advanced countries (top centre panel), negative granular supply shocks (red bars) dragged down aggregate claims growth starting in 2008. Similarly, negative granular demand shocks (blue bars) during the crisis further lowered the growth in aggregate claims. This is consistent with the many country-specific explanations for declines in borrowing that varied in severity and sign. For example, the crisis was precipitated by a severe downturn in housing prices in some advanced economies that, once underway, devastated household balance sheets. However, other countries were largely unaffected. Second, the structured finance products that turned toxic during the crisis were overwhelmingly backed by mortgages and other securities issued by obligors located in certain advanced economies (in particular in the United States), and these products sat primarily in the portfolios of banks, pension funds and other asset managers from these advanced economies. Often, these structured products were issued by financial vehicles located in certain offshore financial centres (eg Cayman Islands). The confluence of particular, large banking systems running into trouble because of their claims on particular, large borrower countries led to the downturn, and explains why the common shock gives way to the granular components during the crisis period.
The Anna Karenina Principle was also at work in emerging economies. Prior to the crisis, all emerging regions experienced rapid growth due to a global increase in credit and robust local demand, but after the crisis hit, the patterns across regions diverged as common shocks receded. Negative supply shocks (red bars) contributed to slower growth in claims on all three. Asia-Pacific saw a large decline in growth even though the its creditor banking systems were relatively unaffected. By contrast, robust demand for credit in emerging Europe did not produce significant growth because the this region’s creditor banking systems cut back sharply. In other words, the two regions’ experiences were largely idiosyncratic. In Section 5.4 below, we explore more formally how the characteristics of the claims contributed to these divergent patterns.
WP639 Supply- and demand-side factors in global banking17
Shocks to banks’ aggregate foreign claims, by borrower region
In per centGraph 6
On all borrower countriesOn advanced economiesOn offshore financial centres5
Demand2
Year-over-year growth1
15
0
–15
–30
Supply3 Common4
30
15
0
–15
–30
30
15
0
–15
–30
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
On Latin AmericaOn Asia-PacificOn emerging Europe
25
00
02 04
06 08
10 12
14 16
–25
02 04
06 08
10 12
14 16
–25
02 04
06 08
10 12
14 16
Note: Vertical black lines indicate end-Q2 2007 and end-Q3-2008.
1 Year on year growth in BIS reporting banks’ combined foreign claims on the country group indicated in the panel title, adjusted for breaks in series and exchange rate movements. 2 Estimated demand shocks unique to the borrower countries in the country group in the panel title. 3 Estimated supply shocks to the constellation of banking systems that report claims on the country group in the panel title. 4 Estimated shocks that are common to all borrower countries and banking systems. 5 Includes Cayman Islands, Hong Kong, Singapore, Guernsey, Jersey, Isle of Man and other offshore financial centres.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
External validity of the banking system shocks
One way to check if our estimates make sense is to see if they correspond to our priors of which banking systems suffered the most during the crisis. Graph 7 shows how supply and demand shocks contributed to the growth in total foreign claims reported by selected banking systems that were hit particularly hard during the crisis. All of these banking systems registered large negative idiosyncratic supply shocks in the first few quarters after the crisis. Belgian, Dutch, French, German, Swiss, US and UK banks, all of which had invested heavily in structured products in the run up to the crisis, saw much steeper and more sustained contractions in the growth of their foreign claims. These appear as negative supply shocks in Graph 7. The collapse of ABN Amro, a Dutch bank, and Fortis, a Belgian bank, drove the particularly sharp contractions in foreign claims booked by all internationally-active banks headquartered in these countries, and hence the severe negative supply shocks.
18WP639 Supply- and demand-side factors in global banking
Similarly, Swiss banks, whose appetite for foreign currency assets swelled their global balance sheets to multiples of Swiss GDP on the eve of the crisis, suffered particularly large losses, prompting a later scaling back of their investment banking operations.
Shocks to banking systems most affected during the global financial crisis
In per centGraph 7
US banksGerman banksSwiss banks
02 04 06 08 10 12 | 14 | 16 | 02 | 04 | 06 08 10 12 | 14 | 16 | 02 | 04 | 06 08 10 12 | 14 | 16 |
UK banks | Dutch banks | Belgian banks |
20
10
0
–10
–20
20
10
0
–10
–20
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
–30
02 04
06 08
10 12
14 16
–30
Note: Vertical black lines indicate end-Q2 2007 and end-Q3-2008.
1 Year-on-year growth in foreign claims of internationally active banks of the nationality indicated in the panel title, adjusted for breaks in series and exchange rate movements. 2 Estimated net demand shocks to the borrower countries on which the banking system in the panel title has outstanding foreign claims. 3 Estimated supply shocks that are unique to banking system in the panel title. 4 Estimated shocks that are common to all banking systems and borrower countries.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
While UK banks also suffered losses during the crisis, the estimated supply shocks appear relatively smaller for these banks than for others. This could indicate the bulk of their losses were on positions vis-à-vis counterparties in the home country (United Kingdom), which are not captured in these banks’ foreign claims. In addition, at least two of the largest UK banks (Standard Chartered and HSBC) have large operations in Asia, in part insulating these banks from the turmoil in advanced economies.
Graph 8, by contrast, shows the corresponding figures for banking systems that emerged from the crisis relatively unscathed. (Additional banking systems are presented in Graph A.1 in Appendix 1.) These banking systems exhibited either positive idiosyncratic shocks or no shocks in the key crisis quarters, indicating that they were in a relatively good place to provide credit. Japanese banks, for example, held relatively small amounts of toxic assets. That is, they did not experience a direct
WP639 Supply- and demand-side factors in global banking19
negative supply shock and, despite facing funding difficulties during the most intense quarters, their overall claim growth recovered relatively quickly.23 Australian, Canadian, Swedish and several smaller Asian banking systems were similar in this regard and also had positive idiosyncratic shocks. Even the Spanish banks, whose home country was particularly hard hit when the unsustainable housing boom came to an end, emerged from the crisis in relatively good shape, which is consistent with their lack of a negative idiosyncratic supply shock.24
Shocks to banking systems less affected during the global financial crisis
In per centGraph 8
Japanese banksSwedish banksSpanish banks
Year-over-year growth1
30
0
Demand2 Supply3 Common4
3030
00
02 04
06 08
10 12
14 16
–30
02 04
06 08
10 12
14 16
–30
02 04
06 08
10 12
14 16
–30
Canadian banksIndian banksAustralian banks
30
15
0
–15
60
30
0
–30
02 04
06 08
10 12
14 16
–30
02 04
06 08
10 12
14 16
–60
02 04
06 08
10 12
14 16
Note: Vertical black lines indicate end-Q2 2007 and end-Q3-2008.
1 Year-on-year growth in foreign claims of internationally active banks of the nationality indicated in the panel title, adjusted for breaks in series and exchange rate movements. 2 Estimated net demand shocks to the borrower countries on which the banking system in the panel title has outstanding foreign claims. 3 Estimated supply shocks that are unique to banking system in the panel title. 4 Estimated shocks that are common to all banking systems and borrower countries.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
23Japanese banks did register a series of large negative idiosyncratic supply shocks in the early 2000s, when many were on the verge of collapse and under regulatory scrutiny.
24This reflected Spanish banks’ reliance on local lending funded by local liabilities in their many host countries across Latin America, which had the effect of insulating them from the disruptions in the funding market in their home country and elsewhere (McGuire and von Peter (2016)).
20WP639 Supply- and demand-side factors in global banking
To further evaluate the plausibility of the estimated supply shocks across banking systems, we correlate them with outside measures of the losses banks experienced during the crisis. Starting with Peek and Rosengren (1997), we have long known that international banking flows are inversely related to capital-adequacy ratios when banks are insufficiently capitalized. We can verify that the same forces are apparent in our data. In order to show this, we collected data from Bloomberg and SNL Financial on the losses incurred by individual banks between 2008 and 2010, aggregated these to the level of national banking systems, and scaled the totals by the Tier 1 capital of the same set of banks.25 As shown in the left panel of Graph 9, the scaled losses incurred by banking systems are negatively correlated with the average size of their estimated supply shocks during the crisis, implying that those systems that incurred larger losses recorded slower claims growth on all borrower countries. The relationship is highly statistically significant, with an R2 of 0.64, and shows that our estimated supply shocks behave the way we would expect.
A second key transmission channel during the crisis was the dislocations in banks’ funding markets. Banks that relied more on wholesale funding and cross-currency swaps instead of deposits found themselves unable to roll over their positions during the most severe quarters of the crisis. Consistent with this, the estimated supply shocks during the crisis are positively correlated with pre-crisis deposit to total-liabilities ratios (Graph 9, centre panel). The regression line has a positive slope (significant at the 90% level), and an R-squared of 21%. That is, those banking systems with a lower share of relatively-stable deposit funding in 2008 experienced relatively larger negative shocks.
Finally, the maturity of claims also has bearing on their aggregate stability. Banks are able to reduce outstanding short-term claims simply by not rolling them over, whereas longer-term claims are more difficult to adjust quickly.26 In the right-panel of Graph 9, we relate the size of bank supply shocks to a lower-bound estimate of the share of foreign claims that had a remaining maturity of one year or less.27 Because the effects of the crisis hit different banking systems in different quarters, their supply shocks arise at different times, and are not always consistently negative throughout the 2007 Q3 – 2009 Q4 window used above. But, if we consider the most severe negative supply shock during that window, we find it is highly correlated with the share of each banking systems’ total foreign claims with a short-term maturity. The regression line has a negative slope (significant at the 95% level), and an R2 of 32%.
25Loss data are available for only those banking systems shown in the left panel of Graph 9. For each reporting banking system, we assemble the data for the top internationally-active banks headquartered in each country and match these with the list of reporting banks for those countries provided to the BIS by each reporting jurisdiction.
26Amiti and Weinstein (2011) use Japanese data to show that in crisis periods banks cut their short- term claims relative to their long-term ones.
27International claims (INTLC) are broken down into three maturity buckets (remaining maturity of less than one year, less than two years but more than one year, and over two years). No maturity breakdown is available for local claims in local currencies, and thus not for total foreign claims (FC). As a result, the ratio used in the right panel of Graph 9 is a lower bound estimate of each banking system’s share of foreign claims that are short term.
WP639 Supply- and demand-side factors in global banking21
Supply shocks during the financial crisis (Q3 2007 – Q4 2009)Graph 9 Bank losses1,2Deposits shares1,3Short-term international claims4
050100150200
Losses over Tier 1
20406080
Deposits in total liabilities(end−Q4 2008)
20406080
INTLST share (ave 2006 Q4 − 2007 Q2)
1 The y axis depicts the average value of the supply shock between Q3 2007 and Q4 2009 for the banking system listed in the panels. Grey shaded areas show the error bands for the linear regression line. 2 The x axis plots each banking system’s total credit losses reported between 2008 and 2010 as a share of the same banks’ combined Tier 1 capital as of end-2008. For each individual bank entering these banking system aggregates, total credit losses are taken to be the larger value from two different sources: the maximum of non-performing loans reported in 2008–10 (SNL Financial), and reported credit losses on loans and securities (Bloomberg). 2 Total deposits as a percentage of total liabilities (including domestic banking liabilities) as of end-2008, weighted average across the major banks headquartered in the countries shown. 4 The y axis depicts the minimum value of the supply shock between Q3 2007 to Q4 2009 for the banking system listed in the panels. The x axis shows the share of each banking system’s short-term international claims (INTLST) in total foreign claims on all borrower countries; average over the 2006 Q4 – 2007 Q2 window. Short-term international claims are those with a remaining maturity of one year or less. Note that there is no maturity breakdown for local claims in local currencies (LCLC).
Source: Bloomberg, SNL Financial; BIS consolidated banking statistics (IC basis); BIS locational banking statistics; authors’ calculations.
From the perspective of borrower countries
In this section, we evaluate the growth in foreign claims on individual borrower countries. Here, the growth rates of all banking systems’ combined foreign claims on selected countries are disaggregated into the common, supply and demand shocks. Demand shocks (blue bars) are unique to each borrower country while the supply shocks (red bars) for each country are the sum of idiosyncratic shocks to each of the country’s creditor banking systems.
Claims on advanced economies
While demand shocks always matter for understanding why capital flows to a particular country (as opposed to aggregate flows out of a country), we still can see a weak form of the Anna Karenina Principle at play here as well. Namely, that a borrower’s idiosyncratic supply and demand shocks matter much more for particular borrower countries during crisis periods. Graphs 10 and 11 show that the growth in aggregate claims on several large countries in the run up to the financial crisis was driven primarily by common shocks (yellow bars). Most striking is the fact that borrowers’ idiosyncratic supply shocks, which combine the idiosyncratic shocks to the borrower’s creditor banking systems, were largely unimportant in the pre-crisis period.
During and following the 2007-09 financial crisis, however, the common element becomes much less important. In part, this is because foreign claims on particular
22WP639 Supply- and demand-side factors in global banking
countries differ in their degree of flexibility. That is, key characteristics like the remaining maturity, counterparty sector and type of instrument all affect the ease with which banks can quickly change their outstanding positions. For example, a bank hit by a balance sheet shock can reduce its outstanding positions simply by not rolling over short-term loans, or by selling liquid securities; long-term loans and illiquid securities make balance sheet adjustment more difficult.28 As discussed in Box 1, however, these differences in claim characteristics, which are not explicitly taken into account when estimating the idiosyncratic supply and demand shocks, do not account for the heterogeneity in the differences observed across borrower countries.
Shocks to foreign claims on selected advanced economies
In per centGraph 10
United StatesGermanyUnited Kingdom
Demand2 Supply3
Common415
1515
000
–15
–15
–15
Year-over-year growth1
–30
–30
–30
02 04 06 08 10 12 14 16
02 04 06 08 10 12 14 16
02 04 06 08 10 12 14 16
JapanSwitzerlandAustralia
20
0
–20
02 04 06
08 10 12 14 16
02 04 06
08 10 12 14 16
–40
02 04 06
08 10 12 14 16
Note: Vertical black lines indicate end-Q2 2007 and end-Q3-2008.
1 Year-on-year growth in foreign claims of all reporting banks on the country listed in the panel title, adjusted for breaks in series and exchange rate movements. 2 Estimated demand shocks to unique to the borrower country listed in the panel title. 3 Estimated net supply shocks to the constellation of banking systems that have outstanding foreign claims on the borrower country listed in the panel title. 4 Estimated shocks that are common to all banking systems and borrower countries.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
The increased importance of the idiosyncratic supply and demand shocks is evident also during the European sovereign crisis which started in 2010. Graph 11
28The contraction in foreign claims on the United Kingdom was amongst the most severe (-22%), reflecting the fact that London is a financial Hub for both banks and non-bank financial institutions. Short-term cross-border interbank lending to banks in the UK in particular dropped sharply and has yet to recover.
WP639 Supply- and demand-side factors in global banking23
shows the decomposition for selected euro area countries, many of which came under severe strain as this crisis unfolded. Again, the patterns are largely consistent with the patterns in the 2007-09 financial crisis: common shocks accounted for a relatively small share of the growth in foreign claims on these countries. Greece, Ireland, Italy, Portugal and Spain all registered massive negative demand-side shocks (blue bars), consistent with the heightened market scrutiny of their sovereign debt levels. In other words, banks’ claims on these countries contracted more rapidly than did these same banks’ claims on other countries. That said, several of the creditor banks to these countries were themselves headquartered in countries that also were under strain. And problems at home may have contributed to slower growth in these banks’ foreign claims, including those on other periphery countries. Italian and Portuguese banks, for example, accounted for 10% and 8% respectively of the combined foreign claims on Greece and Spain at end-2010. Both banking systems registered negative supply shocks during the 2010-12 window (Graph A.1 in appendix). Such feedback channels contributed to the overall negative supply shocks experienced by the periphery countries in Graph 11.
Shocks to foreign claims on selected euro area countries
In per centGraph 11
FranceGreeceIreland
Demand2
Supply3 Common4
Year-over-year growth1
30
15
0
–15
–30
60
30
0
–30
–60
50
25
0
–25
–50
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
ItalyPortugalSpain
40
20
0
–20
02 04
06 08
10 12
14 16
–40
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
Note: Vertical black lines indicate end-Q2 2007 and end-Q3-2008.
1 Year-on-year growth in foreign claims of all reporting internationally active banks on the country listed in the panel title, adjusted for breaks in series and exchange rate movements. 2 Estimated demand shocks to unique to the borrower country listed in the panel title. 3 Estimated net supply shocks to the constellation of banking systems that have outstanding foreign claims on the borrower country listed in the panel title. 4 Estimated shocks that are common to all banking systems and borrower countries.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
24WP639 Supply- and demand-side factors in global banking
Estimated shocks and the maturity of claims
Box 1
The estimated supply and demand shocks are quite heterogeneous across borrower countries. One reason for this is that foreign claims differ across countries in terms of the counterparty sector, remaining maturity and instrument, all of which affect the ease with which creditor banks can adjust their balance sheets. For example, banks can more quickly cut back on short-term interbank loans by simply not rolling them over. Similarly, they can quickly sell high quality liquid securities. But longer-term loans, and illiquid securities are far more difficult to take off the balance sheet.
Estimation of the shocks based on overall bilateral foreign claims does not take these claim characteristics into account. Yet the combination of instrument type, maturity and counterparty type for a particular borrower country clearly has an impact on the estimated shocks, as discussed in Section 5.4.2. Borrower countries where a high share of the claims in 2007 were short-term or inter-bank experienced larger contractions in the growth of overall foreign claims. These outsized contractions mean that the common shock accounts for less of the overall change in the growth rate, leaving the estimated demand and supply side shocks to absorb the remaining part. This has bearing on how the estimated shocks should be interpreted, as discussed below.
Table A on the next page provides some concrete examples of where these differences come into play. Column 2 lists all banks’ combined foreign claims at end-Q2 2007 on the country listed in the first column. The breakdown by remaining maturity is available only for international claims (column 3); no such information is available for banks’ local claims in local currencies. As such, short-term international claims (column 4) provide a lower-bound estimate of the share of short-term claims in total foreign claims (column 5). More than 80% of the claims on China were international claims (column 5), meaning banks’ had a relatively small local presence there. And more than half of these had a remaining maturity of one year or less (column 7). As a result, short-term claims comprised at least 44% of the total foreign claims on China (column 6), the highest share for all the major countries listed in Table A. Only claims on Caribbean offshore centres, virtually all of which were international, had an estimated share close to China’s (39%). By contrast, the estimated share for Latin America (15%) and Emerging Europe (24%) were considerably lower. These differences across regions help explain the heterogeneous growth in foreign claims in Graph 3 in the main text.
Shock estimates for foreign claims and short-term international claims
In per centGraph A
Common shock estimates, by claims type1China (ST INTL claims)2Hungary (ST INTL claims)2
Demand2 Supply3 Common4
r-over-year grow
30
0
–30
–60
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
1 The lines show the estimated common shock based on the year-over-year growth in foreign claims (FC, red line) and in short-term international claims only (ST INTL, gold line). 2 Shock estimates based on the year-over-year growth in ST INTL.
Sources: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
These differences have implications for the interpretation of the shocks. To see this, the left panel of Graph A provides a comparison of the common shock estimated for foreign claims (red line) and for short-term international claims only (gold line). Focusing only on short-term claims greatly reduces the outstanding claim amounts, but also reduces the heterogeneity across countries in the flexibility of the claims. With this heterogeneity removed, the
WP639 Supply- and demand-side factors in global banking25
dynamics of short-term claims are more likely to be driven by common shocks than by idiosyncratic supply and demand-side shocks. During the 2007-09 crisis period, this indeed seemed to be the case: the common shock estimated with short-term claims moved farther into negative territory (-10%) than that estimated with foreign claims. In other words, the dynamics of short-term claims during the crisis had a large common component.
That said, for individual countries, the broad patterns in the demand-side shocks evident in the graphs in the main text are not all that different when estimated with short-term international claims only. The centre and right panels of Graph A (previous page) show the complete set of estimated shocks for China and Hungary. A comparison of these panels to their counterparts in Graphs 12 and 13 in the main text show that short-term claims contracted more (black lines) during the 2007-09 financial crisis (for China) and during European sovereign crisis (for Hungary) than did foreign claims. However, the overall patterns are remarkably similar, which suggests that the demand shocks we are estimating are picking up the movements in short-term claims. In both cases the estimated demand side shocks dominated during these periods regardless of which underlying claim input is used.
Characteristics of claims on selected borrower countries1
At end-Q2 2007Table A
Borrower country | Outstanding amounts (USD bln) | Shares (per cent) | Min FC growth (2007-2010)3 (per cent) | ||||||
Foreign claims (FC) | International claims (INTL) | Short-term International (ST INTL)2 | INTL/FC | ST | INTL/FC | ST | INTL/INTL | ||
All countries | 27,193 | 17,022 | 8,393 | 63 | 31 | 49 | -12.5 | ||
Advanced | 21,833 | 13,540 | 6,823 | 62 | 31 | 50 | -13.2 | ||
United States | 6,182 | 2,525 | 979 | 41 | 16 | 39 | -15.7 | ||
Euro area | 8,749 | 6,547 | 2,927 | 75 | 33 | 45 | -11.1 | ||
United Kingdom | 4,019 | 2,851 | 2,125 | 71 | 53 | 75 | -21.3 | ||
Japan | 687 | 334 | 168 | 49 | 24 | 50 | -28.4 | ||
Asian offshore | 596 | 294 | 186 | 49 | 31 | 63 | -19.2 | ||
Caribbean offshore | 1,129 | 1,109 | 436 | 98 | 39 | 39 | -22.6 | ||
Emerging economies | 3,309 | 1,782 | 841 | 54 | 25 | 47 | -6.3 | ||
Emerging Europe | 1,009 | 605 | 245 | 60 | 24 | 40 | -3.6 | ||
Hungary | 116 | 78 | 23 | 67 | 19 | 29 | -6.4 | ||
Poland | 194 | 86 | 23 | 44 | 12 | 26 | 2.6 | ||
Czech Republic | 138 | 36 | 13 | 26 | 10 | 37 | -0.8 | ||
Latin America | 791 | 269 | 119 | 34 | 15 | 44 | -3.0 | ||
Brazil | 248 | 76 | 35 | 31 | 14 | 46 | -10.1 | ||
Mexico | 311 | 74 | 22 | 24 | 7 | 30 | -2.7 | ||
Chile | 68 | 27 | 14 | 39 | 21 | 52 | -3.8 | ||
Asia-Pacific | 1,094 | 645 | 360 | 59 | 33 | 56 | -14.8 | ||
China | 203 | 164 | 89 | 81 | 44 | 54 | -25.1 | ||
India | 151 | 88 | 47 | 58 | 31 | 54 | -9.2 | ||
Korea | 314 | 144 | 88 | 46 | 28 | 61 | -15.0 | ||
1 Claims of all reporting banks on the country/region listed in the first column. Growth rates adjusted for breaks in series and exchange rate movements (Appendix A.2) 2 Short-term international claims are international claims with a remaining maturity up to and including one year. 3 Minimum observed year-over-year growth (2007-10) in foreign claims of all reporting countries on the borrower country listed in the first column.
Sources: BIS consolidated banking statistics; authors’ calculations.
26WP639 Supply- and demand-side factors in global banking
Claims on emerging market economies
The decomposition of the growth in claims on emerging economies shows that demand shocks played an even larger role for these economies both before and after the financial crisis (Graphs 12 and 13). Between 2000 and 2005, large negative demand shocks are clearly apparent for Argentina and Brazil (Graph 12). Argentina’s default in late 2001 and a 11% contraction in GDP in 2002 is associated with a large negative idiosyncratic demand shock that essentially cut Argentina off from credit markets. Similarly, a drought in Brazil, which is heavily reliant on hydroelectric power, precipitated a severe energy crises in 2001-02, and we see a substantial decline in demand for capital.
Shocks to foreign claims on selected emerging economies
In per centGraph 12
ArgentinaBrazilChile
Demand2 Supply3
Common4
Year-over-year growth1
30
0
–30
–60
30
0
–30
–60
30
0
–30
–60
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
ChinaIndiaRussia
40
20
0
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
–20
02 04
06 08
10 12
14 16
Note: Vertical black lines indicate end-Q2 2007 and end-Q3-2008.
1 Year-on-year growth in foreign claims of all reporting internationally active banks on the country listed in the panel title, adjusted for breaks in series and exchange rate movements. 2 Estimated demand shocks to unique to the borrower country listed in the panel title. 3 Estimated net supply shocks to the constellation of banking systems that have outstanding foreign claims on the borrower country listed in the panel title. 4 Estimated shocks that are common to all banking systems and borrower countries.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
We also see some of the impacts of idiosyncratic demand factors in China and Russia. After several post-crisis years of rapid economic growth and surging capital flows, emerging economies came under investor scrutiny in 2014 and 2015, prompting massive capital outflows from many countries. Both Russia and China stand out in this regard, as evidenced by the large negative demand shocks in these
WP639 Supply- and demand-side factors in global banking27
years (Graph 12). The economic sanctions on Russia introduced in early 2014 following its annexation of the Crimea and the subsequent collapse in oil prices in mid-2014 put significant strain on Russia’s fiscal position, prompting creditor banks to significantly reduce their exposures to the country. The growth in foreign claims on Russia, which had reached almost 30% year-over-year in late 2012, subsequently fell to -25 by end-2015. For its part, uncertainty about the breadth of the slowdown in China’s economy sparked dislocations in Chinese equity markets and large capital outflows in 2015. Year-on-year claims growth fell from a high of roughly 40% in 2013 to -22% by mid-2016.
Despite the importance of local demand conditions, what is striking is that for most of these countries, idiosyncratic supply shocks hitting each borrower are much more pronounced during the crisis periods. We can see this particularly clearly in Brazil, Russia and India (Graph 12), and in several emerging European economies that were most dependent on troubled banks (Graph 13).
Shocks to foreign claims on selected emerging European economies
In per centGraph 13
Czech RepublicHungaryPoland
Demand2
Supply3 Common4
Year-over-year growth1
30
15
0
–15
–30
30
15
0
–15
–30
30
15
0
–15
–30
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
EstoniaLatviaLithuania
02 04
06 08
10 12
14 16
02 04 06
08 10 12
14 16
02 04 06
08 10 12 14 16
Note: Vertical black lines indicate end-Q2 2007 and end-Q3-2008.
1 Year-on-year growth in foreign claims of all reporting internationally active banks on the country listed in the panel title, adjusted for breaks in series and exchange rate movements. 2 Estimated demand shocks to unique to the borrower country listed in the panel title. 3 Estimated net supply shocks to the constellation of banking systems that have outstanding foreign claims on the borrower country listed in the panel title. 4 Estimated shocks that are common to all banking systems and borrower countries.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
28WP639 Supply- and demand-side factors in global banking
In the year following the 2007-09 crisis, the growth in claims on eastern Europe continued to fall, particular once the European sovereign crisis was underway (Graph 13). The Czech Republic, Hungary and Poland (top panels) all registered large negative supply shocks during this period whereas Estonia, Latvia and Lithuania (lower panels) all registered large negative demand shocks in the following years (bottom panels).29 The key to understanding these shock patterns is the mix of banking systems that have claims on these countries. The largest creditor banking systems to the Czech Republic, Poland and Hungary in mid-2008 were the major European banking systems (Austrian, Belgian, Dutch, French, German and Italian banks), each of which sustained large negative supply shocks in the wake of the crisis and smaller ones since (Graph 7). By contrast, Swedish banks were by far the dominant creditor banking system to the Baltic countries (Estonia, Latvia and Lithuania).30 Swedish banks actually emerged from the crisis relatively unscathed, and the growth in their foreign claims globally returned to pre-crisis levels quickly (Graph 8).
As noted in Section 4, local claims on emerging economies proved to be more stable during the 2007 – 2009 crisis (Graph 4). In part, this reflects the fact that, in many countries, these local positions were corporate and retail lending backed by local deposits. These pieces of banks’ balance sheets were relatively insulated from the rest of their global operations, in particular from the meltdown in structured finance products held in banks’ offices in home countries and major financial centres.
It stands to reason, then, that those borrower countries where such local positions were particularly important experienced less severe negative shocks during the crisis period. The data seem to bear this out. Graph 14 examines the top 25 emerging economies, ranked by total foreign claims, which together accounted for almost 90% of all banks’ total foreign claims on all emerging economies in mid-2007. The panels relate the most adverse shocks experienced by each borrower country in the 2007 Q3 – 2009 Q4 crisis window (vertical axes) to the local intermediation share (LINT) measured on the eve of the crisis (x-axes).31 LINT is a proxy that captures the portion of claims on a country whose funding is insulated from the rest of creditor banks’ global operations, and is defined as the share of total foreign claims on a country that are both extended locally in the local currency and funded locally in the local currency.32
29The Baltic countries of Estonia, Latvia and Lithuania were amongst the hardest hit in the world during the crisis, with output contractions of 20-25% in 2008 and 2009 (Purfield and Rosenberg (2010)).
30They extended $30 billion to these countries (combined) in mid-2008, compared to the next largest creditor banking system, German banks, at $500 million.
31The y-axes in Graph 14 show the minimum value of the shock measures (ie the smallest positive or the largest negative values) during the crisis window.
32In many countries, a portion of banks’ local claims in local currencies are funded by cross-border inter-office positions, or by non-local currencies raised either locally or offshore. By focusing on the local intermediation share, which captures only those local claims that have local currency funding, we arguably better capture the most insulated portions of creditor banks’ balance sheets. See McCauley et al (2012) for more discussion. Formally, LINT is defined as the ratio of the minimum of local claims in local currencies and local liabilities in local currencies summed across creditor banking systems b to total foreign claims on the country, or:
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WP639 Supply- and demand-side factors in global banking29
The top left panel shows that the lower the LINT share, the more severe was the total shock to a country, where a total shock is defined as the supply and demand shocks combined (ie the actual growth in claims less the common shock). The slope coefficient is significant at the 99% level, and implies that a 10 percentage point higher LINT share on the eve of the crisis was associated with a maximum negative total shock that was 2.5 percentage points smaller (R2 of 35%).
Estimated shocks and claim structure in emerging economies (Q3 2007-Q4 2009)1
In per centGraph 14
Shocks and the share of local intermediation (LINT share)2
Total shocks (supply + demand)Demand shocksSupply shocks
0204060
LINT share (ave 2006 Q4 − 2007 Q2)
0204060
LINT share (ave 2006 Q4 − 2007 Q2)
0204060
LINT share (ave 2006 Q4 − 2007 Q2)
Shocks and the share of claims on other (unaffiliated) banks (Bank share)3
Total shocks (supply + demand)Demand shocksSupply shocks
0204060
Bank share (ave 2006 Q4 − 2007 Q2)
0204060
Bank share (ave 2006 Q4 − 2007 Q2)
0204060
Bank share (ave 2006 Q4 − 2007 Q2)
1 The y-axes show the minimum value of the estimated total shock (ie demand plus supply shocks, left panel), demand shock (centre panel), and supply shock (right panel) experienced by each country in the 2007 Q3 – 2009 Q4 crisis window. 2 For each borrower country, the local intermediation share (LINT) is defined as the sum (across creditor banking systems) of the minimum of each banking system’s local claims and local currencies and local liabilities (ie min(LCLC, LLLC) as a share of all creditor banking systems’ total foreign claims the country; average value in 2006 Q4 – 2007 Q2. See footnote 32 in main text. 3 For each borrower country, the bank share (x-axes) is the share of foreign claims on banks in the country in total foreign claims on all sectors. This share is constructed using the CBS (Ultimate Risk basis), since the sectoral breakdown in these statistics applies to total foreign claims.
Source: BIS consolidated banking statistics (IC basis and UR basis); BIS locational banking statistics; authors’ calculations.
Did a higher LINT share help to insulate countries from supply or demand shocks specifically? To answer this question, the top centre and top right panels show the scatter plot separately for these shocks. The most severe negative demand shocks
30WP639 Supply- and demand-side factors in global banking
(top centre panel) experienced by each country in the crisis window were smaller for countries with high LINT values.33 By contrast, the regression based on the supply shocks (top right panel) falls short of statistical significance.
This pattern is not surprising, and is another example of the Anna-Karenina principle in action. During the crisis window, higher LINT shares helped insulate countries, as is evident in the top left panel. But whether demand or supply shocks offset or compounded each other depended on the mix of banking systems and the structure of their claims on particular countries. The supply shocks are pinned down mainly by the movements in each banking system’s global claim portfolio. But, vis-à- vis individual countries, banks’ claims are structured differently; more or less cross- border, longer or shorter term, interbank or otherwise (see Box 1 for discussion). Thus, we should expect a higher correlation with the demand shocks. For example, Poland experienced a severe negative supply shock, since many of its creditor banks held toxic assets. But because these banks booked and funded a high share of their claims locally in Poland, the country was less affected by problems in these banks than were countries where short-term cross-border claims were more prominent. In the case of Russia, the two shocks compounded each other, making the total shock more severe.
The lower panels of Graph 14 show a similar pattern for interbank claims on these key emerging economies. A higher share of claims on other (unaffiliated) banks is associated with more severe negative total shocks during the crisis window (left panel). Overall, the slope coefficient is statistically significant at the 99% level, and implies that a 10 percentage point higher share of claims on banks in a country on the eve of the crisis was associated with a 5.8 percentage point more severe total shock during the crisis window. This share of claims on banks explains a full 47% of the variation across countries in the size of the total shocks. As with the LINT share in the top panels, it is the demand shocks that drive this result (centre panel); the supply shocks are virtually uncorrelated with the share of interbank claims on these emerging economies.
Conclusion
It is critical for macroprudential policy makers interested in monitoring cross-border capital flows to understand the drivers of the global credit cycle. But credibly estimating supply- and demand-side drivers has proven to be difficult. Previous studies that rely on panel regression models with fixed effects generally find statistically significant coefficients on a host of plausible drivers. But the models tend to fall short in explaining the aggregate dynamics in the data, as evidenced by small R2 values and predicted dependent variables that bear little resemblance to the actual aggregate movements.
This paper exactly decomposes the growth in internationally-active banks’ consolidated foreign claim positions. The methodology used here allows for an exact decomposition of claim growth into supply, demand and common factors. As a result, it yields estimated supply, demand and common shocks that, when summed,
33The relationship is statistically significant (at the 95% level), and the slope of the regression line indicates that a ten percentage point higher local intermediation share on the eve of the crisis is associated with a maximum negative demand shock that was 1.8 percentage points smaller (ie less severe) during the crisis window.
WP639 Supply- and demand-side factors in global banking31
perfectly match the growth in each banking system’s claims on all countries, and all banking systems’ claims on any one country.
The shock estimates afforded by this methodology are only as good as the inputs. In order to implement the methodology, we use the BIS Consolidated Banking Statistics, the most comprehensive dataset available on national banking systems’ country exposures. Importantly, the CBS, unlike balance of payments data and other residence-based statistics, respect the perimeter of banks’ consolidated balance sheets, which means that supply shocks that affect these national banking groups can be credibly estimated. Along the way, the paper demonstrates the importance of two adjustments to the raw CBS data: for breaks in series and for exchange rate movements. Absent these adjustments, the raw data present a very misleading picture of the trajectory of international claims growth.
We document one novel stylized fact, which we term the “Anna Karenina Principle.” During normal and boom-periods, the growth rate of banks’ foreign claims is largely driven by global common factors and idiosyncratic local demand. But during crisis periods, growth is driven by idiosyncratic demand and idiosyncratic supply shocks. This pattern is evident for borrower countries as well.
The estimated supply and demand shocks appear plausible across a number of dimensions. The size and direction of the supply shocks across all banking systems during the 2007-09 financial crisis are very highly correlated with the losses suffered by these banks during that period. On the demand side, negative shocks are clearly evident for those European economies that came under strain during the sovereign debt crisis that started in 2010. And they correlate well with idiosyncratic macro- economic shocks (eg sovereign defaults or international sanctions) and recessions in emerging economies. Importantly, those emerging economies where the bulk of creditor banks’ claims were both extended and funded locally seemed to suffer from less severe shocks during and following the 2007-09 financial crisis.
The methodology used in the paper provides policy makers with a convenient tool for monitoring global banking activity. By decomposing bilateral growth rates into supply, demand and common shocks, policy makers can quickly ascertain whether rapid increases or decreases in credit to a particular country are driven by systematic changes in the balance sheets of that country’s key creditor banking systems (ie supply shocks), or whether they are idiosyncratic for that country (ie demand shocks).
32WP639 Supply- and demand-side factors in global banking
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34WP639 Supply- and demand-side factors in global banking
A.1Estimated shocks for smaller banking systems
Shocks to selected banking systems
In per centGraph A.1
Austrian banksDanish banksItalian banks
Demand2
Supply3 Common4
Year-over-year growth1
40
20
0
–20
–40
40
20
0
–20
–40
40
20
0
–20
–40
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
Portuguese banksSingaporean banksTaiwanese banks
30
15
0
–15
02 04
06 08
10 12
14 16
–30
02 04
06 08
10 12
14 16
02 04
06 08
10 12
14 16
Note: Vertical black lines indicate end-Q2 2007 and end-Q3-2008.
1 Year-on-year growth in foreign claims of internationally active banks of the nationality indicated in the panel title, adjusted for breaks in series and exchange rate movements. 2 Estimated net demand shocks to the borrower countries on which the banking system in the panel title has outstanding foreign claims. 3 Estimated supply shocks that are unique to banking system in the panel title. 4 Estimated shocks that are common to all banking systems and borrower countries.
Source: BIS consolidated banking statistics (IC basis); BIS locational banking statistics; national data; authors’ calculations.
WP639 Supply- and demand-side factors in global banking35
Adjustments to foreign claims
Breaks in series
Breaks in series caused, for example, by bank mergers or methodological changes lead to jumps in bilateral positions that do not signify that extension or withdrawal of actual credit. Fortunately, the distortions caused by many of the largest of the breaks can be corrected. Reporting countries often provide to the BIS, on a confidential basis, “pre-break” values of outstanding claims from which adjusted bilateral growth rates can be constructed. Where available, we have used these pre-break values in calculating the year-over-year changes in outstanding bilateral claims amounts, which are used as inputs in the empirical analysis.
When there is a known break-in-series but the pre-break data are not available (ie not provided by the reporting jurisdiction), we have two choices; either truncate the sample for the affected banking system, so that the series starts in the quarter after the break; or assume the pre-break growth rates are zero. A priori, it is not clear which procedure is better. Truncating the series has no effect on the estimated shocks in later periods. But the aggregate growth rates (and hence the estimated common and demand-side shocks) prior to the break date are necessarily affected since some observations have been excluded. By the same token, retaining the full series for these banking systems and simply assuming that the growth in claims in the quarter in which the break occurred is zero also introduces error into the estimated shocks. In practice, however, the difference between these approaches is small. In what is presented in the paper, we have truncated the series for certain banking systems where breaks occurred (as is evident in Graphs 7, 8 and A.1).
For one observation for which break-in-series values was not available, we estimated the break value from information in the underlying bilateral positions. For another that reflected the purchase of a subsidiary bank in a particular country, we assumed that the break value was simply full change in the outstanding claim amount.
Exchange rate movements
Foreign claims on a particular borrower country tend to be denominated in a mixture of currencies. Changes in the relative value of these currencies induce changes in the outstanding stock of claims when expressed in any single currency, here in US dollars. Changes in exchange rates may have economic meaning from the perspective of a reporting banking system, for example in analyses of how currency mismatches across the balance sheet affect bank profitability. However, they are not indicative of the provision or retraction of actual credit, which is the metric needed for the empirical analysis in this paper. In most quarters, exchange rate movements contribute little to the growth in aggregate foreign claims. But, as shown in the main text, extreme exchange rate movements, like those that occurred in the months following the collapse of Lehman Brothers, significantly distort measures of the growth in foreign claims.
The first step in the adjustment is to obtain measures of the share of each currency in foreign claims. Foreign claims can be broken into three pieces: (a) cross- border claims (XBC), (b) local claims in foreign (ie non-local) currencies (LCFC) and
(c) local claims in local currencies (LCLC). That is, FC = XBC + LCFC + LCLC. In the CBS, XBC and LCFC are reported together as international claims (INTLC = XBC + LCFC),
36WP639 Supply- and demand-side factors in global banking
although these claims can be separated (albeit imperfectly) using the BIS Locational Banking Statistics, which has a currency breakdown. We obtain the currency shares for each of these three components separately, and then use them to obtain the shares of each currency in total foreign claims.
The currency shares for these three pieces are obtained as follows:
LCLC: The currency of denomination of LCLC is known by construction. It is simply the currency in use in the borrower country.
LCFC: For many banking-system borrower pairs, the currency shares for LCFC are also known, from the BIS Locational Banking Statistics by Nationality (LBSN). Unlike the CBS, the LBSN track the cross-border claims and local claims in non-local currencies (LCFC) of banks located in a particular location, broken down by the nationality of the banking system.34 Thus, for any country that reports the LBSN to the BIS, we know the currency breakdown (USD, EUR, JPY and Other foreign currencies) for each national banking systems’ LCFC on the residents of that reporting country.
Currently, more than 40 countries report the LBSN to the BIS, covering more than 95% of each consolidated national banking systems’ global foreign claims. But there are only a few emerging economies that report the LBSN (Brazil, Chile Mexico, South Africa, Chinese Taipei, India, Indonesia, Malaysia and South Korea), and several of them only started reporting after 2000. We do not have actual data about the currency composition of each banking systems’ LCFC vis-à-vis those countries that do not report in the LBSN (eg China, Czech Republic, Hungary and Poland). For these countries, we assume that the composition of each banking systems’ LCFC is the same as that for all cross-border claims on that country, as described in (c) below.35
XBC: Obtaining the currency shares for a consolidated national banking system’s cross-border claims on a particular country is the most problematic. The LBSN provide information about the currency composition of banks’ cross-border claims booked by their offices in each reporting location. But, critically, they do not reveal the location (country) of the borrower.36 The BIS Locational Statistics by Residency (LBSR), by contrast, track the cross-border claims booked by banks offices in each reporting country on individual borrower countries, broken down by currency. But, the LBSR, unlike the LBSN, do not reveal the nationality of the banking system located in each reporting country. In addition, cross-border claims in the LBSR include banks’ interoffice positions, which are not included in the CBS and thus not in foreign claims. Cross-border claims in the LBSR are broken down into
34For example, in the LBSN, the reporting country United Kingdom reports LCFC with a currency breakdown separately for the German banks, Swiss banks, French banks, etc that are located there.
35By definition, LCFC does not include positions denominated in the domestic currency of the counterparty country. Thus, in applying the currency distribution taken from cross-border claims on that country as described (c), the domestic currency of that country is excluded.
36That is, they reveal, for example, the currency composition of the cross-border claims of German banks in the United Kingdom, and that of cross-border claims of German banks in every other reporting location. These can be aggregated to reveal the currency composition of German banks’ total cross-border claims booked in all locations. But the information about the counterparty country was introduced in the LBSN only in 2013. Thus, they do not reveal the currency distribution of German banks’ worldwide consolidated claims on counterparties in any one particular country.
WP639 Supply- and demand-side factors in global banking37
positions denominated in USD, EUR, JPY, GBP, CHF, the domestic currency of the borrower country, and “Other” foreign currencies.
To obtain the currency shares of each national banking system’s worldwide consolidated cross-border claims on a particular country, we take the shares reported in the LBSR for banks of all nationalities and apply these to banks of each nationality. That is, the currency shares of US banks’ cross-border claims on Hungary are assumed to be the same as the shares of German, Swiss and other banks’ claims on Hungary. For those borrower countries that themselves report the LBSN to the BIS, we make an additional correction to exclude interoffice positions in each currency. Specifically, for these countries, we obtain the currency distribution by taking cross-border claims of all banks in all other BIS reporting countries on all sectors in the borrower country and subtract from this the total cross-border interoffice liabilities reported by banks (of all nationalities) located in the borrower country.
For those borrower countries that do not report the LBSN, we assume that the currency composition of the total international claims in the CBS (INTLC
= XBC + LCFC) is simply equal to the currency composition of total cross- border claims (including interoffice) from the LBSR.
With the currency shares for the three components of foreign claims in hand, we are able to estimate the overall currency shares for each consolidated banking system’s total foreign claims on each borrower country. The second step in our adjustment is to feed these data series, along with exchange rates, into a chain-linked adjustment that yields the year-over-year growth in foreign claims excluding the effect of exchange rate movements.
38WP639 Supply- and demand-side factors in global banking
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Assessing fiscal policy through the lens of the financial and the commodity price cycles
Global value chains and effective exchange rates at the country-sector level
The impact of macroprudential policies and their interaction with monetary policy: an empirical analysis using credit registry data
Prudential policies and their impact on credit in the United States
Evaluating the impact of macroprudential policies on credit growth in Colombia
The impact of warnings published in a financial stability report on loan-to-value ratios
The impact of macroprudential housing finance tools in Canada
Arbitrage costs and the persistent non-zero CDS-bond basis: Evidence from intraday euro area sovereign debt markets
How post-crisis regulation has affected bank CEO compensation
The beneficial aspect of FX volatility for market liquidity
Is monetary policy less effective when interest rates are persistently low?
External debt composition and domestic credit cycles
Monetary policy's rising FX impact in the era of ultra-low rates
Scarcity effects of QE: A transaction-level analysis in the Bund market
Does exchange rate depreciation have contractionary effects on firm-level investment?
International inflation spillovers through input linkages
External financing and economic activity in the euro area – why are bank loans special?
Enrique Alberola and Ricardo Sousa
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WP639 Supply- and demand-side factors in global banking39
Bangladesh
En Route to LDC Graduation: Firm-Level Preparedness in the Textile and Clothing Sector
Table of Contents
Apparel exports from Bangladesh: Some stylised facts3
Apparel export trends, composition and major preferential markets3
Sources of imported inputs for apparel exports7
LDC Graduation and Its Implications on Export Competitiveness in RMGs10
Preferential market access and RMG exports10
Firm-level Preparedness to Remain Competitive after Graduation16
Salient features of the firms participating in the consultation process16
Firm-level perceptions and preparedness for LDC graduation22
IV.Conclusion [will need further working]33
Firm-Level Preparedness in the Textile and Clothing Sector
Background
Bangladesh is set to graduate from the group of least developed countries (LDCs) in 2026 (UNCDP, 2021).1 As an LDC, Bangladesh has been enjoying various international support measures (ISMs) provided by the international community in areas such as trade preference, development finance, and technical assistance. Most importantly, Bangladesh’s apparel exports have been the largest beneficiary of tariff-free market access in most developed and several developing countries under their respective generalised system of preference (GSP) regimes targeting the LDCs. Utilizing duty- free access and relaxed rules of origin (RoO) requirements in the importing countries in conjunction with generous policy support at home, apparel exports from Bangladesh increased rapidly over the past three decades. After graduation, Bangladesh will have to forgo LDC-specific trade preferences in all the major export market destinations including the European Union, the United Kingdom, Canada, China, India, Japan, Australia, Republic of Korea, etc. Consequently, the apparel exporters of the country are expected to face stiff international competition. There are concerns that the loss of preferences could undermine Bangladesh’s competitiveness, affecting export earnings from the textile and clothing sector. Maintaining the competitiveness of the sector is critical for Bangladesh in ensuring a sustainable and smooth LDC graduation. It is in this context that the preparedness of exporting firms—along with other relevant factors—should be given serious consideration.
Against the above backdrop, the main objective of this paper is to provide perspectives of entrepreneurs, factory owners, and senior managers on the issues related to LDC graduation and to capture firm-level initiatives that are being carried out in dealing with any future challenges owing to Bangladesh’s development transitions. This assessment has been prepared based on extensive consultations with industry associations and by administering a questionnaire survey to gather information from export-oriented apparel firms on wide-ranging issues.2 In providing context to the survey and to analyse the responses received from the survey and key informants, this paper also includes a snapshot of Bangladesh’s apparel export trend, reliance on LDC preferences, and the likely changes to take place in trade policy regimes after LDC graduation.
This paper is organised as follows: after this background, section II provides stylised facts of the RMG industry in terms export trends, growth, and market composition, sources of imported raw materials, etc.; Section III depicts preference utilisation in important export destinations and provides a summary
1 Graduation from LDC status requires a country to meet development thresholds under at least two of the three pre-defined criteria (of per capita income, human asset, and economic vulnerability) in two consecutive triennial reviews. Bangladesh qualified for graduation by satisfying all three thresholds. It is to be noted that there is also a provision for the ‘income-only’ graduation rule under which, if the 3-year average per-capita gross national income of an LDC has risen to a level at least double the graduation threshold, the country could be eligible for graduation regardless of its situation under the other two criteria. In 2018, Bangladesh, for the first time, met the criteria for graduation from the group of least developed countries (LDCs), assessed at the Triennial Review conducted by the Committee for Development Policy (CDP) of the United Nations Economic and Social Council (ECOSOC). The country met all three criteria for graduation from the Lease Developed Countries (LDC) for the second time in 2021 triennial review by United Nations Committee for Development Policy (UN CDP). The UNCDP recommended Bangladesh for graduation in 2026 (UNCDP, 2021).
2 In the questionnaire survey 38 firms participated.
of potential implications of LDC graduation as available from different studies to capture the perceived weakened competitiveness of Bangladesh after graduation; Section IV discusses the results of the industry consultation exercise including responses received from the questionnaire survey; Section V concludes.
Apparel exports from Bangladesh: Some stylised facts
Apparel export trends, composition and major preferential markets
The success story of the export-oriented textile and clothing (T&C) industry of Bangladesh has hugely contributed to the country’s socio-economic progress paving the way for LDC graduation. Bangladesh’s merchandise exports grew from a small base of less than $2 billion in the early-1990s to
$40.5 billion in 2018-19 (Figure 1).3 This expansion has been overwhelmingly dominated by the textile and clothing sector. Apparel exports stood at 34.1 billion in 2018-19 (i.e., more than 84 per cent of total merchandise exports). The Covid-19 global pandemic caused apparel exports to fall by 18.1 per cent in 2019-20 before a partial recovery to be achieved in the following year when apparel exports from the country were recorded at $31.5 billion in 2020-21. Over the past three decades prior to the onset of Covid-19 global pandemic, apparel exports grew at an average annual rate of more than 14 per cent compared to less than 7 per cent for non-apparel goods (Figure 2). The rapid and sustained growth of apparel exports has been unmatched by non-apparel sectors resulting in a dramatic shift in the country’s export composition in which the relative significance of apparels in overall exports grew from virtually nothing to more than 80 per cent while that of other sectors has been subject to a secular decline (Figure 3). The apparel sector has generated massive employment opportunities, especially for women. According to the data provided by the industry association (BGMEA), the sector currently employs more than 4 million workers, of which 62 per cent of are female.
Figure 1: Bangladesh's merchandise exports of readymade garment products and other products
45
40
35
30
25
20
15
10
5
0
Source: Authors’ presentation using data from the Export Promotion Bureau of Bangladesh.
3 Due to Covid-19 disruptions, export earnings in 2019-20 fell by 17 per cent. Exports in 2020-21 (i.e., June 2020— July 2021) staged a strong recovery to reach $38.7 billion but were still lower than the pre-Covid level of 2019- 20.
Figure 2: Growth rates of RMG and Non-RMG exports (%)
50
40
30
20
10
0
-10
-20
-30
-40
Source: Authors’ presentation using data from the Export Promotion Bureau of Bangladesh. RMG stands for readymade garments (as apparels are more popularly called in Bangladesh).
Figure 3: Chaning shares of RMG and non-RMG exports in total exports (%)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Share of RMG (%)Share of non-RMG (%)
Source: Authors’ presentation using data from the Export Promotion Bureau of Bangladesh.
Bangladesh’s apparel exports were initially dependent on woven items (Harmonized System (HS) code
62). However, since the early 1990s, the knitwear sector expanded fast and its current share in total apparel exports exceeds 50 per cent (Figure 4). In knitwear manufacturing, Bangladesh has a strong domestic backward linkage to spinning factories, and thus the domestic value-added content out of this export is quite high. Oven items, on the other hand, have remained largely dependent on imported intermediate inputs, most importantly, fabrics.
Figure 4: Share of woven and knitwear in RMG exports of Bangladesh
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Woven garmentsKnitwear
Source: Authors’ presentation using data from the Export Promotion Bureau of Bangladesh.
Until 2011, EU rules of origin (RoO) required LDCs fulfil a ‘double transformation’ of clothing items to qualify for duty-free quota-free preferential market access. For woven products, this would imply domestically produced fabrics to be used in making garment items. The derogation of EU rules of origin in 2011 allowed a single transformation for exporting apparels, which helped raise the share of woven garments in exports to the EU (Razzaque and Rahman, 2019)4 as Bangladesh lacks domestic supply capacities in fabrics.
The largest exporting apparel products from Bangladesh is t-shirts, singlets, and other vests, of cotton, knitted or crocheted (HS 610910) capturing almost 19 per cent of T&C exports and about 16 per cent of overall exports. This is closely followed by men's or boys' trousers, breeches, etc., of cotton (HS 620342) comprising about 16 per cent of RMG exports. The list of major 20 apparels exporting items is in 2018-19 (Table 1).
Table 1: Top 20 apparel products exported from Bangladesh in 2019-20
HS code | Description | Exports (million $) | Share in apparel exports (%) | Share in total exports (%) |
610910 | T-shirts, singlets and other vests, of cotton, knitted or crocheted | 5296.43 | 18.95 | 15.73 |
620342 | Men's or boys' trousers, breeches, etc, of cotton | 4323.15 | 15.47 | 12.84 |
620462 | Women's or girls' trousers, breeches, etc, of cotton | 2445.82 | 8.75 | 7.26 |
611020 | Jerseys, pullovers, etc, of cotton, knitted or crocheted | 1908.97 | 6.83 | 5.67 |
620520 | Men's or boys' shirts of cotton | 1502.78 | 5.38 | 4.46 |
611030 | Jerseys, pullovers, etc, of man-made fibres, knitted or crocheted | 1207.83 | 4.32 | 3.59 |
610462 | Women's or girls' trousers, etc, of cotton, knitted or crocheted | 796.09 | 2.85 | 2.36 |
620343 | Men's or boys' trousers, breeches of synthetic fibres | 716.53 | 2.56 | 2.13 |
610510 | Men's or boys' shirts of cotton, knitted or crocheted | 595.61 | 2.13 | 1.77 |
620193 | Men's or boys' anoraks, windcheaters, etc, of man- made fibres | 424.80 | 1.52 | 1.26 |
621210 | Brassi*res | 416.83 | 1.49 | 1.24 |
611090 | Jerseys, pullovers, etc, of other textiles, nes, knitted or crocheted | 368.83 | 1.32 | 1.10 |
4 During 2010-2019, the share of woven garments in the EU increased from 32 per cent to 43 per cent.
611120 | Babies' garments, etc, of cotton, knitted or crocheted | 364.05 | 1.30 | 1.08 |
610821 | Women's or girls' briefs and panties of cotton, knitted or crocheted | 361.58 | 1.29 | 1.07 |
620293 | Woman's or girls' anoraks, wind-cheaters, etc, of man- made fibres | 344.54 | 1.23 | 1.02 |
610711 | Men's or boys' underpants and briefs of cotton, knitted or crocheted | 333.08 | 1.19 | 0.99 |
610990 | T-shirts, singlets, etc, of other textiles, nes, knitted or crocheted | 317.57 | 1.14 | 0.94 |
610342 | Men's or boys' trousers, etc, of cotton, knitted or crocheted | 290.72 | 1.04 | 0.86 |
610442 | Dresses of cotton, knitted or crocheted | 224.75 | 0.80 | 0.67 |
620640 | Women's or girls' blouses, shirts, etc, of man-made fibres | 218.61 | 0.78 | 0.65 |
Source: Authors’ presentation using data from the Export Promotion Bureau of Bangladesh.
The European Union is the single largest destination of Bangladesh’s apparel exports: more than 60 per cent of earnings from clothing comes from 28 EU countries (including the United Kingdom) (Figure 5), where Bangladesh gets duty-free market access under the EU’s Everything But Arms (EBA) preferential scheme for LDCs.5 Excluding the United Kingdom (after Brexit), the 27 EU countries together capture around half of all apparel exports of Bangladesh. In terms of individual destination markets prior to Covid-19 hitting the world economy, the United States is the single important destination with a share of 18 per cent of earnings followed by Germany (16.1%), the United Kingdom (11.3%), Spain (7.1%), France (6.1%), Italy (4.5%), Canada (3.5%) and Japan (3.2%). The recent data during the Covid disrupted period of July 2020 – May 2021 also shows a broadly similar pattern of export market distribution (Figure 6). Annex Table A1 shows market shares of disaggregated apparel export items of Bangladesh.
India
Figure 5: RMG exports to major destinations, 2018-19
China 1.5%
Australia 2.1%
Japan 3.2%
Canada 3.5%
U.K. 11.3%
1.5%Others
8.4%
Other 50.6%
Spain 7.1%
Germany 17.1%
France
6.1%Italy
4.5%
Poland 3.5%
Netherlands 3.0%
Belgium
2.2%
Other EU
7.2%
USA 18.0%
Figure 6: RMG exports to major destinations, July-may 2020-21 (Covid disrupted period)
Australia 2.2%
Canada 3.0%
Japan 3.1%
India
3.3%
China
1.8%Others
14.0%
UK 9.8%
USA 17.8%
Other 45.0%
Spain 6.1%
Germany 15.4%
France 5.0%
Poland 3.8%
Italy 3.4%
Netherlands 3.3%
Denmark 2.2%
Other EU 5.8%
Source: Authors’ presentation using data from the Export Promotion Bureau (EPB) of Bangladesh.
The analysis of apparel exports markets of Bangladesh shows that while the overall import growth of apparels in most important partners was largely stagnant during the five year period of 2015-19 (as measured on the vertical axis), Bangladesh achieved much higher growth in exports in almost all major market (as measured on the horizontal axis) (Figure 7).
Figure 7: Apparel export growth to partner countries vis-a-vis partner country's import growth
25
20
15
10
SA, 0.3%
ITA, 4.5%
MAL, 0.5%
CAN, 3.5%
AUS, 2.1%
KOR, 0.8%
CHN, 1.5%
CZE, 1.5%
POL, 3.5%
5MEX, 0.6%
UAE, 0.6%
ESP, 7.1%
0
-5BRA, 0.5%
USA, 18.0%
GER, 17.1%
FRA, 6.1%
RUS, 1.4%
CHL, 0.3%
-10
HKG, 0.3%
UK, 11.3%
SGP, 0.2%
JPN, 3.2%
-10.0-5.00.05.010.015.020.025.030.0
Average growth in Bangladesh’s apparel exports to partner countries (2015-19)
Note: Bubble sizes represent Bangladesh’s market shares in different importing countries. The market shares are calculated from EPB exports data. Countries are indicated as AUS – Australia, BRA—Brazil, CAN – Canada, ESP – Spain, FRA—France, GER – Germany, HKG – Hong Kong, IND—India, ITA—Italy, JPN – Japan, KOR – Korea Republic, MAL – Malaysia, Mex – Mexico, RUS – Russia, SA – South Africa, SGP – Singapore, TUR – Turkey, UK – the United Kingdom, and USA – the United States of America.
Source: Authors’ analysis using ITC Trade Map and EPB data.
Sources of imported inputs for apparel exports
Bangladesh’s apparel sector is heavily dependent on imported raw materials. However, in recent years, dependent on imported raw materials has declined substantially as several composite factories have been set up boosting backward integration for the sector. The knitwear subsector is predominantly dependent on domestic sources with about 90 per cent of yarn demanded is met by
the local textile industry. For woven subsector the comparable domestic sourcing of fabrics is 35-40 per cent (Mian, 2020).6 The findings from sample survey undertaken as part of this study will provide further insights on this in a later section. Overall, the estimated local value addition for knitwear is around 70 per cent and woven is 30-35 per cent (BTMA, 2019).
An analysis undertaken for this paper with firm-level import data recorded by the National Bureau of Revenue (NBR) finds that Bangladeshi textile and apparel firms in 2018-19 imported $8.7 billion worth of cotton, $4 billion of yarn and fibre, $1.9 billion of fabrics, $2.1 billion of accessories and $1.5 billion worth of dyes, chemicals, and industrial salt (Figure 8).7 Asian countries together are the main sources of garments raw materials for Bangladesh (Figure 9-13) with China being the most dominant supplier. India, Hong Kong, Pakistan, and Singapore are amongst the important sources.
Fiure 8: Imports of textiles and RMG raw materials in Bangladesh (billion $)
10
Figure 9: Major source of cotton imports (%)
9Turkey
81.5%
7
6
5Switzerland
41.8%
3Malaysia
21.9%
1Australia
02.0%Brazil
2.9%
Others 22.2%
China 25.5%
India 20.3%
Singapore 3.8%
USA 4.5%
Pakistan 6.7%
Hong Kong 7.0%
Figure 10: Major sources of yarn and fibre (%)
Figure 11: Major sources of fabrics (%)
Vietnam
Ind
Japan 1.4%
Singapore 1.6%
Korea Rep.
3.6%
Sri Lanka
1.1%
India 4.9%
1.0%
Others 8.1%
4
Taiwan 5.0%
Hong Kong 19.0%
China 54.4%
6 Mian, M. E. U. (2020). A Study on Competitiveness of Ready-Made Garments for Export-Led Economic Growth in Bangladesh: Issues and Challenges. A PhD thesis submitted to the Johnson Shoyama Graduate School of Public Policy, University of Saskatchewan.
7 Cotton is defined as HS52, yarn and fibre as HS53-HS56, fabric as HS58-HS60. The 8-digit HS codes for imported accessories, and dies, chemical and salt used and imported by textile and apparel firms have been collected from NBR.
Figure 12: Major ources of imported accessories used in RMG industry (%)
Figure 13: Major ources of imported dyes, chemical and solt used in RMG industry (%)
T
Ind 3.1
Kor
Source: Author’s presentation using NBR firm-level import data. This database has more than 4000 export oriented RMG firms.
At the HS 8-digit level, HS52010000 (cotton not carded or combed cotton samples of no value) is the largest imported raw material in Bangladesh. The country imported more than $3 billion worth of this single item in 2018-19. 18 per cent of this item is sourced from India. Other sources include China, Hong Kong etc. Imported raw materials and their largest sources at the HS 8-digit level are reported in Annex Table A2. The Government of Bangladesh has accorded special policy support to allow imports of raw materials at world prices for apparel exporters. Two most prominent schemes, viz. bonded warehouse facilities and back-to-back letter of credit (L/C) arrangements, greatly facilitated procuring raw materials without paying import duties and without needing for paying in cash up front. The domestic textile sector has expanded significantly over the past decades to meet the demand for intermediate inputs by apparel firms. According to the Bangladesh Textile Mills Association (BTMA), there are 1,511 members in manufacturing yarn, fabric and dyeing, and printing-finishing materials. The production capacity of 433 yarn manufacturing unit is 3,270 million kgs per year (Table 2) while that of 827 fabric manufacturing firms is 7790 million meters (of which woven is of 4100 million Mtrs and knit 3690 million Mtrs). The combine capacity of 251 dyeing and printing-finishing mills has an annual capacity of 4,000 million meters. However, Bangladesh depends on imported raw materials (cotton, yarn, dyes and chemicals) and the annual demand for raw cotton is about 10.5 million bales (Mian, 2020).
Table 2: Number of textile related factories in Bangladesh
Subsector | Number of units | Installed capacity | Annual production capacity |
A. Yarn manufacturing mills Synthetic spinning mills Acrylic spinning mills | 433 | Spindles 14.00 million
Rotors 0.24 million | Annual yarn spinning capacity 3270 million Kgs |
B. Fabric manufacturing mills Denim Home textile | 827 | Shuttle-less loom &
Shuttle loom: 60000 | Annual fabric manufacturing capacity: Woven 4100 million Mtrs Knit 3690 million Mtrs |
C. Dyeing-printing-finishing mills (Textile product processors) | 251 | 4000 million Mtrs |
Source: BTMA
According to Bangladesh Garments Accessories and Packaging Manufacturers and Exporters Association (BGAPMEA), the country is adequately capable of meeting the demand for accessories in the RMG sector. However, in some cases, exporters also import accessories to meet buyers’ requirements. Currently there are 1754 members of BGAPMEA producing accessories including
buttons, zippers, cartons, packaging and printing materials, labels, tags, hangers, etc. The deemed exports of accessories as part of apparel exports are claimed to be as high as $7.5 billion in 2018-19.8
LDC Graduation and Its Implications on Export Competitiveness in RMGs
Preferential market access and RMG exports
The export regime of Bangladesh is heavily dependent on LDC-specific preferential market access. Bangladesh has benefitted from unilateral trade preferences provided by many developed and developing countries under their respective Generalized System of Preference (GSP) schemes for products originating in LDCs. These preferences usually combine duty-free market access with less stringent rules of origin (RoO) requirements for the preferential access. Bangladesh also enjoys LDC- specific market access concessions through the regional trade agreements of SAFTA and APTA. Currently, Bangladesh has duty-free market access in about 50 countries including Australia, Canada, China, the EU, India, Japan, Norway, Republic of Korea, Turkey, the United Kingdom etc. The only major global market that does not offer such preferential access to Bangladesh is the United States. In 2000, Bangladesh had almost an identical apparel market share of around 3 per cent in Canada, the EU, and the United States. Over the next two decades, its share in Canada and the EU (including the United Kingdom) — that provided generous duty-free market access—would rise to about 12 per cent and 13 per cent, respectively in contrast to just about 7 per cent in the US. Between 2011 and 2018, Bangladesh’s export market share in the US remained virtually stagnant followed by a slight increase in relatively recently—mostly due to a slowdown in Chinese apparel exports exacerbated by the US- China trade war. Bangladesh’s market share in Australia and Japan—again, taking advantage of duty- free access—rose from virtually nothing to more than 10 per cent and 4 per cent, respectively.
Figure 14: Bangladesh'e market share in partner countries, 2000-20 (%)
16
14
12
10
8
6
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
AustraliaCanadaEUJapanUnited States
Source: Authors’ presentation using data from UNCOMTRADE and ITC Trade Map.
The impending graduation would imply Bangladesh would no longer be benefitted from LDC-specific preferential access and the likely impact will depend on the associated provisions for market access in destination countries. It will have no implication if the export items of interest to a particular LDC are not covered by the LDC-specific treatment and if the importing countries do not allow any preferential access a priori (e.g., the USA).
European Union and the UK
The European Union and the UK together is the largest destination of Bangladesh’s exports. Apparel items comprise more than 90 per cent of Bangladesh’s export receipts from the EU. The European Union grants non-reciprocal and unilateral trade preferences to developing nations to support their development process. The current EU-GSP regime offers three different preferential treatments: (i) a general arrangement (Standard GSP); (ii) a Special Incentive Arrangement for Sustainable Development and Good Governance (GSP Plus); and (iii) an Everything But Arms (EBA) arrangement for the group of LDCs (Table 3). About 66 per cent of goods imported in the EU under EBA are sourced from Bangladesh. The preference utilisation rate of Bangladeshis more than 97 (European Commission, 2020).9 This is in sharp contrast to Vietnam, which has a capacity utilisation rate of just around 15 per cent. Countries often cannot utilize GSP preference due to their inability to meet the RoO requirements and these provisions for LDCs in the EU market are much less stringent.
Table 3: Current EU GSP arrangements and provisions
Standard GSP | GSP+ | EBA | |
Eligibility criteria | Low- or lower middle-income countries | Vulnerable (in terms of export diversification, export and import volumes) Standard GSP beneficiaries that have ratified the 27 GSP Plus-relevant international conventions | LDCs |
Number of beneficiaries (as of 2020) | 18 | 8 | 48 |
Non-sensitive goods | Duty reduction for around 66% of all EU tariff lines | Duty suspension for around 66% of all EU tariff lines | Duty suspension for all goods with the exception of arms and ammunition |
Sensitive goods: specific duty ad valorem duty | Duty reduction: - 30% - up to 3.5 per centage points | Duty suspension | Duty suspension |
Rules of origin (important provisions only) | Double transformation for textile and clothing items. For all other products a minimum local value- added of 50% | Double transformation for textile and clothing items. For all other products a minimum local value-added of 50% | Single transformation for textile and clothing items. For all other products a minimum local value-added of 30% |
Source: Razzaque and Rahman (2019) using the documents available in European Commission website.
Table 4: Preference utilisation for apparels in the EU 28 countries
CounrtGSP201720182019 | |||||||||||||
y | regime | Imports ('000 €) | % GSP Utililsa tion | Imports ('000 €) | % GSP Utililsa tion | Imports ('000 €) | % GSP Utililsa tion | ||||||
T otal | GSP eligible | GSP used | T otal | GSP eligible | GSP used | T otal | GSP eligible | GSP used | |||||
Bangla | EBA | 15,476 | 15,228 | 14,781 | 97.1 | 16,441 | 16,166 | 15,650 | 96.8 | 17,667 | 17,663 | 17,18 | 97.3 |
desh | ,440 | ,567 | ,447 | ,102 | ,262 | ,922 | ,184 | ,931 | 6,195 | ||||
Cambo | EBA | 3,689, | 3,679, | 3,557, | 96.7 | 3,934, | 3,917, | 3,786, | 96.6 | 4,018, | 4,018, | 3,851,65 | 95.9 |
dia | 839 | 147 | 268 | 397 | 256 | 008 | 450 | 415 | 2 | ||||
India | Standa | 6,044, | 5,962, | 5,561, | 93.3 | 5,986, | 5,896, | 5,475, | 92.9 | 6,092, | 6,074, | 5,708,69 | 94.0 |
rd GSP | 819 | 349 | 440 | 161 | 978 | 487 | 395 | 477 | 9 | ||||
Vietna | Standa | 3,264, | 3,244, | 406,10 | 12.5 | 3,440, | 3,421, | 475,48 | 13.9 | 3,800, | 3,800, | 582,010 | 15.3 |
m | rd GSP | 872 | 939 | 8 | 807 | 941 | 3 | 581 | 460 | ||||
Pakista | GSP | 875,77 | 838,82 | 813,30 | 97.0 | 850,32 | 814,06 | 787,94 | 96.8 | 815,93 | 794,02 | 774,431 | 97.5 |
n | Plus | 3 | 5 | 3 | 0 | 2 | 8 | 4 | 9 | ||||
Sri | GSP | 1,531, | 1,527, | 644,04 | 42.2 | 1,556, | 1,553, | 732,75 | 47.2 | 1,750, | 1,746, | 913,138 | 52.3 |
Lanka | Plus | 050 | 133 | 9 | 505 | 044 | 3 | 005 | 829 | ||||
Source: European Commission (2020)
The current EU GSP regime will expire in 2023—much before Bangladesh’s graduation. The impact of graduation will depend on the next round of EU GSP regime. Under the existing system, LDCs after their graduation can continue to access EBA benefits for an additional three-year transition period. This implies that after Bangladesh’s graduation in 2026, it will remain eligible for the current market access facilities until 2029. Graduating LDCs can then apply for the next most attractive market access provisions under GSP+ (as shown in Table 3). However, if the provisions of the upcoming EU regime
do not change significantly, Bangladesh will not qualify for GSP+ (Razzaque and Rahman, 2020; Box 1). In that case, Standard GSP could be an option, which provides some duty reduction for various pre- defined products (including textile and clothing items) comprising 66 per cent of EU tariff lines.10 The rules of origin provisions, however, are almost similar for both GSP+ and standard GSP and require ‘double transformation’ for textile items. If Bangladesh is eligible for Standard GSP only, more than 90 per cent of its exports will be subject to an average tariff of 8—9.9 per cent (Figure 15) (for comparison, the MFN tariff rate on these items is 12 per cent on average). As the United Kingdom is now out of the EU, it is in the process of formulating its own GSP regime. Until now, it is offering the same preferences that are available from the EU.
Box 1: Bangladesh’s LDC graduation and provisions for various EU GSP schemes Currently, Bangladesh enjoys duty-free and quota-free access under the EBA. Under EBA rules of origin (RoO), a single transformation for textile and clothing items is sufficient, while for all other products a minimum local value-added of 30 per cent is needed to qualify for preferential market access. After LDC graduation, EU GSP schemes that are available are GSP+ and Standard GSP. GSP+ grants duty-free access to 66 per cent EU tariff lines including apparel items. But, RoO provisions change to double transformation for clothing (i.e. domestically produced fabrics will be needed in garment making) and the minimum local value-added of 50 per cent for all other products. Graduating LDCs can apply for GSP+ preferences subject to the fulfilment of two broad eligibility conditions, specified as the vulnerability and sustainable development criteria. The vulnerability criterion comprises, i) the import share criterion which specifies that the country’s share of GSP-covered import must remain below 6.5 per cent of GSP-covered EU imports of all GSP beneficiary countries; and ii) the diversification criterion, which stipulates that the seven largest sections of GSP-covered imports must constitute 75 per cent of imports from the beneficiary country over a period of three years. The sustainable development criterion requires the exporting country to have ratified and effectively implemented 27 international conventions on labour rights, human rights, environmental protection and good governance. Given the current GSP provisions, Bangladesh does not qualify for GSP+ as it does not satisfy the import share criterion (Bangladesh’s current share in all GSP-covered imports is more than 17 per cent). On complying with various international conventions, Bangladesh has not ratified the Convention concerning Minimum Age for Admission to Employment (No. 138, 1973) (UNCDP, 2019). Also, there are concerns related to the implementation of several conventions including freedom of association (Convention 87) and collective bargaining (Convention 98). If GSP+ is not available, Bangladesh can apply for the much less attractive Standard GSP scheme. Standard GSP provides duty concessions of about 30 per cent and up to 3.5 percentage points of MFN tariff rates for 66 per cent of EU tariff lines. The RoO provisions are the same as GSP+. Even if Bangladesh has to opt for Standard GSP, textile and clothing items (EU product section S-11b which includes HS 61, 62 and 63) items might exceed EU product graduation threshold level share and thus could be subject to exclusion. Bangladesh’s current share in EU GSP covered import S-11b is 43 per cent, which is close to the product graduation threshold of 47.2 per cent. Vietnam, which is a beneficiary of Standard GSP, signed a free trade agreement with the European Union. It will not be regarded as a GSP beneficiary country when the agreement comes into force. As Vietnam goes out of the GSP beneficiary list, Bangladesh’s share in EU imports from GSP beneficiary countries will increase. This will have implications for product graduation threshold (for S-11b). The current GSP regime will apply until 2023 and will be replaced by a new regime, stipulating eligibility provisions that will be relevant to Bangladesh in the post-graduation era. Source: Razzaque and Rahman (2020) and authors’ summary from different sources. |
10 It has been shown that even under Standard GSP Bangladesh might not be eligible for duty reduction for textile and clothing items given that it could exceed the threshold level import market share criterion leading to ‘product graduation’ (for T&C products).
100
Figure 15: EU tariff rates under Standard GSP and Bangladesh’s exports
91.52%
80
60
40
20
Note: The figures in the parenthesis show absolute values of Bangladesh’s exports associated with specific tariff slabs. Some products with MFN tariffs are also subject to specific duties. In this exercise, these products are placed under the relevant ad valorem tariff slabs only. Sd, specific duty.
Source: Razzaque and Rahman (2019) using data from the EU Comext and World Integrated Trade Solution (WITS).
United States
Bangladesh does not have any preferential access in the United States. The US Trade Representatives (USTR) suspended Bangladesh’s restricted GSP facilities in 2013 on grounds of weak labour rights and workers’ safety. The United States never considered comprehensive market access offers like those of the EU, to Asian LDCs, (e.g., amongst others, textile and clothing items were kept out of the GSP scheme). Bangladesh thus pays 5-9.9 per cent (MFN) tariffs on more than 50 per cent of its exports to the US; 10-15 per cent tariffs on almost one-third of its exports; and above 15 per cent tariffs on about 12 per cent of its exports (Razzaque et al., 2021). As Bangladesh does not enjoy any preference in the US, graduation should have no implications for exports.
Other major markets where Bangladesh currently have LDC-specific preferences
Bangladesh’s apparel exports expanded in Canada taking advantage of the Canadian GSP for least developed countries are known as least developed country tariff (LDCT), which will give way to Generalised preferential tariff (GPT) after graduation. The GPT preferences are provided for selected agricultural and industrial products in which apparel products are not included. Clothing items will thus be subject to average MFN tariffs in the range 15—20 per cent after graduation.
In Australia, after graduation, preferences designated for developing countries do not include apparel products, most of which (more than 90 per cent of Bangladesh’s exports) would face on average 5 per cent MN tariff. Australia however extended DFQF facilities for graduating LDCs including Maldives, Samoa, and Equatorial Guinea, which graduated in 2011, 2014 and 2017, respectively.11
In Japan, LDCs enjoys duty-free and quota-free special preferential treatment in more than 9,000 items with the preference utilisation rate for Bangladesh in apparel items being close to 95 per cent.12 Graduating Bangladesh will likely to be eligible for the GSP scheme designed for developing countries. The Japanese GSP for developing countries include only a few clothing items and most of such products from Bangladesh will be subject tariffs in the range from 5.4—13.4 per cent.13
Bangladesh currently gets duty free market access in China for 97 per cent of the tariff lines. Graduation would require paying either MFN or APTA non-LDC tariffs depending on any negotiations
11 https://www.un.org/ldcportal/preferential-market-access-australia-gsp/
12 UNCTAD GSP database: https://gsp.unctad.org/utilizationbycountry;reporter=392;partner=050
13 Only 12 items of knitwear get duty free access and 27 items of woven garments have some preference margin including duty free access in Japan under GSP for developing countries. The average tariff for knitwear and woven garments would be 8.5 per cent and 9.1 per cent respectively.
13
721
between the two countries. Apparel products will come under 14-20 per cent tariff hikes under the MFN regime. China does not have any concessional duty rates for other developing countries.
India’s Duty-Free Tariff Preference (DFTP) Scheme for LDCs provides for duty-free or concessional tariffs for about 98.2 per cent of tariff lines at the HS 6-digit level. Bangladesh can access SAFTA regional preferential schemes to access Indian market after graduation. However, SAFTA has a long list of sensitive products on which no preferences exist. For preferential items, RoO provisions will require the local value addition content to increase from 30 per cent (for LDCs under DFTP) to 40 per cent (for non-LDCs under SAFTA). For such other countries as New Zealand, Norway, Republic of Korea, Switzerland, Thailand, Turkey, Russia, etc., LDC graduation would result in higher tariff rates.
Table 5: A summary of preferential market access and rules of origin in key export destinations
Country | Criteria | Preference schemes | Rules of origin | Description | |||
Australia |
LDC | DFQF Australian System of Tariff Preferences | VA 25% | DFQF access for LDCs for the entire tariff schedule. Bangladesh can get GSP after graduation, which comes with up to 5% MFN tariff on key export items. | |||
Non-LDC | GSP under Schedule 1 | Part | 4 | of | VA 50% | ||
Canada14 |
LDC | LDCT-DFQF for LDCs | General VA is 40%. For apparel and textile products, VA is 25%. | LDC-DFQF access for 98.9% of its tariff lines. Although Bangladesh to get GPT in Canada, it will come with substantially higher tariff rates (up to 18–20%) on major export items. | |||
Non-LDC | General Preferential Tariff for developing countries |
VA is 60% for all products | |||||
China |
LDC |
DFQF for LDCs | VA: CTH+40%; | China’s GSP for LDCs is available for 95%- 97% of tariff lines. Bangladesh gets duty- free access in 97% of the lines. | |||
Non-LDC | MFNappliedifnot mentioned otherwise | VA 45% (APTA) RC-VA 60% (APTA) | |||||
European Union15 |
LDC | Everything But Arms DFQF for all LDCs | Single transformation of textiles and RMG. VA is 30% for other goods | DFQF access for all products except arms and ammunitions from the LDCs including Bangladesh. As it stands, Bangladesh would not qualify for GSP+ | |||
Non-LDC |
GSP+, Standard GSP | Double transformation for textile and clothing. VA is 50% for other goods. | |||||
Japan |
LDC |
Duty-free access (on 98.2% of tariff line) for LDCs | De minimis applied for goods in HS 50–HS 63.16 The general rule is sufficient transformation resulting in a different product under HS tariff heading (4 digits).17 | 8,874 of the 9,038 tariff lines are duty- free for the LDCs.
If a country’s export to Japan exceeds ¥1 billion, or 25% of import to Japan for a product originated from the beneficiary, it is considered for graduation from Japanese GSP. | |||
Non-LDC | GSP exists. But most of the applied tariff rates are MFN rates if not mentioned otherwise | Partial graduation (developing) and entire graduation (high- income countries). Japan considers trade statistics and World Bank’s income classification for graduation. | |||||
India |
LDC | Duty-Free Tariff Preference for LDCs; SAFTA-LDC market access applicable for Bangladesh |
VA 30% (DFTPI) VA: CTH+30% (SAFTA) RC-VA: CTH+40% (SAFTA) | Regular LDC-DFTP on 98% products in the tariff line. Under SAFTA, LDC-DFQF provided for all but 25 products. Non- LDC SAFTA preferences do not provide zero tariff and 614 products do not have tariff concessions at all. | |||
Non-LDC | Bangladesh to get non-LDC SAFTA preferences | VA: CTH+40% (SAFTA) RC-VA: CTH+50% (SAFTA) | |||||
14 For Canadian LDCT, 60 per cent value addition can include value of products from Canadian raw materials or raw materials imported from another LDCT recipient country. For GPT, 60 per cent value-addition can include value of products from Canadian raw materials or raw materials imported from another GPT recipient country. 15 Regional cumulation laws in the EU applicable for Bangladesh: if the final exported items use components from regional group III (Bhutan, India, Nepal, Pakistan, and Sri Lanka) they can be considered as originating from Bangladesh under designated level of value addition. The same rule applies if the product incorporates raw materials from the EU countries.
16 In Japanese preferential system, non-originating materials used in the production of a good classified under Chapter 50 through 63 of the Harmonized System that do not satisfy an applicable rule for the good shall be disregarded, provided that the totality of such non-originating materials does not exceed 10 per cent in weight of the good.
17 Products applicable for GSP under HS 01–HS 96 with exemptions listed in https://www.mofa.go.jp/files/000077857.pdf
14
722
Norway | LDC | DFQF | Substantial transformation18 | For developing countries, GSP and GSP+ schemes exist with 10–100% tariff reductions. But Bangladesh would be ineligible given its population size bigger than 75 million. |
Non-LDC | Recipient country must have a population of less than 75 million. | Substantial transformation | ||
Republic of Korea | LDC | LDC-DFQF on 95% of tariff line; APTA specific LDC- DFQFapplicablefor Bangladesh | VA 40% (DFQF) VA 35% (APTA) RC-VA 50% (APTA) | Bangladesh currently enjoys DFQF in all key products including apparel, footwear, etc. Non-LDC APTA preference on 1,367 products with 35.4% preference margin |
Non-LDC | Non-LDC APTA preferences will be applicable for Bangladesh | VA 45% (APTA) RC-VA 60% (APTA) |
Abbreviations: VA= Value-Addition, RC VA=Regional Cumulation Value-Addition, CTH= Change in Tariff Heading.
Source: Based on UNCTAD’s Handbook on Duty-Free and Quota-Free Market Access and Rules of Origin for Least Developed Countries (part I and part II), the EPB, and official sources of GSP/DFQF providing countries.
Source: Razzaque et al (2020)
According to one estimate in WTO (2020), graduating LDCs are expected to face a trade-weighted average tariff increase of 4.2 percentage points in preference-granting markets (difference between LDC duty rate and the next best alternative rate). However, for Bangladesh the average tariff increases would be 8.9 per cent. This much higher tariff hike is due to Bangladesh’s dependence on apparel exports, which attract much higher duties for non-LDCs. The rise in tariff rates could have considerable impact on competitiveness. Estimates available in Razzaque and Rahman (2019) and Razzaque et al. (2020) show that if Bangladesh received the Standard GSP in the EU, facing an average tariff of 9.5 per cent, there could be an export loss of $1,602 million (i.e. about 9.53 per cent of Bangladesh exports of apparels during 2016-18) to the EU. In the Canadian market, an average tariff of 17 per cent is likely to be slapped on apparel products resulting in a potential export loss of $175 million. For Australia, the comparable loss is estimated at $29 million. Overall, the combined export shock from these three markets could be $1,806 million or 9.81 per cent of the existing export revenues.
The above results are comparable with other impact assessment exercises. UNCTAD (2016) estimate a potential loss of 5.5–7.5 per cent of Bangladesh’s exports, while Rahman and Bari (2018) show a decline of 8.7 per cent. In the latest available assessment, the World Trade Organization (WTO) has suggested a staggering 14 per cent export loss for Bangladesh. While these estimates are subject to certain limitations, they do however indicate a huge pressure on export competitiveness arising from the loss of LDC-specific tariff preferences.
Impact on export incentives
Graduation from the LDC group will also have implications for the kind of export support measures or incentives that can be provided. Apparel exports have long been receiving cash assistance or direct subsidies. In 2019, Bangladesh spent about $560 million on export incentives provided to 36 items. The apparel sector has been the primary beneficiary capturing 70 per cent of all cash incentives. These subsidies are considered as prohibitive as per the WTO Agreement of Subsidies and Countervailing Measures and will likely to trigger actions taken by other WTO members once Bangladesh graduates.19 Withdrawal of this support measure would put further pressure on Bangladesh’s export competitiveness.
18 For Norway, a product is sufficiently transformed if the HS tariff heading (first four digits) of the non-originating material is different from the tariff heading of the finished product.
19 Article 27 of the SCM agreement however exempts any LDCs and developing countries with GNP per capita lower than $1,000 at 1990 prices from abiding by prohibitive subsidies unless the product is globally competitive (does not exceed 3.25% share of global export in that sector). Detailed analysis in Razzaque et al (2020) shows that Bangladesh could become a developing country with per capita income above the threshold level by the late 2020s. Also, Bangladesh’s apparel sector has exceeded the limit global share in exports (currently around 6.5%). However, until now no WTO member has raised any issue about it but graduating countries could come under increased scrutiny.
15
723
Figure 16: Export subsidy as % of export earnings (FY2003-FY2019)
42
35
28
21
14
7
0
2.0%
1.5%
1.0%
0.5%
0.0%
Total exports in U$D billion (left axis)
Export subsidy as % of export earning (right axis)
Firm-level Preparedness to Remain Competitive after Graduation
As mentioned earlier, extensive consultations were undertaken to gather perspectives of apparel firm owners and managers about various aspects of graduation and related opportunities and challenges. In the process, leaders of apparel exporters’ associations (BGMEA and BKMEA) were consulted along with other knowledgeable individuals. Working with BGMEA and BKMEA, a questionnaire was sent to their members to generate some of the relevant information. Despite the challenging times of Covid- 19 disruptions, more than three dozen responses were received.20 Furthermore, several case studies were conducted to get further insights into the issues.
Salient features of the firms participating in the consultation process
Most readymade garment factories in Bangladesh are owned by local entrepreneurs (CPD, 2019).21 Of the firms participating in the survey, 84 per cent are owned by local manufacturers. Almost two-thirds of all firms in the survey mainly perform contract manufacturing—either directly supplying to the buyers or manufacturing under sub-contracting arrangements—while the rest reported producing some of their own products as well. Interviews with the enterprises revealed a small number of firms’ having outlets in destination countries including in Malaysia and the UAE where some their own brand products are sold.
Table 6: Ownership structure and mode of manufacturing (% of sample firms)
Contract manufacturing | Produce and sell own product | Both | Total | |
100% domestic ownership | 55.3% | 7.9% | 21.1% | 84.2% |
100% foreign ownership | 2.6% | 5.3% | 0.0% | 7.9% |
Joint Venture | 5.3% | 2.6% | 0.0% | 7.9% |
Total | 63.2% | 15.8% | 21.1% | 100.0% |
Source: Firm-level survey undertaken as part of the study.
20 The objective of this consultation process was not to test competing hypotheses or to undertake rigorous empirical exercises using the responses. Therefore, self-selection of firms should not be a major impediment for the nature of analysis, which is mostly qualitative, is being carried out. The sample does represent different types of firms in terms of their broad specialization such as woven and knitwear and sizes—small, medium, and large—as defined by the author and explained in the text.
21 CPD. (2019). New Dynamics of Bangladesh’s Apparel Enterprises: Perspectives on Upgradation, Restructuring and Compliance Assurance.
On average, more than half of the revenue of the sample firms comes from producing knitwear items, while the same share for woven products is 38.7 per cent (figure 20). Fabrics contribute to 6.3 per cent of the revenue generated by the firms and another 1.7 per cent is due to yarn.
Just above 62 per cent of all workers in the sample factories are female. This is comparable with some of the recently undertaken studies (ILO, 2019; Ahmed and Hossain, 2020).22 The share of female workers in small and large factories—defined in terms of number of workers employed—are 57.6 per cent and 61.5 per cent, respectively.23 Medium-sized enterprises account for the largest share of women workers of 65 per cent.
Women comprise 67.4 per cent of the workforce in sewing, 38.1 per cent in knitting, 40.2 per cent in cutting, 58 per cent in finishing and 46.2 per cent in packaging and printing (ILO and UN Women, 2018). On the other hand, dying, washing and embroidery sections are highly male dominated. With technological upgradation and automation, employment as well as the share of female workers in the RMG sector is likely to decline.
Figure 17: Share of revenue generated from different items (%)
Home textiles
100
Figure 18: Share of male and female workers in apparel sector (%)
Fabrics
0.2%90
6.3%Carpe…
Yarns 1.7%
Woven iems 38.7%
Knitwear items 52.8%
80
70
60
50
40
30
20
10
0
Total
Small firm Medium firm Large firm
Male WorkersFemale Workers
Source: Firm-level survey undertaken by the authors.
Our survey data show that the domestic and foreign sourcing of raw materials for the overall export oriented RMG sector is having a 50-50 share (Figure 19). The knitwear firms locally procure 62.3 per cent of raw materials—yarn, dyes and chemicals, accessories (Figure 19). Woven manufacturers, on the contrary, are more dependent on imports as only 36 per cent of raw materials used by them are obtained domestically.
Several exporters reported that the quality of locally available raw materials is often not up- to the mark and those are often more expensive than their foreign counterparts. Besides, the sourcing of raw materials (yarn, fabrics, and accessories) are sometimes dictated by the buyers.
22 According to ILO baseline study, the share of female in total RMG workforce is 61.17 per cent. Ahmed and Hossain (2020) found women accounted for 60.5 per cent of their workers in 2018.
23 Firms are defined as follows: small firms are defined if total workers are less than 1,000; medium firms have total workers greater or equals 1,000 but less than 5,000; large firms have number of workers greater and equals 5,000.
Most firms consider the quality of domestic yarn quite good for producing knitwear items. Besides, there are advantages of domestically produced yarn (and other inputs) as it can help reduce the lead time.
Some exporters are also of the view that Bangladesh has the capacity to produce and supply high quality accessories (zippers, hangers, buttons, packaging materials etc) required for the RMG industry.
Figure 19: Sources of raw materials used by exporters
70
60
50
40
30
20
10
0
All firmsKnitwear exportersWoven exportersBoth knitwear and woven
Share of domestic raw materialsShare of imported raw materialsexporters
Source: Firm-level survey undertaken by the authors.
More than 95 per cent of revenue of the sample firms are generated from exports. 83.3 per cent of sample firms are 100 per cent export oriented.
For more than 97 per cent of the firms participating in the survey, exports constituted at least 80 per cent of their revenues.
Half of the sample firms export knitwear items only, 26.3 per cent export woven products only, and 18.4 per cent enterprises export both knitwear and woven garments.
Interestingly, a few firms (Less than 10 per cent) reported exporting fabrics (Figure 20).
There is lack of export market diversification among the Bangladeshi RMG exporting firms and the market reach of the sample firms is limited.
More than one-third of the firms ship to 3-5 countries only, while another 16 per cent export to 6-10 countries (Figure 21).
For just over a quarter of the firms, there were more than 20 export market destinations. The sample statistics suggest that export markets for woven manufacturers are relatively more diversified than that for knitwear.
Export shares of the sample firms to different countries are largely comparable to the the relevant aggregate national statistics. Half of the combined export revenue of the sample firms comes from EU-27 countries, 18.9 per cent from the United States, 10.3 per cent from the United Kingdom, 6 per cent from Japan, 2.8 per cent from Canada, 2.1 per cent from Republic of Korea, and 1.5 per cent from Australia (Figure 25).
Several firms reported that they were effectively exploring new market opportunities, amongst others, in Brazil, China, India, and South Africa.
Export to
Figure 21: Market reach of apparels exporters (%)
more than 20
different countries 26%
Export to 11-20
different countries 21%
Export to 3-5
different countries 37%
Export to 6-10
different countries 16%
Firms consider Vietnam as the most important competitor in export destinations, followed by China, India, their fellow exporters from Bangladesh, and Cambodia (Figure 23). Myanmar is also being considered as potential competitor in the EU market. It has some comparative advantage in terms of the lead time—being connected through land, it can easily procure raw materials from China. One respondent reported that while procuring raw materials from China, Bangladesh requires 15-20 days, Myanmar needs only 5-7 days in comparison.
Figure 22: Export share to markets of sample firms (%)
EU 49.3%
Others 7.4%
UK
90%
80%
70%
60%
50%
40%
30%
20%
10%
Figure 23: Major competetor in the export markets - firms perceptions (% of firms)
Switzerland
0.7%
Korea Rep.
2.1%
India
Japan 6.3%
Australia
USA 18.9%
10.3%0%
0.3% China
0.4%
1.5%
Canada 2.8%
Source: Firm-level survey undertaken by the authors.
When asked about their export strategies over the next few years, more than 80 per cent of the respondents mentioned about exporting to more countries. The remaining 20 per cent could not provide any clear indication.
Most firms have plans to export more to the existing markets.
58 per cent of sample firms want to expand exports to the EU.
The United States is considered as the second preferred country in terms of marketing more products, followed by Japan, Russia, the United Kingdom, Canada, and Republic of Korea.
Most exporters also mentioned about expanding business to some non-traditional markets including Latin American countries, South Africa, China, Middle eastern countries, and New Zealand.
Figure 24: Plan for market diversification
60%
Figure 25: Plans to sell more to various markets (% of sample firms)
Export to more countries 84%
No change 5%
Hard to say 11%
50%
40%
30%
20%
10%
0%
Source: Firm-level survey undertaken by the authors.
Export competitiveness can be retained if firms specialise in certain items or produce complex products that cannot be easily replicated by other exporters from competitor countries. Close of half of the respondents (47 per cent) were of the view that their products required special skills to produce or possessed certain unique features, which might not be easily available in other firms both at home and abroad.
Manufacturers reported that Bangladesh has abundant labour with versatile skills. Several exporters produce complex items like jackets. Unlike basic knitwear or woven products (t- shirts, polo-shirts), these items require complex production lines with automated technology. Producing these items will not be easy for other firms.
One firm reported that they produce high-value denim items which uses low ounce stretch, sea plastic recycled fabrics, regenerated cotton fabrics, jute blended fabrics and Tencel fibres, explaining its niche market advantages.24
In fact, as many as 40 per cent of woven manufacturing firms think that their products are difficult to produce by other firms or country.
But many woven and knitwear manufacturers operate in low-value stages of cut, make and trim (CMT) and thus other countries can easily produce them. However, 57 percent firms do think that they have capacity of bulk production, which other firms might find it difficult to match.
24 Tencel is a cellulosic fibre obtained from wood pulp using recyclable solvents. It is produced from the bark of eucalyptus tree in Bangladesh.
Figure 26: Firms products require special skills to produce or have
70certain unique features (% of sample firms)
60
50
40
30
20
10
0
All firmsKnitwear exportersWoven exportersBoth knitwear and woven Require special skills/unique features No special skills/features requierexpdorters
Source: Firm-level survey undertaken by the authors.
Like apparel exporters worldwide, many Bangladeshi exporters are investing in product upgradation and automation. However, labour productivity in Bangladeshi factories is perceived to be quite low. China—the largest apparel exporter—is concentrating on high-value technology intensive items. Labour productivity in China and Vietnam is reportedly much higher than that of Bangladesh. Technology adaptation and automation can greatly help improve efficiency and enhance labour productivity.
The survey results show that more than 85 per cent of sample firms have plans for upgrading products and processes (Figure 27).
They are also adopting new technologies (e.g. use of jacquard machines, auto knitting machines, auto hand and lay cutting, thread sucking, stem icon, auto plain machines, auto flatlock, and auto overlock, fabric spreader machine, fabric relaxation machine, Digi eye, CAD, auto pattern cutting machines etc.) and are training workers on working with upgraded machines and processes. Firms also reported working on adapting energy saving and GHG emission reduction technologies, software-based production tracing, digitalisation of administration activities including employee tracking and payment processing.
Several firms have their own design studios and R&D departments. They reported producing and marketing their designed products along with supplying the regular import orders.
One of the firms reported producing a complete pair of denim trousers in 17 minutes and they are trying to make the process more efficient to do the same task within 14 minutes to be at par with the standard of most efficient global firms.
A jacket manufacturer reported that their efficiency rate is currently at 30-35 per cent, they are working to improve it to 60 per cent within next 2-3 years.
Figure 27: Product and process upgradation plan (% of firms)
Both knitwear and woven exporters
Woven exporters
Knitwear exporters
All firms
020406080100
Plan for upgradationNo plan for upgradation
Source: Firm-level survey undertaken by the authors.
Firm-level perceptions and preparedness for LDC graduation
The firm-level survey suggests that 92 per cent of the firms are aware of their receiving trade preference (i.e., duty-free market access, relaxed rules of origin, etc.) (Figure 28). The remaining 8 per cent were not aware of those benefits: they export based on the buyers’ specifications. These are mostly small firms on sub-contracting.
Of the exporting firms that are aware of LDC trade preferences, about three-quarters reported getting duty-free market access in destination markets. Although this might seem quite low, it is important to note that the United States, one of the key importers of textile and clothing products, does not offer tariff preference to Bangladesh.
Figure 28: Awareness about LDC benefits (% of firms)
100
80
60
40
20
0
Aware of LDC benefitsGet duty-free facilitiesAware of RoO requirements
Source: Firm-level survey undertaken by the authors.
Bangladesh has immensely benefitted from the relaxed rules of origin provisions and is considered as one of the successful countries that utilized the preferential market access privileges (WTO-EIF, 2020).
Around 90 per cent sample enterprises are aware of RoO requirements (Figure 29).
88 per cent of these firms can fulfil RoO requirements for all exports, while the remaining 12 per cent can satisfy these requirements for only a portion of their exports. All knitwear manufacturing firms can fulfil RoO conditions for exports.
Amongst woven manufacturers, 86 per cent can satisfy RoO criteria for all exports and 14 per cent for only a portion of their exports (Figure 29).
71 per cent of the firms producing both knitwear and woven garments can fulfil RoO conditions for all exports.
100%
Figure 29: Fulfiling RoO requirements for exports (% of firms)
80%
60%
40%
20%
0%
All firmsKnitwear exportersWoven exportersBoth knitwear and
woven exporters
For all exportsFor a part of exports
To comply with RoO, 62 per cent of sample firms use locally produced yarn, 47 per cent domestic fabrics, and 50 per cent use locally manufactured asscssories (Figure 30). Knitwear exporters uses proportionately more domestic raw materials compared to their woven counterparts. Interviews with the stakeholders suggest that the use of raw material types is mostly based on the buyers’ specifications and exporters often have limited freedom to chose domestic raw materials. Buyers sometimes also specify raw material sourcing countries.25
Figure 30: Specialization in types of products, fabrics or fibre composition to fulfil RoO requirements in target markets (% of firms)
Both knitwear and woven exporters
Woven exporters
Knitwear exporters
All firms
0102030405060708090
Use locally manufactured accessoriesUse locally made fabricsUse locally made yarn
Source: Firm-level survey undertaken by the authors.
The Government of Bangladesh provides extended policy support for apparel exporters, who benefit from bonded warehouse and back-to-back L/C facilities, cash assistance/subsidy for exports, assistance from the Export Development Fund (EDF) and Export Credit Guarantee Scheme (ECGS), and subsidised interest rate for working capital, amongst others. These support measures greatly helped Bangladeshi apparel producers to boost their export earnings. Apparel exporters get cash incentives to the tune of 4-8 per cent of the FOB value of exports depending on the types of products being exported and destination countries.
Almost two-thirds of the sample firms reported receiving cash assistance. This share appears to be low. One reason for it could be that the respondents may not be aware of the benefits (despite the firms’ obtaining the benefits).
In Bangladesh, 100 per cent export-oriented apparel firms are entitled to bonded warehouse facilities under which they can import raw materials duty-free. Those firms that also operate
25 Information obtained from the interviews with the stakeholders.
in the domestic market are not eligible for bonded warehouse facilities. In our survey, 87 per cent firms reported using bonded warehouse facilities.
RMG factories were provided with subsidised interest rate for working capital under the Covid-19 stimulus package and about one-third of the firms participating in the survey reported accessing such working capital (at an interest rate of 4 per cent as against the standard rate of 9 per cent). Besides, to mitigate Covid-19 consequences, all firms benefitted from the loans offered by the government against only 2 per cent service charges. This facility was available from the special funds for export-oriented industries under which workers’ salaries were paid for three months.
Bangladesh’s Export Development Fund (EDF) offers trade finance at 7 per cent interest rate per year,26 while the Export Credit Guarantee Scheme (ECGS) provides pre- and post-shipment export finances, whole turnover export finance (pre-shipment) guarantees, and export payment risk policies.27 Of the surveyed firms, 58 per cent reported benefitting from the EDF and 42 per cent of from the ECGS.
Figure 31: Benefits from the government (% of firms)
Support from export credit guarantee schemes (ECGS)
Assistance from Export Development Fund (EDF)
Subsidised interest rate for working capital
Bonded warehouse facilities
Cash assistance
-101030507090
Source: Firm-level survey conducted by the authors.
During the survey, firms were asked to rate the importance of international and national support measures for export competitiveness on the scale of 1 (least important) to 5 (most important).
Seventy-four per cent firms awarded a score of 5 to duty-free market access.
Relaxed rules of origin provisions were given a score of 5 by 62 per cent firms.
The average score assigned for duty-free market access is computed as 4.7 and for relaxed rules of origin 4.4. Therefore, LDC-specific trade preferences are perceived to be extremely important for Bangladeshi firms’ competitiveness.
Amongst the national policy support measures, bonded warehouse, loans at subsidised interest rate and cash assistance also receive average high scores of 4.8, 4.5, and 4.4, respectively.
Two-thirds of the firms pointed out that keeping LDC benefits after graduation, if possible, will be very important for maintaining international competitiveness. The average score given for this factor is 4.2 (Figure 33).
26 BRPD Circular No. - 01, dated 10 January 2004, Bangladesh Bank.
27 http://mail.sbc.gov.bd/ins_export_credit.php
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Figure 32: Importance of national and international benefits for exports of RMG products
Note: 5=very important, 1= least important
Source: Firm-level survey undertaken by the authors.
Figure 33: Average score of importance of factor for competitiveness
Maintaining the LDC benefit after graduation
Trade agreement(s) with key partners
Support from ECGS
Assistance from EDF
Loan at subsidised interest rate
Bonded warehouse
Cash assistance
Liberal RoO
Duty-free market access
0123456
Note: 5=very important, 1= least important
Source: Firm-level survey undertaken by the authors.
Striking bilateral and multilateral trade agreements for retaining duty-free market access is considered critical for apparel exports.
Almost 80 per cent exporters think signing free-trade agreements with most important trading partners will be very important (score 5) and help remain competitive in international markets.
In terms of free-trade agreements, exporters perceive that the EU should be given the highest priority, followed by the United States, Canada, the United Kingdom, Japan, and Australia.
80%
60%
40%
20%
0%
EUUSACanadaUKJapanAustraliaRussiaChina
Source: Firm-level survey undertaken by the authors.
Apparel exporters, on average, enjoy a 10-12 per cent tariff advantage in destination markets (over the rival country firms without the access to LDC preference) and 5-8 per cent cash assistance from the government. Therefore, losing a 15-20 per cent margin will imply huge competitive pressure on the exporting firms after graduation.
About three-quarters of the firms are aware of the loss of trade preference and relaxed rules of origin after graduation (Figure 36).
Two-thirds of the firms think that the erosion of trade preference could potentially affect their export performance after graduation, while 19 per cent of the firms reported that their exports will not be impacted by graduation. The reason behind, as pointed out by these respondents, are that Bangladesh exports in bulk and no other countries except China has such capacity to export in large quantities. As China is moving towards high value-added products due to rising cost of labour, a portion of the market would shift to Bangladesh.
Several exporters are of the view that there are dissimilarities in the pattern of specialisation between Bangladesh and its most important comparator, Vietnam. Thus, they think that there are scopes of Bangladeshi firms’ absorbing the graduation shock.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Figure 35: Firms perception regarding LDC graduation (% of firms)
Aware of lossing trade preference after graduation
LDC graduation affect export performance
Forsee shift in export demand
YesNoDo not know
Source: Firm-level survey undertaken by the authors.
Using aggregate export data from ITC Trademap, an attempt is made to identify the similarities in exporting items at a disaggregated product level. Table 7 suggests that apart from China, other comparators (including Vietnam and Cambodia, India and Pakistan) have low presence in top exporting items of Bangladesh. For instance, HS610910 is the most important item of Bangladesh capturing almost 20 per cent of world apparel exports under this category. Vietnam has just less than
5 per cent share in this item. The same pattern of specialisation is also evident for other major items of Bangladesh (Table 7). Some exporters pointed out that Vietnam would not be able to expand its capacity of producing these items instantly. Again, as the cost of labour in Vietnam is already higher, such possibility of specialising in lower value-added items could be low. The pattern of specialisation of Bangladesh and other comparators in EU and US markets are analysed in Annex tables. It also shows that the share of Vietnam is low in major export items in the EU. In the US market, however, Vietnam has significant market shares in major exporting items of Bangladesh. As both Bangladesh and Vietnam do not have preferential access, Bangladesh’s export to the US is unlikely to be impacted due to graduation.
62 per cent of firms think that their export demand may shift after graduation (Figure 36).
Several exporters of high value-added products view that their export demand will not shift to other countries.
Table 7: Bangladesh’s major apparel products and comparators shares in the EU market, 2019
Code | Exports from Bangladesh (million $) | Share in global exports (%) | |||||
Bangladesh | Cambodia | China | India | Pakistan | Vietnam | ||
610910 | 5,993.9 | 19.33 | 2.05 | 12.05 | 6.31 | 1.02 | 4.47 |
620342 | 5,892.0 | 22.81 | 0.77 | 17.39 | 1.95 | 1.55 | 2.96 |
620462 | 3,593.4 | 17.71 | 1.85 | 30.24 | 1.12 | 0.49 | 3.99 |
611020 | 2,864.1 | 12.37 | 2.37 | 28.64 | 0.85 | 0.31 | 8.30 |
611030 | 2,597.5 | 10.64 | 1.64 | 42.87 | 0.29 | 0.02 | 6.79 |
620520 | 1,995.1 | 18.26 | 1.06 | 14.42 | 7.60 | 0.04 | 6.60 |
610462 | 1,236.9 | 17.54 | 3.15 | 31.10 | 1.42 | 0.59 | 7.88 |
610510 | 1,035.8 | 18.43 | 1.05 | 9.47 | 8.43 | 2.42 | 5.33 |
610990 | 849.4 | 5.84 | 2.40 | 25.27 | 4.52 | 1.19 | 8.09 |
611120 | 838.9 | 14.11 | 4.53 | 27.64 | 11.92 | 0.34 | 3.25 |
620343 | 738.9 | 9.93 | 1.64 | 26.12 | 1.34 | 0.32 | 18.05 |
621210 | 569.2 | 5.54 | 0.81 | 33.97 | 1.05 | 0.00 | 7.98 |
620193 | 551.9 | 5.78 | 0.75 | 37.31 | 0.05 | 0.08 | 15.81 |
610711 | 467.0 | 11.83 | 1.78 | 29.39 | 5.30 | 1.38 | 6.57 |
610342 | 449.1 | 10.92 | 3.83 | 38.86 | 3.45 | 1.43 | 6.14 |
620640 | 449.1 | 6.51 | 0.47 | 13.50 | 7.54 | 0.00 | 6.68 |
610442 | 415.0 | 13.39 | 1.35 | 25.80 | 4.21 | 0.08 | 5.95 |
620293 | 411.7 | 4.53 | 0.39 | 44.56 | 0.05 | 0.00 | 12.67 |
610821 | 406.7 | 13.65 | 1.57 | 30.90 | 6.09 | 0.12 | 2.70 |
620469 | 379.5 | 8.52 | 5.20 | 19.08 | 2.65 | 0.99 | 7.41 |
Source: Authors’ analysis using data from ITC Trademap.
Can you sustain your export earnings and remain competitive after losing a margin of 15-20 per cent (including the erosion of tariff preference and withdrawal of cash incentive) after graduation? In answering this question, most exporters expressed their concern about losing such a big margin. Most of them emphasised on improving productivity and reducing the cost of doing business.
According to several exporters, Bangladesh sells at the lowest cost compared to other countries. Export orders are awarded based on open-costing methods.28 They reported that buyers are mindful of the duty-free access in destination markets and cash incentives provided by the government. Buyers bargain on prices considering the margins associated with trade
28 In open-costing methods, cost of all raw materials including cost of cutting and making (CM), commercial expenses, etc. are incorporated in the costing exercise.
preference and government cash assistance. Therefore, they offer very low prices to Bangladeshi firms. This would imply that a significant portion of LDC-related benefits are being appropriated by buyers/importers.29
For the same reasons, some Bangladeshi exporters think that in the post-LDC graduation period, importers/buyers will offer improved prices as they currently do so for the exporters from the countries that do not receive LDC-specific trade preferences.
Case study 1: Low wages should provide a competitive edge for Bangladeshi firms, and it is high time to establish forward linkages. Wisdom Attires Ltd. is a 100% export- oriented company and one of the leading knit composite factories in Bangladesh. since its inception, the firm has exported around 250 million pieces of garment items to 87 customers in 20 countries. Located in Fatullah, Narayanganj, the firm has in-house knitting, dyeing, sewing, packaging, label printing, and sewing thread producing facilities, employing around 2,200 workers. The company also has its own brand in Malaysia and the UAE. The brand products are sold to the Southeast Asian countries such as Thailand, Philippines, Singapore, and Indonesia; Middle Eastern countries such as Saudi Arabia and Qatar; and in some African countries. According to the M.D. of firm, own branding increases profit. Along with it, differential policy regimes in Bangladesh and in UAE, and Malaysia create a space for enhanced profitability. The firm primarily produces low-value added items such as basic t-shirts. As per the management, it is not lucrative for such a big factory to produce fashion items. It is rather profitable for small factories to | ||
concentrate on fashion items. The factory has been awarded the Gold-level LEED certification by the USGBC in 2017. Multiple features and various initiatives make the premise eco-and-worker- friendly, among these are: an effluent treatment plant (ETP); proper cooling system; separate toilets are provided for males and females; eye wash stations; proper and electricity-saving lighting. | ||
29 Information obtained from KIIs with stakeholders.
28
The Director of Wisdom Attires Ltd., Md. Akhter Hossain Apurbo, stated that the firm has made substantial investment to make the factory responsive to workers’ welfare needs, and energy-efficient. However, according to him, it did not bring any immediate added benefits in terms of higher prices or increased export orders. |
***In the post-LDC era, Bangladesh might still be competitive in the export of basic knitwear items due to the country’s lower wage costs. This Industry leaders remark that it is also the right time to invest in forward linkages to export own brand items and to capture higher profit margins. Mr. Apurbo is aware of the likelihood of preference erosion in the EU market in the post-LDC era, and he believes that it will intensify the competition from others, particularly Vietnam. But he tends to believe that Bangladesh will still have the upper hand. “In case of basic items, the scope for technological deepening is quite small; operations will be required to be carried out by workers and hence the determining factor for competitiveness for basic items is the cost of labour where Bangladesh has and will have the edge”. According to him, Bangladeshi firms are in the process of diversifying both products and markets. He argues that basic items will always be required, and hence demand for these products will always exist and competitors such as Vietnam will not be able to supply all orders alone. It is believed that Bangladeshi firms obtain lower prices compared to competitors such as Vietnam, and Mr. Apurbo gives two main reasons for it—the buyers know of the incentives and tariff preferences received by the firms and hence they offer lower prices. Bangladeshi firms also engage in unhealthy price competition, accepting extremely low prices to win orders. He believes that buyers will be willing to pay higher prices after LDC graduation when trade preferences will be eroded. Mr. Apurbo thought that the lead time for Bangladesh is higher than that of its many competitors. Due to the unavailability of a deep-sea port, feeder vessels have to take the products to countries such as Singapore and Sri Lanka, where the products are transferred to mother vessels for shipment to Europe and the U.S. Mr Apurbo pointed out that the number of factories in this sector is on the decline despite the overall rising trend in export earnings. He thinks the sector will experience further consolidation, giving rise to many more bigger firms. This, according to him, can also raise overall competitiveness. Lack of skilled labour is a problem facing Wisdom Attired. High land prices and rise in the price of utilities are also obstacles for business expansion, according to Mr Apurbo. Wisdom Attires Ltd., along with other firms in the country, has been hit hard by the pandemic—orders were cancelled; products were sold at discounted prices; shipping container fees shot up by six times; raw material prices rose sharply. |
On the issue of the future of the sector Mr. Apurbo says, “Backward integration in the knitwear industry is quite strong, and now it is time to make progress on forward linkages, opening outlets in export destinations to sell Bangladeshi brand items and capture the profits at the retail level”. He also thinks that the industry leaders are very proactive and forward looking and will take proper initiatives to propel the industry forward in the right direction to mitigate the changing circumstances of LDC graduation. Source: Interview with Mr Md. Akhter Hossain Apurbo, Director, Wisdom Attires Ltd. |
An attempt is made to investigate exporters’ claim of lower prices paid to Bangladesh using highly disaggregated import data of the EU and the United States. A comparison of weighted unit value prices of products coming from different countries in both EU and US markets shows that Bangladesh indeed fetches lower prices than its comparators. In the EU market, Bangladesh’s weighted average unit value price of top items is 90 per cent lower than that of Vietnam and 45 per cent lower than China (Figure 37). Amongst the competitors, only Pakistan has the average unit value prices lower than that of Bangladesh. Both these countries get duty-free access in the EU and such price differences could be, amongst others, attributable to tariff concessions passthrough to the buyers. In the US market, none of these countries get preferential access and variations in unit value prices are much less compared to the EU market (Figures 37 and 38). In this market, Bangladesh’s unit value price is around 30 per cent lower than India and Vietnam, and almost comparable to other countries. This analysis may suggest that the high variation in prices in the EU market might be accountable to the rent of duty- free market access appropriated by the buyers.
Figure 36: Comparison of unit value perics in the EU market, weighted average (Euro/Kg)
30
25
20
15
10
5
0
201120122013201420152016201720182019
BGDINDCHNCAMVNMPAK
Source: Authors’ analysis using data from EU Comext.
Figure 37: Comparison of unit value perics in the US market, weighted average ($/SME)
6.0
5.5
5.0
4.5
4.0
3.5
3.0
20162017201820192020
BGDINDCHNCAMVNMPAK
Source: Authors’ analysis using data from Office of Textiles and Apparel (OTEXA), United States.
As regards the concern about increased competitive pressure after LDC graduation:
78 per cent of the firms participating in our survey think that there could be substantial competitive pressure after graduation. Only 14 per cent do not regard LDC graduation to affect competitiveness.
All small-sized firms perceive that there will be huge competitive pressure after graduation and export demand may fall substantially.
Some medium and large sized that firm that do not consider LDC graduation to put pressure on their business reason that their produce high-value diversified items with considerable profit margins and having complex capacity to manufacture in bulk.
Figure 38: Competitive pressure after LDC graduation (% of firms)
Large firms
Medium firms
Small firms
All firms
0%10%20%30%40%50%60%70%80%90%100%
YesNoDon't know
Source: Firm-level survey conducted by the authors.
As graduation looms, some firms have developed their strategies or plans to address the potential implications. Half of the firms do not have any strategy to face challenges arising from graduation
while 47 per cent firms reported that they already have or are developing strategies.30 The strategies include product and process upgradation, movement towards high-value items, adaptation with new technologies and automation, enhancing efficiency, skilling workers, digitalisation of production and tracking mechanisms, continuously improving compliance, etc.
Case Study 2: Towards Sustainable Fashion, Workforce Upskilling, and Industrial Transformation: The Story of 4A Yarn Dyeing Ltd. on Gearing up for LDC graduation
4A Yarn Dyeing Ltd started its journey with buying a sweater factory in 2009 and transformed it to one of the leading jacket exporting units of Bangladesh. Located in the Baipail area of Savar at the outskirts of Dhaka, its factory has quadrupled its production capacity since its inception, and employs some 6500 workers, 70 per cent of whom are women. Each production line now remains abuzz with more than 50 workers producing over 150 jackets a day. With its newly
constructed Green Concept building, the factory is aiming to achieve LEED platinum certification – a global recognition for resource-efficient, high performing, and cost-saving green buildings.
4A Yarn Dyeing Ltd focuses on synthetic-fabric based jacket production – a highly specialised outerwear manufacturing activity. Almost 90 per cent of the required raw materials is sourced from imported synthetic fabric. Given the increasing global shift in demand from cotton to synthetic fabric and rise of sustainable fashion trends, the company is now
optimistic about further ramping up its production through its expertise on the use of synthetic fabric. Imtiaz Ahmed, Executive Director of 4A Yarn Dyeing Ltd., noted that “Despite being a non-cotton producing country, Bangladesh rose to prominence among RMG exporters. But 10 years from now, the country’s current specialisation in producing cotton fabric, perhaps, would be at stake. There is a mounting environmental
concern against the use of cotton fabric products as it demands heavy water usage. Also, cotton fabric is not recyclable. In contrast, nowadays, a lot of development has been made on synthetic fabric production that requires less minimal water usage and also offers 100 per cent recyclability. We think businesses in Bangladesh are going to catch up with the sustainable fashion sooner or later. In this regard, our factory is already on the right track.”
Taking cognizance of Bangladesh's looming LDC graduation, the factory management is already mindful to diversify its export market that is now mainly focused on European Union. To avoid the drawbacks of preference erosion in these market in the post-LDC period, 4A Yarn Dyeing Ltd. is proactively searching for new export destinations. In this connection, the company has already started strengthening its footing in the markets of Japan, India, and Korea, amongst others. Bangladesh government’s current export incentive through cash-assistance accorded to RMG exporters for exploring new markets has been of good use for this company.
30 Firm-level survey conducted as part of the study.
Thanks to the U.S.-China trade tension that brought in new U.S. buyers for the 4A Yarn Dyeing Ltd. Large volume orders from U.S. buyers allow the factory to produce at scale. “In the post-LDC era, if our exports were to face 10 per cent tariffs in European Markets, then it would definitely hurt our competitiveness. So, we must look for the potential ways to recoup this excess cost and explore alternative markets to expand exports. Addressing the infrastructural bottlenecks and logistical challenges can help gain competitiveness. In the meantime, aiming for big markets is also
critically important”, Imtiaz Ahmed, who also looks after the marketing of 4A Yarn Dyeing Ltd, added. As LDC graduation approaches, the company is now trying to build a deepened relationship with buyers from North America and South America.
To cushion the adverse impacts of future shocks emanating from LDC graduation, 4A Yarn Dyeing Ltd. has placed continuous skill development and automation at the heart of
its current business strategy. The company has been immensely benefitting from the regular training imparted to its workers who can now handle the sophisticated machine operations. Furthermore, the production process is also being transformed through increased use of advanced machineries and automation. “In contrast to Chinese workers, Bangladesh workers appear to be 4-5 times less efficient. Our goal is to increase our overall efficiency by at least 10 per cent from the current state. We are aiming to achieve this by two means i) regularly arranging training for our workers and ii) investing heavily on advanced machineries. Automation enables us to deliver products with better design and finishing. Automation is inevitable to increase efficiency. But we will also need skilled workers to operate these machines”.
Source: Interview with Mr Imtiaz Ahmed, Executive Director of 4A Yarn Dyeing Ltd.
IV.Way Forward and Concluding Remarks
The apparel sector has been the main driver of Bangladesh’s export growth and a catalyst for economic transformation providing a solid base for manufacturing activities and generating massive employment opportunities for women. It is widely recognised that many of the Sustainable Development Goal (SDG) indicators are related to this sector and as such its export performance will critically hinge upon Bangladesh’s development prospects including compatibility the achieving of SDGs. The first wave of Covid-19 global pandemic caused massive disruptions for the apparel sector causing export earnings to fall drastically during FY2019-20. Subsequently, however, there has been a strong recovery although export receipts for FY2020-21 were still lower than those of the pre-Covid level of FY2018-19. Along with the uncertainty caused by the pandemic, Bangladesh’s impending graduation from the group of LDCs, which will take place in 2026, constitute a major concern for future export competitiveness.
Bangladesh’s export success has been single-handedly driven by the RMG sector alone the current level of export concentration is pointer to the fact that export diversification has proven to be a formidable task. As LDC graduation looms large on the horizon, the overwhelming dependence on the apparel sector also makes the country quite vulnerable to any likely shocks due to graduation related adjustments.
For Bangladesh, the most important change that LDC graduation is likely to bring will be associated with preferential market access for exporters. Within the set of LDC-related privileges, Bangladesh has primarily benefited from unilateral trade preferences granted by all developed countries except the United States. Many developing countries have also extended LDC-related preferential market access
to Bangladesh. Amongst the least developed countries (LDCs), Bangladesh has been most success in utilising the trade preferences. Currently, Bangladesh enjoys preferential market access in close to 50 countries with almost three-quarters of Bangladesh’s export earnings are sourced from the countries that offer tariff preferences. The loss of tariff preferences after graduation could thus trigger tremendous competitiveness pressure for Bangladesh.
Another important aspect of LDC graduation would be a constrained policy space to support the apparel sector, which currently enjoys export subsidies, but such assistance would likely to be incompatible with the existing global trade rules. Members of the WTO members are generally reluctant about raising concerns or lodging official complaints about individual LDCs’ policy support measures. However, graduation from the group of LDCs would almost certainly trigger a closer scrutiny to ensure conformity.
The analysis presented in the paper including consultations undertaken with apparel industry leaders, firm managers and other knowledgeable stakeholders provides interesting insights about the factors that influence export competitiveness and firm-level preparedness. The results show that firms are quite diverse in terms of their specialisation and the level of perceived competitiveness vary widely. While most firm managers and entrepreneurs do acknowledge the competitiveness pressure arising from any future loss market preferences, not everyone thinks that they will be completely out of business. Many industry insiders are of the view that as a bulk producer, Bangladesh has tremendous depth and competitiveness strength.
One interesting finding from various consultation exercises is that buyers of Bangladesh’s garment products might be bargaining hard and offering very competitive prices just because the apparel exporters enjoy duty-free market access and are also benefited from some government export incentive schemes. The analysis presented in this paper does show that prices received by Bangladeshi exporters in the EU is much lower in comparison with supplier from countries that are not eligible for EBA preferences. On the other hand, price differences across suppliers of the same products in the US, which does not offer duty-free access to the set of comparators for which comparisons are made, are much smaller. This would imply that much of the benefits of market preferences and export assistance has been passed onto the buyers/importers of Bangladesh’s apparel items. There is thus a suggestion that buyer may likely to adjust prices upwards once Bangladesh graduates.
The firm-level LDC graduation preparation is mixed. The on-going Covid-19 crisis has also affected the process. But, several exporters indicated their proactively looking for new market opportunities. Some are also upbeat about new business opportunities particularly with the United States in the aftermath of the US-China trade war.
Overall, an overwhelming majority of the exporters did acknowledge the importance of duty-free market access and various export incentives provided by the government. According to some exporters, industrial upgradation is likely to be accelerated by the pressure of competitiveness. While this can be helpful in maintaining and/or expanding market shares, there could put pressure on employment generation.
Finally, the cost of doing business is considered excessively high in Bangladesh because of such factors as infrastructural bottlenecks, inefficient customs processes, incompetent port management and trade facilitation measures, dysfunctional inland transportation, and weak governance. Any improvements in these areas can contribute to improved competitiveness of exporting firms which can help achieve SGDs.
The exporters also point out certain measures that can be considered in mitigating any potential adverse consequences. These include looking for an extended transition period (from EBA arrangements) for graduating LDCs, possible options and strategies for securing preferential trade deals with the major trading partners. On the supply side, industrial upgradation within apparel value chains including technological upgradation in Bangladesh’s garment industry, attracting FDI, and ensuring compliance with workplace standards would help. Most exporters are of the view Bangladesh has invested a lot in working environment and in improving sustainable business practices, the
benefits from which have not been fully reaped but will help mitigate any likely export shock after graduation. Finally, most exporters are of the view that tackling the current excessive cost of doing business could greatly improve their competitiveness in a post-LDC world.
References
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Annex
Table A1: Export share of apparel items in selected destination countries, 2018-19 (%)
Hs Code | Description | Exports in 2018-19 (million $) | EU | UK | USA | Austr alia | Cana da | Chin a | India | Japa n | Russi a | Turk ey | Other s |
61012000 | Men's or boys' over/car coats, etc, of cotton, knitted or crocheted | 48.89 | 62.79 | 3.46 | 16.52 | 0.58 | 6.45 | 0.34 | 0.02 | 1.15 | 5.12 | 0.07 | 3.49 |
61013000 | Men's or boys' over/car coats, etc, of man-made fibres, knitted or crocheted | 61.51 | 52.91 | 0.90 | 34.33 | 0.12 | 5.65 | 0.99 | 0.95 | 0.20 | 2.79 | 0.10 | 1.05 |
61019000 | Men's or boys' over/car coats, etc, of other textiles, knitted or crocheted | 14.71 | 51.52 | 37.58 | 0.19 | 0.00 | 3.85 | 0.00 | 0.00 | 4.41 | 0.00 | 0.11 | 2.33 |
61021000 | Woman's or girls' over/car coats, etc, of wool..., knitted or crocheted | 6.52 | 72.23 | 7.75 | 4.53 | 0.01 | 1.89 | 0.42 | 0.14 | 8.26 | 1.44 | 0.19 | 3.12 |
61022000 | Woman's or girls' over/car coats, etc, of cotton, knitted or crocheted | 100.51 | 76.51 | 1.72 | 8.84 | 0.31 | 1.20 | 1.25 | 0.29 | 0.92 | 3.67 | 0.60 | 4.68 |
61023000 | Woman's or girls' over/car coats, etc, of man-made fibres, knitted/crocheted | 86.26 | 82.66 | 6.36 | 4.53 | 0.18 | 1.55 | 0.29 | 0.55 | 0.72 | 1.35 | 0.07 | 1.73 |
61029000 | Woman's or girls' over/car coats, etc, of other textiles, knitted/crocheted | 5.14 | 56.94 | 29.91 | 2.81 | 0.00 | 1.08 | 0.00 | 0.00 | 0.99 | 0.00 | 0.58 | 7.69 |
61031000 | Men's or boys' Suits, Excl. Sports out fit for sports shooting | 53.13 | 50.84 | 10.20 | 18.45 | 5.91 | 2.11 | 0.37 | 0.14 | 4.05 | 0.36 | 1.25 | 6.31 |
61032200 | Men's or boys' ensembles of cotton, knitted or crocheted | 6.09 | 79.78 | 1.55 | 0.90 | 0.00 | 2.36 | 0.05 | 0.04 | 4.00 | 0.44 | 0.00 | 10.88 |
61032300 | Men's or boys' ensembles of synthetic fibres, knitted or crocheted | 2.23 | 18.80 | 0.43 | 5.97 | 0.00 | 0.00 | 0.00 | 0.00 | 71.20 | 0.00 | 0.00 | 3.60 |
61032900 | Men's or boys' ensembles of other textiles, nes, knitted or crocheted | 2.27 | 50.35 | 26.42 | 6.52 | 4.48 | 2.03 | 0.00 | 1.78 | 0.36 | 2.84 | 3.43 | 1.80 |
61033100 | Men's or boys' jackets and blazers of wool..., knitted or crocheted | 1.49 | 50.24 | 3.49 | 29.81 | 1.75 | 4.62 | 0.00 | 0.08 | 0.00 | 0.00 | 1.10 | 8.90 |
61033200 | Men's or boys' jackets and blazers of cotton, knitted or crocheted | 25.47 | 35.35 | 21.22 | 11.91 | 8.64 | 2.06 | 2.02 | 3.11 | 4.06 | 5.87 | 0.15 | 5.61 |
61033300 | Men's or boys' jackets... Of synthetic fibres, knitted or crocheted | 24.14 | 52.04 | 18.62 | 8.71 | 6.74 | 1.03 | 0.26 | 8.65 | 1.80 | 0.26 | 0.00 | 1.90 |
61033900 | Men's or boys' jackets... Of other textiles, nes, knitted or crocheted | 15.10 | 32.28 | 40.43 | 5.20 | 1.16 | 12.23 | 0.58 | 2.03 | 1.42 | 0.03 | 0.01 | 4.65 |
61034100 | Men's or boys' trousers, etc, of wool..., knitted or crocheted | 3.55 | 57.45 | 4.94 | 7.76 | 0.00 | 10.73 | 0.00 | 0.00 | 13.78 | 3.30 | 0.00 | 2.05 |
61034200 | Men's or boys' trousers, etc, of cotton, knitted or crocheted | 317.45 | 51.39 | 10.14 | 13.00 | 4.27 | 5.33 | 1.28 | 2.02 | 2.13 | 4.59 | 0.59 | 5.26 |
61034300 | Men's or boys' trousers, etc, of synthetic fibres, knitted or crocheted | 66.34 | 13.49 | 3.67 | 47.73 | 3.59 | 18.22 | 0.66 | 1.63 | 6.50 | 1.26 | 0.07 | 3.18 |
61034900 | Men's or boys' trousers, etc, of other textiles, knitted or crocheted | 15.94 | 46.21 | 8.30 | 14.04 | 3.51 | 13.25 | 0.00 | 4.89 | 1.59 | 0.00 | 5.27 | 2.94 |
61041300 | Women's or girls' suits of synthetic fibres, knitted or crocheted | 7.08 | 73.81 | 2.85 | 0.45 | 11.90 | 1.37 | 0.48 | 0.02 | 4.66 | 1.97 | 0.00 | 2.50 |
61041900 | Women's or girls' suits of other textiles, knitted or. Of other textile materials nes, | 5.76 | 56.47 | 15.01 | 2.75 | 0.00 | 16.17 | 0.25 | 0.00 | 1.31 | 0.80 | 0.02 | 7.22 |
61042200 | Women's or girls' ensembles, of cotton, knitted or crocheted | 17.08 | 77.17 | 9.18 | 2.00 | 0.13 | 2.34 | 0.23 | 0.04 | 1.48 | 0.28 | 0.05 | 7.10 |
61042300 | Women's or girls' ensembles, of synthetic fibres, knitted or crocheted | 1.78 | 69.77 | 3.17 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 25.74 | 0.00 | 0.00 | 1.33 |
61042900 | Women's or girls' ensembles, of other textiles, knitted or crocheted | 11.94 | 13.56 | 4.03 | 79.32 | 0.11 | 0.50 | 0.19 | 0.02 | 0.08 | 0.11 | 0.16 | 1.92 |
61043100 | Women's or girls' jackets, of wool..., knitted or crocheted | 1.71 | 57.55 | 3.50 | 6.43 | 3.10 | 12.55 | 0.00 | 0.00 | 3.04 | 0.00 | 0.00 | 13.83 |
61043200 | Women's or girls' jackets, of cotton, knitted or crocheted | 17.92 | 48.27 | 13.10 | 14.07 | 2.03 | 2.56 | 0.26 | 0.14 | 0.89 | 14.41 | 0.30 | 3.99 |
61043300 | Women's or girls' jackets, of synthetic fibres, knitted or crocheted | 23.47 | 77.61 | 10.51 | 2.82 | 0.55 | 1.98 | 0.19 | 4.54 | 0.00 | 0.40 | 0.00 | 1.38 |
61043900 | Woman's or girls' jackets, of other textiles, knitted or crocheted | 6.08 | 41.00 | 19.42 | 16.99 | 0.31 | 11.96 | 0.00 | 1.22 | 6.93 | 0.00 | 0.00 | 2.17 |
61044100 | Dresses of wool or fine animal hair, knitted or crocheted | 4.31 | 70.26 | 6.26 | 7.86 | 0.05 | 5.84 | 1.64 | 0.08 | 1.13 | 1.21 | 0.29 | 5.35 |
61044200 | Dresses of cotton, knitted or crocheted | 268.29 | 64.25 | 9.95 | 7.11 | 1.30 | 2.30 | 2.13 | 0.60 | 3.09 | 2.72 | 0.47 | 6.08 |
61044300 | Dresses of synthetic fibres, knitted or crocheted | 43.12 | 48.70 | 21.95 | 11.30 | 0.15 | 3.86 | 0.65 | 2.03 | 7.04 | 1.36 | 0.25 | 2.70 |
61044400 | Dresses of artificial fibres, knitted or crocheted | 24.76 | 86.61 | 10.97 | 0.48 | 0.00 | 0.54 | 0.05 | 0.10 | 0.04 | 0.51 | 0.03 | 0.67 |
61044900 | Dresses of other textile material, nes, knitted or crocheted | 4.83 | 67.09 | 4.85 | 21.47 | 0.12 | 3.95 | 0.13 | 0.01 | 0.64 | 0.18 | 0.03 | 1.54 |
37
61045100 | Skirts and divided skirts of wool or fine hair, knitted or crocheted | 1.22 | 71.60 | 14.61 | 2.18 | 0.06 | 0.35 | 0.22 | 0.19 | 4.77 | 0.33 | 0.37 | 5.33 |
61045200 | Skirts and divided skirts of cotton, knitted or crocheted | 15.69 | 61.56 | 11.46 | 11.17 | 2.34 | 0.46 | 0.44 | 0.10 | 1.62 | 4.56 | 0.08 | 6.19 |
61045300 | Skirts and divided skirts of synthetic fibres, knitted or crocheted | 8.46 | 25.96 | 7.10 | 41.44 | 0.06 | 5.73 | 4.55 | 2.24 | 5.58 | 0.00 | 0.00 | 7.35 |
61045900 | Skirts and divided skirts of other textiles, nes, knitted or crocheted | 6.87 | 71.22 | 11.75 | 7.47 | 0.19 | 3.55 | 0.11 | 0.43 | 2.54 | 1.50 | 0.02 | 1.22 |
61046100 | Women's or girls' trousers, etc, of wool..., knitted or crocheted | 9.04 | 59.11 | 31.28 | 0.46 | 1.25 | 4.02 | 0.01 | 0.00 | 0.70 | 1.05 | 0.00 | 2.12 |
61046200 | Women's or girls' trousers, etc, of cotton, knitted or crocheted | 933.29 | 61.93 | 16.11 | 7.55 | 1.80 | 2.10 | 1.24 | 0.51 | 1.00 | 2.24 | 0.38 | 5.15 |
61046300 | Women's or girls' trousers, etc, of synthetic, knitted or crocheted | 120.99 | 73.84 | 9.53 | 4.36 | 0.81 | 4.77 | 0.44 | 1.18 | 0.82 | 0.88 | 0.11 | 3.25 |
61046900 | Women's or girls' trousers, etc, of other textile, knitted or crocheted | 73.57 | 44.53 | 26.70 | 16.61 | 0.63 | 3.00 | 0.68 | 0.62 | 1.34 | 0.66 | 0.57 | 4.66 |
61051000 | Men's or boys' shirts of cotton, knitted or crocheted | 805.94 | 65.29 | 12.43 | 7.81 | 1.44 | 1.58 | 0.69 | 2.18 | 1.02 | 1.52 | 0.54 | 5.50 |
61052000 | Men's or boys' shirts of man-made fibres, knitted or crocheted | 67.43 | 46.10 | 6.48 | 31.17 | 0.86 | 3.60 | 0.25 | 4.15 | 3.05 | 0.43 | 0.24 | 3.67 |
61059000 | Men's or boys' shirts of other textiles, nes, knitted or crocheted | 17.64 | 33.26 | 13.64 | 7.32 | 1.12 | 1.95 | 0.06 | 6.03 | 33.75 | 0.12 | 0.05 | 2.70 |
61061000 | Women's or girls' blouses, etc, of cotton, knitted or crocheted | 147.55 | 61.26 | 10.77 | 9.13 | 0.74 | 1.45 | 0.41 | 0.62 | 7.72 | 2.33 | 0.41 | 5.14 |
61062000 | Women's or girls' blouses, etc, of man-made fibres, knitted or crocheted | 43.71 | 56.33 | 7.14 | 14.07 | 0.28 | 1.46 | 0.01 | 1.79 | 10.86 | 1.42 | 0.05 | 6.58 |
61069000 | Women's or girls' blouses etc. Of other textiles nes, knitted or crocheted | 7.06 | 41.61 | 16.98 | 27.69 | 0.35 | 4.66 | 0.00 | 0.72 | 1.00 | 0.39 | 0.15 | 6.45 |
61071100 | Men's or boys' underpants and briefs of cotton, knitted or crocheted | 391.99 | 50.27 | 18.79 | 16.33 | 2.19 | 4.44 | 0.67 | 0.51 | 0.66 | 1.84 | 0.25 | 4.05 |
61071200 | Men's or boys' underpants, etc, of man-made fibres, knitted or crocheted | 32.69 | 27.24 | 23.35 | 38.70 | 0.75 | 6.90 | 0.06 | 0.04 | 0.53 | 0.82 | 0.00 | 1.59 |
61071900 | Men's or boys' underpants etc. Of other textiles nes, knitted or crocheted | 1.92 | 48.37 | 17.36 | 11.36 | 1.20 | 6.80 | 0.00 | 0.10 | 11.44 | 0.00 | 0.00 | 3.38 |
61072100 | Men's or boys' night shirt pyjamas of cotton, knitted or crocheted | 75.56 | 72.33 | 10.44 | 4.61 | 0.29 | 5.10 | 0.24 | 2.30 | 0.95 | 0.72 | 0.16 | 2.84 |
61072200 | Men's or boys' night shirt pyjamas of man-made fibres, knitted or crocheted | 14.95 | 15.75 | 38.01 | 22.87 | 0.00 | 8.61 | 0.06 | 0.31 | 5.91 | 0.00 | 0.00 | 8.49 |
61072900 | Men's or boys'night shirt pyjamas of other textiles, nes, knitted or crocheted | 1.17 | 89.91 | 0.00 | 1.19 | 0.00 | 0.71 | 0.00 | 0.00 | 2.49 | 1.64 | 0.00 | 4.06 |
61079100 | Men's or boys' dressing gowns, etc, of cotton, knitted or crocheted | 8.51 | 16.96 | 0.98 | 58.03 | 0.64 | 12.11 | 0.02 | 7.56 | 0.00 | 0.00 | 0.00 | 3.71 |
61079900 | Men's or boys' dressing gowns, of other textiles,nes, knitted or crocheted | 6.57 | 22.81 | 35.05 | 36.72 | 0.00 | 2.08 | 0.01 | 0.19 | 1.79 | 0.06 | 0.00 | 1.29 |
61081100 | Women's or girls' slips, etc, of man-made fibres, knitted or crocheted | 35.74 | 43.40 | 17.43 | 27.00 | 0.11 | 1.28 | 0.40 | 0.13 | 4.53 | 1.31 | 0.21 | 4.19 |
61081900 | Women's or girls' slips, etc, of other textiles, nes, knitted or crocheted | 1.83 | 53.93 | 20.63 | 14.69 | 0.00 | 0.00 | 0.00 | 4.90 | 0.00 | 0.00 | 0.00 | 5.84 |
61082100 | Women's or girls' briefs and panties of cotton, knitted or crocheted | 399.51 | 38.42 | 14.57 | 32.95 | 1.80 | 3.49 | 0.31 | 1.07 | 0.97 | 0.96 | 0.19 | 5.26 |
61082200 | Women's or girls' briefs, etc, of man-made fibres, knitted or crocheted | 103.26 | 53.37 | 12.53 | 12.92 | 0.40 | 9.37 | 0.25 | 1.06 | 0.28 | 2.18 | 0.19 | 7.45 |
61082900 | Women's or girls' briefs, etc, of other textiles, nes, knitted or crocheted | 36.46 | 14.63 | 69.59 | 6.65 | 0.08 | 0.00 | 0.00 | 0.05 | 0.56 | 0.00 | 0.00 | 8.44 |
61083100 | Women's or girls' night dresses, pyjama etc, of cotton, knitted or crocheted | 171.77 | 57.97 | 17.12 | 3.95 | 1.13 | 7.65 | 0.42 | 1.88 | 1.17 | 1.25 | 0.16 | 7.29 |
61083200 | Women's or girls' pyjamas, night dresses of man-made fibres, knitted/ crocheted | 47.32 | 20.81 | 18.58 | 42.67 | 0.23 | 8.13 | 0.07 | 3.05 | 3.29 | 0.10 | 0.01 | 3.06 |
61083900 | Women'S Or Girls' Night Dresses & Pyjamas Of Other Tex.,Knitted Or Croched | 3.01 | 89.09 | 3.28 | 0.00 | 0.13 | 1.35 | 0.00 | 0.00 | 0.97 | 2.68 | 0.00 | 2.51 |
61089100 | Women's or girls' negliges dressing gowns. of cotton, knitted or crocheted | 17.35 | 62.77 | 5.65 | 23.76 | 0.10 | 4.98 | 0.00 | 0.00 | 0.72 | 0.77 | 0.00 | 1.24 |
38
61089200 | Women's or girls' negliges dressing gowns of man-made fibre, knitted/ crocheted | 23.52 | 16.52 | 58.41 | 18.89 | 0.37 | 3.72 | 0.03 | 0.00 | 0.01 | 0.00 | 0.00 | 2.04 |
61089900 | Women's/girls' negliges dressing gowns. Of other tex.,nes, knitted/ crocheted | 1.51 | 42.32 | 43.18 | 1.91 | 0.00 | 5.81 | 0.00 | 0.57 | 0.00 | 0.00 | 0.00 | 6.20 |
61091000 | T-shirts, singlets and other vests, of cotton, knitted or crocheted | 6552.84 | 60.88 | 11.29 | 5.58 | 3.61 | 2.71 | 1.85 | 0.53 | 2.95 | 1.72 | 0.30 | 8.58 |
61099000 | T-shirts, singlets, etc, of other textiles, nes, knitted or crocheted | 458.42 | 48.08 | 11.30 | 5.71 | 3.62 | 2.91 | 1.17 | 2.03 | 18.54 | 0.99 | 0.33 | 5.33 |
61101100 | Of wool or fine animal hair. Of wool | 93.50 | 62.88 | 17.19 | 1.43 | 1.75 | 1.71 | 0.17 | 1.39 | 5.76 | 0.68 | 0.28 | 6.75 |
61101200 | Of kashmir(cashmere)goats | 8.96 | 58.97 | 1.72 | 10.12 | 0.19 | 25.91 | 0.00 | 0.00 | 1.58 | 1.29 | 0.00 | 0.22 |
61101900 | Of wool or fine animal hair,nes | 43.82 | 60.27 | 6.05 | 8.31 | 4.96 | 4.52 | 2.86 | 0.36 | 1.78 | 2.37 | 0.81 | 7.71 |
61102000 | JERSEYS, PULLOVERS, CARDIGANS, WAISTCOATS & SIMILAR ART., KNITTED OR CROCHETED OF COT | 2209.26 | 58.56 | 10.00 | 11.73 | 1.75 | 3.59 | 1.53 | 0.33 | 3.33 | 2.09 | 0.58 | 6.51 |
61103000 | Jerseys, pullovers, cardigans, waistcoats., knitted or crocheted of man-made fibre | 1384.11 | 60.48 | 13.60 | 5.45 | 1.13 | 3.19 | 0.74 | 0.70 | 6.83 | 0.95 | 0.15 | 6.78 |
61109000 | Jerseys, pullovers, cardigans, waistcoats.. ,knitted or crocheted of oth. Text. Mater | 516.26 | 66.93 | 7.19 | 5.62 | 0.87 | 2.59 | 0.41 | 0.40 | 5.03 | 1.36 | 0.95 | 8.65 |
61112000 | Babies' garments, etc, of cotton, knitted or crocheted | 432.33 | 59.47 | 7.62 | 16.96 | 1.87 | 2.38 | 1.88 | 0.32 | 2.10 | 1.48 | 0.70 | 5.22 |
61113000 | Babies' garments, etc, of synthetic fibres, knitted or crocheted | 12.23 | 28.71 | 4.29 | 40.47 | 11.66 | 6.48 | 1.75 | 0.63 | 0.37 | 0.03 | 0.15 | 5.48 |
61119000 | Babies' garments, etc,of other textiles materials, nes knitted or crocheted | 5.28 | 77.63 | 13.49 | 0.00 | 0.11 | 0.90 | 0.97 | 1.06 | 0.49 | 0.49 | 0.00 | 4.85 |
61121100 | Track-suits of cotton, knitted or crocheted | 16.37 | 66.43 | 9.97 | 0.74 | 0.72 | 0.96 | 0.98 | 0.06 | 0.39 | 8.96 | 1.05 | 9.75 |
61121200 | Track-suits of synthetic fibres, knitted or crocheted | 22.76 | 51.12 | 4.84 | 3.86 | 0.49 | 0.20 | 0.21 | 1.07 | 7.06 | 3.28 | 0.85 | 27.02 |
61121900 | Track-suits of other textiles, nes, knitted or crocheted | 0.49 | 66.48 | 0.00 | 16.17 | 0.00 | 0.00 | 0.00 | 0.00 | 17.35 | 0.00 | 0.00 | 0.00 |
61122000 | Ski suits | 1.86 | 85.01 | 4.74 | 6.56 | 0.00 | 0.19 | 0.07 | 0.00 | 0.00 | 1.10 | 1.97 | 0.36 |
61123100 | Men's or boys' swimwear of synthetic fibres, knitted or crocheted | 11.70 | 58.52 | 16.61 | 7.95 | 0.40 | 1.25 | 0.79 | 0.27 | 1.63 | 2.63 | 1.85 | 8.08 |
61123900 | Men's or boy's swimwear, of other textile materials | 0.22 | 74.75 | 10.34 | 12.40 | 0.00 | 0.00 | 0.00 | 1.19 | 0.00 | 0.00 | 0.00 | 1.32 |
61124100 | Women's or girls' swimwear of synthetic fibres, knitted or crocheted | 31.78 | 53.67 | 22.50 | 8.35 | 0.54 | 0.79 | 0.25 | 0.94 | 0.82 | 2.40 | 1.27 | 8.47 |
61124900 | Women's or girls swimwear of other textile material | 1.66 | 64.72 | 30.20 | 0.18 | 2.80 | 0.00 | 0.00 | 1.13 | 0.00 | 0.00 | 0.00 | 0.97 |
61130000 | Garments, made up of knitted or crocheted fabrics of heading 5903,5906 or 5909 | 8.25 | 41.96 | 0.43 | 18.82 | 0.30 | 2.90 | 0.00 | 0.00 | 0.45 | 0.00 | 0.00 | 35.15 |
61142000 | Garments of cotton, knitted or crocheted, nes | 54.75 | 56.78 | 22.43 | 4.75 | 0.10 | 1.92 | 2.29 | 0.15 | 2.78 | 3.14 | 0.33 | 5.34 |
61143000 | Garments of man-made fibres, knitted or crocheted, nes | 27.43 | 70.08 | 21.14 | 1.76 | 0.09 | 0.41 | 0.63 | 0.27 | 1.63 | 0.33 | 0.13 | 3.52 |
61149000 | Garments of other textiles, knitted or crocheted, nes | 2.25 | 68.74 | 3.16 | 21.64 | 0.02 | 0.01 | 0.18 | 0.74 | 0.19 | 0.67 | 0.26 | 4.38 |
61151000 | Graduated compression hosiery (for example, stockings for varicose veins) | 0.26 | 2.19 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 97.81 | 0.00 | 0.00 | 0.00 |
61152100 | Other panty hose and tights Of synthetic fibres, measuring per single yarn les | 0.17 | 23.92 | 46.23 | 28.80 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 1.06 |
61152200 | Other panty hose and tights Of synthetic fibres measuring per single yarn 67 d | 11.03 | 3.91 | 0.00 | 0.00 | 0.00 | 0.56 | 2.16 | 0.00 | 92.09 | 0.00 | 0.07 | 1.20 |
61152900 | Other panty hose and tights Of other textile materials | 0.23 | 0.64 | 0.00 | 4.92 | 0.00 | 0.00 | 5.39 | 80.04 | 3.37 | 0.00 | 4.08 | 1.57 |
61159500 | Panty hose, tights, stockings, sock..., inclu. grad. Comp. hos.Of Cotton, NES | 13.03 | 51.37 | 4.41 | 0.00 | 0.00 | 33.31 | 0.00 | 2.24 | 0.60 | 0.09 | 0.00 | 7.99 |
61159600 | Panty hose, tights, stockings, sock..., inclu. grad. Comp. hos. Of synthetic fibres | 0.84 | 9.97 | 0.00 | 0.00 | 0.54 | 86.75 | 0.00 | 0.00 | 2.74 | 0.00 | 0.00 | 0.01 |
61159900 | Hosiery and footwear without soles of other tex., knitted or crochete, nes | 0.57 | 7.53 | 8.19 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 55.17 | 0.00 | 0.00 | 29.10 |
61161000 | Impregnated, coated or covered with plastics or rubber | 26.09 | 29.56 | 6.34 | 13.11 | 0.66 | 6.40 | 3.53 | 2.66 | 21.22 | 3.99 | 0.47 | 12.06 |
39
61169100 | Gloves, mittens and mitts, of wool..., knitted or crocheted | 0.11 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 100.0 0 | 0.00 | 0.00 | 0.00 |
61169200 | Gloves, mittens and mitts, of cotton, knitted or crocheted | 2.72 | 6.58 | 8.06 | 0.07 | 0.00 | 15.40 | 0.00 | 1.58 | 65.01 | 0.00 | 0.00 | 3.29 |
61169300 | Gloves, mittens and mitts, of synthetic fibres, knitted or crocheted | 0.85 | 60.32 | 0.00 | 26.51 | 0.00 | 13.18 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
61169900 | Gloves, mittens and mitts, of other textiles, knitted or crocheted | 3.03 | 22.73 | 0.00 | 70.51 | 0.00 | 6.77 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
61171000 | Shawls, scarves, mufflers, mantillas, veils and the like | 4.01 | 64.63 | 6.68 | 7.16 | 0.21 | 2.31 | 0.43 | 0.52 | 3.66 | 3.10 | 0.33 | 10.96 |
61178008 | Other clothing accessories, knitted or crocheted, nes, of cotton | 0.37 | 81.06 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 4.41 | 0.00 | 14.53 |
61178088 | Other clothing accessories, knitted or crocheted, nes | 0.64 | 18.89 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 81.11 |
61179000 | Parts of garments or clothing accessories, knitted or crocheted | 0.06 | 26.78 | 0.00 | 37.89 | 0.00 | 0.00 | 4.75 | 0.00 | 0.00 | 0.00 | 0.00 | 30.59 |
62011100 | Men's or boys' car overcoats, capes, cloaks etc of wool or fine animal hair | 11.79 | 55.46 | 7.61 | 3.95 | 0.33 | 0.49 | 0.22 | 0.44 | 2.89 | 0.28 | 24.15 | 4.19 |
62011200 | Men's or boys' car overcoats, capes cloaks etc, of cotton | 31.50 | 45.92 | 6.86 | 12.17 | 2.16 | 4.60 | 0.33 | 0.05 | 5.32 | 1.19 | 19.89 | 1.50 |
62011300 | Men's or boys' car overcoats, capes, cloaks etc, of man-made fibres | 61.32 | 57.89 | 6.30 | 2.92 | 0.11 | 0.44 | 3.17 | 1.98 | 5.74 | 1.92 | 11.04 | 8.48 |
62011900 | Men's or boys' car overcoats, capes, cloaks etc, of other textiles, nes | 11.01 | 62.90 | 10.82 | 4.80 | 0.29 | 1.19 | 0.88 | 0.05 | 9.02 | 1.41 | 4.94 | 3.71 |
62019100 | Men's or boys' anoraks, wind jackets/cheaters, etc,of wool/fine anima hair | 4.04 | 40.87 | 37.54 | 6.16 | 2.42 | 3.93 | 0.97 | 0.00 | 0.15 | 0.53 | 2.59 | 4.83 |
62019200 | Men's or boys' anoraks, wind jackets/cheaters, etc, of cotton | 203.01 | 54.49 | 5.29 | 23.61 | 0.44 | 3.63 | 3.13 | 0.08 | 1.81 | 1.41 | 0.49 | 5.62 |
62019300 | Men's or boys' anoraks, wind jackets/cheaters, etc, of man-made fibres | 404.62 | 56.89 | 3.18 | 18.99 | 0.38 | 5.06 | 3.13 | 1.51 | 3.35 | 1.81 | 0.93 | 4.78 |
62019900 | Men's or boys' anoraks, wind jackets/cheaters, etc, of other textiles, nes | 21.52 | 37.66 | 3.60 | 5.84 | 0.00 | 41.04 | 0.01 | 0.00 | 0.03 | 0.13 | 11.05 | 0.64 |
62021100 | Woman's or girls' car overcoats, capes, cloaks etc, of wool/fine animal hair | 5.69 | 87.36 | 0.90 | 3.27 | 0.21 | 1.86 | 0.40 | 0.00 | 1.77 | 0.00 | 3.90 | 0.34 |
62021200 | Woman's or girls' car overcoats, capes, cloaks etc, of cotton | 24.18 | 58.96 | 12.62 | 3.20 | 2.51 | 13.14 | 1.21 | 0.08 | 1.87 | 0.64 | 2.06 | 3.72 |
62021300 | Woman's or girls' car overcoats, capes, cloaks etc, of man-made fibres | 55.20 | 53.43 | 3.04 | 19.72 | 0.20 | 1.40 | 1.47 | 2.60 | 6.03 | 0.39 | 4.54 | 7.19 |
62021900 | Woman's or girls' car overcoats, capes, clooks etc. Of other textiles, nes | 14.38 | 40.57 | 1.91 | 0.67 | 0.00 | 0.32 | 1.19 | 0.02 | 48.26 | 1.83 | 2.39 | 2.83 |
62029100 | Woman's or girls' anoraks, wind jackets/cheaters, etc, of wool... | 5.63 | 83.13 | 4.80 | 0.38 | 0.00 | 1.26 | 0.77 | 0.00 | 0.12 | 1.54 | 4.85 | 3.15 |
62029200 | Woman's or girls' anoraks, wind jackets/cheaters, etc, of cotton | 185.81 | 56.14 | 6.06 | 22.93 | 0.44 | 3.03 | 2.57 | 0.08 | 1.48 | 1.05 | 2.20 | 4.02 |
62029300 | Woman's or girls' anoraks, wind jackets/cheaters, etc, of man- made fibres | 290.21 | 61.25 | 4.84 | 15.57 | 0.51 | 5.39 | 1.95 | 0.34 | 2.15 | 1.54 | 1.00 | 5.45 |
62029900 | Woman's or girls' anoraks, wind jackets/cheaters, etc, of other tex.,nes | 8.78 | 46.29 | 2.91 | 21.05 | 0.13 | 16.84 | 0.08 | 0.36 | 0.08 | 1.41 | 10.01 | 0.85 |
62031100 | Men's or boys' suits of wool or fine animal hair | 6.32 | 50.60 | 6.12 | 37.92 | 0.10 | 2.96 | 0.01 | 0.34 | 0.00 | 0.00 | 0.74 | 1.21 |
62031200 | Men's or boys' suits of synthetic fibres | 14.91 | 16.95 | 3.65 | 0.55 | 0.00 | 0.10 | 0.49 | 45.57 | 31.01 | 0.18 | 0.60 | 0.91 |
62031900 | Men's or boys' suits of other textiles, nes | 2.77 | 31.94 | 19.48 | 16.27 | 14.53 | 4.07 | 0.00 | 2.96 | 0.00 | 0.01 | 0.49 | 10.25 |
62032200 | Men's or boys' ensembles of cotton | 19.38 | 63.02 | 2.06 | 24.74 | 0.08 | 1.53 | 0.87 | 0.07 | 0.67 | 0.61 | 0.32 | 6.03 |
62032300 | Men's or boys' ensembles of synthetic fibres | 1.94 | 45.57 | 10.66 | 5.78 | 0.89 | 0.60 | 2.45 | 0.31 | 1.78 | 3.01 | 9.05 | 19.90 |
62032900 | Men's or boys' ensembles of other textiles, nes | 3.74 | 70.90 | 1.63 | 13.09 | 0.00 | 0.00 | 1.17 | 0.00 | 0.60 | 0.00 | 0.00 | 12.61 |
62033100 | Men's or boys' jackets and blazers of wool or fine animal hair | 4.72 | 53.09 | 15.25 | 7.46 | 0.22 | 0.06 | 0.15 | 0.00 | 0.77 | 0.00 | 0.00 | 23.00 |
62033200 | Men's or boys' jackets and blazers of cotton | 115.44 | 23.20 | 6.96 | 49.38 | 1.62 | 6.70 | 2.49 | 1.90 | 2.20 | 1.21 | 0.21 | 4.12 |
62033300 | Men's or boys' jackets and blazers of synthetic fibres | 100.42 | 40.82 | 31.14 | 6.99 | 0.40 | 1.50 | 0.29 | 9.35 | 3.69 | 0.42 | 0.41 | 4.98 |
62033900 | Men's or boy's jackets and blazers of other textiles,(exl.wool,syn.fab,cot | 33.03 | 38.24 | 21.06 | 24.78 | 0.71 | 1.70 | 0.77 | 3.64 | 4.52 | 0.09 | 0.11 | 4.38 |
40
62034100 | Men'S/Boy'S Bib& Brace Trousers, Breeches, Shorts Of Wool Or Fine Animalhar | 9.55 | 42.40 | 11.87 | 24.02 | 5.03 | 4.09 | 0.13 | 0.58 | 0.71 | 1.20 | 0.00 | 9.97 |
62034200 | Men'S Or Boys' Bib & Brace Trousers, Breeches, Shorts, Of Cotton | 5555.87 | 40.73 | 7.39 | 31.48 | 2.41 | 2.98 | 2.07 | 2.00 | 2.92 | 0.99 | 0.46 | 6.56 |
62034300 | Men'S Or Boys' Bib & Brace Trousers, Breeches & Shorts Of Synthetic Fibres | 815.65 | 50.28 | 9.86 | 27.22 | 1.15 | 3.52 | 0.48 | 1.19 | 1.64 | 0.39 | 0.26 | 4.01 |
62034900 | Men'S Or Boys' Bib& Brace Trousers, Breeches & Shorts Of Other Textiles, Nes | 255.87 | 22.97 | 24.90 | 27.32 | 1.91 | 3.17 | 1.11 | 9.88 | 0.94 | 0.48 | 0.65 | 6.68 |
62041100 | Women's or girls' suits of wool or fine animal hair | 5.97 | 62.76 | 3.11 | 19.30 | 4.09 | 1.04 | 0.00 | 0.00 | 0.36 | 2.17 | 5.83 | 1.33 |
62041200 | Women's or girls' suits of cotton | 3.58 | 53.99 | 3.46 | 18.49 | 0.91 | 4.05 | 0.00 | 0.00 | 12.39 | 1.76 | 0.00 | 4.95 |
62041300 | Women's or girls' suits of synthetic fibres | 2.12 | 7.87 | 1.22 | 85.17 | 0.00 | 0.00 | 0.02 | 0.00 | 1.77 | 0.50 | 2.00 | 1.44 |
62041900 | Women's or girls' suits of other textiles, (exl.wool,cotton,syn.fibre) | 11.49 | 23.19 | 3.15 | 3.43 | 0.13 | 1.50 | 0.86 | 0.14 | 62.44 | 0.45 | 0.36 | 4.35 |
62042100 | Women's or girls' ensembles of wool or fine animal hair | 1.29 | 56.02 | 11.63 | 9.16 | 0.00 | 2.35 | 0.00 | 0.00 | 0.94 | 0.29 | 0.59 | 19.01 |
62042200 | Women's or girls' ensembles of cotton | 6.94 | 53.44 | 11.70 | 16.15 | 0.03 | 7.00 | 0.27 | 0.55 | 0.93 | 0.46 | 0.08 | 9.36 |
62042300 | Women's or girls' ensembles of synthetic fibres | 3.05 | 15.50 | 72.24 | 0.21 | 0.00 | 2.40 | 0.00 | 0.00 | 2.92 | 0.00 | 0.00 | 6.73 |
62042900 | Women's or girls' ensembles of other textiles, (exl. wool, cotton, syn. fibre) | 9.97 | 46.03 | 29.93 | 7.16 | 0.00 | 0.33 | 0.11 | 0.00 | 15.91 | 0.00 | 0.00 | 0.53 |
62043100 | Women's or girls' jackets and blazers of wool or fine animal hair | 3.65 | 36.87 | 58.40 | 0.00 | 0.00 | 0.45 | 0.00 | 0.00 | 1.21 | 0.21 | 0.08 | 2.79 |
62043200 | Women's or girls' jackets and blazers of cotton | 82.89 | 47.59 | 7.05 | 24.77 | 2.56 | 4.32 | 2.03 | 2.12 | 4.73 | 1.75 | 0.03 | 3.04 |
62043300 | Women's or girls' jackets and blazers of synthetic fibres | 96.94 | 26.76 | 18.02 | 39.04 | 0.27 | 2.39 | 1.32 | 3.47 | 1.92 | 0.75 | 0.26 | 5.80 |
62043900 | Women'S Or Girls' Jackets & amp; Blazers Of Oth.Tex.,(Exl.Wool,Cotton,Syn.Fibre) | 18.53 | 39.39 | 10.43 | 10.43 | 0.55 | 5.53 | 1.19 | 1.54 | 27.40 | 0.54 | 0.23 | 2.76 |
62044100 | Dresses of wool or fine animal hair | 1.00 | 46.09 | 14.44 | 3.59 | 0.00 | 26.93 | 2.50 | 0.00 | 3.45 | 0.56 | 0.00 | 2.44 |
62044200 | Dresses of cotton | 222.19 | 45.35 | 25.75 | 8.48 | 3.55 | 3.70 | 1.33 | 0.59 | 2.00 | 2.90 | 0.57 | 5.77 |
62044300 | Dresses of synthetic fibres | 53.16 | 50.23 | 26.30 | 7.35 | 0.40 | 3.39 | 0.85 | 3.11 | 0.55 | 2.14 | 0.46 | 5.23 |
62044400 | Dresses of artificial fibres | 36.59 | 70.42 | 10.26 | 4.88 | 0.30 | 5.23 | 0.99 | 0.62 | 0.60 | 4.28 | 0.12 | 2.29 |
62044900 | Dresses of other textiles, (exl.wool, cotton,syn./arti.fibre) | 32.81 | 55.00 | 14.65 | 10.49 | 0.42 | 1.87 | 3.61 | 1.32 | 7.13 | 0.44 | 0.29 | 4.78 |
62045100 | Skirts and divided skirts of wool or fine animal hair | 1.87 | 93.13 | 0.70 | 3.80 | 0.00 | 2.37 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
62045200 | Skirts and divided skirts of cotton | 162.82 | 52.32 | 10.71 | 18.73 | 2.26 | 3.22 | 2.46 | 0.34 | 3.83 | 1.67 | 0.28 | 4.19 |
62045300 | Skirts and divided skirts of synthetic fibres | 33.41 | 21.65 | 48.61 | 18.94 | 0.13 | 0.65 | 0.79 | 0.87 | 0.73 | 0.68 | 0.17 | 6.78 |
62045900 | Skirts and divided skirts of other textiles, (exl.wool, cotton, syn. fibre) | 16.82 | 49.65 | 14.81 | 11.31 | 0.86 | 3.15 | 2.18 | 1.61 | 11.01 | 1.50 | 0.77 | 3.13 |
62046100 | Women's or girls' trousers, breeches, etc, of wool or fine animal hair | 4.67 | 58.05 | 5.85 | 8.87 | 0.00 | 2.71 | 0.27 | 6.19 | 1.44 | 2.15 | 0.00 | 14.46 |
62046200 | Women's or girls' trousers, breeches, etc, of cotton | 3062.47 | 43.91 | 12.51 | 26.35 | 2.23 | 3.92 | 1.45 | 1.54 | 2.48 | 1.10 | 0.29 | 4.23 |
62046300 | Women's or girls' trousers, breeches, etc, of synthetic fibres | 237.19 | 50.40 | 18.23 | 14.62 | 0.40 | 4.03 | 0.80 | 2.01 | 0.75 | 1.36 | 0.46 | 6.95 |
62046900 | Women's/girl's trousers, breeches, etc, of oth.tex.,(exl.wool, cotton, syn.fib. | 273.41 | 38.73 | 18.82 | 23.06 | 0.75 | 8.34 | 0.75 | 2.06 | 1.67 | 1.34 | 0.75 | 3.73 |
62052000 | Men's or boys' shirts of cotton | 1954.25 | 32.58 | 9.81 | 34.51 | 2.24 | 4.12 | 1.67 | 3.98 | 2.30 | 1.30 | 1.13 | 6.36 |
62053000 | Men's or boys' shirts of man-made fibres | 122.49 | 33.29 | 25.74 | 22.67 | 0.82 | 2.69 | 0.50 | 4.33 | 4.04 | 1.60 | 0.08 | 4.24 |
62059000 | Men's or boy's shirts of other textiles, (exl.wool, cotton, man-made fibre) | 248.10 | 27.48 | 24.90 | 19.48 | 0.94 | 2.07 | 0.46 | 2.42 | 13.45 | 0.34 | 1.19 | 7.27 |
62061000 | Women's or girl's blouses, shirts/blouses of silk or silk waste | 8.12 | 47.20 | 5.74 | 2.12 | 7.86 | 7.74 | 0.00 | 0.71 | 21.48 | 3.39 | 0.20 | 3.57 |
62062000 | Women's or girl's blouses, shirts/blouses of wool or fine animal hair | 67.26 | 48.60 | 10.11 | 15.82 | 0.91 | 4.88 | 0.98 | 0.15 | 7.99 | 2.96 | 1.79 | 5.81 |
62063000 | Women's or girls' blouses, shirts/blouses of cotton | 275.38 | 44.04 | 7.72 | 17.98 | 2.79 | 4.43 | 1.88 | 0.81 | 2.62 | 4.03 | 4.45 | 9.26 |
62064000 | Women's or girl's blouses, shirts/blouses of man-made fibres | 248.26 | 58.34 | 17.27 | 9.09 | 0.34 | 2.94 | 1.13 | 2.48 | 1.88 | 1.68 | 0.37 | 4.49 |
41
62069000 | Women/girl's blouses, shirts/blouses of oth. tex.(exl.silk, wool, of man m.fib | 68.04 | 27.86 | 24.97 | 23.75 | 0.07 | 5.19 | 0.75 | 1.17 | 7.69 | 0.74 | 0.90 | 6.91 |
62071100 | Men's or boys' underpants and briefs of cotton | 39.26 | 34.11 | 5.42 | 26.48 | 0.38 | 6.71 | 0.26 | 8.39 | 9.29 | 0.72 | 0.09 | 8.15 |
62071900 | Men's or boys' underpants and briefs of textile materials, (exl. Cotton) | 1.83 | 25.42 | 31.41 | 21.51 | 0.00 | 0.22 | 0.00 | 0.00 | 7.53 | 0.00 | 0.00 | 13.91 |
62072100 | Men's or boys' nightshirts and pyjamas of cotton | 13.47 | 23.50 | 19.85 | 28.95 | 0.96 | 15.40 | 0.46 | 1.30 | 6.75 | 0.07 | 0.02 | 2.74 |
62072200 | Men's or boys' nightshirts and pyjamas of man-made fibres | 3.31 | 22.38 | 24.78 | 22.41 | 8.07 | 15.42 | 0.67 | 0.00 | 1.24 | 0.00 | 0.00 | 5.04 |
62072900 | Men'S Or Boy'S Nightshirts & Pyjamas Of Tex.Mate.(Exl.Cotton,Man Made Fib. | 1.06 | 34.89 | 9.81 | 11.75 | 1.27 | 0.96 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 41.31 |
62079100 | Men's or boys' singlets,vests dressing gowns, etc, of cotton | 6.86 | 5.96 | 3.60 | 79.27 | 0.22 | 9.22 | 0.00 | 0.00 | 1.16 | 0.00 | 0.00 | 0.56 |
62079900 | Mens/boy's singlets, vests dressing gowns, etc,of oth.tex.(exl.cot.man m.fib | 4.33 | 22.00 | 37.07 | 26.71 | 0.00 | 4.23 | 0.03 | 0.00 | 0.05 | 0.00 | 0.42 | 9.49 |
62081100 | Slips and petticoats of man-made fibres | 0.45 | 53.82 | 12.06 | 31.36 | 0.00 | 0.00 | 0.00 | 0.00 | 2.75 | 0.00 | 0.00 | 0.00 |
62081900 | Slips and petticoats of other textiles, (exl. Man made fibre) | 2.41 | 45.80 | 41.96 | 3.04 | 0.00 | 0.45 | 0.01 | 8.50 | 0.01 | 0.07 | 0.11 | 0.05 |
62082100 | Women's or girls' nightdresses and pyjamas of cotton | 17.28 | 23.95 | 21.48 | 13.16 | 1.82 | 4.37 | 2.12 | 1.93 | 15.46 | 1.79 | 0.34 | 13.58 |
62082200 | Women's or girls' nightdresses and pyjamas of man-made fibres | 8.39 | 12.36 | 9.85 | 12.61 | 1.55 | 13.84 | 25.46 | 0.65 | 9.97 | 2.07 | 0.13 | 11.51 |
62082900 | Womens/Girl'S Nightdresses & Pyjamas Of Tex.Mat.(Exl.Cotton, Man Made Fib. | 2.57 | 7.76 | 0.09 | 85.31 | 0.00 | 3.04 | 0.00 | 3.14 | 0.00 | 0.00 | 0.00 | 0.67 |
62089100 | Women's or girls' dressing gowns, panties, etc, of cotton | 9.74 | 70.34 | 3.19 | 15.18 | 1.05 | 5.00 | 0.01 | 1.12 | 0.32 | 0.08 | 0.01 | 3.70 |
62089200 | Women's or girls' dressing gowns, panties, etc, of man-made fibres | 4.00 | 41.64 | 27.17 | 16.79 | 0.08 | 3.05 | 1.03 | 0.02 | 1.10 | 0.98 | 0.32 | 7.83 |
62089900 | Womens/girl's dressing gowns, panties, etc, of oth. tex. (exl. cotton man m.fib. | 0.75 | 39.34 | 45.83 | 5.23 | 0.00 | 4.02 | 0.00 | 0.00 | 1.51 | 0.00 | 0.00 | 4.07 |
62092000 | Babies' garments and clothing accessories of cotton | 218.24 | 36.17 | 6.75 | 43.18 | 1.17 | 2.46 | 2.10 | 1.59 | 0.99 | 0.47 | 0.64 | 4.47 |
62093000 | Babies' garments and clothing accessories of synthetic fibres | 26.30 | 44.94 | 2.24 | 41.35 | 0.01 | 7.11 | 0.79 | 0.21 | 0.86 | 0.34 | 0.12 | 2.02 |
62099000 | Babies Garments & Clothing Accessories Of Oth. Tex.(Exl. Wool, Cotton, Syn. Fib) | 10.41 | 32.37 | 5.10 | 49.67 | 0.00 | 1.15 | 0.31 | 8.03 | 0.00 | 0.00 | 0.25 | 3.12 |
62101000 | Garments, made up. of head.5602,5603,5903, 5906 or 5907 of fabrics of head.5602 or 5604 | 5.46 | 63.18 | 0.06 | 32.11 | 0.00 | 0.09 | 0.00 | 0.00 | 0.68 | 0.00 | 1.30 | 2.59 |
62102000 | Garments of 6201.11 to 19, made up of fabrics of 59.03, 59.06 or59.08 | 9.02 | 79.15 | 0.00 | 10.91 | 0.34 | 7.15 | 0.02 | 0.00 | 0.83 | 0.00 | 0.71 | 0.88 |
62103000 | Garments of 6202.11 to 19, made up of fabrics of 59.03, 59.06 or 59.08 | 7.78 | 56.01 | 1.01 | 24.02 | 0.00 | 0.49 | 2.58 | 0.00 | 1.82 | 9.14 | 0.63 | 4.28 |
62104000 | Men's or boys' garments made up of fabrics of 59.03, 59.06 or 59.10 | 225.64 | 55.14 | 1.16 | 27.05 | 0.37 | 8.64 | 1.85 | 0.01 | 1.17 | 0.26 | 0.17 | 4.18 |
62105000 | Women's or girls' garments made up of fabrics of 59.03, 59.06 or 59.10 | 168.75 | 68.77 | 0.40 | 10.49 | 0.06 | 10.71 | 0.91 | 0.06 | 0.79 | 0.61 | 0.11 | 7.09 |
62111100 | Men's or boys' swimwear | 64.94 | 33.98 | 37.01 | 14.29 | 0.37 | 5.72 | 0.18 | 0.93 | 1.28 | 1.08 | 0.53 | 4.64 |
62111200 | Women's or girls' swimwear | 5.01 | 70.88 | 6.87 | 9.26 | 0.68 | 5.10 | 0.08 | 0.27 | 1.06 | 0.89 | 2.52 | 2.39 |
62112000 | Ski suits | 5.89 | 46.22 | 24.08 | 8.09 | 0.47 | 0.91 | 1.17 | 0.22 | 8.75 | 1.19 | 2.91 | 6.01 |
62113200 | Men's or boys' garments of cotton, nes | 20.11 | 50.33 | 0.23 | 35.34 | 0.07 | 5.50 | 0.19 | 0.17 | 6.90 | 0.02 | 0.02 | 1.23 |
62113300 | Men's or boys' garments of man-made fibres, nes | 22.06 | 50.56 | 2.89 | 7.22 | 0.05 | 2.55 | 7.74 | 0.65 | 12.95 | 2.37 | 0.92 | 12.10 |
62113900 | Men's or boys' garments of other textiles, nes | 2.29 | 68.82 | 9.53 | 15.56 | 0.00 | 1.54 | 0.03 | 0.00 | 0.00 | 0.17 | 2.99 | 1.38 |
62114200 | Women's or girls' garments of cotton, nes | 24.45 | 28.18 | 6.00 | 40.10 | 0.42 | 7.68 | 1.65 | 0.59 | 11.48 | 0.57 | 0.39 | 2.94 |
62114300 | Women's or girls' garments of man-made fibres, nes | 63.86 | 23.99 | 23.76 | 36.25 | 0.05 | 3.49 | 4.00 | 1.19 | 1.69 | 0.66 | 0.10 | 4.80 |
62114900 | Women's or girls' garments of other textiles, nes | 3.87 | 66.79 | 7.45 | 10.91 | 0.00 | 2.57 | 0.00 | 0.41 | 8.91 | 0.84 | 0.13 | 1.99 |
62121000 | Brassisres | 499.82 | 51.61 | 17.71 | 17.93 | 1.26 | 1.86 | 0.20 | 2.95 | 0.41 | 1.33 | 0.29 | 4.44 |
62122000 | Girdles and panty-girdles | 4.64 | 65.42 | 6.43 | 10.87 | 0.64 | 0.05 | 0.34 | 0.40 | 0.58 | 4.05 | 1.14 | 10.08 |
42
62123000 | Corselettes | 0.60 | 32.19 | 42.56 | 0.19 | 0.00 | 0.00 | 0.02 | 0.02 | 24.56 | 0.20 | 0.19 | 0.07 |
62129000 | Corsets, braces, garters, suspenders and similar articles | 5.78 | 52.66 | 33.31 | 5.13 | 0.09 | 0.05 | 0.14 | 4.54 | 0.14 | 0.88 | 0.29 | 2.76 |
62132000 | Handkerchiefs of cotton | 0.14 | 68.44 | 0.00 | 0.00 | 9.32 | 0.00 | 0.00 | 0.00 | 22.25 | 0.00 | 0.00 | 0.00 |
62141000 | Shawls, Scarves, Mufflers, Mantillas, Veils, & The Like Of Silk Or Silk Waste | 0.11 | 72.83 | 12.88 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 14.29 | 0.00 | 0.00 | 0.00 |
62142000 | Shawls, Scarves, Mufflers, Mantillas, Veils & The Like Of Wool/Finearri Hair | 0.04 | 94.22 | 0.00 | 5.78 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
62143000 | Shawls, Scarves, Mufflers, Mantillas, Veils, Etc & The Like Of Synthetic Fibres | 1.12 | 86.30 | 4.72 | 7.38 | 0.00 | 0.00 | 0.00 | 0.00 | 0.77 | 0.00 | 0.00 | 0.83 |
62144000 | Shawls, Scarves, Mufflers, Mantillas, Veils & The Like Of Artificial Fibre | 0.08 | 0.00 | 100.0 0 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
62149000 | Shawls scrvs.,mflrs.,mntls.,veils,etc,of oth.textls.(exl.silk/wool,syn/art | 0.83 | 5.59 | 15.74 | 0.00 | 0.00 | 0.21 | 0.00 | 77.29 | 0.00 | 0.00 | 0.00 | 1.18 |
62151000 | Ties, bow ties and cravats of silk or silk waste | 0.18 | 64.91 | 0.00 | 35.09 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
62152000 | Ties, bow ties and cravats of man-made fibres | 0.11 | 30.12 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 39.02 | 0.00 | 0.00 | 27.24 | 3.62 |
62159000 | Ties, bow ties and cravats of other textiles, nes (excl.silk man- made fibre) | 0.05 | 5.41 | 24.63 | 69.96 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
62160000 | Gloves, mittens and mitts | 10.70 | 6.59 | 1.31 | 51.83 | 0.00 | 33.31 | 0.00 | 0.00 | 1.05 | 0.00 | 0.00 | 5.91 |
62171000 | Clothing accessories, nes | 57.56 | 0.98 | 0.07 | 0.37 | 0.05 | 0.02 | 0.14 | 1.06 | 0.56 | 0.00 | 0.03 | 96.73 |
62179000 | Parts of garments or clothing accessories, nes | 0.15 | 0.00 | 0.00 | 0.00 | 3.49 | 0.00 | 0.00 | 19.67 | 0.00 | 0.00 | 0.00 | 76.84 |
43
Table A2: Top 100 RMG raw materials imports in Bangladesh, 2018-19
Hs code |
Description |
Imports (million $) | Major sourcing country |
Share of top country (%) |
Name of raw materials |
52010000 | Cotton not carded or combed cotton samples of no value | 3104.32 | India | 18 | Cotton Yarn |
52094200 | Denim, with >=85% cotton, >=200g/m2 70% cotton 29% polyester 1% elastane fabrics = 16533 yds | 788.75 | Pakistan | 34 | Woven fabric |
62171000 | Clothing accessories, nes acc button | 707.06 | Kong Kong | 48 | Drawstring |
31053000 | Diammonium hydrogen orthophosphate (diammonium phosphate) dap fertilizer |
364.58 |
China |
48 | DAP (Diammonium Phosphate) |
32041600 | Reactive dyes and preparations based thereon reactive dyes for r/g inds(yellow,red & blue) | 288.34 | India | 38 | Reactive Dyes |
52084200 | Coloured plain cotton woven fabrics with >=85% cotton, >100g/m2 fabrics | 281.88 | China | 70 | Woven fabric |
60063200 | Oth.knitted or crocheted fabrics of synthetic fibres,dyed fabric | 274.49 | China | 64 | Knitted fabric |
52093200 | Dyed 3 or 4-thread twill (incl. Cross twill), with >=85% cotton 97% cotton 3% elastane processed dyed fabric = 17906.00 meter |
271.09 |
China |
34 |
Woven fabric |
54023300 | Textured yarn of polyester poly.texturised yarn dty 75d/34f =25245 kgs | 267.58 | China | 50 | Sythetic Yarn |
52052400 | Com.sin.cot.yarn,with>=85%cot.,nprs,<192.31de.but>=125de>52mn but<=80mn 100%combed cotton yarn=1803.06 kgs |
257.73 |
India |
84 |
Cotton Yarn |
52052300 | Com.sin.cot.yarn,with>=85%cot.,nprs,<232.56deci(>43mm)but>=192.31de(<=52mn ne 30/1&40/1 100% biore org cotn raw yarn =19,998.09 kgs |
204.34 |
India |
78 |
Cotton Yarn |
52052100 | Combed single cotton yarn, with >=85% cotton, nprs,>=714.29 decitex(<=14mn sewingthread yarn | 184.47 | India | 63 | Cotton Yarn |
60062200 | Oth.knitted or crocheted fabrics of cotton dyed knitted fabric | 169.85 | Kong Kong | 39 | Knitted fabric |
38099100 | Finishing agents etc. Of a kind used in the textile or like industries nes textile finishing agent | 165.50 | Singapore | 21 | Anticreasing Agent |
60069000 | Oth.knitted or crocheted fabrics of artificial fibres,nes fabric | 155.14 | China | 58 | Knitted fabric |
52081100 | Unbleached plain woven fabrics of cotton with>=85%cotton, =<100g/m2 fabric swatch | 152.91 | China | 58 | Woven fabric |
54074200 | Dyed woven fabrics of synthetic filament yarn, >=85% nylon... Fabric sample | 137.73 | China | 43 | Woven fabric |
55041000 | Artificial staple fibres,of viscose rayon,not carded,combed or processed viscose staple fiber=1957.70 kgs | 131.45 | Indonesia | 40 | Viscose Rayon |
49060000 | Plans...for archit...purposes;handwitten texts;photogr.of repo.of theDrawing | 116.68 | Russia | 86 | Plain Paper |
52051200 | Uncom.sin.cot.yarn,with>=85%cot.nprs,<714.29de(>14mn)but(>=232.56de)<=43mn 2/32,100% cotton melange yarn=1828 lbs |
111.13 |
India |
41 |
Cotton Yarn |
55093200 | Multiple or cabled yarn, >=85% acrylic or modacrylic staple fibres, nprs yarn | 106.90 | China | 69 | Synthetic yarn |
59032090 | Other textile fabrics impregnatedwith polyurethane 100%poly twill fabric=14086 mtrs | 101.50 | China | 54 | Interlining |
28362000 | Disodium carbonate disodium carbonate (soda ash light) | 97.20 | China | 47 | Soda Ash Light |
55121100 | Unbleached or bleached woven fabrics, >=85% polyester staple fibres fabric(94%poly 6%sp) | 93.48 | China | 60 | Woven fabric |
52052200 | Combed sin.cot.yarnwith>=85%cot.nprs<714.29(>14mn)but>=232.56de.(<=43mn ne 26/1 100%comd conv r/s wax yarn=20498.40 kgs |
87.78 |
India |
51 |
Cotton Yarn |
39069000 |
Acrylic polymers in primary forms nes sera gal c-ftrh (acrylic polymer) |
84.32 |
India |
20 | Acrylic Polymer in Primary Forms (white Pest NR, Orion Pest NR, NK Copper EL) |
60041000 | Conting. By weight 5%or more of elastomeric yarn but not cont.ruber thred 89%cot 10%poly 1%sp fabric=7439 yds | 83.26 | China | 57 | Kintted fabric |
52084900 | Coloured woven cotton fabrics with >=85% cotton nes 100%cotton print fab.w:57/8" = 17706(m) | 73.10 | China | 84 | Woven fabric |
55093100 | Single yarn, with >=85% acrylic or modacrylic staple fibres, nprs sample yarn | 72.68 | China | 92 | Synthetic yarn |
28331100 | Disodium sulphate disodium sulphate (sodium sulphate anhydrous) | 71.72 | China | 84 | Sodium Sulphet |
52113200 | Dyed 3 or 4-thread twill (incl. Cross twill) with <85% cotton >200g/m2 73%cot 25%poly 2% str twill fabrics=6071 yds | 71.66 | China | 63 | Woven fabric |
44
60029000 | Knitted or crocheted fabrics of a width <30cm,containing by weight 5%..nes 90% cotton 10% viscose jersey fabric = 26510 yds | 70.36 | Kong Kong | 37 | Knit Collar & Cuff |
54024400 | Other yarn, single, untwisted or with a twist not exceeding 50 turns per metre 100%sp(polyure)fil.yarn r.w.20de&40de aa grade=4092kgs | 70.22 | Vietnam | 54 | Spandex Yarn |
52051100 | Uncombed sin.cot.yarn,with>=85%cot.,nprs,=>714.29 decitex (<=14mn). Yarn | 69.70 | India | 45 | Cotton Yarn |
48211000 | Printed paper or paperboard labels of all kinds hangtag | 66.48 | Kong Kong | 60 | Hang Tag/Price Tag/ Bar Code Sticker/Paper band(Non Adhesive) |
52081900 | Unbleached woven cotton fabrics nes with >=85% cotton sample of fabric swatch | 64.19 | China | 60 | Woven fabric |
60011000 | Long pile fabrics, knitted or crocheted 100%polyester knitted fabric | 63.97 | China | 60 | Knit Collar & Cuff/ Draw Cord |
54024700 | Other yarn,single,untwisted or with a twist <=50 turns per metre other, of pol 100% poly textur. Yarn 150d/48f ddb nim= 25160kgs | 63.24 | China | 73 | Synthetic Filament Yarn |
73269090 | Other articles of iron or steel, nes(excl.s.s.screen, burette stand) single fire hose boxes | 61.39 | China | 30 | Metal Clip/Iron Seal |
32041100 | Disperse dyes and preparations based thereon terasil yellow (disperse dyes) | 61.06 | Singapore | 30 | Disperse Dyes |
55096200 | Yarn, <85% acrylic or modacrylic staple fibres, mixed with cotton, nprs yarn | 60.60 | China | 84 | Synthetic yarn |
52092900 | Bleached woven cotton fabrics, with >=85% cotton, >=200g/m2, nes fabrics | 54.97 | China | 59 | Woven fabric |
52054400 | Combed cabled cotton yarn,>=85% cotton,nprs,>52mn but<=80mn pr.single yarn 100%combed cotton yarn = 583.33lbs | 53.63 | India | 43 | Cotton Yarn |
52082900 | Bleached woven cotton fabrics, nes, with >=85% cotton fabric sample | 53.00 | China | 86 | Woven fabric |
96071900 | Slide fasteners not fitted with chain scoops of base metal nylon zipper sample | 52.81 | China | 43 | Zipper/Puller/Ring/ Slider |
52083300 | Dyed 3 or 4-thread twill (incl. Cross twill), with >=85% cotton 100% cotton twill fabrics = 1890 yds | 52.60 | China | 45 | Woven fabric |
41079900 | Other,including sides,nes acc pu leather = 2500 yds | 51.30 | Pakistan | 21 | Leather Patch |
48191000 | Cartons, boxes and cases, of corrugated paper or paperboard master carton=7673 pcs | 50.70 | BL | 66 | Carton/Box/Case |
60062300 | Oth.knitted or crocheted fabrics of cotton, of yarns of different colours 57.5%cotton 31.1%poly 11.4%sp fabric=3567 yds | 49.82 | China | 86 | Knitted fabric |
58071000 | Labels, badges... Of textiles, woven, in piece..., not embroidered labels | 48.78 | Kong Kong | 63 | Label/Secured Tag/Paper Tag/ PatchPrice Ticket/ Synthetic Label/Badge |
52094900 | Coloured woven cotton fabrics, with >=85% cotton, >200g/m2 100 pct cotton denim fabric = 1485 yds | 47.39 | China | 53 | Woven fabric |
54034100 | Multiple or cabled yarn of viscose rayon, nprs 2/30s 100% viscose yarn=5353 lbs | 47.18 | China | 92 | Viscose Rayon |
34029090 | Washing & cleaning preparations (excl. Detergents) albatex , univadine (levelling agent) | 45.94 | Singapore | 28 | Leveling Agent |
52082100 | Bleached plain woven fabrics of cotton with >=85% cotton, =<100g/m2 fabric sample | 43.98 | China | 78 | Woven fabric |
96062200 | Buttons of base metal, not covered with textile material button | 42.83 | Kong Kong | 51 | Button(Metal/Plastic) |
39269099 | Pvc scrn.having intrnl.dia.from 4-8 mulch and strct.thereof used in agri.& hoti.,nes plastic string | 42.80 | China | 44 | Hanger |
35079090 | Other than streptokinase lerzyme n 2000 (enzyme) | 42.42 | China | 23 | Enzyme for Textile Use |
52085200 | Printed plain cotton woven fabrics with >=85% cotton, >100g/m2 100%cotton fab.w:54" = 50383.50 yds | 40.54 | China | 76 | Woven fabric |
39199010 | Other self-adhesive plates, tape, strip, foil... Of plastics, nes velcro tape | 39.26 | China | 72 | Mobilon Tape/Velcro Tape/PP Band/ Velcro Tap |
52103100 | Dyed plain cotton woven fabrics with <85% cotton, =<200g/m2 65%polyester 35%cotton woven fabric=4822mtrs | 39.21 | China | 51 | Woven fabric |
54033100 | Single yarn of viscose rayonuntwisted or with =<120turns/m nprs 100% solid dyed viscose yarn=11444.44lbs | 38.64 | China | 93 | Viscose Rayon |
60063100 | Oth.knitted or crocheted fabrics. Of synthetic fibres,unbleached or bleach 100%poly. Knit fab.w:58/60" = 7767 m | 37.18 | China | 89 | Knitted fabric |
55132900 | Dyed woven fabrics, <85% synthetic fibres + cotton, nes, =<170g/m2 68%c 29%poly 3%sp poplin w.56/57=17686yds | 36.81 | China | 55 | Woven fabric |
52091900 | Unbleached cotton fabrics, with >=85% cotton, >=200g/m2, nes 100%tencel fab.w:56" = 2841.70 yds | 36.78 | China | 41 | Woven fabric |
45
52091200 | Unbleached 3 or 4-thread twill (incl. Cross twill), with >=85% cotton 100% cotton slub canvas fabrics =30 yds | 36.46 | India | 37 | Woven fabric |
85319000 | Parts of apparatus of 85.31 super tag | 35.89 | China | 25 | Security Tag, Supper Tag- VST,Security Alarm Tag |
59039090 | Textile fabrics impregnated... With plastics, nes fabric sample | 34.47 | China | 45 | Interlining |
32041700 | Pigments and preparations based thereon pigment dyes (asuprint) | 34.09 | India | 34 | Pigment Dyes |
55092100 | Single yarn, with >=85% polyester staple fibres, nprs 69%acry 28%poly 3%elas y/d yarn=4988.35lbs | 33.17 | China | 80 | Synthetic yarn |
96061000 | Press-fasteners, snap-fasteners and press-studs and parts therefor button | 33.15 | China | 48 | Button(Metal/Plastic) |
54021100 | Synthetic filament yarn?high tenacity of nylon or other polyamides of aramids 100%f.d. nylon oxford fabric=5414 yds | 31.19 | China | 89 | Sythetic Yarn |
54033200 | Single yarn of viscose rayon, with >120turns/m, nprs siro kdd viscose gray yarn | 30.13 | China | 87 | Viscose Rayon |
39100000 | Silicones inprimary forms dicrylan sd (silicone in primary forms) | 29.32 | India | 39 | Silicon in Primary Forms |
60064200 | Oth.knitted or crocheted fabrics of artificial fibres,dyed 100%polyester mesh knit fab.w-58/60" = 1251 m | 28.93 | China | 81 | Knitted fabric |
38249990 | Other prepared binder (asupret e-pol /p) | 28.83 | China | 19 | Sequestering Agent Other |
55101100 | Single yarn, with >=85% artificial staple fibres, nprs ne 30/1 100% viscose dyed od black yarn | 27.81 | Indonesia | 36 | Artificial Yarn |
52052800 | Combed single cotton yarn, with >=85% cotton, nprs,<83.33 >120mn cotton yarn | 27.73 | China | 71 | Cotton Yarn |
52054200 | Combed cabled cotton yarn,with>=85%cotton,nprs,>14mn but<=43mn p.sing.yarn 100%cotton 24/2 combed yarn=17418.24 kgs | 27.62 | China | 62 | Cotton Yarn |
54074100 | Unbleached or bleached woven fabrics, >=85% nylon... Elastic samplessample fabric | 27.23 | China | 50 | Woven fabric |
52051400 | Uncombed sin.cot.yarn,with>=85%cot.nprs,<192.31de(>52mn)but>=125de(<=80mn) 100%cotton 12/1 oe yarn=27000.00 kgs | 26.98 | India | 40 | Cotton Yarn |
83081000 | Hooks eyes and eyelets of base metal eyelet | 26.34 | China | 38 | Hook & Eye/Eyelet |
52030000 | Cotton, carded or combed 100% cotton yarn=19000 kgs | 25.88 | BL | 33 | Cotton Yarn |
40070000 | Vulcanized rubber thread and cord elastic =240000 mtrs | 25.16 | Malaysia | 72 | Rubber Thread |
40159000 | Articles of apparel and clothing accessories of vulcanized rubber, nes knitted elastic,cover rubber thread=57685yds,21kg | 24.52 | Kong Kong | 41 | Elastic/Elastic Band |
96062100 | Buttons of plastics, not covered with textile material button | 24.07 | Kong Kong | 51 | Button(Metal/Plastic) |
96071100 | Slide fasteners fitted with chain scoops of base metal zipper | 23.55 | China | 47 | Zipper/Puller/Ring/ Slider |
58042100 | Mechanically made of lace of man-made fibres in piece,in strips/in motifs 84.2% nylon 15.8% spandex lace | 23.39 | China | 61 | Lace fabric |
32151990 | Printing ink, whether or not concentrated or solid (excl. Black) textile printing ink | 23.27 | Switzerland | 20 | Printing ink/Printing roll/ Blitz Ink Roll |
39262090 | Art.of app.&clothing accessories(exl.gloves)of plastics hd.no.39.01-39.04 hanger=25088 pcs | 23.25 | Kong Kong | 41 | Plastic Clip/Plastic Seal/String |
34029010 | Detergents tf-135 (detergent) | 22.06 | Germany | 25 | Wetting & Detergent Agent |
54023100 | Textured yarn, of nylon or other polyamides, =<5tex, nprs 100%nylon stretch yarn=7288.61 kg | 19.92 | China | 56 | Spandex Yarn |
39199099 | Other self-adhesive plates tape strip foil... Of plastics nes sticker(holo graphic seal components) | 19.89 | China | 60 | Mobilon Tape/Velcro Tape/PP Band/ Velcro Tap |
54024500 | Other yarn,single,untwisted or with a twist <=50 turns per metre othr,of nylon nylon filament yarn 40/13 fdy-6720 kgs | 19.78 | Taiwan | 52 | Synthetic Filament Yarn |
52114900 | Coloured woven cotton fabrics nes with <85% cotton >200g/m2 55%ctn45%poly printed n/p poplin.w57/8=11649yds | 19.52 | China | 85 | Woven fabric |
58042900 | Mechanically made of lace of oth.textiles in piece,in strips or in motifs lace | 18.69 | Kong Kong | 46 | Lace fabric |
60062400 | Oth.knitted or crocheted fabrics of cotton printed 60%cot 40%poly knit fab w-163=20566.64 mtr | 18.57 | Kong Kong | 54 | Knitted fabric |
52061200 | Uncombed single cotton yarn, with <85% cotton, nprs, >14mn but <=43mn yarn | 18.48 | China | 34 | Cotton Yarn |
60053700 | Of synthetic fibres other dyed mesh fabric=3000 mtr | 18.44 | Japan | 30 | Kintted fabric |
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29152100 | Acetic acid acetic acid | 17.66 | Korean Republic of | 53 | Acitic Acid |
39201090 | Plates, of polymers of ethylene, laminated.. Not reinforced,etc.,nes heat transfer logo | 17.63 | Vietnam | 30 | Heat Transfer Label |
Table A1: Tariff on exports to major destinations after graduation for knitwear (HS 61)
Destination | Current duty as LDC | Applicable import regime after graduation | Post-graduation tariff | MFN tariff |
EU | 0% (EBA) | GSP/MFN* | 6.4%-9.6% 9.6% for most products and avg tariff rate 9.3% | 8-12% 12% mostly; average rate 11.6% |
USA | MFN duty | MFN duty | Same as MFN tariff | 0%-32% 15% or more for most items Average 11.6% |
Canada | 0% LDCT | GPT | Duty reduction for only a few products 0%-18% applicable 18 % for most products Average rate 16.5% | 0%-18% 18 per cent for most products Average rate 16.8% |
Japan | 0% (GSP for LDCs) | GSP for developing countries | 0%-10.9% 7.4% and 10.9% for most items Average rate 8.5% | 5.3%-10.9% 7.4% and 10.9% for most items Average rate 8.6% |
Australia | 0% | GSP for developing country status (Part 4 of schedule 1). RMGs are not included in under this | 0%–5% Average tariff rate is 4.5% | 0%–5% Average tariff rate is 4.5% |
Turkey | 0% | GSP/MFN* | As the European Union | As the European Union |
India | 0% (DFTP for LDCs) | SAFTA non-LDC tariff | SAFTA non-LDC tariff | 10% |
China | 0% | MFN rate of APTA non-LDC tariff** | Same as MFN tariff or APTA non-LDC tariff. | 14%-25% 14 per cent for most items Average tariff rate 16.16% |
Note: Average rate are calculated as simple average. * there is less probability that Bangladesh can get GSP+ preference after graduation ** not clear. Source: Razzaque et al (2021) using data from WITS and other sources.
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Table A2: Tariff on exports to major destinations after graduation for woven garments (HS 62)
Destination | Current duty as LDC | Applicable import regime after graduation | Post-graduation tariff | MFN tariff |
EU | 0% (EBA) | GSP/MFN* | 5%–9.6% 9.6% for most products and avg tariff rate 9.25% | 6.5-12% 12% mostly; average rate 11.6% |
USA | MFN duty | MFN duty | Same as MFN tariff | 0%-28% 15% or more for most items Average rate 10.3% |
Canada | 0% LDCT | GPT | Duty reduction for only a few products 0%-18% applicable 18% for most products Average rate 14.7% | 0%-18% 18% for most products Average rate 15.2% |
Japan | 0% (GSP for LDCs) | GSP for developing countries | 0%-13.4% 12.8 per cent for most products Average rate 9.1% | 0%-13.4% 12.8 per cent for most products Average rate 9.25 |
Australia | 0% | GSP for developing country status (Part 4 of schedule 1). RMGs are not included in under this | 0%–5% Average tariff rate is 4.4% | 0%–5% Average tariff rate is 4.4% |
Turkey | 0% | As the European Union | As the European Union | |
India | 0% (SAFTA LDC) | SAFTA non-LDC tariff | SAFTA non-LDC tariff | 10% |
China | 0% | MFN rate of APTA non-LDC tariff** | Same as MFN tariff or APTA non-LDC tariff. | 14% – 20% 14% and 16% for most products Average rate 15.9% |
Note: Average rate are calculated as simple average. * there is less probability that Bangladesh can get GSP+ preference after graduation ** not clear. Source: Razzaque et al (2021) using data from WITS and other sources.
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Table A.: Preference utilisation rate of Bangladesh in the EU, by product section
2017 | 2018 | 2019 | ||||||||||
Product Section | Imports ('000 €) | % GSP Utililsation | Imports ('000 €) | % GSP Utililsation | Imports ('000 €) | % GSP Utililsation | ||||||
Total | GSP eligible | GSP used | Total | GSP eligible | GSP used | Total | GSP eligible | GSP used | ||||
All sections | 16,654,045 | 16,317,432 | 15,833,721 | 97 | 17,565,802 | 17,211,986 | 16,656,939 | 97 | 18,880,835 | 18,818,307 | 18,283,375 | 97.2 |
S-01a | 88 | 0 | 6 | 76 | 0 | |||||||
S-01b | 332,481 | 312,855 | 311,727 | 99.6 | 249,772 | 249,772 | 249,277 | 99.8 | 262,486 | 262,486 | 261,658 | 99.7 |
S-02a | 3 | 3 | 1 | 33.7 | 1 | 0 | 0 | |||||
S-02b | 6,783 | 5,171 | 5,152 | 99.6 | 8,272 | 6,241 | 6,222 | 99.7 | 9,577 | 7,246 | 7,225 | 99.7 |
S-02c | 663 | 293 | 293 | 100 | 1,067 | 293 | 293 | 100 | 619 | 332 | 332 | 100 |
S-02d | 1,049 | 1,014 | 1,003 | 98.9 | 1,286 | 1,226 | 1,221 | 99.6 | 1,471 | 1,324 | 1,313 | 99.2 |
S-03 | 829 | 827 | 825 | 99.7 | 624 | 624 | 620 | 99.4 | 1,173 | 1,171 | 1,148 | 98 |
S-04a | 6,953 | 6,953 | 6,873 | 98.8 | 6,272 | 6,272 | 6,252 | 99.7 | 7,139 | 7,139 | 7,120 | 99.7 |
S-04b | 8,819 | 8,608 | 8,584 | 99.7 | 12,978 | 12,789 | 12,224 | 95.6 | 15,773 | 15,507 | 15,073 | 97.2 |
S-04c | 40,543 | 37,378 | 36,981 | 98.9 | 43,783 | 39,313 | 38,831 | 98.8 | 39,090 | 39,090 | 35,278 | 90.2 |
S-05 | 43 | 48 | 0 | 747 | 7 | 7 | 98.7 | |||||
S-06a | 112 | 112 | 683 | 594 | 33 | 5.6 | 869 | 487 | 19 | 4 | ||
S-06b | 4,478 | 78 | 2 | 2 | 5,314 | 39 | 19 | 47.7 | 5,580 | 46 | 5 | 11.7 |
S-07a | 21,790 | 21,355 | 19,591 | 91.7 | 23,890 | 23,772 | 21,803 | 91.7 | 27,541 | 27,271 | 25,085 | 92 |
S-07b | 160 | 151 | 141 | 93.5 | 329 | 308 | 256 | 83.3 | 121 | 91 | 66 | 72.9 |
S-08a | 34,467 | 31,379 | 31,204 | 99.4 | 33,190 | 29,840 | 29,641 | 99.3 | 26,497 | 24,568 | 24,281 | 98.8 |
S-08b | 57,744 | 56,970 | 52,881 | 92.8 | 52,864 | 51,398 | 48,430 | 94.2 | 60,189 | 60,189 | 57,338 | 95.3 |
S-09a | 103 | 0 | 229 | 0 | 179 | 24 | 24 | 99.5 | ||||
S-09b | 7,624 | 7,474 | 6,989 | 93.5 | 9,605 | 9,504 | 8,838 | 93 | 11,403 | 11,347 | 10,638 | 93.8 |
S-10 | 1,348 | 1,411 | 1,194 | |||||||||
S-11a | 54,436 | 22,612 | 16,328 | 72.2 | 53,379 | 25,702 | 17,787 | 69.2 | 53,070 | 27,169 | 20,558 | 75.7 |
S-11b | ######## | ######## | ######## | 97.1 | ######## | ######## | ######## | 96.8 | ######## | ######## | ######## | 97.3 |
S-12a | 387,071 | 385,749 | 377,246 | 97.8 | 402,917 | 401,515 | 394,760 | 98.3 | 437,307 | 437,307 | 429,231 | 98.2 |
S-12b | 45,006 | 43,531 | 39,644 | 91.1 | 42,757 | 41,108 | 37,594 | 91.5 | 49,004 | 48,444 | 37,164 | 76.7 |
S-13 | 26,886 | 26,321 | 25,015 | 95 | 19,231 | 18,968 | 18,240 | 96.2 | 22,375 | 22,355 | 21,182 | 94.8 |
S-14 | 65 | 41 | 7 | 18.1 | 360 | 27 | 14 | 50.1 | 346 | 306 | 11 | 3.5 |
S-15a | 718 | 308 | 273 | 88.6 | 1,190 | 971 | 442 | 45.5 | 984 | 940 | 506 | 53.8 |
S-15b | 12,008 | 515 | 412 | 80.2 | 13,119 | 1,908 | 1,837 | 96.3 | 15,542 | 3,684 | 3,157 | 85.7 |
S-16 | 4,555 | 3,375 | 669 | 19.8 | 15,108 | 4,317 | 135 | 3.1 | 8,410 | 6,843 | 217 | 3.2 |
S-17a | 3 | 3 | 9 | |||||||||
S-17b | 65,319 | 63,700 | 62,559 | 98.2 | 62,485 | 60,695 | 58,153 | 95.8 | 78,420 | 78,346 | 76,378 | 97.5 |
S-18 | 7,527 | 5,658 | 3,767 | 66.6 | 10,321 | 7,921 | 4,693 | 59.2 | 14,354 | 9,700 | 4,772 | 49.2 |
S-19 | ||||||||||||
S-20 | 47,886 | 46,429 | 44,108 | 95 | 52,177 | 50,606 | 48,403 | 95.6 | 61,973 | 60,957 | 57,394 | 94.2 |
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S-21 | 45 | 33 | 134 |
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Currency Devaluation
and its impact on the economy
759
760
VISION
Chamber Building
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Phone : +880-2-223385208-10 & +880-2-223354129-31 (PABX)
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BOARD OF DIRECTORS 2022
Be the leading voice serving responsible business
MISSION
Become the leading Chamber for providing research and analysis related to business in Bangladesh
Attract quality membership, representative of a cross section of business
Effectively respond to changing business environment Collaborate with local and international institutions Engage and communicate regularly with our stakeholders Promote best practices that benefit business and society
VALUES
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Equal Opportunity
CORE COMPETENCIES - ORGANIZATION
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Business Intelligence
CORE COMPETENCIES – PEOPLE
Professional Innovative Adaptable Team Player Proactive
Communication & Interpersonal Skills
MR. MD. SAIFUL ISLAM
MR. KAMRAN T. RAHMAN
MR. HABIBULLAH N. KARIM
MR. SYED TAREQUE MD. ALI
MR. MOHAMMAD NASER EZAZ BIJOY MR. TAPAN CHOWDHURY
MS. UZMA CHOWDHURY DR. ARIF DOWLA
MR. RUBAIYAT JAMIL MS. NIHAD KABIR MR. ANIS A. KHAN
MR. ADEEB HOSSAIN KHAN, FCA MR. HASAN MAHMOOD, FCA MR. GOLAM MAINUDDIN
MR. SYED NASIM MANZUR MS. SIMEEN RAHMAN
MR. FAROOQ AHMED
The Chamber News is published for private circulation by Metropolitan Chamber of Commerce and Industry, Dhaka. The Chamber assumes no responsibility for the correctness of items quoted in the bulletin although every effort is made to give information from sources believed to be reliable.
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Chamber News / Issue 6 / June 2022
The P&H air manager
Currency devaluation and its impact on the economy
New covid-19 testing device delivers results in 30 seconds
Effective methods to identify and meet customer needs
Norway
Chamber office-bearers pay courtesy call to the law minister
Export earnings
Import Payments (C&F)
Inflows of Remittance
Foreign Direct Investment (FDI)
Foreign exchange reserves
Exchange rate
Price situation
Capital market
Export performance of Bangladesh
Fresh opening and settlement of import LCs
Balance of payments (BOP)
Production of selected industrial items
Capital market snapshot
Consumer price index: national
Consumer price index: rural
Consumer price index: urban
Wage rate index by sectors: Bangladesh
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Currency Devaluation and its Impact on the Economy
Currency devaluation is defined as ‘the decline of a currency’s value relative to another currency’. It specifically refers to currencies in a floating exchange rate–a system in which a currency’s value is set by the foreign exchange market, based on supply and demand. When devaluation happens, exports become cheaper and imports expensive. In the short-term, a devaluation pushes the prices of commodities up and causes inflation. As a result, under normal circumstances, devaluation is not desirable for any import-based economy.
Devaluation increases output costs, which results in high inflation. This leads to lower consumption levels and reduced economic activities. Many economies are facing almost double-digit inflations, with some experiencing record levels of it in recent years. This would mean a fall in disposable income, and hence less money will flow into the economy. It will also have a negative impact on both GDP growth and employment. A prolonged devaluation of currency might lead to global economic recession, and also lead to critical challenges for Bangladesh, since our economy largely depends on imports.
Two major sources for Bangladesh foreign currency inflows are RMG exports and wage earners remittance. In the current financial year, there has been a decent growth in RMG export. However, wage earners remittance flow through the formal channel is facing challenges. In fact, rising import costs, declining remittances, and a large payment to the Asian Clearing Union (ACU) all contributed to a reduction in the supply of dollars. Thus, the forex reserve went down from a record $48 billion in August 2021 to $42 billion in May 2022. Since the gap between dollar outflow and inflow is widening, the current account deficit is under pressure.
In a period of stagnant wage growth, devaluation can cause a fall in real wages. This is because devaluation causes inflation, but if the rate of inflation is higher than that of wage increases, then real wages will fall. Under the circumstances, the government has two alternatives to deal with the foreign
currency imbalance: either resort to restrictions on imports and exchange transactions, or reduce the deficit through financial policies.
The Government may review mega project investments, cut less important projects, or take initiatives to complete all ongoing mega projects immediately to ensure their contribution to economic activities. There might be a need to focus on foreign currency loan structure in both short-term and long-term perspective to ease the repayment pressure. This follows the Government’s restriction on ‘unnecessary’ foreign travels by the employees and officials of the republic. Again, import of luxury goods has been discouraged as part of a move to lessen the strain on foreign currency reserve. The Government should extend subsidies to agricultural inputs for sustaining food production, thus ensuring less import of food and savings of foreign currencies. Also, the incentive to wage earners may be further increased from 2.5% to increase foreign currency increase.
Generally, currency devaluation helps those countries which have a substantial export-based economy, where the high valuation of local currency makes them less competitive. Devaluation in such cases makes their products and prices more competitive in the international market. Bangladesh’s economy, however, does not stand to gain much from a prolonged devaluation, as it is largely import dependent. For example, RMG export depends on raw material and machinery imports. As a fast-growing economy with higher imports than exports, with all other sources of foreign currency inflows, the net impact of devaluation on Bangladesh economy will be unfavorable due to short term and long-term economic consequences.
In the current context, Bangladesh needs to make necessary adjustments within the policies by assessing crucial economic factors such as inflation, rate of interest, and taxation policies for the export and import of the economy. Such timely initiatives can help to deal with the effects of devaluation.
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EFFECTIVE METHODS TO IDENTIFY AND MEET CUSTOMER NEEDS
By Snigdha Patel
Most of the businesses focus on innovations and fail to align their brand with customer needs. Customer-centric companies are 60% more profitable than companies that don’t focus on customers.
Being customer-focused help in understanding customers better and align products and services to create great value. You cannot persuade consumers without knowing what they are looking for.
Identifying and meeting customer needs should be the focal point of every business to build a solid customer base. Once you have a clear knowledge about the same, you can further use it to persuade your customers. We have outlined the techniques of identifying customer needs and wants as well as using the information to win more customers.
What are Customer Needs?
Customer needs are defined as the influential factors that trigger them to
buy your product or service. In order to identify customer needs, it is important to understand the reasons behind their decision making.
In order to understand customer needs better, it’s very important to know who your customers are. By defining your target audience and segmenting them based on their industry or other attributes, you not only get a clear view of what’s your selling proposition but also identify their needs.
Here are four simple steps to follow in order to meet customer needs successfully.
Identify – Follow customer needs analysis via surveys, interviews, focus groups, or social listening.
Distribute – Once identified the needs, you can distribute it across the right teams and departments.
Create – Tailor product features, create detailed content that speaks about customer needs.
Collect – Obtain customer feedback regularly to learn how your efforts meet their expectations.
Why is it Important to Identify Customer Needs?
Businesses are taking strides to understand customer needs and meet them as early as possible to align with internal teams. 76% of customers expect companies to understand their needs.
With business operating under a cyclical process of anticipating, and meeting customer needs, you can have quick and positive results. Prior to your business promotions or product launch, it is vital to know your customer needs and wants. Conducting market research can greatly help you to understand your potential customers.
The more you know about your customers, it helps you define your brand positioning around their needs and help your business in the following ways:
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Provide faster solutions – One of the common things customers want is real time support. By identifying the needs of your customers you can provide faster and effective support.
Improve your products & services – Customer research helps understand the motives behind the buying process. You can learn about the areas you are missing out and create an effective USP. The insights can be used to enhance the products or services to satisfy customer needs.
Reduce the number of support tickets – Building the product and services considering the needs of the target customers ensures effective solutions to customer issues.
How to Identify Customer Needs?
Recognizing customer needs includes deep research across your industry and asking your customers lots of specific questions. It is very important to gather in-depth details from your customers through regular communication and be sure you can deliver on their individual needs.
Understanding customer psychology can act as a catalyst for your business to deliver better customer service, build
long-lasting relationships, and maintain a consistent source of revenue.
The key way to anticipate is via a thorough analysis of the needs and wants of customers.
What is the customer needs analysis?
It refers to a comprehensive analysis that can benefit your business to understand what value your customers want from your products or services. It provides valuable insights about your target audience that can be inculcated within the brand positioning to make sure that delivers great customer value.
Effective customer needs analysis depends mainly on two factors. Firstly, to create customer personas and identify what customer inputs are needed to create breakthrough products and the second is to know how to capture customer inputs and feedback.
Conducting customer research to understand the factors that influence purchasing decisions can be done by:
Customer interviews – It is the direct way of collecting customer inputs. You can interact directly with customers who are using your product or who have chosen to buy it. It is considered to be reliable over other ways of acquiring inputs.
Focus groups – Focus groups comprise a small group and focal point is a specific product or topic. The groups emphasize qualitative or quantitative surveys because it provides more opinions and motivations.
Surveys – The analysis done through surveys help businesses to get a picture of their position in the market in terms of fulfilling the needs of their target customers.
Types of Customer Needs
Businesses ought to understand customer needs as it is vital to match the competitive market place. Broadly, customer needs are about delivering a better experience by exceeding their expectations. When you anticipate what your customers want, you can create content, expand your product features or services to meet those needs early.
Product needs
Product requirements are associated with and around the product. If your product matches your customer needs they become your potential buyers and vice-versa. The main attributes of product needs can be:
Price – Customers generally set their budgets for any product purchase.
Features – Customers look for features that would solve their problem and reliability in functioning while using the product.
Effectiveness – The product should be effective in streamlining the process to save time.
Service Needs
Service needs refer to the emotional needs of the customers. Being able to quench the customer service needs, can give your business a competitive edge and set good example for other brands to follow. The key attributes of good service can be:
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Empathy – Customers stick to brands that serve them with an empathetic attitude.
Clarity– Customers look for transparent information from the brand related to pricing, refund policy, etc.
Information – Customers need information from the point of interaction until the end. Build FAQ pages, Knowledgebase, how-to videos to educate the customers
Good Examples to Meet Customer Needs
Addressing customer needs is critical for any business that focuses on customer retention in order to create good examples. Because, as important as the discovery phase is, knowledge about what your customer needs from you is only as good as the way you use it.
Let us discuss the best practices of how to meet customer needs and build stronger relationships.
Deliver quality customer support
Not always “good product quality” is what customers look for. Customers prefer brands that offer real time support. So, your support teams should focus on providing frictionless service experience and improve customer handoff.
66% of customers believe that valuing their time is the most important thing in any online customer experience. Resolving customer queries faster is a cornerstone of good customer service.
When customers get what exactly they need, there is an increase in the satisfaction rate. If you focus on putting extra effort towards exceeding customer expectations, it will certainly be worthy. You are able to delight your customers with excellent service.
How can you enhance your customer support quality?
Provide real time support – You can connect with your customers with live chat to deliver real time assistance for sales and support queries.
Use live assistance solutions – By using tools like co-browsing and video chat, you can provide faster solutions by reducing the number of touchpoints.
Automate your customer support – Use a chatbot template for information collection to engage with customers 24×7 and answer their simple queries promptly.
Map your customer journey
A great way to meet customer needs is by understanding the different customer touchpoints and how they interact with your business across these contact points. You can map your customer journey to get a visualization of the process they go through when engaging with your products or services.
Mapping journeys include multiple phases and touchpoints the customer goes through, right from prospect to loyal customers. It helps you to streamline fragmented efforts and identify points of friction and opportunities for improvement.
Identifying and meeting customer needs in the whole journey are all about providing a delightful experience that will further cultivate loyalty.
Measure customer satisfaction regularly
To know how happy your customers are with your overall business you need to measure it on a regular basis. Choosing the right communication channels and customer satisfaction metrics is crucial.
The key KPIs are customer satisfaction score (CSAT), net promoter score (NPS), and customer effort score (CES) help in measuring performance, monitor, and
analyze satisfaction level in the overall customer journey.
How does measuring customer satisfaction help to meet your customer needs?
It provides deep insights into your overall business performance. Based on that you can improve on the areas you are doing well and having loopholes.
CSAT scores can help team leaders identify coaching opportunities to improve agent performance, give agents visibility into their individual performance to encourage self- correcting behavior.
Based on the inferences, you can restructure your product and services in order to reduce the customer churn by boosting the satisfaction rate.
Be consistent in customer communication
Inconsistent customer service is among the top frustration reported by customers. If your representatives are unable to deliver consistent assistance, there are chances that consumers feel confused and alienated.
It takes no time to create a negative impression on your customers and shows that your business strategies are not organized. You can meet your customers’ requirements if you make the right efforts to understand the goals and capabilities of the company.
Use every possible strategy for effective
customer service communication.
Here are some strategies to you can follow:
Focus on building an omnichannel customer service strategy to deliver consistent support across all channels.
Train your support team with customer service etiquette to meet customer needs effectively.
Provide real time assistance to your customers with live customer engagement tools.
Note: When communicating with your customers make sure your brand voice and brand image are consistent. In case you are communicating with your customers across multiple channels you have to retain your unique voice so your customers will understand your message thoroughly.
Develop a customer centric culture
One great way to meet your customer needs is to create a company culture that is focused on customer experience at every touchpoint.
The customer experience (CX) is the major differentiator for every business, but creating a great CX isn’t that easy. It includes visualizing interactions through every touchpoint from the customer’s perspective: What are the expectations, what makes sense, and where do you have a chance to surprise and delight someone?
And all these moments won’t happen all
at once.
What can be done to build a customer centric culture?
Align your company culture to focus on the customer experience first. Your employees make or break most customer touchpoints, so be clear on your brand’s values and what makes the experience delightful.
Empoweryoursupport representatives to be proactive, thoughtful, and creative in making it practically happen.
Enhance the USP of your product
Every business needs a reason for its customers to buy from them over their competitors, which is known as a Unique Selling Proposition (USP). Your USP can change depending upon the changes in your business and for different types of customers.
A good product is anything that can be offered to a market for attention, acquisition, or consumption satisfies customer needs. Product quality is the characteristic that bears on its ability to satisfy implied customer needs. The USP of your product can be effective to differentiate your brand when the customers are making their buying decision.
The product quality speaks for itself. If your products are built across helping customers to resolve their issues faster, it will attract them and keep them coming back.
In order to maintain the smooth process you need to follow certain tips:
Conduct customer research on identifying customer needs and analyzing them to serve them much better.
Ask customer feedback after and categorize it further to implement for improving the brand value to match with customer needs.
Ask customer feedback
Customer feedback is a vital ingredient for the success of every business. It helps to enhance your products and services to better suit the needs of your customers. This will then raise
the chances of the purchase of your improved products or services.
You must always choose the right time to ask for honest customer feedback like after the chat session of a successful transaction. Further, the feedback can be analyzed to generate valuable insights. The insights can help to recreate better products as per their needs.
Essentially, once you receive customer feedback you need to follow certain steps that give opportunities to know your customer needs.
Analyze the data according to internal & external customers’ needs and expectations and enhance it.
Figure out the gaps between your business and customers. Set new plans and strategies to reduce the gaps.
Make all the team members part of the discussion and give a view about customer needs and wants.
Final Thoughts on Customer Need Analysis
When you start prioritizing customer needs, you need to identify them successfully in your products and services. When customers are able to relate your brand along with their needs, they are highly satisfied. Being able to deliver a great experience grows your customer base of loyal customers.
Having good knowledge of customer needs and wants not only helps to add constructive value but also level up the overall brand recognition. It gives your business a competitive advantage and stays a step ahead in the market.
Source: https://www.revechat.com
CHAMBER OFFICE-BEARERS PAY COURTESY CALL TO THE LAW MINISTER
H.E. MR. IONUT VIZIRU, MINISTER COUNSELOR-HEAD OF ECONOMIC AND COMMERCIAL OFFICE, THE EMBASSY OF ROMANIA IN INDIA VISITS MCCI
H.E. Mr. Ionut Viziru, Minister Counselor-Head of Economic and Commercial Office, the Embassy of Romania in India (accredited to Bangladesh), visited the Gulshan office of the Chamber on 1 June 2022. Mr. Md. Saiful Islam, President of the Chamber, along with the members of the Chamber’s Board of Directors discussed with the Minister Counselor the ways to increase trade and investment between the two countries and other issues of mutual interest. Both parties agreed to support and work together in that regard.
MARICO BANGLADESH
MARICOBangladesh recently launched Parachute SkinPure Face Wash for the first time in Bangladesh. The Brightening Facewash comes in three exciting variants: Parachute SkinPure Goat Milk Brightening Facewash, Parachute SkinPure Aloe Vera Brightening Facewash, Parachute SkinPure Orange Brightening Face Wash. All three variants contain natural, skin-benefiting ingredients and no harmful substances like paraben or sulfate are used in the
products. Allen Ebenezer, Director of Marketing, Marico Bangladesh Limited said, "With Parachute SkinPure we are working towards a holistic range of skincare products to cater to every relevant customer need in the market. The brand-new Parachute SkinPure Brightening Face Wash range is designed to make a premium face wash experience accessible to all consumers."
BRAC BANK
BRAC Bank launched 'Agami Personal Loan' - a new customized product to help parents and guardians with their children's higher education in Bangladesh and abroad. It is part of the bank's 'Agami Student Banking Services' - a complete solution to financial needs for school, college and university students to have bank accounts, FD and DPS schemes, study-abroad credit cards, student files and student loans. Parents and legal guardians of students of all University Grants Commission (UGC)- approved universities can apply for this loan, which can also be availed to finance higher education in overseas
universities, in which case, the bank will arrange fund transfer to foreign educational institutions. The loan, which can be paid back in maximum 5 years, will be disbursed in phases of 3/4/6/12 months according to the customer's preferred schedule. The parents/guardians with a minimum monthly income of Tk 20,000 can apply for the loan and enjoy an attractive interest rate of 8% per annum. The customers will get finance up to 130% of total education expenses with a maximum limit of Tk 20 lakh.
Standard Chartered Bangladesh was recognized as the 'Best CSR Bank in Bangladesh' at the International Finance Awards ceremony. The bank was awarded by the International Finance, a premium business and finance magazine published in UK, for its commitment to empowering all members of the community and for enabling both long-term and sustainable progress, growth, and recovery. In dealing with the pandemic, Standard Chartered Bangladesh facilitated lasting economic and social recovery while addressing the pressing need to save lives. To deal with immediate challenges, the bank worked with development sector partners to deliver aid and essentials to communities hit hard by the pandemic and to support frontline health services. To enable long-term recovery, the bank focused on empowering individuals through education, skills development, and workforce reintegration. Standard Chartered has also launched community initiatives centered on health, environment, and sustainability in recent months. Mr. Mohammad Naser Ezaz Bijoy, Chief Executive Officer, Standard Chartered Bangladesh, said, "Standard Chartered Bangladesh is very proud to receive the award for Best CSR Bank from International Finance. We hope this will help showcase our tested initiatives to the corporate sector, so that together we can achieve the large-scale impact that is required to address the need of the hour."
MUTUAL TRUST BANK
Mutual Trust Bank (MTB), as part of its CSR initiatives, extended financial aid to Bangladesh Thalassaemia Samity Hospital to support Thalassaemia patients. Additional Managing Director and GCRO of the bank Chowdhury Akhtar Asif handed over a cheque to Senior Vice President of Bangladesh Thalassaemia Samity Hospital Dr M A Matin at a simple ceremony held in Bangladesh Thalassaemia Samity Hospital. Adviser Sayed Didder Bakth, General Secretary Dr Md Zahidul Islam, Treasurer Eng Md Mosharraf Hossain, Executive Director Dr Ekramul Hossain Swapan and Chief Medical Officer Dr Kabirul Islam of Bangladesh Thalassaemia Samity Hospital and Head of Communications Department Azam Khan and Head of Sustainability and Risk Governance Functions Tahmina Zaman Khan of MTB, among others, were also present at the event.
METLIFE BANGLADESH
As part of its ongoing aim to give customers greater choice and greater access, MetLife Bangladesh has introduced online enrollment for EFT (Electronic Fund Transfer) Debit premium payment channel. EFT Debit enables customers to automatically pay their premiums through their preferred bank accounts, providing an easy and convenient way to maintain their protection needs while eliminating the hassle and environmentally unfriendly practice of filling out paper-based forms or making physical visits to their bank or any MetLife offices for this purpose. To activate EFT Debit, customers need only to register once and after registration, premiums will be paid automatically from customers’ bank accounts.
BANK ASIA LIMITED
Bank Asia Limited signed a participation agreement with Bangladesh Bank for refinance facility under "Supporting Post Covid-19 Small Scale Employment Creation Project" (SPCSSECP) on 24 May 2022. Under the agreement, Bank Asia will have the participation to finance the targeted vulnerable groups such as returning migrant workers, unemployment/underemployed youth and rural entrepreneurs with a special focus on women entrepreneurs at minimum interest rate under the SPCSSECP refinance fund of US$ 150.00 million by Asian Development Bank (ADB). Mr. Abu Farah Md. Nasser, Deputy Governor, Bangladesh Bank was the Chief Guest and Mr. Dongdong Zhang, Principal Financial Sector Specialist ADB was the Special Guest at the signing ceremony. Ms. Nurun Nahar, Executive Director of Bangladesh Bank and Mr. Md. Arfan Ali, President & Managing Director of Bank Asia Ltd., signed the agreement on behalf of their respective sides. Mr. Md. Shaminnor Rahman, Head of MSME and Agri Division and Mr. Samiul Anam, AVP, Head of CMSE, Channel Banking of Bank Asia were also present.
Prime Bank has been a long supporter of an inclusive, accessible and sustainable world. In order to achieve that Prime Bank has partnered with Bangladesh Disabled Development Trust (BDDT) and their drive to support Persons with Disabilities (PWDs) for their capacity building and initiate income generating activities, rehabilitation services etc. Managing Director and CEO of Prime Bank Mr. Hassan O Rashid handed over a cheque to Mr. Md Moniruzzaman Khan, founder and managing trustee (CEO) of BDDT to bear their cost of training program on the Braille System. He also handed over a copy of Al-Quran published in the Braille System to a visually impaired person. "Prime Bank is proud to support BDDT in their venture to help the visually impaired with their training program on Braille System", Mr. Hassan, commenting on the occasion, said. "In order to create an inclusive world Prime Bank appreciates BDDT's efforts and Prime Bank is committed to support person with disabilities in any way possible." he added.
IDLC Finance Limited recently contributed 5% of its total Corporate Social Responsibility (CSR) budget for the year 2022 to the Prime Minister’s Education Assistance Trust, a Bangladesh government trust fund under the Ministry of Education responsible for providing scholarships to underprivileged students based on merit. An advisory council headed by the Prime Minister manages the Trust. IDLC handed over a cheque equivalent to Tk 18,00,000 to the Trust on 01 June 2022. IDLC’s CEO and Managing Director, Mr. M. Jamal Uddin said, “IDLC has always been very active in trying to help and improve the situation of the underprivileged meritorious students of the country. I would like to express my gratitude to Bangladesh Bank for this timely initiative. In only a few years, Prime Minister’s Education Assistance Trust has done outstanding work in supporting the education of the deprived population of the country, and we are happy to be a part of this noble initiative.”
Square Pharmaceuticals Limited said the recent fire incident at its factory in Kaliakoir will burn through the company’s revenues by Tk 500 million and profits by Tk 80 million. The fire that devastated the Large Volume Parenteral Plant will hamper the production of 50 products. The plant is fully insured under the coverage of the Industrial All Risk Insurance Policy. It will take two to three years to restore the damaged facility to its full capacity and resume production. In 2020-21, the company’s revenues were Tk 58.35 billion and profits Tk
15.95 billion. With a market capital of nearly Tk 187.13 billion and Tk 8.86 billion paid-up capital, Square Pharmaceuticals has around Tk 80 billion in its reserves.
The board of directors of Pubali Bank Limited decided to raise Tk 10 billion through issuance of subordinated bonds as Tier- II capital to support the bank's capital base. However, the bond issue is subject to the approval of concerned authorities such as Bangladesh Bank (BB) and Bangladesh Securities and Exchange Commission (BSEC) and complying with regulatory requirements. Currently, the bank's paid-up capital is Tk 10.28 billion, authorized capital is Tk 20 billion and total number of securities is 1.02 billion. As per the Q1 financial statements, the bank's consolidated earnings per share (EPS) rose 21.42 percent to Tk 1.19 in January-March 2022 against Tk 0.98 for January-March 2021.
The board of directors of Premier Bank decided to issue non-convertible subordinated bonds worth Tk 6.0 billion to include in Tier-2 capital of the bank under Basel-III norms. The bank will issue the bond through private placement and the tenure of the bond will be seven years. However, the issuing of bond is subject to the approval of the concerned authorities. Currently, the bank's paid-up capital is Tk 10.43 billion, authorized capital is Tk 15 billion and total number of securities is 1.04 billion. As per Q1 un-audited financial statements, the bank's consolidated earnings per share rose
16.07 percent to Tk 0.65 in January-March 2022 against Tk 0.56
in January-March 2021.
Aman Feed, a listed animal feed producer, recently decided to make an agreement with Star Feed Mills for all works related to feed production. Additional 6000 tonnes finished broiler and layer feed per month will be produced for consecutive twelve months. Aman Feed will sell this feed through its existing distribution network to all over the country. Currently, the company's paid-up capital is Tk 1.30 billion and authorized capital is Tk 1.50 billion while total number of securities is
130.97 million. Sponsors held 63.26 percent stake in the company, institutions 10.28 percent, foreign investors 0.05 percent and the general public 26.41 percent as of 30 April 2022.
Shahjalal Islami Bank Ltd decided to issue ‘SJIBL 3rd Mudaraba Subordinated Bond’ of Tk 5.0 billion to strengthen the capital base of the bank. The board of the bank decided to issue bonds to raise the Tier-II Capital of the lender as per requirement under Basel III through private placement. The tenure of the bond is seven years. However, the issuing of bonds is subject to the approval of the regulatory authorities. The bank’s paid-up capital is Tk 10.80 billion, authorized capital is Tk 15 billion and the total number of securities is 1.08 billion. The sponsor-directors owned 48.22 percent stake in the bank, while institutions owned 14.60 percent, foreign investors 0.15 percent and the general public 37.03 percent as of 31 March 2022.
The board of directors of Provati Insurance Company, a listed general insurer, decided to purchase majority stakes of two non-listed companies worth Tk 355 million. The company decided to purchase 63 percent shares of Al-Muntaha Trading Company Ltd worth Tk 290 million. Besides, the insurer also decided to buy 65 percent shares of Reliance General & Renal Hospital, a private hospital, at a price of Tk 65 million. However, the purchase of majority stakes of the two companies is subject to the approval by the regulatory authority.
The board of directors of Green Delta Insurance Company Ltd decided to sponsor an open-end mutual fund (MF) and an Exchange Traded Fund (ETF) through an aggregate amount of investment worth Tk 50 million. As a sponsor, Green Delta Insurance will subscribe Tk 25 million of an open-end MF namely Green Delta Dragon Enhanced Blue Chip Growth Fund. The remaining amount of the fund having a size of Tk 500 million will be raised from other sponsors and the market. Green Delta Insurance will also subscribe Tk 25 million of an ETF namely DS30 Index Tracking Exchange Traded Fund (DS30ETF). The remaining portion of the fund will be raised from other sponsors and the market. The company's sponsor- directors held 30.51 percent shares, institutes 20.59 percent, the foreign investors 4.60 percent and general public 44.30 percent as of 30 April 2022.
The Bangladesh Securities and Exchange Commission (BSEC) asked Walton Hi-Tech Industries Limited to offload additional 9 percent shares in three years to ensure 10 percent free-float shares of the listed company on the market. The BSEC issued a letter to the Walton in this connection recently. Walton directors must offload 2.73 crore or 9.03 percent shares of the company’s paid up capital to ensure minimum 10 percent requirement. The company must report the commission about the offloading every month. It may be mentioned that on April 6, Walton submitted a proposal to the BSEC in pertaining with offloading 9.03 percent more shares on the market and the regulator on the basis of the proposal gave the approval.
Daraz Bangladesh Limited and Swisscontact Bangladesh teamed up under B-Skilful Programme Phase II recently to promote digital marketing platforms among Micro, Small, and Medium Enterprises in the leather goods, light engineering, and furniture making sectors. Under this partnership, Daraz Bangladesh will educate MSMEs on e- commerce and assist them in setting up and maintaining digital shops in social media channels including Facebook and Instagram. This will allow MSMEs to connect to a wider customer base and enhance their sales capacity. MSMEs will be able to establish a viable commercial relationship with Daraz Bangladesh, which will lead to increased growth of businesses through improved marketing practices.
Mobil Jamuna Bangladesh, a listed lubricant seller, is going to add another oil tanker to its fleet in order to increase its oil trading capacity as well as rent the vessel out to others. Mobil Jamuna Bangladesh, formerly known as Mobil Jamuna Lubricants, is a joint venture between the state-owned Jamuna Oil Company and EC Securities Limited, a subsidiary of East Coast Group. The company’s board of directors decided to purchase an AFRAMAX Oil Tanker at an agreed price of
$29.75 million and additional $976,000 for bunkers, spares, lubricants, registration and legal cost. The new tanker will be used to carry out products like crude oil and for giving rent to other companies. Mobil Jamuna Bangladesh currently rents tankers from other oil companies for the same purpose as per the company's needs.
National Bank Ltd (NBL), a first-generation private commercial bank, will raise Tk 5.0 billion by issuing subordinated bonds to strengthen its capital base. The capital will be raised to comply with capital requirement under BASEL-III subject to the approval of the regulatory authorities. The NBL, presently a 'B' category company, was listed on the Dhaka Stock Exchange in 1984. The company's sponsor-directors held 28.48 percent shares, institutes 23.94 percent, foreign investors 0.83 percent and general shareholders 46.75 percent as of 30 April 2022.
BRAC Bank Limited recently signed a tripartite agreement with Delivery Tiger, a courier service platform, and Dana Fintech, an embedded finance and credit scoring platform, to launch platform-based e-Loans for SME businesses in Bangladesh. The partnership will enable ‘Platform Based SME Lending’ facilities to the cottage, micro, small and medium enterprises (CMSMEs), which will use Delivery Tiger to deliver their products all over Bangladesh. BRAC Bank will provide short- term working capital financing to the registered CMSMEs of Delivery Tiger. Dana Fintech will facilitate technological support for digital customer onboarding and designing BRAC Bank’s credit scorecard. The e-Loan aims to provide quick and easy financing to small businesses with customers all over the country.
ECONOMY GROWS 7.25% AMID ROBUST REBOUND
A robust rebound from pandemic shocks powers Bangladesh's economy to grow 7.25 percent in the outgoing fiscal year as per an official estimation shown. The provisional data prepared by the Bangladesh Bureau of Statistics (BBS) also show a remarkable concomitant lift to the per-capita income (Gross National Income-GNI) by $233 to $2,824 in the FY2021- 22 from $2,591 in the FY 2020-2021. In the last FY2020-2021, the country's gross domestic product (GDP) grew at a rate of 6.94 percent from a massive shortcoming in the previous FY2020 when it expanded only 3.45 percent for the fallout from the pandemic.
BB DISBURSES TK 2.05 BILLION TO CAPITAL MARKET REFINANCING SCHEME
Bangladesh Bank (BB) disbursed Tk 2.05 billion to the capital market refinancing scheme to enhance liquidity support in the capital market through market operators. The fund came following the government's announcement regarding extension of tenure of the revised refinancing scheme until December 2027 to help revamp the capital market which recently saw persistent downward trend. The fund will be disbursed among market operators including Investment Corporation of Bangladesh (ICB) with an interest rate of 4.0 percent. The recent downward of the capital market has prompted the central bank to disburse the fund on an urgent basis.
CURRENT-ACCOUNT DEFICIT BALLOONS TO $14 BILLION
Bangladesh's current-account deficit hits an 'all-time high' at $14.07 billion as a widening trade gap coupled with lower remittance receipts affects the macroeconomic balance. The country's trade deficit reached nearly a $25-billion mark in the first nine months of the current fiscal year for higher import bill largely for global price spirals. The trade gap with the rest of the world increased by nearly 64 percent or $9.69 billion to
$24.91 billion during the July-March period of the fiscal year (FY) 2021-22, from $15.22 billion in the same period of FY'21, according to the central bank's latest statistics.
During the period, import expenses ballooned nearly 44 percent to $61.52 billion from $42.77 billion while export earnings grew nearly 33-percent to $36.62 billion from $27.55 billion, upsetting the balance-of-payments (BoP) barometer for the economy.
NO BB PERMISSION NEEDED TO TRANSFER FUND FROM FC ACCOUNT
The Bangladesh Bank clarified that any foreign currency
account-holder non-resident Bangladeshi or individual
residing aboard can take out fund held in their accounts without taking permission from the central bank. BB came up with the clarification based on an allegation placed before the government high-ups that several banks were reluctant to transfer fund abroad from the FC accounts. To this end, BB issued a press release saying that non-resident Bangladeshis or persons residing abroad can maintain private foreign currency accounts or non-resident foreign currency deposit accounts with authorized dealer bank branches in Bangladesh under the prevailing foreign exchange regulatory framework.
GAS PRICE UP BY 22.78%
The Bangladesh Energy Regulatory Commission (BERC) raised the average price of gas by 22.78% for retail consumers, which will be applicable from June 2022. As per the new tariff order announced by the energy regulator, one cubic meter of gas will now cost Tk11.91, up from Tk9.70. From June, non- metered double burner domestic gas users will have to pay an additional Tk105 each month as the price has been raised to Tk1,080 from Tk975. Meanwhile, the price of gas for a single burner user has been hiked to Tk990 from Tk925.
BAGDA SHRIMP GETS GI CERTIFICATE
Bagda Shrimp has got GI certificate as a geographical indication product of Bangladesh. Recently, it has been recognized by the Department of Patents, Designs and Trademarks. The registrar of the department confirmed the matter and said that the shrimp had got the geographical indication certificate as the tenth product of Bangladesh.
In May 2019, the Department of Fisheries applied for GI recognition to promote Bagda Shrimp as a specialized product of Bangladesh in the world market. On October 6 this year, the government's Department of Patent, Design and Trademarks issued a gazette and published it in two international journals. Black-striped Bagda shrimp farming began in the Sundarbans region of Bangladesh about 100 years ago. Shrimp was added to the list of exports of Bangladesh in the eighties.
TK 2,000 CRORE REFINANCE SCHEME FOR SHIPBUILDING
Bangladesh Bank formed a Tk 2,000 crore refinance scheme to ensure sustainable development of the shipping industry, increase export earnings and employment and gradually reduce dependence on imports. The refinance scheme was formed under a Shipbuilding Industry Development Policy 2021. Under the scheme, a customer can get loans at 4.5 percent interest. However, the maximum limit of the loan was not mentioned in the circular. A customer can get term loans for a maximum of 12 years, for which the grace period will be of three years. The deadline for submitting applications for
the loan is 30 June 2024.
TAX RECEIPTS FROM DSE JUMP 41% IN 10 MONTHS
The government revenue earnings from Dhaka Stock Exchange (DSE) jumped 41 percent in 10 months of the current fiscal year compared to the same period of the last fiscal backed by rising trading volume. The government bagged revenue worth Tk 3,474 million in 10 months for July-April of the Fiscal Year (FY) 2021-22, against Tk 2,468 million in the same period of the previous fiscal.
Of the total earnings in July-April for the current fiscal, Tk 2,865 million came from the TREC holders' commission, popularly known as brokerage commission, while Tk 609 million came from the share sales by sponsor-directors and placement holders.
In FY 2020-21 for July-April, Tk 1,801 million came from the TREC holders' commission while Tk 667 million came from the share sales by sponsor-directors and placement holders.
BANGLADESH SIGNS $200 MILLION LOAN AGREEMENT WITH AIIB
The Government of Bangladesh signed a loan agreement of
$200 million with the Asian Infrastructure Investment Bank (AIIB) on 26 April 2022 to implement the "IDCOL Multi-Sector On-Lending Facility Project". The objective of the project is to promote infrastructure investment by providing long-term financing to the private sector in Bangladesh. It is aligned with Bangladesh's goal to bridge its infrastructure deficit and
achieve sustainable growth, as highlighted in Bangladesh's Perspective Plan 2021-2041. Rate of interest of the loan will be 0.60% + the borrowing cost margin (variable) of AIIB. The repayment period of the loan is 18 years including 5 years grace period.
BB LINES UP TK 100 CRORE FOR DIGITAL NANO LOANS
Bangladesh Bank introduced a Tk 100 crore refinance scheme for "digital nano loan" disbursements with an aim to expand the financial inclusion of marginalized people. Participating banks will be able to disburse loans of Tk 500 to Tk 50,000 to individual customers with up to 9 per cent interest under the scheme. The loans have to be disbursed entirely digitally by using internet banking, mobile apps, mobile financial services (MFS), or e-wallet services, according to a central bank circular. Scheduled banks will be able to avail the fund to disburse it to customers. Of the Tk 100 crore, Tk 50 crore will be disbursed as loans and later, another Tk 50 crore will be given as refinance benefits.
SOUTH KOREAN FIRM TO INVEST $35MILLION IN BEPZA EZ
South Korean company HKD Bangladesh is going to establish a plant in BEPZA Economic Zone to manufacture a range of camping equipment, from tents and sleeping bags to nuts and steel wires. The company will invest $35.03 million to set up the facility where 6,650 people will get employment opportunities, according to Bangladesh Export Processing Zones Authority (BEPZA). The company will produce 18.8 million pieces of products annually.
CHATTOGRAM CUSTOMS’ REVENUE EARNINGS RISE 19.55%
Revenue earnings at the Chattogram Custom House, the largest customs station in the country, crossed the Tk50,000 crore mark for the current fiscal year 2021-22. As of 24 May 2021, total collection stood at Tk51,238.29 crore, a year-on- year growth of 19.55%.
PAKISTAN
Pakistan's current account deficit - the gap between foreign expenditures and income - narrowed 39% month- on-month to $623 million in April 2022 on the back of historic rise of workers' remittances (by $315 million) and a fall in the import bill (by $246 million), reports The Express Tribune. Remittances hit a historic high at $3.12 billion in April compared to $2.81 billion in the previous month. Imports of goods shrank to $6 billion in April compared to $6.25 billion in the prior month. Besides, the export earnings improved to $3.15 billion in the month under review compared to $3.07 billion in the previous month.
SRI LANKA
Sri Lanka's central bank has secured foreign exchange to pay for fuel and cooking gas shipments that will ease crippling shortages, its governor said. Most of Sri Lanka's petrol stations have run dry as the nation battles its most devastating economic crisis since independence in 1948. At some pumps in the commercial capital, Colombo,
dozens of people stood in lines holding plastic jerry cans, as troops in combat gear and armed with assault rifles patrolled the streets. Traffic was extremely light, as most people were staying at home because of the lack of transport. Meanwhile, inflation hit 29.8 percent in April with food prices up 46.6 percent year-on-year.
THAILAND
Thailand's economy grew 2.2 percent in the first quarter following an export and tourism boost after the relaxation of pandemic entry restrictions, the kingdom's main economic agency said. During the pandemic, Southeast Asia's second-largest economy suffered its worst economic performance since the 1997 Asian financial crisis with the number of visitors crashing from roughly 40 million annually. However, in April the government announced the end of compulsory on-arrival Covid-19 tests for vaccinated travelers, as well as the requirement that foreign arrivals wait in a hotel room for the results.
CHINA
China’s consumer and producer prices rose more than expected in April, according to the National Bureau of Statistics. The consumer price index rose by 2.1% in the month from a year ago, boosted by a surge in energy and fresh vegetable costs. China’s official CPI target for 2022 is “around 3%.” Fresh vegetable prices rose by 24% year-on-year in April, while fresh fruit prices increased by 14.1% during that time. Pork prices, a major contributor to China’s CPI, posted a relatively rare 1.5% increase from the prior month for a more moderate year-on-year drop of 33.3%. Fuel prices for transportation climbed by 28.4% from a year earlier, reflecting recent surges in oil and commodities prices.
JAPAN
Japan's exports extended double-digit gains for a third straight month in April, but surging global commodity costs inflated the country's import bill to a record, adding to worries about the rising cost of living. Japan's exports rose 12.5% in April from a year earlier, Ministry of Finance data showed, led by U.S.-bound shipments of cars, slightly missing a 13.8% increase expected by economists in a Reuters poll. It followed a 14.7% rise in March. However, in a worrying sign for the outlook, China-bound shipments fell 5.9% in April, the biggest drop since March 2020, as heavy COVID-19 curbs in major cities like Shanghai disrupted
supply-chains and paralyzed economic activity. Imports from China -- Japan's largest trading partner -- also fell the most since September 2020.
SINGAPORE
After struggling to find staff during the pandemic, businesses in Singapore have increasingly turned to deploying robots to help carry out a range of tasks, from surveying construction sites to scanning library bookshelves. The city-state relies on foreign workers, but their number fell by 235,700 between December 2019 and September 2021, according to the Manpower Ministry, which notes how Covid-19 curbs have sped up "the pace of technology adoption and automation" by companies. At a Singapore construction site, for example, a four-legged robot called "Spot" scans sections of mud and gravel to check on work progress, with data fed back to construction company Gammon's control room. Meanwhile, Singapore's National Library has introduced two shelf-reading robots that can scan labels on 100,000 books, or about 30% of its collection, per day. Robots are also being used for customer-facing tasks, with more than 30 metro stations set to have robots making coffee for commuters. Singapore has 605 robots installed per 10,000 employees in the manufacturing industry, the second-highest number globally, after South Korea's 932.
NEW ZEALAND
New Zealanders who trade in their gas-guzzling car will get financial aid towards buying a cleaner alternative, in one of a raft of climate change initiatives announced by Prime Minister Jacinda Ardern's government. The country's first Emissions Reduction Plan, costing nearly three billion NZ dollars (US$1.88 billion), outlined spending for the next four years to help meet its goal of cutting carbon dioxide emissions to net-zero by 2050. A "scrap and replace" pilot scheme will initially give 2,500 low-income families financial support towards an electric or hybrid vehicle if they replace their petrol- or diesel- powered car. The country’s Transport Minister said the scheme's details were yet to be finalized but he envisaged it would expand rapidly to include "tens of thousands" of New Zealanders. He said the government's ultimate goal was for less reliance on all cars by 2035 by getting people to switch to public transport or other alternatives.
ITALY
Italy has increased its imports of Russian crude despite EU efforts to end ties to Russian energy in an unintended
consequence of western sanctions against the Kremlin. Russia has exported about 450,000 barrels per day of crude to Italy in May, more than four times as much as in February and the most since 2013, according to Kpler, a commodity data company. As a result, Italy is set to overtake the Netherlands as the EU’s largest import hub for seaborne Russian crude. Two-thirds of those exports are destined for Augusta, a port in Sicily near the Russian-controlled ISAB refinery. The refinery, which is owned by Moscow-based company Lukoil, used to secure a variety of supplies worldwide thanks to credit lines from European banks. Although Lukoil is not under sanctions, lenders have stopped providing financing after the EU imposed sanctions on Moscow over its invasion of Ukraine, forcing the refinery to rely solely on supplies from its parent company, according to government officials, bankers and union leaders with knowledge of the shipments.
UK
UK inflation soared to a 40-year high of 9% in April 2022 as food and energy prices spiraled, escalating the country’s cost-of-living crisis. Consumer prices rose by 2.5% month-on-month. The 9% rise in the consumer price index is the highest since records began in their current form in 1989, outstripping the 8.4% annual rise posted in March 1992 and well ahead of the 7% seen in March of this year. The U.K.’s Office for National Statistics also said its estimates suggest that inflation would have last been higher “sometime around 1982.”
THE P&H AIR MANAGER
The P&H Air Manager is a concept for an air purifier and humidifier in one that has a water system to help do its job. And in case you want to use just the humidifier part, it can be detached and used separately. Using it and controlling the device doesn’t seem to be too complicated as you only have four buttons that you need to use and understand: the power button, the speed controls, the button for the humidifier function, and a sleep button in case you need it to automatically turn off after a certain time. The conceptual P&H Air Manager is equipped with an LED display for monitoring the levels within the space and accented by colored fabric to give it a stylistic flair.
LITTLEBIRD
Even with a high likelihood of parents working from home, it’s unrealistic to assume they can keep a constant watch on their children. You never really know when a child requires your attention… although that’s where the Littlebird steps in. Designed as a wearable for toddlers, Littlebird helps parents track their kids’ whereabouts, health/activity, and sleep patterns. Designed to sit on a child’s wrist, the wearable comes with 24×7 GPS and cellular connectivity, allowing parents to track their kids’ locations, while onboard sensors help monitor the toddler’s heart rate, temperature, activity, and mood, allowing guardians to chart their physical and emotional wellbeing.
OLIVE MAX HEARING AIDS
Designed to be worn by people with anywhere from normal hearing to severe hearing loss, the Olive Max are a pair of inclusively-designed TWS earbuds that give you precise control over your audio… more on that in a bit. For starters, the Olive Max come with a major boost in their volume capabilities, with now the ability to be 150% more loud, so people with hearing loss can easily listen to audio. Simultaneously, the Olive Max’s noise reduction algorithm comes with its own improvements, bringing stray noise down by 13 decibels, so you can focus on just the right sounds without any of that
annoying background noise.
BIODEGRADABLE COVID-19 TEST
A London-based design consultancy has created a concept testing device for Covid-19 that cuts down on the single- use plastic waste that has plagued us since the beginning of the pandemic. An estimated 26,000 tonnes of plastic Covid waste currently pollutes our oceans, according to a study. Morrama’s ECO-FLO hopes to curb that number. ECO-FLO was envisioned as a one-of-a-kind test kit that, instead of relying on nasal swabs, uses a saliva sample instead. The kit itself is made from recycled paper pulp. When disposed of, the kit can naturally break down and disintegrate within 4 to 6 weeks.
ELECTRIC CHOPSTICKS
Too much salt in the diet has been linked to a variety of lifestyle-related diseases, including hypertension and kidney disease. And that's pretty relevant in Japan. According to Reuters, the country's traditional diet skews towards salty flavors, with the average Japanese adult consuming roughly 10 grams of salt a day, twice the amount recommended by the World Health Organization.The chopsticks, a collaboration between beverage company Kirin Holdings and the Miyashita Laboratory, are aimed at people who follow a low-sodium diet, in an effort to give them an enhanced perception of saltiness. According to a press release, it’s the first ever demonstration of “salty taste enhancement via electrical stimulation.”
ERGONOMIC PORTABLE SEAT
Having an ergonomic seat is important not only for children but also for adults. Getting a comfortable chair for study or work is essential, but it may not be enough. You need something that you can use anytime, anywhere if you want to maintain correct posture all the time. No, you can’t bring your chair everywhere. What you can have instead is something like this Ergonomic Portable Seat. The new product design is mainly for those working at home since this kind of remote work setup is becoming the usual environment for many people. Two student designers made the special seater intending to offer comfort while sitting during long hours at work. You can move it with you to sit on your work chair, the sofa, and even on the floor.
HOLD THE PHONE
Hold The Phone does exactly what it says it does, while also hiding a trick up its sleeve. The phone stand is made up of 3 elements – the stand itself, a slab-shaped piece of plastic, with a small cylindrical lip at the bottom to hoist the phone up, and a large cylindrical element at the back that props the entire structure upwards at an angle. This large rear cylinder slides upwards and downwards, adjusting the angle at which your phone rests, giving you the ability to tilt your phone at virtually any angle you need. Besides, that large cylinder is actually hollow on the inside, allowing you to use it to store items like cables, thumb drives, SD cards, and any other tiny items you’d otherwise end up losing!
THE MISSAGLIA TILES
When we spend a lot of time indoors and keep the windows closed for air conditioning, we feel cool and comfortable. However, that means we also need air purifying devices to make sure that we’re breathing in healthy air inside our homes. There are several kinds of air-purifying devices out there but they seem to be pretty distinctive and will most likely not blend in with your furniture. This new concept will solve that problem by designing something that looks like part of your decoration. The Missaglia tiles are square-shaped tiles with rounded corners which you can attach to your walls. More than just tiles to match your aesthetic, they’re actually air purifying devices that can capture pollutants, bacteria, and viruses that are floating around your house.
NEW COVID-19 TESTING DEVICE DELIVERS RESULTS IN 30 SECONDS
It is crucial to get a test result for a pathogen quickly, lest someone continue in their daily lives infecting others. And delays in testing have undoubtedly exacerbated the COVID-19 pandemic. Unfortunately, the most accurate COVID-19 test often takes 24 hours or longer to return results from a lab. At-home test kits offer results in minutes but are far less accurate or sensitive. Some researchers at the University of Florida(UF), however, have helped developed a COVID-19 testing device that can detect coronavirus infection in as little as 30 seconds as sensitively and accurately as a PCR (polymerase chain reaction) test, the gold standard of testing. The device, researchers said, could transform public health officials’ ability to quickly detect and respond to the coronavirus — or the next pandemic. Like PCR tests, the device is 90% accurate, researchers said, with the same sensitivity. The hand-held apparatus is powered by a 9-volt battery and uses an inexpensive test strip, similar to those used in blood glucose meters, with coronavirus antibodies attached to a gold-plated film at its tip. The strip is placed on the tongue to collect a tiny saliva sample. UF has entered into a licensing agreement with a company in hopes of ultimately manufacturing and selling the device, not just to medical professionals but also to consumers.
MONITORING SLEEP WITH A HEAD-TRACKING SMART PILLOW
Sleep is critical for good physical and mental health. Yet many people have trouble falling asleep or staying asleep, resulting in not enough sleep. While recent research suggests that 7 hours is the ideal amount of sleep for adults, many people struggle to even get that much on a regular basis. Fortunately, scientists are working on the problem, and one of the ways is through better monitoring of sleep. A new self-powering smart pillow that tracks the position of the head could help. To construct this new smart pillow, the researchers formulated a flexible, porous polymer triboelectric layer. Movement between the head and this layer changes the electric field around nearby electrodes, generating a current. They strung together several of these self-powering sensors to create a flexible and breathable TENG (FB-TENG) array that can be placed atop an ordinary pillow. This system could generate voltage that corresponded to the amount of applied pressure, and it could track the movement of a finger tracing out letters. The FB-TENG also could capture the pressure distribution of a fake human head as it shifted position.
COUNTRY PROFILE
Source: The World Factbook, Central Intelligence Agency orway, officially Kingdom of Norway, is a constitutional monarchy in northern Europe. A long and mostly narrow country, Norway occupies the western portion of the Scandinavian Peninsula. It has the lowest population density in continental Europe. The Norwegian economy is a prosperous mixed economy, with a vibrant private sector, a large state sector,
and an extensive social safety net. The country is richly endowed with natural resources such as oil and gas, fish, forests, and minerals. Norway is one of the world's leading petroleum exporters, although oil production is close to 50% below its peak in 2000. Gas production, conversely, has more than doubled since 2000. Norwegians enjoy the second-highest GDP per-capita among European countries (after Luxembourg), and the sixth-highest GDP (PPP) per-capita in the world. Today, Norway ranks as the second-wealthiest country in the world in monetary value, with the largest capital reserve per capita of any nation. Norway maintained first place in the world in the UNDP Human Development Index (HDI) for six consecutive years (2001–2006), and then reclaimed this position in 2009, through 2015. It has achieved one of the highest standards of living in the world in part by having a large amount of natural resources compared to the size of the its population.
Industry
Petroleum and gas, shipping, fishing, aquaculture, food processing, shipbuilding, pulp and paper products, metals, chemicals, timber, mining, textiles are major industrial sectors.
Mining
Petroleum, natural gas, coal, carbonate, iron, granite, marble, slate, sand, gravel, nickel etc are major mineral products.
Agriculture
Only 3 percent of the country’s land is cultivated—which seems natural, given the cold climate, thin soils, and mountainous terrain.
Main crops are dairy products, grains, oats, potatoes, barley, wheat and corn.
Tourism
Tourism contributed to 4.2% of the GDP in 2016.
Every one in fifteen people throughout the country work in
the tourism industry.
Tourism is seasonal, with more than half of total tourists visiting the country between the months of May and August.
Popular tourist destinations include Oslo, Ålesund, Bergen, Stavanger, Trondheim and Tromsø.
The fjords, mountains and waterfalls in Western and Northern Norway attract foreign tourists each year
Foreign Trade
Transportation
Due to the low population density, narrow shape and long coastlines, public transport in Norway is less developed than that in many European countries, especially outside the cities.
The country has long-standing water transport traditions, but the Norwegian Ministry of Transport and Communications in recent years implemented rail, road, and air transport through numerous subsidiaries to develop the country's infrastructure.
Railway:
The main railway network consists of 4,114 kilometers of standard gauge lines, of which 242 kilometers is double track and 64 kilometers high-speed rail (210 km/h) while 62% is electrified.
All domestic passenger trains except the Airport Express Train are operated by Norges Statsbaner (NSB). Several companies operate freight trains.
Road:
Norway has approximately 92,946 kilometers of road network, of which 72,033 kilometers are paved and 664 kilometers are motorway.
The most important national routes are part of the European route scheme, the two most prominent being the E6 going north-south through the entire country, and the E39, which follows the West Coast
Airports:
Of the 98 airports in Norway, 52 are public, and 46 are operated by the state-owned Avinor.
A total of 41,089,675 passengers passed through Norwegian airports in 2007, of whom 13,397,458 were international.
The central gateway to Norway by air is Oslo Airport, Gardermoen. Located about 35 kilometers northeast of Oslo, it is hub for the two major Norwegian airlines: Scandinavian Airlines and Norwegian Air Shuttle, and for regional aircraft from Western Norway.
Oslo Airport
Export Earnings
Export earnings (merchandise) in the first eleven months of the current fiscal year (July-May of FY22) increased significantly by 34.09 percent to US$47.17 billion from US$35.18 billion in the corresponding period of the previous fiscal year (Table 1), thanks to an extraordinary performance by readymade garment (RMG) products. Demand for RMG in the United States and the European Union countries surged after the second/third wave of the COVID-19 pandemic as the economies had contained the outbreak through mass vaccination programs. RMG exports in the eleven months of FY22 grew by 34.87 percent to US$38.52 billion from US$28.56 billion in the corresponding period of the previous fiscal year. Export earnings witnessed a significant rise as both the prices of RMG products and quantity of orders increased in the last few months.
Among the RMG, export earnings of woven garments increased by 32.85 percent to US$17.54 billion in July-May of FY22 from US$13.20 billion in the same period of the previous fiscal year and earnings from knitwear exports in the eleven months of FY22 increased by 36.61 percent to US$20.99 billion from US$15.36 billion in the same period of FY21. Overall export earnings in July-May of FY22 also surpassed the strategic target (US$39.86 billion) by 18.34 percent.
However, the single-month export recorded a slow growth with US$3.83 billion earnings in May 2022, the lowest since September last, because of a sluggish global demand. Bangladesh witnessed a 23.24 percent growth in export earnings in May 2022 compared to that of May 2021, when it fetched $3.11 billion, according to the Export Promotion Bureau (EPB)’s latest data. Since September last to April this year, the country's single-month export earnings had been surpassing the four-billion mark, fetching US$4.91 billion in December of FY22. The May 2022 earnings also missed the target (US$3.89 billion) set for the month by 1.64 percent.
Table 1: Monthly Trends in Exports (Goods)
Month | Exports (million US$) | Change (%) | |
FY22P | FY21R | ||
July | 3473 | 3911 | -11.20 |
August | 3383 | 2967 | +14.02 |
September | 4165 | 3019 | +37.96 |
October | 4728 | 2948 | +60.38 |
November | 4041 | 3079 | +31.24 |
December | 4908 | 3310 | +48.28 |
January | 4850 | 3437 | +41.13 |
February | 4295 | 3192 | +34.56 |
March | 4762 | 3076 | +54.82 |
April | 4739 | 3134 | +51.18 |
May | 3830 | 3108 | +23.24 |
Total of July – May | 47174 | 35181 | +34.09 |
Notes: P=Provisional; R=Revised Sources: Export Promotion Bureau
The country’s major export products that showed positive growth during July-May of FY22, year-on-year, included agricultural products (+21.51%), frozen & live fish (+14.10%), knitwear (+36.61%), woven garments (+32.85%), home textile (+41.30%), cotton & cotton products (+52.17%), handicrafts (+24.65%), specialized textiles (+143.11%), headgear/cap (+62.71%), man-made filaments & staple fibers (+84.45%), carpet (+12.13%), ceramic products (+35.82%), rubber (+43.92%), other footwear (+33.85%), leather & leather products (+31.85%), plastic products (+36.84%), paper & paper products (+41.20%), chemical products (+36.71%), petroleum
bi-products (+41.57%), engineering products (+48.33%), and other manufactured products (+13.70%). However, negative growth was found in a number of products, such as, jute & jute goods (-3.19%), and building materials (-28.41%).
Import Payments (C&F)
According to Bangladesh Bank data, total value of custom based import during July-April of FY22 remarkably increased by 41.40 percent to US$74.22 billion against US$52.49 billion during July-April of FY21 (Table 2). A gradual decline in the COVID-19 infection cases and the subsequent relaxation of restriction encouraged the businesses to rescue imports. Besides, custom based import in April alone of FY22 increased by 23.35 percent to US$7.72 billion compared to US$6.26 billion of the same month of the previous fiscal year caused by higher purchase of fuel oils to meet a growing domestic demand amid expanding activity after the pandemic slowdown.
Table 2: Monthly Trends in Imports (C&F)
Month | Imports (million US$) | Change (%) | |
FY22P | FY21R | ||
July | 5141 | 4228 | +21.59 |
August | 6587 | 3806 | +73.07 |
September | 6992 | 4653 | +50.27 |
October | 7111 | 4376 | +62.50 |
November | 7855 | 4818 | +63.03 |
December | 8437 | 5389 | +56.56 |
January | 8327 | 7235 | +15.09 |
February | 8325 | 5564 | +49.62 |
March | 7725 | 6161 | +25.39 |
April | 7722 | 6260 | +23.35 |
Total of July – April | 74222 | 52490 | +41.40 |
Notes: P=Provisional; R=Revised Sources: Bangladesh Bank
The settlement of import Letters of Credit (LCs) during July- April of FY22 increased year-on-year by 48.25 percent and stood at US$67.87 billion from US$45.78 billion. This increase was driven by petroleum & petroleum products (+100.73%), industrial raw material (+52.28%), intermediate goods (45.26%), capital machinery (+43.86%), others (+37.78%) and
consumer goods (+35.01%).
On the other hand, fresh opening of import LCs during July- April of FY22 also increased year-on-year by 44.53 percent and stood at US$76.65 billion from US$53.04 billion. This increase was mainly due to rise in opening of import LCs of petroleum & petroleum products (+94.75%), industrial raw material (+46.15%), capital machinery (+45.50%), intermediate goods
(+42.69%), others (+41.22%), and consumer goods (+22.56%).
Inflows of Remittance
The inflow of remittances in July-May of FY22 decreased substantially by 15.95 percent to US$19.19 billion from US$22.84 billion in the corresponding eleven months of the previous fiscal year (Table 3). The decline is mainly a widening gap in exchange rates in the formal channel and the kerb (informal) market. The decline is also a reflection of the second/ third wave of COVID-19 pandemic situation when many Bangladeshi migrants lost their jobs, some migrants were laid off by their companies, and many others who returned home couldn’t go back due to suspended international flights as a part of countrywide lockdown and unmet vaccination requirements.
In the last month of the review period (May 2022), year-on- year, remittances dropped by 13.16 percent to US$1.89 billion from US$2.17 billion. May’s remittances also decreased month-on-month by 5.97 percent from US$2.01 billion (April 2022).
Table 3: Monthly Trends in Remittances
Month | Remittances (million US$) | Change (%) | |
FY22P | FY21R | ||
July | 1871 | 2598 | - 27.98 |
August | 1810 | 1964 | - 7.84 |
September | 1727 | 2151 | - 19.71 |
October | 1647 | 2102 | - 21.65 |
November | 1554 | 2079 | - 25.25 |
December | 1629 | 2051 | - 20.58 |
January | 1704 | 1962 | - 13.12 |
February | 1496 | 1781 | - 16.00 |
March | 1860 | 1911 | - 2.67 |
April | 2009 | 2068 | - 2.85 |
May | 1885 | 2171 | - 13.16 |
Total of July – May | 19192 | 22838 | - 15.95 |
Notes: P=Provisional; R=Revised Source: Bangladesh Bank
development.
Foreign Exchange Reserves
Amidst the ongoing COVID-19 crisis, Bangladesh Bank's gross foreign exchange reserves stood at US$42.20 billion as of end May 2022, compared to US$44.96 billion as of end May 2021 (Table 4). The foreign exchange reserve dropped below US$43 billion after the payment to the Asian Clearing Union (ACU) as import payments remained high. In the first week of May, the central bank cleared ACU payments of US$2.24 billion for March and April.
Table 4: Monthly Trends in Foreign Exchange Reserves
Month | Foreign Exchange Reserve (million US$) | |
FY22P | FY21R | |
July | 45842 | 37288 |
August | 48060 | 39040 |
September | 46200 | 39314 |
October | 46459 | 41006 |
November | 44881 | 41269 |
December | 46154 | 43167 |
January | 44951 | 42863 |
February | 45948 | 44020 |
March | 44147 | 43441 |
April | 44018 | 44950 |
May | 42202 | 44961 |
Notes: P=Provisional; R=Revised Source: Bangladesh Bank
Exchange Rate
According to the experts, the Bangladesh Taka (BDT) keeps depreciating significantly against the US dollar as higher demand for the greenback for settling import-payment obligations outweighs foreign exchange reserves inflow. Between end-June of FY21 and end-May of FY22, the value of Taka depreciated by 4.72 percent in terms of US dollar. On the inter-bank market, the US dollar was quoted at Tk.84.8054 at the end of June 2021 and Tk.89.0020 at the end of May 2022 (Table 5).
Table 5: Monthly Exchange Rate
Foreign Direct Investment (FDI)
The net foreign direct investment (FDI) in the first ten months of the current fiscal year (July-April of FY22) increased by 53.59 percent to US$1,863 million from US$1,213 million in the corresponding ten months of the previous fiscal year (FY21), according to the BB’s balance of payments data. On the other hand, the gross inflow of FDI during the period under review also increased year-on-year by 35.21 percent to US$3,882 million from US$2,871 million. FDI inflow in Bangladesh is low compared to that in many countries at similar level of
25
Note: i) P=Provisional; R=Revised
785
ii) Exchange rate represents the mid-value of buying and selling
rates
Price Situation
According to the latest Bangladesh Bureau of Statistics (BBS) data, the general point to point inflation rate increased further by 0.07 percentage points to 6.29 percent in April 2022 from
6.22 percent in the immediate past month (March 2022) due to an upward trend of non-food prices (Table 6). However, the BBS has reported a fall in food inflation in April, despite a hike in prices caused by the heightened demand in Ramadan and a global shortage due to the Ukraine-Russia war. Prices of soybean oil, vegetables, fruits and many other products
Table 6: Monthly Trends in Inflation (Base: 2005-06=100)
increased in the month. A year ago, in April 2021, the general
point to point inflation rate was lower at 5.56 percent (Table 6).
The food inflation decreased by 0.10 percentage point to
6.24 percent in April 2022 from 6.34 percent in March 2022. Year-on-year, food inflation was lower at 5.57 percent in April 2021. On the other hand, non-food price inflation increased by 0.35 percentage points to 6.39 percent in April 2022 from
6.04 percent in the previous month. Year-on-year, non-food price inflation was also lower at 5.55 percent in April 2021. According to the BBS data, the rates of general, food and non- food point-to-point inflation in rural area in April 2022 were higher than the rates of urban area (Table 6).
(Per cent)
Period | Point to Point-All (National) | Point to Point-Rural | Point to Point-Urban | ||||||
General | Food | Non-food | General | Food | Non-food | General | Food | Non-food | |
FY22P | |||||||||
July | 5.36 | 5.08 | 5.80 | 5.53 | 5.56 | 5.47 | 5.06 | 4.01 | 6.24 |
August | 5.54 | 5.16 | 6.13 | 5.71 | 5.67 | 5.79 | 5.22 | 4.02 | 6.59 |
September | 5.59 | 5.21 | 6.19 | 5.77 | 5.74 | 5.84 | 5.25 | 4.03 | 6.65 |
October | 5.70 | 5.22 | 6.48 | 5.81 | 5.62 | 6.17 | 5.50 | 4.31 | 6.89 |
November | 5.98 | 5.43 | 6.87 | 6.20 | 5.90 | 6.78 | 5.59 | 4.37 | 6.99 |
December | 6.05 | 5.46 | 7.00 | 6.27 | 5.93 | 6.94 | 5.66 | 4.41 | 7.07 |
January | 5.86 | 5.60 | 6.26 | 6.07 | 5.94 | 6.32 | 5.47 | 4.85 | 6.17 |
February | 6.17 | 6.22 | 6.10 | 6.49 | 6.62 | 6.25 | 5.59 | 5.30 | 5.91 |
March | 6.22 | 6.34 | 6.04 | 6.52 | 6.71 | 6.15 | 5.69 | 5.49 | 5.90 |
April | 6.29 | 6.24 | 6.39 | 6.59 | 6.64 | 6.50 | 5.75 | 5.31 | 6.25 |
FY21R | |||||||||
July | 5.53 | 5.70 | 5.28 | 5.43 | 5.67 | 4.98 | 5.72 | 5.76 | 5.68 |
August | 5.68 | 6.08 | 5.05 | 5.60 | 6.09 | 4.70 | 5.81 | 6.06 | 5.51 |
September | 5.97 | 6.50 | 5.12 | 5.96 | 6.61 | 4.71 | 5.98 | 6.26 | 5.65 |
October | 6.44 | 7.34 | 5.00 | 6.67 | 7.73 | 4.62 | 6.03 | 6.48 | 5.51 |
November | 5.52 | 5.73 | 5.19 | 5.55 | 6.01 | 4.65 | 5.47 | 5.11 | 5.90 |
December | 5.29 | 5.34 | 5.21 | 5.28 | 5.60 | 4.67 | 5.31 | 4.77 | 5.93 |
January | 5.02 | 5.23 | 4.69 | 5.00 | 5.46 | 4.15 | 5.05 | 4.72 | 5.41 |
February | 5.32 | 5.42 | 5.17 | 5.33 | 5.72 | 4.61 | 5.30 | 4.76 | 5.92 |
March | 5.47 | 5.51 | 5.39 | 5.55 | 5.83 | 5.03 | 5.31 | 4.80 | 5.87 |
April | 5.56 | 5.57 | 5.55 | 5.66 | 5.88 | 5.25 | 5.39 | 4.87 | 5.96 |
Capital Market
Notes: i) P=Provisional, R=Revised; ii) Food includes food, beverages and tobacco
Source: Bangladesh Bureau of Statistics
blue chips, went down by 0.55 points or 0.02 percent to finish
On 31 May 2022, the last trading day of the month, the turnover on Dhaka Stock Exchange (DSE) closed marginally lower at Tk.6.38 billion which was 23.74 percent lower than the turnover of the previous session amid day-long volatility following investors' cautious stance. On the day, the major sectors of listed securities performed mixed and end of the day, DSE saw a decline in turnover as many remained silent in the sidelines of trading fence. At the end of the session, the DSEX, the key index of the DSE, however, ended slightly higher and went up by 4.19 points or 0.16 percent to settle at 6,392.85. Two other indices, the DSE 30 Index, comprising
at 2,350.25 and the DSE Shariah Index (DSES) rose 2.04 points or 0.14 percent to close at 1,403.53. Of 376 issues traded on that day, 138 advanced, 195 declined and 43 remained unchanged.
On the Chittagong Stock Exchange (CSE), it edged lower with the CSE All Share Price Index - CASPI -losing 35.27 points or 0.18 percent to settle at 18,667.50. Of the 279 issues traded, 162 declined, 86 advanced and issues 31 remained unchanged on the CSE. The port-city bourse posted a turnover value worth Tk.175.71 million.
786
Products | Export for 2020-21 | Proposed Export Target of 2021-22 | Strategic Target for July-May 2021-22 | Export Performance for July-May 2021-22 | Export Performance for July-May 2020-21 | % Change of export Performance Over Strategic Target | % Change of export performance July-May 2021-22 Over July-May 2020-21 |
1 | 2. | 3 | 4 | 5 | 6 | 7 | 8 |
All products (A+B) | 38758.31 | 43500.00 | 39862.00 | 47174.63 | 35180.82 | 18.34 | 34.09 |
A. Primary Commodities | 1505.51 | 1617.20 | 1481.95 | 1592.52 | 1336.88 | 7.46 | 19.12 |
(1) Frozen & Live Fish | 477.37 | 508.00 | 465.51 | 491.62 | 430.88 | 5.61 | 14.1 |
a) Live Fish | 6.32 | 6.70 | 6.14 | 5.88 | 5.99 | -4.23 | -1.84 |
b) Frozen Fish | 115.57 | 141.80 | 129.94 | 86.57 | 110.26 | -33.38 | -21.49 |
c) Shrimps | 328.84 | 330.00 | 302.40 | 374.20 | 289.24 | 23.74 | 29.37 |
d) Crabs | 12.38 | 13.50 | 12.37 | 10.41 | 11.83 | -15.84 | -12.00 |
e) Others | 14.26 | 16.00 | 14.66 | 14.56 | 13.56 | -0.68 | 7.37 |
(2) Agricultural Products | 1028.14 | 1109.20 | 1016.44 | 1100.89 | 905.99 | 8.31 | 21.51 |
a) Tea | 3.56 | 4.00 | 3.67 | 2.05 | 3.35 | -44.14 | -38.81 |
b) Vegetables | 118.73 | 120.00 | 109.96 | 95.75 | 91.82 | -12.92 | 4.28 |
c) Tobacco | 86.20 | 94.00 | 86.14 | 98.67 | 80.33 | 14.55 | 22.83 |
d) Cut Flower & Foliage | 0.09 | 0.10 | 0.09 | 0.08 | 0.07 | -11.11 | 14.29 |
e) Fruits | 0.58 | 5.6 | 5.13 | 5.25 | 0.32 | 2.34 | 1,540.63 |
f) Spices | 43.29 | 50.50 | 46.28 | 36.33 | 39.14 | -21.50 | -7.18 |
g) Dry Food | 283.38 | 340.00 | 311.57 | 231.09 | 260.82 | -25.83 | -11.40 |
h) Others | 492.31 | 495 | 453.60 | 631.67 | 430.14 | 39.26 | 46.85 |
B. Manufactured Commodities | 37252.8 | 41882.80 | 38380.05 | 45582.12 | 33843.94 | 18.77 | 34.68 |
(1) Cement, Salt, Stone Etc | 7.26 | 8.00 | 7.33 | 8.7 | 6.9 | 18.69 | 26.09 |
(2) Ores, Slag and Ash | 29.28 | 35.85 | 32.85 | 39.99 | 24.44 | 21.74 | 63.63 |
(3) Petroleum bi Products | 23.33 | 25.70 | 23.55 | 27.79 | 19.63 | 18 | 41.57 |
(4) Chemical Products | 280.58 | 302.85 | 277.52 | 333.01 | 243.59 | 19.99 | 36.71 |
a) Pharmaceuticals | 169.02 | 180.00 | 164.95 | 175.10 | 145.44 | 6.15 | 20.39 |
b) Chemical Fertilizer | 5.84 | 6.50 | 5.96 | 0.00 | 5.84 | -100.00 | -100.00 |
c) Cosmetics | 0.46 | 0.50 | 0.46 | 0.89 | 0.37 | 93.48 | 140.54 |
d) Others | 105.26 | 115.85 | 106.16 | 157.02 | 91.94 | 47.91 | 70.79 |
(5) Plastic Products | 115.28 | 127.00 | 116.38 | 142.98 | 104.49 | 22.86 | 36.84 |
a) PVC Bags | 23.28 | 26.50 | 24.28 | 23.61 | 21.16 | -2.76 | 11.58 |
b) Plastic Waste | 13.71 | 15.50 | 14.20 | 20.62 | 12.16 | 45.21 | 69.57 |
c) Others | 78.29 | 85.00 | 77.89 | 98.75 | 71.17 | 26.78 | 38.75 |
(6) Rubber | 34.24 | 40.50 | 37.11 | 43.78 | 30.42 | 17.97 | 43.92 |
(7) Leather & Leather Products | 941.67 | 1031.00 | 944.78 | 1115.58 | 846.08 | 18.08 | 31.85 |
(a) Leather | 119.14 | 130.50 | 119.59 | 139.93 | 108.84 | 17.01 | 28.56 |
(b) Leather Products | 252.65 | 280.50 | 257.04 | 302.66 | 225.81 | 17.75 | 34.03 |
(c) Leather Footwear | 569.88 | 620.00 | 568.15 | 672.98 | 511.42 | 18.45 | 31.59 |
(8) Wood & Wood Products | 4.26 | 5.41 | 4.96 | 4.81 | 4.11 | -3.02 | 17.03 |
(9) Handicrafts | 33.97 | 39.00 | 35.74 | 39.55 | 31.73 | 10.66 | 24.65 |
(10) Pulp | 0.03 | 0.04 | 0.04 | 0 | 0.03 | -100 | -100 |
(11) Paper & Paper Products | 71.44 | 73.00 | 66.89 | 91.61 | 64.88 | 36.96 | 41.2 |
(12) Printed Materials | 0.94 | 1.14 | 1.04 | 1.85 | 0.92 | 77.88 | 101.09 |
(13) Silk | 0.57 | 1.00 | 0.92 | 1.01 | 0.49 | 9.78 | 106.12 |
(14) Wool & Woolen Products | 0.26 | 0.35 | 0.32 | 0.21 | 0.26 | -34.38 | -19.23 |
(15) Cotton & Cotton Product (Yarn, Waste, Fabrics etc) | 154.29 | 175.00 | 160.36 | 216.17 | 142.06 | 34.8 | 52.17 |
27
787
(Million US $)
Products |
Export for 2020-21 |
Proposed Export Target of 2021-22 |
Strategic Target for July-May 2021-22 |
Export Performance for July-May 2021-22 |
Export Performance for July-May 2020-21 |
% Change of export Performance Over Strategic Target | % Change of export performance July-May 2021-22 Over July-May 2020-21 |
1 | 2. | 3 | 4 | 5 | 6 | 7 | 8 |
(16) Jute & Jute goods | 1161.48 | 1420.00 | 1301.24 | 1055.05 | 1089.81 | -18.92 | -3.19 |
a) Raw Jute | 138.15 | 150.00 | 137.46 | 191.41 | 126.79 | 39.25 | 50.97 |
b) Jute Yarn & Twine | 799.04 | 1,000.00 | 916.37 | 664.57 | 755.19 | -27.48 | -12.00 |
c) Jute Sacks & Bags | 138.66 | 180.00 | 164.95 | 110.79 | 129.61 | -32.83 | -14.52 |
d) Others | 85.63 | 100.00 | 91.64 | 88.28 | 78.22 | -3.67 | 12.86 |
(17) Man Made Filaments & Staple Fibres | 119.43 | 130.00 | 119.13 | 198.8 | 107.78 | 66.88 | 84.45 |
(18) Carpet (Jute & Others) | 33.54 | 45.00 | 41.24 | 34.2 | 30.5 | -17.07 | 12.13 |
(19) Specialized Textiles | 130.9 | 150.00 | 137.46 | 294.16 | 121 | 114 | 143.11 |
a) Terry Towel | 34.77 | 38.00 | 34.82 | 42.01 | 33.29 | 20.65 | 26.19 |
b) Special Woven Fabric | 22.53 | 24.00 | 21.99 | 29.97 | 19.25 | 36.29 | 55.69 |
c) Knitted Fabrics | 64.77 | 78.00 | 71.48 | 206.41 | 60.55 | 188.77 | 240.89 |
d) Other | 8.83 | 10.00 | 9.16 | 15.77 | 7.91 | 72.16 | 99.37 |
(20) RMG | 31456.73 | 35144.00 | 32204.83 | 38521.16 | 28561.85 | 19.61 | 34.87 |
(a) Knitwear | 16,960.03 | 19,515.00 | 17,882.92 | 20,985.88 | 15,362.32 | 17.35 | 36.61 |
(b) Woven Garments | 14,496.70 | 15,629.00 | 14,321.91 | 17,535.28 | 13,199.53 | 22.44 | 32.85 |
(21) Home Textile | 1132.03 | 1370.00 | 1255.42 | 1467.19 | 1038.36 | 16.87 | 41.3 |
a) Bed, Kitchen toilet lines | 521.33 | 620.00 | 568.15 | 533.57 | 474.93 | -6.09 | 12.35 |
b) Other | 610.70 | 750.00 | 687.28 | 933.62 | 563.43 | 35.84 | 65.70 |
(22) Other Footwear | 344.46 | 400.00 | 366.55 | 408.18 | 304.95 | 11.36 | 33.85 |
(23) Headgear/Cap | 226.38 | 250.00 | 229.09 | 329.56 | 202.54 | 43.86 | 62.71 |
(24) Umbrella Waking Sticks | 0.02 | 0.01 | 0.01 | 0.22 | 0.01 | 2100 | 2100 |
(25) Wigs & Human Hair | 57.13 | 64.00 | 58.65 | 95.59 | 51.73 | 62.98 | 84.79 |
(26) Building Materials | 0.88 | 1.00 | 0.92 | 0.63 | 0.88 | -31.52 | -28.41 |
(27) Ceramic Products | 31.11 | 35.00 | 32.07 | 37.69 | 27.75 | 17.52 | 35.82 |
(28) Glass & Glass ware | 7.94 | 10.00 | 9.16 | 18.04 | 6.84 | 96.94 | 163.74 |
(29) Engineering Products | 529 | 644.75 | 590.83 | 718.66 | 484.49 | 21.64 | 48.33 |
a) Iron Steel | 128.86 | 160.00 | 146.62 | 145.90 | 121.00 | -0.49 | 20.58 |
b) Copper Wire | 55.24 | 65.00 | 59.56 | 64.38 | 46.61 | 8.09 | 38.12 |
c) Stainless Steel ware | 3.03 | 3.50 | 3.21 | 3.62 | 2.49 | 12.77 | 45.38 |
d) Engineering Equipment | 96.31 | 115.00 | 105.38 | 214.24 | 90.09 | 103.30 | 137.81 |
e) Electric Products | 67.48 | 86.25 | 79.04 | 77.86 | 60.92 | -1.49 | 27.81 |
f) Bicycle | 130.89 | 155.00 | 142.04 | 156.57 | 120.24 | 10.23 | 30.21 |
g) Others | 47.19 | 60.00 | 54.98 | 56.09 | 43.14 | 2.02 | 30.02 |
(30) Ships, boats & floating structures | 0.2 | 0.20 | 0.18 | 0.23 | 0.17 | 27.78 | 35.29 |
(31) Other mfd Products | 324.18 | 353.00 | 323.48 | 335.71 | 295.25 | 3.78 | 13.7 |
a) Optical, Photographic, Medical Instruments etc | 89.27 | 92.00 | 84.31 | 85.81 | 82.00 | 1.78 | 4.65 |
b) Furniture | 79.47 | 90.00 | 82.47 | 101.50 | 73.81 | 23.08 | 37.52 |
c) Golf Shaft | 14.30 | 16.00 | 14.66 | 16.80 | 13.78 | 14.60 | 21.92 |
d) Others | 141.14 | 155.00 | 142.04 | 131.60 | 125.66 | -7.35 | 4.73 |
Source: Export Promotion Bureau
788
FRESH OPENING AND SETTLEMENT OF IMPORT LCS
(USD in million)
Items | July-March, FY22 | July-March, FY21 | ||||
Opening | Outstanding | Settlement | Opening | Outstanding | Settlement | |
A. Consumer goods | 7485.45 | 2020.81 | 6864.30 | 5870.97 | 456.69 | 4848.42 |
Rice and wheat | 2067.74 | 619.90 | 1993.21 | 1882.89 | 250.82 | 1223.32 |
Sugar and salt | 890.54 | 214.65 | 783.00 | 509.10 | 16.54 | 531.32 |
Milk food | 287.36 | 138.24 | 261.09 | 259.23 | 7.03 | 226.33 |
Edible oil (refined) | 1234.45 | 306.20 | 1061.54 | 688.60 | 14.26 | 630.67 |
All kinds of fruits | 437.11 | 116.87 | 348.43 | 469.72 | 41.24 | 364.53 |
Pulses | 179.33 | 46.31 | 207.60 | 184.07 | 5.65 | 196.17 |
Onion | 145.64 | 19.79 | 137.57 | 152.11 | 27.27 | 130.57 |
Spices | 201.43 | 46.54 | 198.36 | 282.04 | 5.83 | 306.23 |
Second hand clothings | 1.73 | 0.23 | 2.09 | 2.89 | 0.14 | 1.93 |
Drugs and medicines(finished) | 545.84 | 18.34 | 559.57 | 81.84 | 6.95 | 75.43 |
Others | 1494.29 | 493.75 | 1311.83 | 1358.48 | 80.98 | 1161.90 |
B. Intermediate goods | 6355.08 | 1908.09 | 5351.76 | 4264.17 | 265.99 | 3555.02 |
Coal | 705.34 | 175.40 | 510.01 | 301.37 | 9.08 | 250.53 |
Cement | 186.00 | 67.80 | 162.85 | 144.14 | 16.02 | 116.75 |
Clinker & limestone | 960.83 | 337.18 | 790.16 | 818.46 | 51.23 | 666.59 |
B. P. sheet | 109.02 | 31.25 | 94.97 | 84.13 | 4.97 | 103.17 |
Tin plate | 9.09 | 2.14 | 9.13 | 5.63 | 0.15 | 6.16 |
Scrap Vessels | 931.56 | 35.67 | 980.67 | 655.91 | 5.54 | 637.01 |
Iron and steel scrap | 1595.45 | 536.13 | 1421.38 | 1097.90 | 77.35 | 882.06 |
Non-ferrous metal | 241.96 | 43.12 | 269.42 | 165.74 | 17.52 | 113.18 |
Paper and paper board | 566.51 | 378.55 | 242.92 | 250.98 | 35.16 | 212.81 |
Others | 1049.33 | 300.86 | 870.27 | 739.91 | 48.97 | 566.77 |
C. Industrial raw materials | 25311.04 | 9402.24 | 22131.74 | 17079.56 | 1126.82 | 14394.64 |
Edible oil (Crude) | 392.66 | 85.37 | 307.56 | 350.23 | 7.81 | 393.49 |
Seeds | 566.98 | 257.17 | 545.80 | 439.49 | 8.35 | 406.55 |
Textile fabrics (B/B & others) | 9666.02 | 3947.67 | 8185.38 | 6745.01 | 494.94 | 5618.34 |
Pharmaceutical raw materials | 919.24 | 279.22 | 839.46 | 764.46 | 21.72 | 806.86 |
Raw cotton | 3105.25 | 1316.48 | 2481.22 | 2327.07 | 158.04 | 1752.52 |
Cotton yarn | 2773.89 | 1188.05 | 2455.39 | 1394.15 | 93.05 | 1088.85 |
Copra | 456.67 | 153.01 | 387.14 | 384.42 | 23.00 | 271.02 |
Synthetic fibre & yarn | 1320.56 | 483.53 | 1178.03 | 730.58 | 42.79 | 614.09 |
Chemicals & chem. products | 6109.77 | 1691.73 | 5751.77 | 3944.15 | 277.13 | 3442.92 |
D. Capital machinery | 4977.34 | 3172.43 | 3812.72 | 3324.35 | 779.09 | 2676.93 |
Textile machinery | 495.63 | 416.37 | 151.36 | 140.06 | 14.65 | 130.83 |
Leather / tannery | 14.96 | 7.34 | 9.93 | 12.19 | 1.90 | 11.16 |
Jute industry | 18.76 | 15.23 | 10.84 | 17.33 | 0.41 | 9.49 |
Garment industry | 610.05 | 390.49 | 449.91 | 299.42 | 34.56 | 325.47 |
Pharmaceutical industry | 150.25 | 89.19 | 138.65 | 144.58 | 36.95 | 91.26 |
Packing industry | 12.57 | 7.25 | 7.92 | 9.52 | 0.42 | 9.07 |
Other industry | 3675.10 | 2246.56 | 3044.12 | 2701.25 | 690.19 | 2099.65 |
E. Machinery for misc. inds. | 3399.45 | 1174.92 | 3109.51 | 2723.69 | 145.25 | 2350.78 |
Other machineries | 96.44 | 33.91 | 84.32 | 102.21 | 3.20 | 106.84 |
Marine diesel engine | 3.79 | 3.55 | 1.65 | 16.17 | 13.07 | 10.85 |
Computer & its accessories | 376.21 | 140.80 | 429.05 | 292.37 | 22.59 | 239.19 |
Motor vehicle & motorcycle parts | 139.46 | 26.57 | 187.45 | 208.21 | 5.11 | 157.01 |
Bicycle parts | 103.45 | 17.43 | 112.19 | 96.08 | 10.04 | 77.67 |
Other iron and steel products | 230.14 | 73.97 | 193.41 | 188.82 | 10.71 | 174.85 |
Motor vehicles | 567.75 | 134.44 | 523.02 | 493.91 | 17.78 | 435.23 |
Other electronics components | 113.76 | 37.65 | 98.79 | 118.84 | 5.96 | 104.18 |
Tractors & power tiller | 38.18 | 15.18 | 40.89 | 51.88 | 5.08 | 48.10 |
Others | 1730.27 | 691.42 | 1438.73 | 1155.20 | 51.72 | 996.86 |
F. Petroleum & petro.prodts. | 5464.49 | 681.43 | 5461.28 | 3003.18 | 75.08 | 2918.62 |
Crude | 945.93 | 43.74 | 1004.13 | 526.92 | 6.04 | 547.30 |
Refined | 4518.56 | 637.68 | 4457.15 | 2476.26 | 69.04 | 2371.32 |
G. Others | 15368.95 | 11999.44 | 10248.07 | 7914.82 | 9202.61 | 7157.68 |
Commercial sector | 3432.51 | 1059.88 | 3096.45 | 2899.53 | 278.10 | 2489.96 |
Industrial sector | 11936.44 | 10939.56 | 7151.61 | 5015.30 | 8924.51 | 4667.72 |
Rooppur Nuclear Power Plant | --- | 7166.80 | 814.30 | --- | 8292.18 | 847.18 |
Total | 68361.78 | 30864.08 | 60575.30 | 46810.44 | 12023.90 | 40481.20 |
of which back to back | 9940.13 | 4317.10 | 8635.27 | 6447.57 | 389.94 | 5396.72 |
Source: Foreign Exchange Operations Department(FEOD), Bangladesh Bank
Opening = 'Fresh opening of import LCs', Settlement = 'Settlement of import LCs' and Outstanding = 'Outstanding LCs at the end period'.
29
789
BALANCE OF PAYMENTS (BOP)
(USD in million)
Items | July-March of FY22P | July-March of FY21R |
Trade balance | -24907 | -15218 |
Exports f.o.b(including EPZ) | 36617 | 27549 |
Imports f.o.b(including EPZ) | 61524 | 42767 |
Services | -2806 | -1992 |
Credit | 7083 | 5448 |
Debit | 9889 | 7440 |
Primary income | -2159 | -2391 |
Credit | 257 | 135 |
Debit | 2416 | 2526 |
Of which:Official interest payment | 688 | 711 |
Secondary income | 15800 | 19046 |
Official transfers | 15 | 22 |
Private transfers | 15785 | 19024 |
of which : Workers' remittances ( current a/c. portion) | 15299 | 18598 |
Current Account Balance | -14072 | -555 |
Capital account | 166 | 125 |
Capital transfers | 166 | 125 |
Financial account | 11343 | 7950 |
i) Foreign direct investment(net)* | 1677 | 1142 |
ii) Portfolio investment (net) | -110 | -228 |
of which : Workers' remittances ( financial a/c. portion) | 86 | 174 |
iii) Other investment(net) | 9776 | 7036 |
Medium and long-term (MLT) loans | 6616 | 4233 |
MLT amortization payments | 1170 | 1067 |
Other long-term loans (net) | 729 | 994 |
Other short-term loans (net) | 2011 | 1003 |
Trade credit (net) | 180 | 2885 |
DMBs & NBDCs(net) | 1410 | -1012 |
Assets | 119 | 225 |
Liabilities | 1529 | -787 |
Errors and omissions | -534 | -530 |
Overall Balance | -3097 | 6990 |
Reserve Assets | 3097 | -6990 |
Bangladesh Bank (net) | 3097 | -6990 |
Assets | -1994 | 7055 |
Liabilities | 1103 | 65 |
Source :Statistics Department, Bangladesh Bank.
Note:- Both of exports and imports are compiled on the basis of customs data. P=Provisional; R = Revised.
* FDI is calculated on net basis by deducting disinvestment, repayments of loans & loss.
790
PRODUCTION OF SELECTED INDUSTRIAL ITEMS (BASE YEAR 2005-06=100)
Description of items of industry | Unit | No .of reporting industries (selected) | 2019-20 | 2020-21 | Jan-21 | Dec 21 (R) | Jan 22(P) |
Manufacture of Food Products | |||||||
Fish & sea food | M.Ton | 180 & * | 42724 | 40512 | 1886 | 4624 | 3270 |
Processing & Preserving of fruits and vegetables | "000" Littre | 3 | 123517 | 109120 | 9095 | 12411 | 13059 |
Hyd. Vegetable oil | M.Ton | 2 | 1005502 | 998073 | 88538 | 80134 | 80512 |
Grain milling | M.Ton | 8 | 614006 | 332939 | 28438 | 36157 | 35932 |
Rice milling | M.Ton | 6 | 42689 | 47888 | 4050 | 3384 | 3171 |
Sugar | M.Ton | 16 | 81768 | 48082 | 19747 | 6600 | 12735 |
Black & Blending Tea | M.Ton | 116 | 89930 | 90008 | 286 | 6932 | 507 |
Edible salt | M.Ton | 8 | 88272 | 101262 | 8100 | 8769 | 9039 |
Animal feeds | M.Ton | 3 | 704880 | 859315 | 67088 | 65305 | 65290 |
Manufacture of beverages | |||||||
Spirits & Alcohol | "000" Littre | 1 | 5159 | 4272 | 265 | 365 | 657 |
Soft Drinks | `000' Doz Bottle | 4 | 59222 | 104902 | 5711 | 8207 | 10085 |
Mineral Water | "000" Littre | 4 | 156784 | 273894 | 21106 | 32982 | 35625 |
Manufacture of tobacco products | |||||||
Cigarettes | Mill. No | 1 | 16186 | 15403 | 1280 | 1305 | 1310 |
Biddies | Mill. No | 5 | 96246 | 89893 | 6498 | 6931 | 7359 |
Manufacture of textile | |||||||
Preparation & Spinning of Textile fibers | M.Ton | 20 | 223314 | 257198 | 21018 | 23230 | 23495 |
Weaving of Textiles | "000" Metre | 15 | 42283 | 36858 | 3260 | 4132 | 4154 |
Dyeing, bleaching & finishing | "000" Metre | 19 | 129650 | 130133 | 11938 | 12864 | 13717 |
Jute Textile | M.Ton | 95 | 379585 | 310057 | 18712 | 15993 | 26311 |
Mfg. of wearing apparel | |||||||
Wearing Apparel | Million Tk. | * | 1188830 | 1229409 | 117297 | 137101 | 144972 |
Knitwear | Million Tk. | * | 1177323 | 1398236 | 116671 | 159673 | 156016 |
Manufacture of leather and related products | |||||||
1511 Tanning & Finishing Leather: | "000" Sq Metre | 175 & * | 13075 | 16595 | 1236 | 1887 | 2100 |
Leather Footwear | "000" Pair | 4 | 28538 | 32079 | 2767 | 1145 | 1912 |
Manufacture of wood and products of wood and cork | |||||||
Particle board/ plywood | "000" Sq Metre | 2 | 12258 | 13710 | 1148 | 1215 | 1220 |
Manufacture of Paper and paper products | |||||||
Pulp, Paper & newsprint | M.Ton | 3 | 241050 | 328647 | 30213 | 67964 | 53786 |
Articles made of paper | M.Ton | 2 | 41000 | 40766 | 5169 | 3345 | 4082 |
Printing and reproduction of recorded media | |||||||
Printing of Books and periodicals | "000" No. | 10 | 142464 | 157634 | 13279 | 12908 | 12835 |
Manufacture of coke and refined petroleum products | |||||||
Petroleum refining | M.Ton | 1 | 1078570 | 1530820 | 118540 | 40530 | 135920 |
Manufacture of chemicals and chemical products | |||||||
Compressed liquidities gas | Cylinder (12.5 Kg.) | 2 | 1160550 | 1057162 | 103565 | 44032 | 43830 |
Fertilizer | M.Ton | 7 | 976157 | 1296008 | 95401 | 105807 | 59945 |
Perfumes and cosmetics | "000" Tk. | 3 | 10942940 | 12012471 | 666340 | 1589887 | 1597919 |
Soaps & detergents | M.Ton | 3 | 176084 | 190893 | 17235 | 10954 | 12236 |
Matches | "000" Gross | 2 | 36644 | 45323 | 3655 | 3275 | 3285 |
Manufacture of Pharmaceuticals and medicinal chemical | |||||||
Pharmaceuticals/Allopathic drugs and medicine | "000" Tk. | 20 | 251533893.4 | 281575024 | 26301793 | 25646638 | 29593548 |
Unani and Ayur Bedic Medicine | "000" Tk. | 3 | 712467 | 1502532 | 112273 | 149396 | 147628 |
791
Description of items of industry | Unit | No .of reporting industries (selected) | 2019-20 | 2020-21 | Jan-21 | Dec 21 (R) | Jan 22(P) |
Manufacture of rubber and plastic products | |||||||
Rubber footwear/ other rubber products | Dozen Pair | 8 | 536631 | 310938 | 22148 | 28550 | 28594 |
P.V.C products/plastic products | M.ton | 3 | 54410 | 52008 | 4300 | 4100 | 5697 |
Non-Metallic mineral Prod | |||||||
Glass Sheet | "000" Sq ft. | 3 | 20364 | 22587 | 1929 | 1952 | 2011 |
Tiles | "000"Sq ft | 5 | 279741 | 199944 | 14486 | 20278 | 21311 |
Ceramic | "000" Dz | 2 | 36480 | 37361 | 3150 | 3175 | 3841 |
Cement | M.Ton | 8 | 17951285 | 21030828 | 2023518 | 1683537 | 1945628 |
Bricks | "000" No. | 4 | 218294 | 325598 | 22526 | 23179 | 23198 |
Manufacture of basic metals | |||||||
Re-rolling mills | M.Ton | 31 | 335640 | 379761 | 31881 | 37672 | 38663 |
Manufacture of fabricated metal products except machinery | |||||||
Structural metal products | "000" M.ton | 5 | 14161 | 13519 | 1253 | 1448 | 1593 |
Other Fabricated metal products | Dozen | 8 | 970756 | 991088 | 83386 | 68736 | 60085 |
Manufacture of computer, electronic and optical products | |||||||
communication equipment’s (TV, Telephone) Television | No. | 3 | 665938 | 700595 | 56162 | 45902 | 54850 |
Manufacture of electrical equipment | |||||||
Electric Motors, Generators, transformers/ | No. | 2 | 614681 | 335541 | 22820 | 32189 | 32210 |
Electrical apparatus 2732 Wires & Cables (ELEC.) | M.ton | 3 | 52426 | 53210 | 4454 | 6179 | 6171 |
Electrical appliances / Domestic appliances | No. | 9 | 532528 | 521593 | 43341 | 44058 | 43978 |
Manufacture of machinery and equipment n.e.c | |||||||
Agriculture & Forestry machinery | No. | 2 | 105041 | 95682 | 6989 | 8086 | 8980 |
Machinery for Textile , apparel and leather production | No. | 9 | 20236 | 21067 | 1778 | 1870 | 1875 |
Machinery equipment NEC | No. | 10 | 1154859 | 1165988 | 99899 | 90580 | 105069 |
Manufacture of motor vehicles, trailers and semi-trailers | |||||||
Assemble of Motor vehicles | No. | 2 | 1214 | 844 | 72 | 228 | 208 |
Manufacture of other transport equipment | |||||||
Ship and boat building | M.Ton | 3 | 578562 | 370882 | 30812 | 33862 | 33142 |
Motor cycle | No. | 3 | 86393 | 91094 | 6898 | 7122 | |
Manufacture of furniture | |||||||
Metal furniture | No. | 2 | 4497 | 4149 | 376 | 458 | 461 |
Wooden furniture | No. | 5 | 92457 | 122211 | 13963 | 10215 | 10241 |
Plastic furniture | No. | 2 | 1527531 | 1202074 | 99062 | 97338 | 97673 |
Natural Gas | MMCM | 8 | 24998 | 25172 | 2179 | 2017 | 2015 |
Electricity | MKWH | 1 | 69634 | 78654 | 5262 | 5310 | 5641 |
Note: n.a.=not available. p= provisional, r= revised, M.cu.m.= million cubic meter. Mt = metric ton. Mkwh = million kilowatt per hour, Tk.= Taka, * = EPB; F = Final
Source: Bangladesh Bureau of Statistics
792
CAPITAL MARKET SNAPSHOT
Negative Sentiment Continues with Macro Tension
Chart: DSEX Index with MoM returnChart: Avg. daily turnover (BDT bn)
Chart: Market P/E (x)
8,50010.0%
7,500
6,500
25.0
20.0
15.0
25.0
5,500
4,500
3,500
2,500
0.0%
-10.0%
10.0
5.0
0.0
DSEX (LHS)MoM return (RHS)
Chart: Sector M.cap return in May’22Chart: Turnover (BDT bn) in May’22
Contribution of Sectors by M.Cap
Ceramic
NBFI
Pharma Textile Mutual Fund Fuel & Power
Bank Jute
Food & Allied
Service & Real estate
Telecom Engineering
Misc.
Tannery
-1.6%
-1.7%
-1.8%
-2.1%
-2.6%
-2.7%
-3.7%
-4.8%
-4.9%
-5.3%
-6.0%
-6.2%
-7.6%
6.3%
Misc. Engineering
Pharma Textile NBFI
Bank Insurance Food & Allied
IT
Fuel & Power
Paper Cement Tannery
Travel & Leisure
14.9
12.0
11.2
10.7
10.3
7.7
7.6
6.0
5.7
5.2
4.6
3.7
2.9
2.5
Cement -9.4%
IT -9.6%
Paper -9.8%
Insurance -9.8% Travel & Leisure-10.8%
Telecom Service & Real estate
Mutual Fund
Ceramic
Jute
1.8
1.3
1.1
0.7
0.1
Table: P/E ratio of sectors vs market
Table: Turnover leaders in DSE
Ticker | Turnover (BDT bn) | |
1 | BEXIMCO | 8.2 |
2 | JHRML | 5.5 |
3 | SPCERAMICS | 4.7 |
4 | IPDC | 4.3 |
5 | ACIFORMULA | 3.2 |
Source: DSE, City Brokerage Limited
Sector P/EMarket P/E
793
CONSUMER PRICE INDEX: NATIONAL
(BASE: 2005-06=100)
Period | General Index | Index by expenditure group | ||||||||
1. Food & Beverage | 2. Non- Food | I. Clothing & Footwear | II. Fuel & Lighting | III. Household Equipment | IV. Medical Care & Health Expenses | V. Transport & Communication | VI. Recreation, Entertainment, | VIII. Mise. Goods & Services | ||
2013-14 | 195.08 | 209.79 | 176.23 | 194.77 | 163.47 | 206.14 | 164.06 | 167.20 | 164.38 | 193.75 |
2014-15 | 207.58 | 223.80 | 186.79 | 204.50 | 171.80 | 214.45 | 180.77 | 181.78 | 168.02 | 204.21 |
2015-16 | 219.86 | 234.77 | 200.66 | 233.38 | 182.74 | 227.39 | 199.94 | 201.34 | 171.01 | 211.61 |
2016-17 | 231-82 | 248.90 | 209.92 | 243.56 | 194.01 | 235.85 | 206.70 | 210.78 | 177.56 | 217.51 |
2017-18 | 245.22 | 266.64 | 217.76 | 255.24 | 200.25 | 249.68 | 209.28 | 218.80 | 183.65 | 223.81 |
2018-19 | 258.65 | 281.33 | 229.58 | 277.64 | 206.98 | 265.25 | 215.31 | 235.23 | 186.72 | 239.87 |
2019-20 | 273.26 | 296.86 | 243.00 | 290.00 | 220.70 | 282.67 | 230.07 | 248.48 | 190.13 | 259.27 |
2020-21 | 288.44 | 313.86 | 255.85 | 298.14 | 228.29 | 298.15 | 247.86 | 271.45 | 193.61 | 288.53 |
2021-22 | ||||||||||
October | 307.49 | 337.70 | 268.75 | 314.48 | 231.64 | 316.85 | 252.99 | 306.31 | 199.71 | 306.66 |
November | 305.97 | 333.58 | 270.58 | 316.73 | 232.46 | 317.92 | 253.09 | 313.36 | 200.25 | 307.71 |
December | 304.81 | 330.71 | 271.61 | 320.38 | 232.71 | 318.70 | 253.16 | 314.27 | 201.02 | 308.65 |
January | 307.02 | 333.51 | 273.05 | 321.57 | 233.53 | 320.51 | 253.44 | 315.70 | 203.16 | 312.88 |
February | 308.21 | 334.95 | 273.93 | 323.49 | 233.65 | 322.05 | 253.57 | 317.11 | 203.76 | 314.16 |
March | 310.12 | 337.43 | 275.11 | 325.31 | 234.17 | 323.51 | 253.91 | 317.88 | 204.95 | 317.85 |
April | 312.38 | 340.25 | 276.64 | 328.18 | 234.65 | 325.93 | 254.59 | 319.82 | 206.59 | 319.99 |
Source: Bangladesh Bureau of Statistics
CONSUMER PRICE INDEX: RURAL
(BASE: 2005-06=100)
Period | General Index | Index by expenditure group | ||||||||
1. Food & Beverage | 2. Non- Food | I. Clothing & Footwear | II. Fuel & Lighting | III. Household Equipment | IV. Medical Care & Health Expenses | V. Transport & Communication | VI. Recreation, Entertainment, | VIII. Mise. Goods & Services | ||
2012-13 | 183.90 | 192.14 | 170.79 | 184.54 | 157.40 | 186.40 | 164.63 | 160.98 | 174.07 | 187.05 |
2013-14 | 196.90 | 207.72 | 179.69 | 200.61 | 164.05 | 197.62 | 168.87 | 166.01 | 179.72 | 199.74 |
2014-15 | 209.10 | 221.02 | 190.13 | 214.07 | 171.34 | 209.29 | 187.18 | 174.09 | 183.84 | 212.34 |
2015-16 | 220.10 | 230.31 | 203.86 | 242.26 | 179.19 | 222.11 | 211.04 | 188.69 | 187.84 | 221.12 |
2016-17 | 231.02 | 243.08 | 211.83 | 253.51 | 187.45 | 229.57 | 219.35 | 193.71 | 194.81 | 226.47 |
2017-18 | 244.17 | 259.86 | 219.21 | 263.96 | 192.89 | 246.23 | 221.15 | 197.24 | 201.31 | 233.72 |
2018-19 | 256.74 | 273.55 | 230.01 | 282.76 | 198.99 | 261.30 | 225.86 | 207.51 | 205.05 | 253.71 |
2019-20 | 271.20 | 289.08 | 242.74 | 292.21 | 212.44 | 277.56 | 242.40 | 217.05 | 208.93 | 275.65 |
2020-21 | 286.37 | 306.40 | 254.51 | 298.86 | 220.23 | 286.65 | 264.04 | 234.11 | 214.52 | 305.80 |
2021-22 | ||||||||||
October | 306.10 | 330.77 | 266.85 | 311.93 | 223.17 | 305.04 | 269.32 | 267.33 | 221.97 | 325.94 |
November | 304.31 | 326.57 | 268.89 | 314.38 | 224.10 | 306.24 | 269.42 | 275.53 | 222.77 | 326.97 |
December | 303.14 | 324.00 | 269.95 | 318.14 | 224.27 | 306.91 | 269.47 | 276.30 | 223.49 | 328.00 |
January | 305.83 | 327.31 | 271.65 | 319.35 | 225.55 | 308.99 | 269.76 | 277.71 | 226.00 | 332.88 |
February | 307.44 | 329.30 | 272.67 | 321.45 | 225.65 | 310.54 | 269.85 | 279.66 | 226.65 | 334.27 |
March | 309.62 | 332.01 | 273.99 | 323.44 | 225.96 | 311.76 | 270.20 | 280.56 | 228.42 | 339.28 |
April | 312.15 | 335.13 | 275.59 | 326.74 | 226.43 | 314.30 | 270.98 | 282.94 | 229.43 | 340.50 |
CONSUMER PRICE INDEX: URBAN
(BASE: 2005-06=100)
Period | General Index | Index by expenditure group | ||||||||
1. Food & Beverage | 2. Non- Food | I. Clothing & Footwear | II. Fuel & Lighting | III. Household Equipment | IV. Medical Care & Health Expenses | V. Transport & Communication | VI. Recreation, Entertainment, | VIII. Mise. Goods & Services | ||
2013-14 | 199.73 | 214.85 | 171.61 | 183.66 | 162.80 | 221.11 | 155.82 | 168.52 | 147.83 | 186.37 |
2014-15 | 204.76 | 230.56 | 182.32 | 197.93 | 172.33 | 223.53 | 169.80 | 190.26 | 150.95 | 194.16 |
2015-16 | 219.31 | 245.66 | 196.39 | 216.50 | 186.86 | 236.67 | 180.93 | 215.50 | 152.84 | 199.87 |
2016-17 | 233.29 | 263.09 | 207.38 | 224.66 | 201.60 | 246.87 | 185.05 | 229.59 | 158.93 | 206.45 |
2017-18 | 247.17 | 283.19 | 215.83 | 238.67 | 208.77 | 255.74 | 188.96 | 242.55 | 164.59 | 211.57 |
2018-19 | 262.17 | 300.30 | 229.00 | 267.92 | 216.22 | 272.20 | 197.25 | 265.77 | 166.95 | 222.78 |
2019-20 | 277.06 | 315.83 | 243.34 | 285.82 | 230.27 | 291.66 | 208.97 | 283.12 | 169.81 | 239.06 |
2020-21 | 292.27 | 332.08 | 257.64 | 296.78 | 237.63 | 318.36 | 220.17 | 312.59 | 171.05 | 267.20 |
2021-22 | ||||||||||
October | 310.05 | 354.60 | 271.29 | 319.31 | 241.45 | 337.61 | 225.03 | 349.27 | 175.69 | 282.86 |
November | 309.05 | 350.69 | 272.83 | 321.21 | 242.13 | 338.46 | 225.15 | 355.04 | 175.94 | 283.93 |
December | 307.89 | 347.07 | 273.82 | 324.64 | 242.48 | 339.45 | 225.24 | 356.12 | 176.77 | 284.76 |
January | 309.21 | 348.62 | 274.92 | 325.78 | 242.76 | 340.78 | 225.52 | 357.57 | 178.50 | 288.20 |
February | 309.63 | 348.75 | 275.61 | 327.36 | 242.93 | 342.30 | 225.69 | 358.39 | 179.05 | 289.33 |
March | 311.06 | 350.65 | 276.61 | 328.86 | 243.68 | 344.18 | 226.04 | 359.00 | 179.62 | 291.40 |
April | 312.80 | 352.74 | 278.05 | 330.92 | 244.17 | 346.38 | 226.54 | 360.45 | 181.93 | 294.67 |
Source: Bangladesh Bureau of Statistics
WAGE RATE INDEX BY SECTORS: BANGLADESH
(BASE: 2010-11=100)
Sector | 2018-19 | 2019-20 | 2020-21 | February’22 | March’22 | April’22 |
General | 160.23 | 170.39 | 180.83 | 194.90 | 195.89 | 196.04 |
percentage change (Point to Point) | 6.40 | 6.35 | 6.12 | 6.03 | 6.15 | 6.28 |
percentage change (over previous month) | 0.97 | 0.51 | 0.08 | |||
1. Agriculture | 159.92 | 170.28 | 181.16 | 195.55 | 196.35 | 196.46 |
percentage change (over previous month) | 6.42 | 6.48 | 6.39 | 6.02 | 6.13 | 6.22 |
percentage change (over previous month) | 1.00 | 0.41 | 0.06 | |||
i) Agriculture | 159.91 | 170.32 | 181.23 | 195.77 | 196.57 | 196.68 |
percentage change (Point to Point) | 6.44 | 6.51 | 6.41 | 6.10 | 6.21 | 6.29 |
percentage change (over previous month) | 1.00 | 0.41 | 0.05 | |||
ii) Fish | 160.59 | 168.58 | 177.84 | 184.31 | 184.84 | 185.30 |
percentage change (Point to Point) | 5.22 | 4.97 | 5.49 | 2.01 | 1.97 | 2.80 |
percentage change (over previous month) | 0.66 | 0.29 | 0.05 | |||
2. Industry | 158.74 | 168.24 | 177.52 | 190.41 | 190.88 | 192.12 |
percentage change (Point to Point) | 6.22 | 5.99 | 5.51 | 5.88 | 6.07 | 6,28 |
percentage change (over previous month) | 0.89 | 0.77 | 0.12 | |||
i) Construction | 152.86 | 160.17 | 167.24 | 176.12 | 177.49 | 177.67 |
percentage change (Point to Point) | 5.19 | 4.77 | 4.42 | 4.44 | 4.59 | 4.75 |
percentage change (over previous month) | 0.62 | 0.73 | 0.10 | |||
ii) Production | 170.66 | 184.65 | 198.37 | 219.21 | 221.07 | 221.42 |
percentage change (Point to Point) | 8.14 | 8.21 | 7.43 | 8.32 | 8.55 | 8.86 |
percentage change (over previous month) | 1.32 | 0.85 | 0.16 | |||
3. Service | 164.78 | 175.33 | 185.99 | 200.90 | 221.84 | 202.04 |
percentage change (Point to Point) | 6.69 | 6.41 | 6.07 | 6.36 | 6.41 | 6.59 |
percentage change (over previous month) | 0.97 | 0.47 | 0.10 |
39
799
800
801
802
Working Paper Series: WP 1305
Mahfuza Akther Mohammad Monirul Islam Sarker
Khan Md. Saidjada
December 2013
Research Department (RD) Bangladesh Bank
Head Office, Dhaka, Bangladesh
Mahfuza Akther* Mohammad Monirul Islam Sarker
Khan Md. Saidjada
Though exchange rate was stable in the initial stage of floating regime in Bangladesh, sharp depreciations occurred during August 2004 to April 2006 and again in July 2010 to January 2012. As excessive fluctuation of exchange rate can be an obstacle to macroeconomic stability, it is important to know the sources of fluctuations in both the phases. In this context, this paper tries to investigate the probable reasons behind sharp depreciation of Bangladesh Taka (BDT) against US dollar (USD) in these two phases using Structural Vector Autoregression (SVAR) model following Clarida and Gali (1994) and uses data from January 2003 to June 2012. The paper finds that both the demand shocks mainly arising from external sector and the supply shocks are responsible for sharp depreciations of Bangladesh’s exchange rate in the two phases of our concern. However, the supply shocks are less effective than demand shocks in exchange rate fluctuations and the money supply shock also has a negligible effect on the depreciation of BDT during the period of this study.
Keywords: Structural VAR, Exchange rate depreciation, Demand shock, Supply Shock, Nominal Shock.
JEL Classification: E3, F41
1 In order to upgrade research capacity and policy analysis at Bangladesh Bank (BB), Research Department conducts research work on macroeconomic issues as a part of its routine activities. The paper reflects research in progress, and as such comments are most welcome (email: mahfuza.akhther@bb.org.bd). It is anticipated that the paper will eventually be published in learned journals after completion of the due review process. The views expressed in this paper are those of the authors' own and do not necessarily reflect those of Bangladesh Bank. The authors would like to thank Dr. Ahsan H. Mansur, Executive Director, Policy Research Institute (PRI) of Bangladesh, who provided valuable insights and guided the research study.
* Authors are Deputy General Manager of Research Department, Joint Director of Monetary Policy Department, and Deputy Director of Chief Economist’s Unit, Bangladesh Bank respectively.
Introduction
The sharp depreciation of Bangladesh Taka (BDT) against US dollar (US$) in late 2011 has generated considerable interest in seeking the reasons behind the exchange rate fluctuations in Bangladesh. The early stage of the floating exchange rate regime in Bangladesh was almost stable with low volatility and minimal depreciation of the taka against major trading partners' currencies due to adequate preparatory steps taken by Bangladesh Bank and the low inflationary environment at home and internationally (Rahman and Barua, 2006). From June 2003 to July 2004 the BDT/US$ exchange rate remained fairly stable while during August 2004 to April 2006 it experienced substantial depreciating pressure. After April 2006, the exchange rate remained very stable moving very gently during May 2006 to June 2010. The exchange rates again started to depreciate sharply from July 2010 and it continued up to January 2012. From February 2012, it recorded an appreciating tendency which is still continuing.
It is generally believed that depreciation of the domestic currency improves net exports as well as the external current account balance of the home country. But the benefits depend on the elasticity of export and import demand function of the country. Besides, it increases the country's rate of inflation through pass through effect. Therefore, depreciation is not always a good thing for a country. It may also be harmful for the external sustainability as well as economic growth of a country. So, the paper attempts to find out the logical reasons behind the sharp depreciation of BDT against US dollar as well as its trading partners' currencies. The paper also investigate the inter linkage of foreign exchange market with money market of Bangladesh. Besides, a comparative analysis between the two episodes is also presented for future policy options. In this regard, the paper is divided into five sections. The first section summarizes the literature review. In the second section, the behavior of exchange rate movements is analyzed rigorously. The third section focuses the plausible reasons behind the exchange rate depreciations. The fourth section seeks the long-run relationship among the variables of interest (relative output, relative real exchange rate and relative price) and also tries to find out the possible reasons of exchange rate fluctuations using structural vector auto regression (SVAR) model. The last section provides some concluding remarks with policy suggestions.
Literature Review
In literature, several studies attempted to investigate the sources of exchange rate fluctuations for different countries over different time periods. But very few studies are found for Bangladesh. Clarida and Gali (1994) was the pioneer to empirically investigate the sources of real exchange rate fluctuations. They studied exchange rate movements in Germany, Japan, Canada and Britain using the data since the collapse of Breton Woods. They found that nominal shocks explained a substantial part of the variance of the change in the dollar-DM and dollar-yen real exchange rates. They also found reverse results in the case of Canada and Britain. In case of Canada and Britain, demand shocks explain the majority of the variance in real exchange rate fluctuations, while supply shocks explain very little.
Bhundia and Gottschalk (2003) investigates the sources of fluctuations in the rand-U.S. dollar exchange rate in 2001 and 2002 using an empirical exchange rate model which identifies aggregate supply, aggregate demand, and nominal disturbances as possible sources for exchange
rate fluctuations. They found that nominal disturbances explain by far most of the rand depreciation in the final quarter of 2001. They also found that financial market developments are the most likely source of the depreciation.
Wang (2004) reviews the evolution of China's real effective exchange rate between 1980 and 2002, and uses a structural vector auto-regression model to study the relative importance of different types of macroeconomic shocks for fluctuations in the real exchange rate. He showed that real relative demand shocks had been the most important sources of fluctuations in the real exchange rate over the estimation period, while supply shocks had been the main factors accounting for variations in relative output and relative prices. He also showed that supply shocks were at least as important as nominal shocks in contributing to real exchange rate variations in China.
Chen (2004) estimated a structural VAR model using quarterly data of the USA, Canada, Germany, Japan and the UK from 1974:Q3 to 2002:Q4 by following Clarida and Gali (1994). His obtained results indicating that the variance of real exchange rates can be attributed more to monetary shocks when the sample span is extended. He also used VAR model with long-run annual data from 1889 to 1995 and found that that monetary shocks can explain nearly 50% of real exchange rate variance in the long run sample period.
Inoue and Hamori (2009) empirically analyzed the sources of the exchange rate fluctuations in India using monthly data from January 1999 to February 2009 by employing the structural VAR model. The VAR model consists of three variables, i.e., the nominal exchange rate, the real exchange rate, and the relative output of India and a foreign country. The empirical evidence demonstrated that real shocks were the main drivers of the fluctuations in real and nominal exchange rates, indicating that the central bank could not maintain the real exchange rate at its desired level over time.
Rahman and Barua (2006) attempted to analyze the underlying causes and impact of the recent developments in the foreign exchange and money markets of Bangladesh using the data of FY05 and FY06. They observed that depreciation and volatility of exchange rate depends on various components of foreign exchange market. For example, when the gap between the monthly flow of imports and exports widens or the demand for opening import LCs rises, the exchange rate tends to depreciate. On the other hand there is high positive correlation between volatility of exchange rate and that of call money rate.
The above survey indicates that a systematic and comprehensive study on recent sharp exchange rate fluctuations in Bangladesh is necessary for adapting future policy options.
Behavior of the exchange rate movements
As mentioned earlier, there were two episodes when there were pressures for exchange rate depreciation during the floating exchange rate regime in Bangladesh. The first episode continued about 21 months from August 2004 to April 2006 and the second episode lasted about 19 months from July 2010 to January 2012. During the first episode BDT depreciated by 15.67 percent against the US dollar and stood at Tk. 70.05 per US$1.0 on April 2006 from Tk. 59.37 per
US$1.0 on August 2004. During the second episode BDT depreciated by 17.80 percent and stood at 84.44 per US$1.0 on January 2012 compared with Tk. 69.41 per US$1.0 on July 2010.
Figure 1a shows the movement of BDT/US$ exchange rate (end period rate, epr) and the figure 1b shows exchange rate depreciation (in percent, %) during the two episodes mentioned above. It is observed that the trend and overall depreciation in 2nd episode was severe than first episode. But the trends of depreciation were increasing for both episodes. Therefore, the correlation between exchange rate movements between two episodes stood at 0.91 (highly correlated).
Although the USA is the second largest trading partner (18 percent of total trade in FY06) and US$ is the intervention currency in foreign exchange transactions of Bangladesh, the multilateral exchange rate , i.e., effective exchange rate is more important for policy decision. The ways to express the effective exchange rates are -nominal effective exchange rate (NEER) and real effective exchange rate (REER) indices.
From figure 2a and 2b, it is observed that BDT sharply depreciated in nominal term against its major trading currencies during the first episode. The depreciation would have been more severe in the second episode except for the months of September-October, 2009. From figure 3a and 3b, it is also observed that BDT depreciated in real term in the first episode except for the months of November-December, 2005 and February 2006. It also depreciated severely in the second episode except for the months of July-December, 2010, January 2011 and September 2011.
Plausible reasons for exchange rate depreciations
Under a floating regime, exchange rate movements depend on the demand and supply of foreign currency which are determined by the foreign exchange rate as well as money market variables. Some important variables are discussed below in order to explain the possible reasons for the sharp depreciation of BDT during the two episodes mentioned above.
Movement of net exports: Net exports in Bangladesh are always negative since its independence due to merchandise trade account imbalance. The size of the external trade account deficit becomes smaller or larger at different time periods. The vulnerability of the net export situation resulted mainly due to inelastic import demand of Bangladesh. About eighty percent of Bangladesh exports are on account of woven garments and knitwear, which in-elastically depend on the import of raw materials. The other important import items namely consumer goods (basically food), machinery and petroleum products are also inelastic in nature. An increase in net exports increases the demand for foreign exchange and trends to put pressures on the BDT exchange rate against partners' currencies. From figure 4, it is observed that net exports of Bangladesh had increased sharply during both the 1st and 2nd episodes. From figure 5, it is apparent that import demands for consumer goods as well as for petrol and petroleum product were responsible for the higher import demand during the two episodes under review. It is observed that during the first episode import demand for petrol and petroleum products was greater than the demand for consumer goods, but during the second episode demand for consumer goods was much higher than its levels in normal
times. Demand for consumer goods increased sharply in value terms mainly due to increased food prices in the world market.
Inward remittance: The flows of inward remittances in Bangladesh have contributed significantly to the external current account surplus recorded in recent years. It is also a very important source of foreign exchange from the supply side of the foreign exchange market in Bangladesh and thus can potentially play an important role in exchange rate determination. In this context it is noteworthy that the remittance growth, especially during the second episode, was disappointing (Fig. 6). The average growth of inward remittance during the second episode was 8.29 percent where the historical average of inward remittance was 18.86 percent (during January 2003-June 2012). The slower growth of inward remittances certainly exacerbated the recent exchange rate pressure in Bangladesh during the second episode.
FDI inflow: The FDI inflow in Bangladesh has generally been very low compared to most comparator countries in the region. It was even lower during the two episodes under review compared to the inflow in between the two episodes (Fig. 7). The monthly average (y-o-y) FDI inflow during the first and second episodes were US$47.0 million and US$62.2 million respectively whereas it was US$68.8 million during the period in between the two episodes (May 2006 - June 2010).
Net foreign aid: Bangladesh is still dependent on international foreign aid for financing its development projects and for the stability of the overall balance of payments. By financing imports associated with development projects and through budget support, foreign aid is also important for the stability of the foreign exchange market of the country. The level of foreign aid, especially during the first episode, was very low compared to the historical average (US$ 93.3 million, during January 2003 - June 2012). The monthly average of net amounts of foreign aid during the first and second episodes were US$69.8 million and US$84.21 million respectively where as it was US$107.1 million during the period in between the two episodes (Fig. 8).
FX intervention: Although the floating exchange rate regime has been prevailing, Bangladesh Bank has to intervene sometimes indirectly through selling and buying of foreign currency in the market to mitigate the undesirable fluctuations in the exchange rate. In this context, the amounts of net sales during the first and second episodes were US$1135.9 million and US$1680.5 million, respectively. Market interventions works to smooth out fluctuations due to temporary or short-term liquidity problems and it never works when the exchange market is fundamentally in disequilibrium. Since the interventions were made when the exchange market was subjected to some fundamental shifts on the supply and demand side both working toward larger excess demand for foreign exchange Bangladesh Bank interventions were not sufficient to stabilize the market (Fig. 9).
Liquidity movement: Theoretically, exchange rate depreciation is positively related with the expansion of money supply (liquidity). From figure 10, it is observed that the growth of broad money during first episode was increasing. For the second episode it may appear that liquidity was decelerating when the exchange market pressure emerged. However, a closer look at the monetary/liquidity situation would indicate that in the period immediately preceding the start of the episode for a significant period during the second episode, liquidity expansion remained at the very high level of about 22 percent. Therefore, the impact of nominal shock behind the sharp depreciation can be supported for both the episodes. This observation is also supported by the movement of excess reserve and call money rate. From figure 11, it is observed that the movements of the excess reserves were decline during the both episodes and the call money rates were comparatively high. It may also be observed that (Fig. 12) the correlations between volatility of call rate and that of exchange rate (0.63 for first episode and 0.37 for second episode) were not strong.
Foreign exchange reserves: Due to both domestic and external factors discussed above the level of foreign exchange reserves was decreasing during both episode, in part because of market interventions. Bangladesh Bank’s inability to stabilize the exchange rate despite sizable market interventions and the consequent loss of reserves led to a sharp exchange rate depreciation pressure in during the two episodes in Bangladesh.
Model based analysis of exchange rate fluctuations Theoretical background
Following the pioneering work of Blanchard and Quah (1989), there has been a growing body of literature in which long-run relationships from theory are used to identify structural shocks in an open economy setting. Clarida and Gali (1994) construct a three variable - relative output, relative prices, and the real exchange rate - structural VAR and identify three types of macroeconomic shocks: supply, real demand, and nominal shocks. The contribution of each type of shock to the variability of each variable is then assessed.
Clarida and Gali (1994) derive a stochastic version of the Obstfeld (1985) open economy macro model where output is supply determined over the long run. Their representation illustrates how the Mundell-Fleming-Dornbusch model can provide theoretical foundations for the restrictions used in their analysis to identify three separate types of “fundamental” shocks in the economy. The key assumptions of the model include (i) prices and output adjustments are sticky and (ii) foreign and domestic goods are imperfect substitutes in consumption. Shocks in the model can be categorized into: (i) real aggregate supply (AS) shocks, which includes all labor market factors, such as changes in the relative productivity of home to foreign countries, that shift the aggregate supply curve; (ii) aggregate demand or real good market (IS) shocks, encompassing exogenous changes to real relative domestic absorption due to shifts in consumption, investment, government expenditure and home/foreign goods tastes; and (iii) nominal or money market (LM) shocks, reflecting shifts in both relative money supplies, such as monetary policy shocks and relative money demands, such as velocity shifts, and effects of financial liberalization.
A positive supply shock, such as a higher productivity growth in the home country, raises the aggregate supply of domestic goods and the rate of return to capital and, in a traditional Mundell- Fleming model in which capital is mobile, leads to capital inflows and an appreciation of the exchange rate on impact (Obstfeld, 1994). Over the long run, domestic output increases to its higher potential level, domestic price declines, and the real exchange rate depreciates in order to generate trade surpluses to pay down the accumulated stock of net foreign liabilities. A positive demand shock increases demand for home goods, pushes up prices of home products and leads to an appreciation of the real exchange rate and an increase in output in the short run. Over time, output returns to the long-run trend, but the price level remains higher and the real exchange rate remains above its trend. A positive nominal shock lowers home interest rates. In the short run, both the nominal and real exchange rates depreciate, the relative price rises, and the domestic output increases. Over time, output and the real exchange rate return to their long-run trends. The long-run relationships described here are used in this paper as restrictions to identify the fundamental shocks in the model.
Data and Variables
Three variables - relative output (y), relative prices (p) and the real exchange rate (q) - have been included in this study. Monthly data on these variables have been collected for the period from January 2003 to June 2012. All variables are expressed in natural logarithms. The variables are relative to the weighted average of same variables in eight largest trading partner countries because both domestic and external macroeconomic conditions may affect the real exchange rate. Due to unavailability of quarterly or monthly data on GDP in Bangladesh, in this paper the index of industrial production (IIP) is used as a proxy of output variable. Hence, the log of relative real output is measured as the log of IIP of Bangladesh minus the log of trade weighted IIP of trading partner countries; the relative price level (CPI) has been measured similarly. Data on these variables related to Bangladesh have been collected from various publications of Bangladesh Bank and Bangladesh Bureau of Statistics (BBS). On the other hand, data related to trading partner countries have been collected from the CD-ROM of International Financial Statistics (IFS).
Model
The empirical model contains a three-variable structural VAR (∆y, ∆q, ∆p) and its identification restriction. The observed variations of economic variables are governed by three mutually orthogonal disturbances: supply shocks, demand shocks and monetary shocks. Formally, we want to transform the reduced form VAR to the structural model:
���� = ��(�� )����(1)
where
∆����
���� = ∆����
∆����
��11(��)��12(��)��13(��)
,��(�� ) = ��21(��)��22(��)��23(��)
��31(��)��32(��)��33(��)
���� ��
,���� = ������
������
(2)
In equation (2), Cij(L) is the polynomial of lag operator L, and ������, ������ and ������ are sequences of supply, demand and monetary shocks respectively. The orthogonality assumption implies E��������′ = ��. Furthermore, following Clarida and Gali (1994), the restriction that neither monetary shocks ������ nor demand shocks ������ influence relative output levels in the long run requires that
��12(1) = ��13(1) = 0(3)
Similarly, the restriction that monetary shocks ������ do not influence the real exchange rate in the long run implies that
��23(1) = 0(4)
Estimation Procedure
First, the reduced form VAR will be estimated by ordinary least square regression (OLS). Second, from the estimated reduced form VAR and long-run restriction denoted in equations (3) and (4), three orthogonal shocks can be disentangled, yielding the estimated coefficients {Cij:i,j= 1,2,3} in equation (2). Finally, the paper will employ impulse response and variance decompositions, which help us to investigate the direction and the sources of real exchange rate fluctuations.
Estimation Results
This section examines the time-series properties of the variables in the analysis. As we see in Figure 14, three variables included in this study are most likely to have unit roots. Regression of non-stationary variables may leads to a spurious result. Formal stationary tests are conducted and the results from the Augmented Dickey Fuller unit root tests are reported in Table 1. The null hypothesis of a unit root cannot be rejected for the levels of all three variables at conventional level of significance, while the first differences are confirmed to be stationary at 1 percent level of significance.
Fig. 14: Movements of variables
115
2.0
1.8
1.6
1.4
1.2
1.0
110
105
100
95
90
0.8
0.6
2003200420052006200720082009201020112012
Table 1: Augmented Dickey-Fuller Test for Stationarity
Variables | In Level | In first difference |
t-statistic | t-statistic | |
Relative output | 0.41 | -10.16* |
REER | -2.34 | -9.81* |
Relative Price level | 1.70 | -7.70* |
Note: * test statistic significant at 1 percent level of significance.
Using the Akaike Information Criterion (AIC), we find that the Vector Auto Regressive (VAR) model is the most appropriate for the system. In order to examine the sources of fluctuation, computed impulse response functions (IRFs) and variance decompositions (VDCs) of these three variables have been used. Since the nominal exchange rate is of central interest to us, below we also present the impulse response analysis for this variable2.
Figure 15 displays the impulse response functions of relative output, real exchange rate, relative price level and nominal exchange rate to one standard deviation structural shocks. Since the variables were entered in first differences in the VAR, the resulting impulse responses were cumulated in order to obtain the impulse responses of level of each of the variable to the structural shocks in the model. These impulse response functions are in line with the theoretical priors discussed above. Figure 15 shows that a positive supply shock leads to an increase in output; however, it declines to a lesser rise over the long run. The increase in relative output in
2 Even though this variable does not enter our empirical model directly, it can be constructed from the relative price variable and the real exchange rate variable.
Bangladesh is accompanied by a relative decline in the price level in Bangladesh. Since it is a key characteristic of a supply disturbance to drive output and prices in opposite directions, the responses shown in the figure are consistent with the predictions of our theoretical model. The real exchange rate initially appreciates slightly in response to the supply disturbance, but then a pronounced and persistent depreciation sets in, which is the long-run response predicted by Clarida and Gali’s model. To quantify the impulse response of nominal exchange rate we deduct the response of relative price from the response of real exchange rate. The figure shows that in response to supply shock, nominal exchange rate appreciates slightly in the long run and the response seems to be very weak.
In the case of real demand shock, there is an increase in output, an increase in the price level, and an appreciation of the real exchange rate. Both responses are predicted by our theoretical model. The nominal exchange rate also appreciates. In the long run, the output response is restricted to zero. The price and the exchange rate responses, on the other hand, turn out to be very persistent. In the case of nominal shock, the output response lasts for a few months and is accompanied by a depreciation of the nominal and real exchange rate. In the long-run, both the output and the real exchange rate responses are restricted to zero. But the nominal disturbance is followed by a persistent increase in the price level, and, consequently, in the nominal exchange rate. It is noteworthy that the nominal exchange rate overshoots its long-run level considerably, which is consistent with the predictions of the familiar Dornbusch (1976) model.
Fig. 15: Accumulated Impulse Response Function
Impulse response of relative outputImpulse response of real exchange rate
.06.025
.05
.020
.04
.03
.02
.01
.00
-.01
.015
.010
.005
.000
-.005
-.02
2468 10 12 14 16 18 20 22 24 26 28 30
-.010
246 8 10 12 14 16 18 20 22 24 26 28 30
Supply Shock Demand Shock Nominal Shock Supply Shock Demand Shock Nominal Shock
.010
.008
.006
Impulse response of relative priceImpulse response of nominal exchange rate
.020
.015
.004
.002
.000
-.002
-.004
.010
.005
.000
-.005
-.006
246 8 10 12 14 16 18 20 22 24 26 28 30
-.010
246 8 10 12 14 16 18 20 22 24 26 28 30
Supply Shock Demand Shock Nominal Skock
While impulse responses are useful in assessing the signs and magnitudes of responses to specific shocks, the forecast error variance decomposition analysis provides an important insight into the relative importance of each shock at different forecast horizons to the structural disturbances in our model. Since this paper focuses on the nominal exchange rate, we report here the variance decomposition only for the nominal exchange rate, which has been produced from the variance decomposition of real exchange rate and relative price. Table 2 presents the share of the forecast error variance of nominal exchange rate at different forecast horizon that can be attributed to each type of shocks in the model.
Table 2 shows that the main cause of the unexpected changes in the nominal exchange rate is demand shock. Demand shock accounts for almost half of the short-run variability in the nominal exchange rate. At the one-year horizon, nominal disturbances still account for about 60 percent of the variance decomposition, but at the two-year horizon this share has declined to about one- third. It decreases slightly to 46.56 percent at six month forecast horizon and it remained persistent for longer forecast horizon. While nominal shocks are the second largest source of the variability in nominal exchange rate which accounts for one-third of the unexpected fluctuations of the nominal exchange rate and it remains persistent in the longer forecast horizon. Initially supply shocks account for only 17.53 percent of the variability in nominal exchange rate. It increases to 20.44 percent at eight month forecast horizon and remains persistent thereafter.
Table 2: Forecast Error Variance Decomposition of Nominal Exchange Rate
Forecast horizon | Supply shock | Demand shock | Nominal shock |
1 | 17.52 | 48.10 | 34.38 |
2 | 17.68 | 47.79 | 34.53 |
3 | 18.27 | 47.92 | 33.81 |
4 | 19.35 | 47.99 | 32.66 |
5 | 19.73 | 47.33 | 32.94 |
6 | 19.94 | 46.56 | 33.49 |
7 | 20.27 | 46.60 | 33.13 |
8 | 20.44 | 46.57 | 32.99 |
9 | 20.38 | 46.60 | 33.03 |
10 | 20.55 | 46.42 | 33.03 |
11 | 20.56 | 46.42 | 33.02 |
12 | 20.56 | 46.40 | 33.04 |
In this paper our main objective is to identify the sources of volatility of nominal exchange rate with special attention to two episodes (Episode 1: August 2004 - April 2006 and Episode 2: July 2010 - January 2012) of high depreciation pressure on nominal exchange rate in Bangladesh. This purpose may be better served by historical decomposition of the nominal exchange rate. Using the estimated VAR, a historical decomposition can be derived to examine whether or not the supply, demand, and nominal shocks that have been identified can plausibly explain the time path followed by the nominal exchange rate of Bangladesh during the two episodes mentioned earlier.
Figure 16: Historical Decomposition of Nominal Exchange Rate During the Two Episodes
Episode 1Episode 2
.03.04
.02
.01
.02
.00
-.01
.00
-.02
-.03
-.04
-.05
-.02
-.04
-.06
IIIIVIIIIIIIVIII
200420052006
-.06
IIIIVIIIIIIIVI 20102011
.03.04
.02
.01
.02
.00
-.01
.00
-.02
-.03
-.04
-.05
-.02
-.04
-.06
IIIIVIIIIIIIVIII
200420052006
-.06
IIIIVIIIIIIIVI 20102011
.03.04
.02
.01
.02
.00
-.01
.00
-.02
-.03
-.04
-.05
-.02
-.04
-.06
IIIIVIIIIIIIVIII
200420052006
-.06
IIIIVIIIIIIIVI 20102011
Figure 16 plots the unconditional forecast error for the nominal exchange rate and shows the decomposition of this forecast error into the components that can be attributed to supply, real demand, and nominal shocks. The blue line in each graph of two panels (for two episodes) is the total forecast error, which depicts the difference between the actual (log level of the) nominal
exchange rate and the level that would have been forecast from the VAR. In other words, the blue line reflects the cumulative impact of the three types of structural shocks on the nominal exchange rate. The red line in each panel plots the contribution of each type of shocks to the total forecast error, or the forecast error that would have resulted if only one particular source of shocks had hit the variable. As shown in the figure, unexpected movements in the nominal exchange rate have been driven mainly by demand shocks.
Government expenditure which is a component of aggregate demand expands very largely during both episodes (Figure 17). The average quarterly growth of government expenditure stood at 19.37 percent and 40.51 percent during the 1st and 2nd episode respectively, whereas the average growth between two episodes was 15.79 percent. The growth of other components of aggregate demand except net exports (exports minus imports) also increases largely during the two episodes compared to pre-episodes periods (Figure 18a and Figure 18b).
The growths of consumption during 1st and 2nd episodes were 11.24 percent and 15.31 percent respectively, whereas the growths were 9.47 percent and 13.74 percent during pre-episodes respectively. The growths of investment during 1st and 2nd episodes were 13.19 percent and
17.19 percent respectively, while the growths were 12.47 percent and 13.41 percent during pre- episodes respectively. As a result, the nominal GDP growths during 1st and 2nd episodes were
11.74 percent and 14.78 percent respectively, whereas the growths were 10.40 percent and 13.69 percent during pre-episodes respectively.
Concluding remarks
In order to find out the recent exchange rate fluctuations in Bangladesh, this paper has discussed all relevant variables of foreign exchange market and money market using graphical as well as econometric technique. This paper also tries to find out the reasons behind the exchange rate fluctuations on historical as well as episode basis. It is observed that demand shocks especially created from external sector are responsible for sharp depreciation of BDT exchange rate during the two episodes. As per econometric analysis supply shocks are also important (but less than demand shock) for exchange rate fluctuation. The nominal shock, i.e., the money supply shock is ignored in the overall analysis.
References
Bhundia, A. & Gottschalk, J. (2003). Sources of Nominal Exchange Rate Fluctuations in South Africa. IMF Working paper No. WP/03/252.
Blanchard, O. & Quah, D. (1989). The Dynamic Effects of Aggregate Supply and Demand Disturbances. American Economic Review, 79(4): 655–673.
Chen, S. (2004). Real Exchange Rate Fluctuations and Monetary Shocks: A Revisit.
International Journal of Finance and Economics, 9:25-32.
Clarida, R. & Gali, J. (1994). Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks? NBER Working paper no. 4658.
Dornbusch, R. (1976). Expectations and Exchange rate dynamics. Journal of Political Economy,
84:1161–76.
Inoue, T. & Hamori, S. (2009). What Explains Real and Nominal Exchange Rate Fluctuations? Evidence from SVAR analysis for India. Discussion paper no. 216, Institute of Developing Economics, Japan.
Obstfeld, M. & Rogoff, K. (1995). Exchange Rate Dynamics Redux. Journal of Political Economy, 102: 624–660.
Rahman, M. H. & Barua, S. (2006). Recent experiences in the foreign exchange and money markets, Policy Note Series: PN 0703, Policy Anlysis Unit (PAU), Bangladesh Bank.
Wang, T. (2004). China: Sources of Real Exchange Rate Fluctuations. IMF Working Paper No. WP/04/18.
Currency Devaluation and Exports: Separating Actual from Statistical Author(s): Sugata Marjit, Byasdeb Dasgupta and Sandip Mitra
Source: Economic and Political Weekly , Apr. 29 - May 5, 2000, Vol. 35, No. 18 (Apr. 29 -
May 5, 2000), pp. 1553-1558
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821
DOI: 10.1111/rode.12340
Mi Dai1 | Miaojie Yu2 | Chunming Zhao1
1Business School, Beijing Normal University, China
2China Center for Economic Research (CCER), National School of Development, Peking University
Correspondence
Chunming Zhao, Business School, Beijing Normal University, China. 100875.
E-mail: cmzhao@bnu.edu.cn
| INTRODUCTION
One of the key ideas in international economics is that trade can bring dynamic gains by fostering innovation. Why is trade associated with more innovation? The recent trade literature has focused on two channels, one on the export side and one on the import side. On the export side, a number of papers have found that exports increase the incentive of innovation by expanding firms’ market size.1 On the import side, most of the studies have focused on the impact of increased import com- petition on the innovation behavior of domestic firms.2
In the present paper, we investigate a new channel linking trade and innovation: changes in competitive pressure in a firm’s export markets. Following Gald´on-S´anchez and Schmitz (2002),
Rev Dev Econ. 2018;22:263–286.wileyonlinelibrary.com/journal/rode© 2017 John Wiley & Sons Ltd | 263 828
we define competitive pressure as the probability of closure. Since the probability of closure is negatively related to profits, forces that reduce firm profits are supposed to raise competitive pres- sure. Theoretically, increased competitive pressure can benefit innovation through several channels, such as reducing agency costs (Schmidt, 1997), releasing factors that are “trapped” in producing old goods, escaping competition in the existing product market (Aghion, Bloom, Blundell, Griffith, & Howitt, 2005), or increasing the incentive to gain market share (Raith, 2002).3 For a firm with sales in multiple countries, competitive pressure may arise from either the domestic market or export destinations. Although empirical evidence on the impact of competition in the domestic market is considerable, less is known about the impact of competitive pressure from the export market. One possible reason for such lack of investigation is that it is difficult to observe exoge- nous shocks that systematically change firms’ competitive pressure in export markets.
Our study investigates the innovation response to competitive pressure in the export market that arises from exchange rate shocks. We use China’s exchange rate regime policy reform as a natural experiment and investigate the effect of the subsequent exchange rate appreciation on the innova- tion of Chinese manufacturing firms. Appreciation of the renminbi (RMB) increases the relative price (denominated in the local currency of the destination country) of a Chinese exporter against its competitors in the export destination, negatively affecting the Chinese exporter’s profits and translating into increased competitive pressure from the export market. We identify the impact of this by exploiting the heterogeneity across firms in their export status. Intuitively, appreciation increased competitive pressure in the foreign market relatively more for firms more reliant on exports. We employ a difference-in-difference approach to examine its impact on innovation.
One empirical challenge in our study is that the appreciation may affect firm innovation through channels other than changing the competitive pressure in the export market. First, the appreciation implies a tightened export market and contracts the total market size of exporters, discouraging innovation that displays economies of scale (market size effects). Second, the appreciation makes foreign exporters more competitive in domestic markets and increases the import competition faced by indigenous firms (import competition effect). Third, the appreciation lowers the prices of imported intermediated inputs, which may benefit innovation if imported inputs and innovation are complementary (imported inputs effect). We make several attempts to control for these alternative channels. For import competition effects, we include the import penetration ratio at the industry level and investigate whether the impact of the appreciation differs across industries with different import competition stances. For the imported inputs channel, we control for the firm’s intensity of use of intermediate inputs and investigate whether the effect of the appreciation differs across firms with different import intensity. Finally, by investigating the response of firms with different export dynamics, we provide suggestive evidence for market size effects. Our results suggest that these alternative channels do matter for innovation. However, they cannot explain our major empirical finding that the innovation behavior of the ex ante exporters rose faster than ex ante non-exporters during the appreciation period. First, since the foreign market contracts more for exporters under the appreciation, market size effects will predict that the innovation of exporters will fall, rather than rise, relative to non-exporters. Second, as long as exporters also have sales in the domestic market, as in Melitz (2003), pressures from import competition should be present for exporters, failing to explain why the innovation of exporters rose faster. We attribute this faster innovation growth of exporters to the increased competitive pressure in the export market induced by the appreciation.
To preview the results, we find that the RMB appreciation caused the research and development (R&D) expenditure of exporters to increase by 11 percent, and new product development to increase by nearly 1.5 times more than for non-exporters. We also find such effect to be
heterogeneous across industries with different R&D intensities, and also across firms with different export dynamics.
This paper is related to a broad literature that studies the nexus between trade and innovation. Papers like Bustos (2011), Lileeva and Trefler (2010), Verhoogen (2008), and Aw et al. (2011) link exports to innovation through increased market size. These studies are usually set in an export expansion scenario, such as tariff reductions or exchange rate devaluation, and investigate the impact of increased export opportunities on firms’ innovation (or upgrading) behaviors, such as R&D, product innovation, ISO certification and technology adoption from advanced countries. The present paper, however, is set in a scenario of export tightening (caused by the exchange rate appreciation) and therefore investigates the flip side of the coin. Interestingly, we find that firm innovation also rises under the exchange rate appreciation, which contradicts the prediction of the models that link export and innovation solely via market access. Therefore there must be some other forces at work. Another line of literature links trade and innovation through import competi- tion. Papers like Bloom et al. (2016) and Iacovone et al. (2011) investigate the impact of increased import competition from China on the innovation behavior (patent, information technology adop- tion, just-in-time system, etc.) of European and Mexican firms, while Teshima (2008) investigates the impact of increased import competition resulting from the Mexican unilateral tariff reductions on firm innovation. Our study links with this literature in that we also investigate the impact of competition on firm innovation. However, we focus on the competitive pressure in firms’ export markets instead of import competition in the domestic market. To the best of our knowledge, our paper is the first to study the impact of competitive pressure in foreign markets on innovation using firm-level micro-data.
This paper is also related to the literature that investigates the impact of exchange rate shocks on firm performance. Although this literature has a long history, there are still not many papers using firm-level data. Nucci and Pozzolo (2001, 2010) study how the exchange rate affects the investment and employment decisions of Italian manufacturing firms. Ekholm, Moxnes, and Ullt- veit-Moe (2011) study the impact of the real exchange rate appreciation on the employment, pro- ductivity, and capital intensity of manufacturing firms in Norway. Micro-level studies on the RMB appreciation have recently also begun to emerge, but mostly focused on its impact on trade flows (Li, Ma, & Xu, 2015; Tang & Zhang, 2012). To the best of our knowledge, our paper is the first to study how exchange rate shocks affect the innovation behavior of firms.
The rest of this paper is organized as follows. Section 2 describes the data. Section 3 conducts a preliminary analysis on the impact of exchange rate appreciation on export, firm performance, and innovation. Section 4 estimates the impact of appreciation on firm innovation using a differ- ence-in-difference approach. Section 5 conducts a series of robustness checks. Section 6 discusses industry and firm heterogeneity. Section 7 concludes.
| DATA
The firm-level data in this paper come from the Annual Survey of Industrial Firms (ASIF) con- ducted by the National Bureau of Statistics of China from 2001 to 2007. The survey includes all state-owned enterprises (SOEs) and those non-state-owned enterprises in the industrial sector with annual sales of RMB 5 million (or equivalently, about $650,000) or more. The dataset includes a comprehensive set of variables from firm’s balance sheet, profit and loss statements, and cash flow statements, including firms’ identity code, ownership, export status, employment, capital stock, and revenue. Importantly for this study, the survey reports information about annual R&D expenditure
as well as revenue from new products for each firm.4 We will use these two variables to construct the main measures of firm innovation. Because of the China Industry Census, R&D and new pro- duct data are missing in 2004. We restrict our sample to manufacturing industries.
To clean the data, we follow Feenstra, Li, and Yu (2014) and drop an observation if one of the following criterion is met: (1) Missing or negative values are reported for any of the following variables: total sales, total revenue, total employment, fixed capital, export value, intermediate inputs. (2) Export value exceeds total sales or share of foreign assets exceeds 1. (3) Fewer than least eight employees. Based on this cleaned dataset, we construct a balanced panel of firms that exist throughout the entire sample period. We conduct the subsequent analysis on the balanced panel for two reasons. First, our paper aims to study the within-firm performance change instead of cross-firm resource reallocation. Therefore firm entry and exit are not the focus of our study. Second, most micro-level studies on export and innovation rely on balanced panel data (e.g. Ver- hoogen, 2008; Lileeva & Trefler, 2010; Bustos, 2011). The final sample for subsequent analysis consists of 58,182 firms and 407,274 observations.5
| PRELIMINARY ANALYSIS
| Background: China’s exchange rate regime reform and the RMB appreciation
On July 21, 2005, after 11 years of strictly pegging the RMB to the US dollar, the People’s Bank of China (PBOC) announced a revaluation of the currency and a reform of the exchange rate regime. The reform transformed the Chinese yuan from a strict pegging to the US dollar into a managed float system that use an undisclosed basket of currencies as reference. The RMB saw an instant appreciation of 2.1% right after the announcement. The subsequent appreciation, however, proceeded in a gradual manner. Each day the PBOC announced its target for the following work- ing day based on that day’s RMB closing price in terms of a “central parity.” The following day, the RMB exchange rate would be allowed to fluctuate against the dollar and other currencies within a band of plus or minus 0.3% around the central parity announced.6 Despite the small movement allowed each day, by the end of December 2008, the RMB had actually appreciated 21% against the US dollar compared with its value prior to the reform. The effective nominal exchange rate had also appreciated by 21% (see Figure 1).
Several remarks about the reform and the appreciation are in order. First, the reform was initi- ated under a strong expectation of appreciation. By the time of the reform, China had maintained a huge current account surplus for over 10 years, accumulating foreign exchange reserves of $700 billion. It was widely believed that the RMB had been substantially undervalued to keep Chinese exports competitive. The reform signaled that the Chinese monetary authority would finally allow for greater exchange rate flexibility and a possible long-term appreciation. In this regard, the effects captured in our study reflect not only the effect of the actual appreciation, but also the expectations of future appreciation. Second, the gradual manner of the appreciation is important for our study. A gradual appreciation allows the firm to adjust to the competitive pressure without being wiped out of the market immediately. A drastic appreciation, by contrast, may lead to firm closure and discourage innovation through a strong market size effect. Actually, giving the domes- tic firms enough time to adjust to the competitive pressure is also a major reason why the Chinese government has adopted a managed floating exchange regime rather than an independently floating exchange rate regime.7
time
FIGURE 1 Nominal Exchange Rate of the RMB, 2000–2008 [Colour figure can be viewed at wileyonlinelibrary.com]
Note: This figure reports the RMB–dollar exchange rate index and the effective RMB exchange rate. The base period is January 2000, with the exchange rate index set to 100. An increase in the index implies an appreciation of the RMB.
| Export tightening
We start by examining whether the appreciation led to export tightening and increased competitive pressure for exporters. In Table 1(a) we calculate the average export growth, share of exporters (in terms of number of firms), and average export intensity (defined as exports over total sales) in each year. The share of exporters and average export intensity indicate exports at the extensive margin and intensive margin, respectively. The data show that all three indicators kept rising before 2005, but began to fall after then. Total export growth fell from 26.4% in 2004 to 13.6% in 2007, share of exporters fell from 41.1% to 38.1%, and average export intensity from 24.2% to 22.5%. Thus it is clear that the appreciation has led to sizable export tightening. Table 1(b) shows the fraction of firms that entered and exited the export market during the pre-appreciation period (2001–2004) and the appreciation period (2005–2007). Compared to the pre-appreciation period, the fraction of firms entering the export market decreased from 9.38% to 3.79%, while that of firms exiting the export market increased from 4.14% to 5.56%. This once again suggests that exports shrank at the extensive margin during the appreciation period.
The critical assumption we rely on for identification in the econometric analysis is that the appre- ciation imposed larger competitive pressure for exporters than for non-exporters. We would like to know whether such differential effects exist in the data. Following Gald´on-S´anchez and Schmitz (2002) and Ekholm et al. (2012), we argue that greater potential negative impact of the appreciation translates to greater competitive pressure. Therefore, we examine whether the appreciation imposed a greater negative impact for exporters than for non-exporters. Table 2 reports the growth rate of employment, profits, and total sales for exporters and non-exporters during the appreciation period and pre-appreciation period, respectively. The growth rate difference between the two periods is also reported. It is evident from Table 2 that exporters experienced a much more severe slow-down in the growth of employment, profits, and sales under the appreciation. For example, compared to the pre-appreciation period, the employment growth rate reduced by 10.7 percentage points during
TABLE 1 Export Tightening
(a) Export Growth, Share of Exporters, and Average Export Intensity (%) | |||
Year | (1) Total export growth | (2) Proportion of exporters | (3) Average export intensity |
2001 | – | 35.89 | 22.43 |
2002 | 23.81 | 37.35 | 22.93 |
2003 | 25.79 | 38.12 | 23.08 |
2004 | 26.35 | 41.09 | 24.24 |
2005 | 14.73 | 39.86 | 23.22 |
2006 | 22.85 | 39.67 | 23.01 |
2007 | 13.64 | 38.09 | 22.46 |
(b) Share of Firms by Entry and Exit Status (%) | ||||
Type | (1) Pre-appreciation | period | (2) Appreciation | period |
Start to export | 9.38 | 3.79 | ||
Continue to export | 31.72 | 34.31 |
Quit exporting | 4.14 | 5.56 |
Never export | 54.73 | 56.33 |
Notes: Part (a) reports total export growth, proportion of exporters, and average export intensity by year. Part (b) reports the propor- tion of firms that start to export, continue to export, quit exporting and never export during the pre-appreciation and appreciation period. All numbers are percentages. In part (b), the pre-appreciation period is 2001–2004 and the appreciation period 2005–2007. Start to export: export = 0 in the first year of the period, export = 1 in the last year of the period. Continue to export: export = 1 in the first year of the period, export = 1 in the last year of the period. Quit exporting: export = 1 in the first year of the period, export = 0 in the last year of the period. Never export: export = 0 in the first year of the period, export = 0 in the last year of the period.
the appreciation period for exporters but by only 4.5 percentage points for non-exporters. Profits and sales show a similar pattern. Thus the data suggest that the appreciation imposed a greater nega- tive shock on exporters and this translates into increased competitive pressure.8
| Firm innovation
How, then, do firms’ innovation activities respond to the competitive pressure imposed by the appreciation? Do exporters increase innovation faster than non-exporters because the incremental competitive pressure is greater? We measure innovation with two variables. The first is the annual R&D expenditure of the firm, and the second is new product development, defined as the revenue from sales of the new products over total sales revenue. R&D expenditure measures the input side of innovation, while new product revenue share measures the output side. Figure 2 shows the log R&D expenditure (Figure 2(a)) and the new product revenue share (Figure 2(b)) for exporters and non-exporters over the sample years. Two patterns emerge immediately from Figure 2, the most important figure in this paper. First, consistently with the literature, exporters on average have a better performance in innovation (Bustos, 2011; Lileeva & Trefler, 2010; Aw et al., 2011). They invest more in R&D and recoup a larger share of revenue from new products. Second, before 2005, R&D expenditure and new product revenue share had a similar trend for both exporters and non-exporters, while after 2005, both R&D and new product revenue share obviously rose faster
TABLE 2 Growth of Employment, Profit and Total Sales (%), for Exporters and Non-exporters
Employment | Profit | Total sales | |
Exporter | |||
Appreciation period | 3.29 | 87.90 | 17.23 |
Pre-appreciation period | 13.95 | 116.40 | 34.01 |
Difference | –10.66 | –28.54 | –16.78 |
Non-exporter | |||
Appreciation period | 2.60 | 117.91 | 23.59 |
Pre-appreciation period | 7.12 | 104.83 | 32.92 |
Difference | –4.52 | 13.08 | –9.33 |
Note: This table reports average growth rate of employment, profit and total sales during the appreciation period and pre-apprecia- tion period, for exporters and non-exporters in 2004 separately. All numbers are in percentage points.
for exporters. Such a data pattern is consistent with our previous conjecture that the export tighten- ing under the appreciation imposed larger competitive pressure for exporters than for non-exporters and induced more innovation from exporters. Notice that the innovation of non-exporters also rose slightly after 2005, possibly due to increased import competition resulting from the appreciation. We will control for import competition in our subsequent econometric analysis.
In order to show the innovation difference for exporters and non-exporters more clearly, we run the following regression in a flexible specification:
2007
INVft = a +
t=2002
2007
bt EXPft × Yeart +
t=2002
Yeart + vf + eft,(1)
where INVft is the innovation measure for firm f in year t. We include a full set of year dummies Yeart as well as the exporter dummy interacted with the year dummy EXPft 9 Yeart. vf is firm fixed effects and ɛft is the error term with conventional properties. A simple derivation shows that
bt = E(INVft|EXPft = 1, Year = t)— E(INVft|EXPft = 0, Year = t).(2)
Thus bt measures the average innovation difference between exporters and non-exporter in year
t. By tracking the evolution of bt over the years we can see how the innovation difference has changed over time. This flexible specification has the advantage of not imposing arbitrary structure on the data. We plot the bt. for 2002–2007, together with their 95% confidence intervals, in Fig- ure 3. It is clear that the bt are low and steady before 2005, but rose dramatically afterwards. The bt in 2007 is almost four times its value in 2003, indicating that the RMB appreciation might have a large impact on the innovation behavior of exporters. However, the previous results might be caused by other firm and industry characteristics instead of exchange rate movements, so we con- trol for these factors in the following econometric analysis.
| ESTIMATING THE IMPACT OF THE APPRECIATION ON FIRM INNOVATION
| Empirical strategy
Realizing that the appreciation has differential impact on exporters and non-exporters, we use a difference-in-difference (DID) estimation approach. In a seminal paper, Bertrand, Duflo, and
FIGURE 2 (a) Log R&D Expenditure and (b)New Product Revenue Share, by Exporters and Non-exporters
Mullainathan (2004) point out that a multiple-period DID specification (like that in equation (1)) with persistent dependent variable (such as R&D) may run into serious serial correlation problems and lead to over-rejection of the null hypothesis. To fix this problem, we adopt one of their sug- gested remedies and collapse the data into a pre-appreciation period (2001–2004) and a post-appre- ciation period (2005–2007). We take the following specification:
INVft = a + b1Post05t + b2EXP04f × Post05t + vf + eft, t = 0, 1,(3) where t = 0 and t = 1 refer to the pre-appreciation period and the appreciation period, respectively.
INVft is the year average of innovation measure for firm f in period t. In the benchmark results, we use four indicators of innovation: log R&D expenditure; an R&D dummy that equals 1 if a firm conducts positive R&D and equals 0 otherwise; new product revenue share; and a new
FIGURE 3 bt, 2002–2007
product development dummy that equals 1 if a firm has positive revenue share from new products. Post05t is a dummy variable that equals 1 for the years after (and including) 2005, and equals 0 otherwise.9 EXP04f is a dummy variable that equals 1 for exporters in year 2004, and equals 0 for non-exporters.10 vf and ɛft are again firm fixed effects and an error term. Taking first-difference between the two time periods for equation (3) yields
DINVf = b1 + b2EXP04f + e*.(4)
Although equation (4) forms the core of our estimation equation, in practice, innovation growth might also be affected by other firm attributes and industry-specific shocks. To control for these confounding factors, we supplement equation (4) with a bunch of firm and industry control variables. Firm-level controls include firm-level TFP,11 log employment, and log fixed capital stock. For industry-level controls, we include the import penetration ratio of each industry to control for the impact of import competition,12 plus total export and total domestic sales (both in logs) to control for foreign and domestic demand shocks that might affect firm innovation through market size effects. All control variables take the value of the year prior to the apprecia- tion shock (i.e., 2004) to avoid possible reverse causality.13 This yields our final estimation equation:
DINVf = b1 + b2EXP04f + b3Xf04 + b4Xi04 + e*,(5)
where Xf04 and Xi04 denote firm- and industry-level control variables, respectively. We estimate equation (5) using ordinary least squares (OLS). Standard errors are clustered at the four-digit industry level.14 Table 3 reports the summary statistics of the major variables used in estimations.
| Results
Table 4 reports the benchmark estimation results. No matter which indicator is used to measure innovation, the coefficient of the export dummy (EXP04f) is always positive and significant. This
TABLE 3 Summary Statistics for Major Variables
Variables | Mean | Std. Deviation |
Dependent variable (ΔINVf) | ||
Δlog R&D expenditure | 0.129 | 1.694 |
ΔR&D dummy | –0.011 | 0.295 |
Δnew product revenue share | 0.013 | 0.129 |
Δnew product dummy | 0.040 | 0.257 |
Key independent variable | ||
Exporter dummy (EXP04f) | 0.411 | 0.492 |
Firm-level control variable | ||
TFP_OP15 | 4.284 | 1.163 |
Log employment | 5.233 | 1.093 |
Log capital stock | 8.996 | 1.724 |
Industry-level control variable | ||
Import penetration ratio | 0.110 | 0.125 |
Log industry export | 15.095 | 1.867 |
Log industry domestic sales | 16.582 | 1.478 |
suggests that the innovation of exporters increased more than non-exporters during the appreciation period. Since we take logs of the R&D expenditure, the coefficient in column 1 suggests that the R&D investment by exporters increased by 11% more than by non-exporters. For new product rev- enue share (column 3), the new product revenue share for exporters increased by 0.1 percentage points more than that for non-exporters. This result may seem insignificant at first glance. How- ever, the new product revenue share for non-exporters increased by only 0.066 percentage points during the same period. Thus the coefficient suggests that the increase in new product revenue share for exporters is actually nearly 1.5 times more than that of non-exporters. The import pene- tration ratio coefficient is also positively significant in some cases, though the significance is not robust to the measure of innovation.16
| ROBUSTNESS
| Using one year before and after the shock
In Section 4 we use the year average of innovation in the pre-appreciation and appreciation period as the dependent variable. Doing so takes advantage of innovation information in all years and helps to capture the full impact of the appreciation if any lagged effects exist. However, a potential problem with this approach is that our estimation result might also capture the effect of other poli- cies that took effect during the appreciation period and influenced the innovations of exporters and non-exporters differently. As suggested by Bertrand et al. (2004), an alternative way to carry out estimation is to use just one year before and after the appreciation shock. To this end, we repeat the DID regression in equation (4), using the observations in year 2003 and 2006 only. The result reported in Table 5 show that the coefficient of the variable EXP04f is slightly smaller than the benchmark results in Table 5, but is nevertheless positive and highly significant.
TABLE 4 Baseline Regression Result
(1) | (2) | (3) | (4) | |
Dependent variable | Δlog R&D | ΔR&D dummy | Δnew product revenue share | Δnew product dummy |
EXP04f | 0.112*** | 0.016*** | 0.010*** | 0.014*** |
(4.73) | (4.52) | (5.96) | (4.04) | |
TFP | 0.083*** | 0.010*** | 0.003*** | 0.010*** |
(8.78) | (6.51) | (4.86) | (6.90) | |
Log employment | 0.073*** | 0.003* | 0.001 | 0.002 |
(6.01) | (1.85) | (0.79) | (1.04) | |
Log capital | 0.065*** | 0.005*** | 0.001*** | 0.002** |
(10.77) | (6.27) | (3.30) | (2.37) | |
Import penetration | 0.084*** | 0.003 | 0.002** | 0.001 |
(4.14) | (1.31) | (2.06) | (0.23) | |
Industry export | –0.003 | 0.001 | 0.002*** | 0.002* |
(–0.28) | (0.99) | (4.19) | (1.96) | |
Industry domestic sales | 0.009 | 0.001 | –0.001** | –0.003* |
(0.62) | (0.06) | (–2.21) | (–1.86) | |
Constant | –1.350*** | –0.143*** | –0.019** | –0.020 |
(–6.63) | (–6.55) | (–2.12) | (–0.94) | |
Observations | 57,330 | 57,330 | 57,006 | 57,006 |
R-squared | .019 | .005 | .004 | 0.004 |
Notes: This table reports the estimation results for equation (5). The dependent variable is the difference of average innovation between the appreciation period and pre-appreciation period. EXP04f = 1, exporter in 2004. EXP04f = 0, non-exporter in 2004. t-values in parentheses.
*,**,*** indicate significance at 10%, 5%, and 1% level, respectively.
TABLE 5 Using One Year before and after the Shock
(1) | (2) | (3) | (4) | |
Dependent variable | Δlog R&D | ΔR&D dummy | Δnew product revenue share | Δnew product dummy |
EXP04f | 0.108*** | 0.014*** | 0.011*** | 0.010** |
(3.69) | (2.80) | (5.27) | (2.09) | |
Firm-level controls | Yes | Yes | Yes | Yes |
Industry-level controls | Yes | Yes | Yes | Yes |
Observations | 57,330 | 57,330 | 57,006 | 57,006 |
R-squared | .007 | .002 | .004 | .001 |
Notes: This table reports the regression results of equation (5), using only one year before and after the exchange rate regime reform (2003 and 2006). The dependent variable is the difference of innovation. EXP04f = 1, exporter in 2004. EXP04f = 0, non-exporter in 2004. Firm-level controls include log employment, log fixed capital, TFP. Industry-level controls include industry import penetra- tion ratio, log industry total exports, log industry total domestic sales. t-values in parentheses. *,**,*** indicate significance at 10%, 5% and 1% level, respectively.
| Control for other confounding polices
Although using one year before and after the shock may alleviate the effect of the confounding poli- cies long before and after the shock, it will not be able to exclude the effect of policies that took effect contemporaneously with the exchange rate shock. Here we consider two highly relevant poli- cies. The first is the expiration of the Multi-Fiber Arrangement (MFA) in January 2005, as docu- mented in Brambilla, Khandelwal, and Schott (2010). The quota elimination on textile and apparel products led to a surge in exports to the USA and Europe. This may have promoted the innovation of textile exporters through market size effects. To rule out the effect of the MFA, we repeat the DID regression but excluding textile related industries. Results are reported in Table 6(a). The sec- ond possible confounding factor is the rise of labor costs in China after 2005 (Zhang, Yang, & Wang, 2011), which might have induced firms to adopt more skill-intensive techniques. We control for this factor by including the change in log average wage as the additional control variable. Results are reported in Table 6(b). In both cases, the main result in the previous section holds very well.
| Placebo tests
One of the critical assumptions in applying the DID is that the outcome variable for the treatment group should be identical with the control group in the absence of the treatment. In our case, this
TABLE 6 Excluding the Influence of Other Confounding Policies
(1) | (2) | (3) | (4) | |
Dependent variable | Δlog R&D | ΔR&D dummy | Δnew product revenue share | Δnew product dummy |
(a) Excluding textile sectors | ||||
EXP04f | 0.138*** | 0.019*** | 0.011*** | 0.016*** |
(5.57) | (4.80) | (5.89) | (4.07) | |
Firm-level controls | Yes | Yes | Yes | Yes |
Industry-level controls | Yes | Yes | Yes | Yes |
Observations | 48,406 | 48,406 | 48,121 | 48,121 |
R-squared | .020 | .005 | .004 | .005 |
(b) Including wage growth | ||||
EXP04f | 0.113*** | 0.016*** | 0.010*** | 0.014*** |
(4.78) | (4.57) | (5.97) | (4.04) | |
Δlog wage | 0.053*** | 0.007*** | 0.001 | –0.002 |
(3.69) | (2.92) | (0.77) | (–0.88) | |
Firm-level controls | Yes | Yes | Yes | Yes |
Industry-level controls | Yes | Yes | Yes | Yes |
Observations | 57,322 | 57,322 | 57,001 | 57,001 |
R-squared | .019 | .005 | .004 | .004 |
Notes: This table reports the regression results of equation (5). Part (a) excludes textile industries. Part (b) includes change in log wage as an additional control. The dependent variable is the difference of average innovation between the appreciation period and pre-appreciation period. EXP04f = 1, exporter in 2004. EXP04f = 0, non-exporter in 2004. Firm-level controls include log employ- ment, log fixed capital, TFP. Industry-level controls include industry import penetration ratio, log industry total exports, log industry total domestic sales. t-values in parentheses. *,**,*** indicate significance at 10%, 5% and 1% level, respectively.
assumption means that the innovation of exporters and non-exporters should have a statistically identical trend before the exchange rate appreciation. If not, the impact we find in the previous section may just be spurious. We test this hypothesis by picking some year before the appreciation to conduct a DID regression. The results using 2002 and 2004 as the dividing years are reported in Table 7.17 In both cases, none of the export dummy coefficients is positively significant. Thus, it is not likely that our previous result is driven by the innately different innovation trend between exporters and non-exporters.
| Firm entry and exit
All the previous results are based on a balanced panel and therefore do not take into account firm entry and exit. However, it is well documented in the literature that entry and exit of firms are not random. Less productive firms are more likely to exit the sample (Pavcnik, 2002) and are thus more likely to be excluded in the previous analysis. These firms might have different innovation response compared with firms that stay throughout the sample period. To ensure that our previous result is not driven by sample selection, we repeat the DID exercise using the full unbalanced sam- ple and report the results in Table 8. It is clear that the benchmark results still qualitatively hold.
| Imported inputs
Another possible channel of the exchange rate effect is that home currency appreciation may lower the price of imported intermediate inputs. We expect this effect to benefit innovation in
TABLE 7 Placebo Test
(1) | (2) | (3) | (4) | |
Dependent variable | Δlog R&D | ΔR&D dummy | Δnew product revenue share | Δnew product dummy |
(a) Dividing year: 2002 | ||||
EXP01f | –0.023 | –0.003 | –0.001 | –0.015*** |
(–0.95) | (–0.68) | (–0.92) | (–4.38) | |
Firm-level controls | Yes | Yes | Yes | Yes |
Industry-level controls | Yes | Yes | Yes | Yes |
Observations | 55,987 | 55,987 | 55,885 | 55,885 |
R-squared | .003 | .001 | .001 | .001 |
(b) Dividing year: 2004 | ||||
EXP03f | 0.040* | 0.006* | –0.001 | –0.015*** |
(1.87) | (1.67) | (–0.15) | (–4.02) | |
Firm level controls | Yes | Yes | Yes | Yes |
Industry-level controls | Yes | Yes | Yes | Yes |
Observations | 57,536 | 57,536 | 57,428 | 57,428 |
R-squared | .001 | .001 | .001 | .001 |
Notes: This table reports the regression results of equation (5), using years before the appreciation as dividing year. Part (a) uses 2002, part (b) uses 2004. The dependent variable is the difference of innovation. Only one year before and after the dividing year are included. Firm-level controls include log employment, log fixed capital, TFP. Industry-level controls include industry import penetration ratio, log industry total exports, log industry total domestic sales. t-values in parentheses. *,**,*** indicate significance at 10%, 5% and 1% level, respectively.
TABLE 8 Unbalanced Sample Regressions
(1) | (2) | (3) | (4) | |
Dependent variable | Δlog R&D | ΔR&D dummy | Δnew product revenue share | Δnew product dummy |
EXP04f | 0.193*** | 0.0258*** | 0.00977*** | 0.0148*** |
(5.11) | (8.41) | (7.32) | (5.01) | |
Firm-level controls | Yes | Yes | Yes | Yes |
Industry-level controls | Yes | Yes | Yes | Yes |
Observations | 122,629 | 122,629 | 121,952 | 121,952 |
R-squared | .042 | .025 | .004 | .004 |
Note: This table reports the regression results of equation (5), using the unbalanced sample. Dependent variable is the period differ- ence of average innovation. EXP04f = 1, exporter in 2004. EXP04f = 0, non-exporter in 2004. Firm-level controls include log employment, log fixed capital, TFP. Industry-level controls include industry import penetration ratio, log industry total exports, log industry total domestic sales. t-values in parentheses. *,**,*** indicate significance at 10%, 5% and 1% level, respectively.
several ways. First, cheaper imported inputs yield higher operating profits, leaving more room for the firm to pay for the fixed costs of innovation. Second, firms may import new input varieties or higher-quality inputs, which are usually considered to be complementary to innovation.
In order to control for this alternative channel of the exchange rate effect, we include in the regression the firm’s import intensity, defined as the ratio of imported material costs to total variable costs (wage bill plus material costs).18 Intuitively, the cost-saving effect of the appreciation should be larger for firms that are more reliant on imported intermediate inputs. Therefore, we expect a positive coefficient before the import intensity variable. Table 9 shows that that it is what we find in the data. In any case, the coefficient before the export status variable remains positive and significant, suggesting that the effect of export market competi- tive pressure on innovation is still present even when controlling for the imported input cost channel.
TABLE 9 Imported Intermediate Inputs
(1) | (2) | (3) | (4) | |
Dependent variable | Δlog R&D | ΔR&D dummy | Δnew product revenue share | Δnew product dummy |
EXP04f | 0.110*** | 0.0139*** | 0.0117*** | 0.0182*** |
(5.88) | (4.25) | (7.85) | (6.21) | |
Import intensityf | 0.0221 | 0.0216*** | 0.0126*** | 0.0368*** |
(0.50) | (3.22) | (3.63) | (6.59) | |
Firm-level controls | Yes | Yes | Yes | Yes |
Industry-level controls | Yes | Yes | Yes | Yes |
Observations | 52,456 | 52,456 | 52,161 | 52,161 |
R-squared | .019 | .006 | .004 | .005 |
Notes: This table reports the regression results of equation (5), controlling for firm-level import intensity. Dependent variable is the period difference of average innovation. EXP04f = 1, exporter in 2004. EXP04f = 0, non-exporter in 2004. Import intensityf is the share of imported intermediate inputs in total costs in 2004. Firm-level controls include log employment, log fixed capital, TFP. Industry-level controls include industry import penetration ratio, log industry total exports, log industry total domestic sales. t-values in parentheses. *,**,*** indicate significance at 10%, 5% and 1% level, respectively.
| INDUSTRY AND FIRM HETEROGENEITY
| Industry heterogeneity
In Section 4 we saw that the increased competitive pressure imposed by the appreciation induced more innovations from exporters than from non-exporters. In this section we examine whether such effects vary across industries and firms. Intuitively, R&D is more critical for competitiveness in industries that are more R&D-intensive. Therefore, firms in R&D-intensive industries should be more likely to respond to the competitive pressure by increasing innovation. To test whether this is true in the data, we include in equation (4) an interaction term for the export dummy and the R&D intensity (defined as R&D expenditure over total sales) of each 4-digit industry. In Table 10, all the coefficients before the interaction term are positively significant. Therefore, while in general exporters respond to increased competitive pressure with more innovation, such response is larger in industries with greater reliance on research and development.
| Response across firms with different export dynamics
Although we had the general finding that the appreciation encouraged R&D and new product devel- opment for exporters, the effects could be heterogeneous among firms with different export dynam- ics. Some exporters may have been driven out of the foreign market due to the appreciation, while other firms survived. We might expect the quitters and the continuing exporters to have different responses in terms of innovation. First, the appreciation implied tougher competition in the foreign market only for the continuing exporters but not for the quitters. For the quitters, competitive stance in the export market no longer matters. Second, exiting the export market will further discourage innovation through the market size effects if it leads to a contraction of firm size. In sum, we expect the appreciation to induce relatively more innovation for continuing exporters than the quitters.
In order to investigate this heterogeneity, we divide exporters in our data into two subgroups: continuing exporters and export quitters. We define continuing exporters to be firms that exported
TABLE 10 Industry Heterogeneity
(1) | (2) | (3) | (4) | |
Dependent variable | Δlog R&D | ΔR&D dummy | Δnew product revenue share | Δnew product dummy |
EXP04f | 0.034 | 0.010*** | 0.008*** | 0.012*** |
(1.33) | (2.70) | (4.42) | (3.21) | |
EXP04f 9 RDinti | 0.388*** | 0.030*** | 0.011** | 0.012 |
(5.13) | (4.41) | (2.17) | (1.54) | |
Firm-level controls | Yes | Yes | Yes | Yes |
Industry-level controls | Yes | Yes | Yes | Yes |
Observations | 57,328 | 57,328 | 57,004 | 57,004 |
R-squared | .020 | .005 | .004 | .004 |
Notes: This table reports the regression results of equation (5). The interaction term of the exporter dummy and industry R&D intensity is added to investigate the different response across industry. The dependent variable is the period difference of average innovation. Firm-level controls include log employment, log fixed capital, TFP. Industry-level controls include industry import pene- tration ratio, log industry total exports, log industry total domestic sales. t-values in parentheses. *,**,*** indicate significance at 10%, 5% and 1% level, respectively.
in 2004 and continued exporting during 2005–2007. Export quitters are firms that exported in 2004 but quitted the export market during 2005–2007 and never exported afterwards.19 We rerun the DID regression in equation (4), but now restrict the treatment group to continuing exporters or export quitters.20 The results are reported in Table 11. The results show that the exporter dummy coefficient in the continuing exporter sample is still positively significant, and the magnitude is lar- ger than what we found in Section 4 using exporters in general as the treatment group. However, for export quitters, the coefficient are all negative, though most of them nonsignificant. Therefore, although exporters in general increased innovation in response to the appreciation, such effects are restricted to firms that managed to survive in the export market.21
| Processing versus non-processing exporters
Processing accounts for nearly 50% of China’s exports. The recent literature has found that pro- cessing firms perform quite differently than non-processing exporters (Dai et al., 2016; Yu, 2015). These firms import foreign intermediate inputs for assembly and re-export, and are associated with low-end, labor-intensive tasks. We expect less innovation response from these firms for two rea- sons. First, processing firms usually receive patents and blueprints from foreign suppliers, and do not have their own brands or products. Therefore, their competitiveness depends little on in-house innovation. Second, processing firms are usually associated with high import intensity because they need to import foreign materials for assembly. As a result, the appreciation may increase the com- petitiveness of processing firms by making the imported inputs less expensive. Thus, the
TABLE 11 Firm Heterogeneity: Continuing Exporters and Export Quitters
(1) | (2) | (3) | (4) | |
Dependent variable | Δlog R&D | ΔR&D dummy | Δnew product revenue share | Δnew product dummy |
(A) Continuing Exporters | ||||
Continuing exporter | 0.185*** | 0.023*** | 0.016*** | 0.043*** |
(6.36) | (5.35) | (7.97) | (10.20) | |
Firm-level controls | Yes | Yes | Yes | Yes |
Industry-level controls | Yes | Yes | Yes | Yes |
Observations | 48,063 | 44,768 | 44,539 | 44,539 |
R-squared | .021 | .006 | .007 | .012 |
(B) Export Quitters | ||||
Export quitter | –0.042 | –0.003 | –0.007** | –0.021*** |
(–1.02) | (–0.48) | (–2.42) | (–3.52) | |
Firm-level controls | Yes | Yes | Yes | Yes |
Industry-level controls | Yes | Yes | Yes | Yes |
Observations | 31,725 | 31,725 | 31,459 | 31,459 |
R-squared | .005 | .001 | .001 | .002 |
Notes: This table reports the regression results of equation (5). Part (a) uses the sample of continuing exporters as treatment group, panel (b) uses the sample of export quitters as treatment group. Continuing exporters: firms exporting in 2004 and continue export- ing during 2005–2007. Export quitters: firms that export in 2004 but quit the export market during 2005–2007 and never export afterwards. The comparison group is the firms that do not export in 2004 and afterwards. Firm-level controls include log employ- ment, log fixed capital, TFP. Industry-level controls include industry import penetration ratio, log industry total exports, log industry total domestic sales. t-values in parentheses. *,**,*** indicate significance at 10%, 5% and 1% level, respectively.
competitive pressure imposed on processing exporters is expected to be less than that on non-pro- cessing exporters.
Following Dai et al. (2016), we directly identified processing trade firms using the information in the firm-level trade data provided by China Customs. We define processing exporters as firms with at least half of their total exports coming from processing trade. We then create categorical variables splitting all firms into three groups: processing exporters, non-processing exporters, and non-exporters. We regress the growth of innovation on a processing exporter dummy and a non- processing exporter dummy, omitting the non-exporter. The regression results in Table 12 show that, consistent with our expectations, the non-processing firms have higher innovation growth than non-exporters, as we documented for exporters in general. However, processing exporters do not exhibit higher innovation growth in most of the specifications.
| CONCLUSIONS
The aim of this paper has been to investigate a new channel linking trade and innovation: changes in competitive pressure in firms’ export markets. We use China’s exchange rate regime reform and the subsequent gradual appreciation of its currency as a natural experiment and exploit its differen- tial impact on exporters and non-exporters. The appreciation reduced exports and imposed greater competitive pressure on exporters than on non-exporters. Exporters responded to this competitive pressure by increasing innovation. Our benchmark results show that the appreciation caused the R&D expenditure of ex ante exporters to increase by 11% more than that of non-exporters, and new product development to increase by nearly 1.5 times more than that of non-exporters. We also show these effects exhibit variations across industries with different R&D intensities, and across firms with different export dynamics and export types.
Governments in many countries are often reluctant to appreciate their currencies for fear of the potential negative impact on employment and growth. While these concerns are reasonable in the short run, our results suggest that the competitive pressure induced by the appreciation may benefit productivity and growth in the long run by creating incentives for innovation. In this regard, a
TABLE 12 Processing versus Non-processing Exporters
(1) | (2) | (3) | (4) | |
Dependent variable | Δlog R&D | ΔR&D dummy | Δnew product revenue share | Δnew product dummy |
Proc04f | –0.019 | 0.013* | –0.001 | –0.006 |
(0.45) | (1.88) | (0.32) | (1.07) | |
Nonproc04f | 0.169*** | 0.020*** | 0.019*** | 0.035*** |
(6.53) | (4.62) | (9.04) | (8.69) | |
Firm-level controls | Yes | Yes | Yes | Yes |
Industry-level controls | Yes | Yes | Yes | Yes |
Observations | 43,008 | 43,008 | 42,734 | 42,734 |
R-squared | .018 | .006 | .006 | .007 |
Note: Proc04f = 1, processing exporter in 2004 (processing exports/total exports > 0.5). Nonproc04f = 1, non-processing exporter in 2004 (processing exports/total exports < 0.5). Omitted category is non-exporter. Firm-level controls include log employment, log fixed capital, TFP. Industry-level controls include industry import penetration ratio, log industry total exports, log industry total domestic sales. t-values in parentheses. *,**,*** indicate significance at 10%, 5% and 1% level, respectively.
gradual appreciation is more favorable than a drastic appreciation, because the former allows firms to adjust to the competitive pressure over time and is therefore more effective in inducing produc- tivity-enhancing activities. These considerations should be taken into account in the making of monetary and exchange rate policies.
ACKNOWLEDGMENT
We thank David Weinstein, Eric Verhoogen, Meixin Guo, and seminar participants at Peking Univer- sity, Tsinghua University, Beijing Normal University and Southeast University for helpful comments. Mi Dai thanks the financial support from National Natural Science Foundation of China (No. 71603027) and interdisciplinary research project “Income Distribution and Labor Market” of Beijing Normal University. Miaojie Yu thanks the financial support from China’s National Natural Science Grant (No. 71625007; No.71573006) and China’s National Social Science Grant (No. 16AZD003) and China’s Ministry of Education Grant (No. 15JJD780001). Chuming Zhao thanks the financial support from National Social Science Foundation of China (No. 14ZDA082). All errors are ours.
ENDNOTES
1 See Bustos (2011), Lileeva and Trefler (2010), Aw, Roberts, and Winston (2007), Aw, Roberts, and Xu (2011), Costantini and Melitz (2008), and Verhoogen (2008).
2 See Bloom, Draca, and Reenen (2016), Teshima (2008), and Iacovone, Keller, and Rauch (2011).
3 Increased competitive pressure can also reduce innovation through the Schumpeter force that leads to lower price- cost margins, thereby reducing the quasi-rents from innovation (Aghion et al., 2005).
4 According to the definition provided by the National Bureau of Statistics of China, new products are products that are made using new technology or new design, or that significantly improve the function or quality of the original products. In order to be officially recognized as new products, the firm should deliver applications and receive assessment from the relevant government authorities. There are three levels of new products: national, provincial, and sub-provincial. New products at different levels are authorized by the government authority at the correspond- ing level, and are given different periods of validity. The validity period for national, provincial, and sub-national level new product is 3 years, 2 years, and 1 year, respectively. The new product revenue variable in our data includes the sales revenue from all authorized new products that are in the period of validity. For example, the 2007 value will include the following: national-level new products authorized in either 2005, 2006, or 2007, provincial-level new product authorized in 2006 or 2007, or sub-provincial-level new product authorized in 2007. Unfortunately, we do not have information about the level of the new product.
5 The original data set includes 526,612 firms and 1,733,848 observations. In order to ensure our results are not purely driven by firm entry and exit, we also repeat the benchmark regression using the unbalanced sample which includes all firms in Section 5.
6 In 2007 the fluctuating band against the dollar was enlarged to 0.5%, with the band against other currencies unchanged.
7 http://usa.chinadaily.com.cn/china/2011-03/14/content_12167195.htm
8 In Appendix Table 1C we show that among exporters, the negative shock of the appreciation is stronger for firms with higher export intensity. However, firms with export intensity equal to 1 (i.e. pure exporters) are less affected. As mentioned in Dai et al. (2016), a large proportion of pure exporters in China are processing exporters, which import foreign intermediate inputs for assembly and re-export. As processing firms import a large share of inputs, the appreciation may reduce their total cost by making the imported inputs less expensive. This cost-saving effect on the import side may offset the revenue-reducing effect on the export side.
9 Although the appreciation began only in July 2005, and the actual appreciation during 2005 is modest, we still choose 2005 as the first year of the appreciation period. As mentioned, the innovation response may result from not only the actual appreciation, but also the expectation of future appreciation. In this sense, although the actual appreciation in 2005 is not drastic, the exchange rate regime reform has already changed firms’ behavior by
altering their expectations for the future exchange rate movement. For robustness, we have also used year 2006 as the first year of the appreciation period. The results are quite similar.
10 We use the exporting status one year before the exchange rate shock to avoid potential endogeneity. Results using exporting status in 2005 show similar results (results available upon request)
11 TFP is estimated using the Olley and Pakes (1996) approach. Detailed estimation procedures are described in Appendix A.
12 The industry import penetration ratio is defined as the value of imports over total absorption. For the detailed cal- culation procedure, see Appendix B.
13 All control variables taking the value of the initial year (i.e., 2001) yield similar results.
14 Considering that firm R&D and new product share have lots of zeros, it is tempting to run a Tobit regression instead of simple OLS. However, since our main estimation equation is in the first-difference form, the dependent variable is no longer left or right censored. Therefore the usual Tobit approach will not apply. But we indeed tried a Tobit model in levels, as in equation (3). The results are qualitatively similar to the benchmark results and are available upon request.
15 TFP_OP refers to total factor productivity estimated using the Olley-Pakes (1996) method.
16 In Appendix Table 2C we also investigate whether the innovation response is larger for firms with higher export intensity. We replace the export dummy in equation (4) with export intensity and then rerun the regression. The results show that when pure exporters are excluded, firms with higher export intensity have a larger increase in innovation. However, the coefficients become nonsignificant when pure exporters are included. We discuss the role of pure exporters in Section 6.
17 We cannot do the test using 2003 as the dividing year because the innovation for 2004 is missing.
18 The ASIF does not have firms’ import information. We obtain the import value of each firm by combining the ASIF with firm-level trade data provided by China Customs. The specific matching procedure is described in Dai, Maitra, and Yu (2016). Wage bill and total material costs data are from the ASIF.
19 Table 1D in Appendix D compares the productivity (measured by TFP), firm size (log employment) and log sales of continuing exporters and export quitters. Consistent with the literature (e.g., Pavcnik, 2002), continuing expor- ters are larger and more productive.
20 The comparison group is firms that did not export in 2004 and afterwards. Results are similar using firms that never exported during the whole sample period as the comparison group.
21 One might worry that export markets may not actually tighten for continuing exporters, so their increase in inno- vation might simply reflect the effect of expanding market size instead of competition. To check this possibility, we calculate the average export growth and export intensity for continuing exporters for each year in the sample period in Appendix Table 2D. It is quite obvious that continuing exporters also experienced certain degrees of market contraction. While their export growth was over 60% in the pre-appreciation period, it fell to around 10% in the appreciation period. Export intensity also fell. Therefore, the increased innovation by continuing exporters cannot be the result of market size effects. It is driven by the competitive pressure from the foreign markets.
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APPENDIX A: AUGMENTED OLLEY– PAKES TFP MEASURES
Here we describe in detail the Olley–Pakes approach to estimating firms’ TFP with some exten- sions. First, we adopt different price deflators for inputs and outputs. Data on input deflators and output deflators are from Brandt, Van Biesebroeck, and Zhang (2012) in which the output deflators are constructed using reference price information from China’s statistical yearbooks, whereas input deflators are constructed based on output deflators and China’s national input–output table (2002).
Next, we construct the real investment variable using the perpetual inventory method. Rather than assigning an arbitrary number for the depreciation ratio, we use the firms’ real depreciation rate provided by the Chinese firm-level dataset.
We work with the standard Cobb–Douglas production function
Yit = pitLbl Kbk Mbm ,(A1)
it itit
where Yit is the output of firm i in year t, and Kit, Lit, and Mit denote labor, capital, and intermedi- ate inputs, respectively. By assuming that the expectation of future realization of the unobserved productivity shock, vit, relies on its contemporaneous value, firm i’s investment is modeled as an increasing function of both unobserved productivity and log capital, kit = ln Kit. Following previ- ous work, such as Van Biesebroeck (2005) and Amiti and Konings (2007), we add the firm’s export decision as an extra argument of the investment function since most firms’ export decisions are determined in the previous period:
Iit = ~I(kit, vit, Xit),(A2)
where Xit is a dummy measuring whether firm i exports in year t. Therefore, the inverse function of Iit is
vit = ~I—1(kit, Iit, Xit).(A3)
The unobserved productivity also depends on log capital and the firm’s export decisions.
Accordingly, the estimation specification can now be written as:
yit = b0 + bmmit + bllit + g(kit, Iit, Xit)+ eit,(A4)
where g(kit, Iit, Xit) is defined as bkkit + ~I—1(kit, Iit, Xit). Following Olley and Pakes (1996) and Amiti and Konings (2007), fourth-order polynomials are used in log capital, log investment and
firm’s export dummies to approximate g(.). In addition, we also include a World Trade Organization dummy (i.e., 1 for a year after 2001 and 0 for before) to characterize the function g(.) as follows:
44
g(kit, Iit, Xit, WTOt)= (1 + WTOt + Xit) X X dhqkhIq.(A5)
h=0 q=0
After finding the estimated coefficients b^m and b^l, we calculate the residual Rit which is defined as
Rit Ξ yit — b^mmit — b^llit.(6)
The next step is to obtain an unbiased estimated coefficient of bk. We assume that firms’ pro- ductivity follows an exogenous Markov process, vit = h(vit — 1) + git. To correct the selection bias due to firm exit, Amiti and Konings (2007) suggested regressing a firm exit dummy on a high- order polynomial in log capital and log investment. One can then accurately estimate the following specification:
Rit = bkkit + h(^git — 1 — bkkit — 1, p^rit — 1)+ e* ,(A7) where p^ri,t—1 denotes the fitted value for the probability of the firm’s exit in the next year, and
e* = eit + git denotes the composite error. Since the specific true functional form of the inverse
function h is unknown, it is appropriate to use fourth-order polynomials in gi,t-1 and ki,t-1 to approximate that. In addition, (A6) also requires the estimated coefficients of the log capital in the first and second term to be identical. Therefore, nonlinear least squares is used (Pavcnik, 2002). Finally, the Olley–Pakes type of TFP for each firm i in industry j is obtained once the estimated
coefficient b^k is obtained:
TFPOP = yit — b^mmit — b^k kit — b^llit.(A8)
APPENDIX B: CONSTRUCTION OF INDUSTRY IMPORT PENETRATION RATIO
We control for industry-level import competition by means of the industry import penetration ratio. The import penetration ratio is defined as industry import value over industry total absorption. Total absorption is measured as production minus exports plus imports – in symbols,
IMP PENit = IMit ,(B1)
Yit — EXit + IMit
where IMP_PENit is the import penetration ratio of industry i in year t, IMit is China’s imports from the world, EXit is China’s exports to the world, and Yit is domestic gross output. Import and export data are taken from COMTRADE at the 6-digit HS level. We map the HS6 products to 2-digit Chi- nese Industry Classifications (GB/T 4754-2002), and aggregate the import and export value to 2-digit CIC industry level. Finally, we calculate the import penetration ratio in each 2-digit CIC industry over 2001–2007, using (B1). The domestic gross output data are taken from China statistical yearbooks.
APPENDIX C: THE IMPACT OF THE APPRECIATION ON FIRMS WITH DIFFERENT EXPORT INTENSITIES
TABLE C1 Growth Difference of Employment, Profit and Total Sales (%), by Export Intensity
Export intensity | Employment | Profit | Sales |
0<expint<0.1 | –7.501 | –18.609 | –18.608 |
0.1< expint <0.4 | –8.842 | –37.040 | –16.482 |
0.4< expint <1 | –11.258 | –42.231 | –18.191 |
expint =1 | –13.562 | –14.354 | –13.390 |
Note: This table reports the growth difference of employment, profit and sales between the appreciation period and pre-appreciation period by export intensity. Each entry is given by the growth rate in the appreciation period minus the growth rate in the pre-appre- ciation period.
TABLE C2 Regression Results of Equation (5), by Export Intensity
(1) | (2) | (3) | (4) | |
Δlog R&D | ΔR&D dummy | Δnew product revenue share | Δnew product dummy | |
EXPINT04f | 0.032* | 0.017*** | 0.008*** | 0.018*** |
(1.85) | (3.07) | (3.75) | (3.33) | |
TFP | 0.091*** | 0.011*** | 0.003*** | 0.010*** |
(8.84) | (6.63) | (4.63) | (6.73) | |
Log employment | 0.098*** | 0.005*** | 0.001** | 0.004** |
(7.72) | (2.66) | (2.00) | (2.35) | |
Log capital | 0.065*** | 0.006*** | 0.001*** | 0.002** |
(9.96) | (5.90) | (3.69) | (2.06) | |
Import penetration | 0.092*** | 0.004 | 0.003*** | 0.001 |
(4.57) | (1.42) | (2.92) | (0.49) | |
Industry export | 0.017 | 0.003* | 0.002*** | 0.003** |
(1.51) | (1.93) | (5.00) | (2.33) | |
Industry domestic sales | –0.019 | –0.002 | –0.001** | –0.003** |
(–1.22) | (–1.16) | (–2.52) | (–2.04) | |
Constant | –1.296*** | –0.138*** | –0.028*** | –0.033 |
(–6.23) | (–6.17) | (–3.25) | (–1.59) | |
Observations | 51,510 | 51,510 | 51,249 | 51,249 |
R-squared | .019 | .005 | .003 | .004 |
Note: This table reports the estimation results for firms with different export intensity in 2004. The dependent variable is the differ- ence of average innovation between the appreciation period and pre-appreciation period. EXPINT04f is export intensity in 2004. t- values in parentheses.
*,**,*** indicate significance at 10%, 5%, and 1% level, respectively.
APPENDIX D FIRM HETEROGENEITY
TABLE D1 Firm Characteristics of Continuing Exporters and Export Quitters
Firm characteristics | Continuing exporters | Export quitters |
TFP | 4.132 | 4.019 |
Log employment | 5.721 | 5.250 |
Log sales | 10.963 | 10.591 |
Note: This table compares firm characteristics for continuing exporters and export quitters in 2004. Continuing exporters: firms that export in 2004 and continue to export during 2005–2007. Quitters: firms that export in 2004 but quit the export market during 2005–2007 and never export again.
TABLE D2 Export Growth and Export Intensity for Continuing Exporters in 2005
YearExport growthExport intensity | ||
2001 | – | 59.293 |
2002 | 59.012 | 60.131 |
2003 | 44.994 | 63.909 |
2004 | 81.987 | 63.912 |
2005 | 20.198 | 64.273 |
2006 | 9.072 | 63.966 |
2007 | 3.143 | 63.128 |
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Yuan Revaluation and China's External Trade Performance
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Academic Journal of Economic Studies
Vol. 4, No. 2, June 2018, pp. 112–119
Fulgence Dominick Waryoba
School of International Education, Capital University of Economics and Business, No.2 Jintaili, Chaoyang District, Beijing, China
Email: fuldominick@yahoo.com
Abstract This paper analyzed the effect of Yuan revaluation on China’s external trade performance. Using break point unit root analysis, 1994 has revealed to be the beginning of a new regime for real effective exchange rate implying that Yuan peg to US Dollar really played a central role in influencing real effective exchange rate. Though in the short run real effective exchange rate influence on trade seems unimportant, in the long run the influence is positive and economically significant. Since trade involves more than one country, growth in foreign economic activities influences China’s exports growth the same way as China’s economic growth influences import growth.
Key wordsExchange rate revaluation, trade performance, economic growth
JEL Codes: F43, F10, F13
© 2018 Published by Dimitrie Cantemir Christian University/Universitara Publishing House.
Introduction
The Yuan peg to US dollar in 1994 improved China’s exports leading into rapid accumulation of foreign currency reserve against US dollar. China’s foreign currency reserve grew from USD75.4 billion in 1995 to USD291.1 billion in 2002 leading into a number of warnings by the US including threats to trade sanctions unless Yuan is revalued (Morrison and Labonte, 2008). Finally Yuan appreciation by 2.1 percent materialized in July 2005, with managed floating exchange rate adoption (Goujon and Guerineau, 2006). This was followed by other measures like market-maker system, a more market-based mechanism to determine the daily central parity of Yuan to US dollar exchange rate, wider trading bands against currencies other than US dollar and currency forward and swap contracts to prepare a greater flexibility platform (Shu and Yip, 2006). Yuan peg to a basket of major currencies like Euro, Japanese Yen, Korean Won, and US dollar using a weighted exchange rate namely real effective exchange rate surfaced which somehow settled trade dispute (Isidore, 2005; Catao, 2007; and Salitan, 2010).
China’s accession to World Trade Organization (WTO) in 2001 and expiration of multilateral agreement deepened economic significance of export to the economy from 20 percent of GDP in 2000 to 35 percent in 2007. Nevertheless, lower wages made the economy an investment hub of Asia. Economic growth became export oriented and manufacturing investment biased. From 2001 to 2008, export and investment contributed 60 percent to economic growth increasing from 40 percent in 1990s, much larger than the same period’s average of the G7, 16 percent, Euro area 30 percent, and the rest of Asia 35 percent (Guo and N'Diaye, 2009; Berger and Martin, 2011; Yao, 2010). The WTO accession had a profound effect on trade stretching China’s global market share from 3.3 percent in 2001 to 5.9 percent in 2004 for import and 3.9 percent in 2001 to 6.5 percent in 2004 for export (Lawrence 2006). The single variable unit root analysis with break point adopted in this study provides a useful guide to stress on economic significance of different time periods.
Literature Review
Currency devaluation is considered by many economists as a primary determinant of trade balance improvement. Devaluation reduces price level of exports and increases price level of import which directly affects trade balance positively (Stockman, 1980; Appleyard and Field, 1986). Due to this, some governments attempt to devalue their currency through expansionary monetary policy whose effectiveness depends on price flexibility (Bhandari, 1983). However, the success of currency devaluation on trade balance for most countries has not been immediately realized. As initially the economy realizes deteriorating trade balance but later improvements in trade balance materialize. One of the classical explanations for this J path phenomenon is the fact that price effects are immediately harming the economy before being outweighed by volume effect (Arndt and Dorrance, 1987).
Economists have also hypothesized that the Marshall-Lerner condition necessitates trade balance improvement with devaluation (see for example Shea, 1979). Shea propose that with Marshall-Lerner condition, devaluation improves trade balance even if part of import consists of intermediate goods. Reinhart has acknowledged by asserting that the developing countries’ case is different due to the nature of commodities they export (Reinhart, 1995). But international trades are often
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with contracts where for imports they are written in foreign currency and for exports in local currency. These contracts pointed out to be one of factors behind J path phenomenon of trade balance (Arndt and Dorrance, 1987), hinder the ability of Marshall-Lerner condition.
The presence of J curve has attracted economists’ attention for example Backus et al. (1994) analyzed the dynamics of trade balance and terms of trade to see whether J-curve exists. The fact that trade balance is affected negatively by current and future terms of trade while positively by previous terms of trade indicates that relative imprice of import and exports are immediately affected by devaluation while the volume of exports and imports effect come latter conforming the J-curve path. Carter and Pick’s (1989) analysis on how devaluation affected American agricultural trade balance reveals initial deterioration confirming the first segment of the J curve as downward sloping.
It is contend that economies select exchange rate regimes based on the goals to be achieved and that those with frequent economic shocks perform better under floating exchange rate regime. In cases where high inflation is a problem, fixed exchange rate is the best option, while floating exchange rate works better to achieve central bank independency or money growth goal (Rose, 2011). However, even flexible exchange rate regime cannot lead into monetary autonomy without capital control for emerging economies when developed economies undertake monetary expansion policies (Han and Wei, 2016). As a result we see many countries have worked under fixed exchange rate regime even without high inflation problem. It is easy to conclude that most economies are scared of the first portion of J curve as the time for upward movement of trade balance is unclear and the intensity of negative impact of terms of trade is unknown. The black pit is known to be deep but the depth is unknown.
Devaluation though has been acknowledged to improve trade balance under Marshall-Lerner condition even when part of import is used as intermediate (Shea, 1979). Previously export value used to be almost 100 percent domestic, but nowadays goods pass different borders before they can be exported as final products. In other words raw materials exported to one country to be processed into semifinal goods which are exported to another country to be assembled or processed as final goods before they can be exported for final use in another country (Johnson, 2014). The fact that devaluation makes imports expensive increases the fear for economies which imports some of their intermediate goods. These economies cannot be favored by devaluation. In such circumstances negative impacts necessitated by unfavorable terms of trade may not be easily outweighed by increased export volume in the future because even export volume decline with increased production cost. An impractical realization of the J curve’s turning point might explain why some economies adopt fixed exchange rate regime even when there is not high inflation.
For developing economies currency peg or fixed exchange rate with capital control provides domestic financial market protecting wall against external shocks. The financial crisis of the 1990s provided lessons to some economies mostly China that adapting floating exchange rate without enough preparation poses a very high risk to the financial market and economic performance. China is a living example of economies which have paid much attention in the process of financial liberalization. In the process of capital liberalization, China adopted the Shanghai Pilot Free Trade Zone (SPFTZ) at the end of September 2013 as a trial for a new round of Chinese reform and opening up (Yao and Whalley, 2015). With capital liberalization, capital inflow is likely to be strong for emerging economies like what happened in Latin America and Caribbean during the 2007 to 2009 global financial crisis. These emerging economies were not hurt by the crisis and continued to experience strong capital inflow even after the crisis. However, it is pointed out that in such circumstances lending booms followed by banking instability are likely (Powell and Tavella, 2015).
China’s model of capital liberalization by pilot trial reflects Britain’s circumstance during great depression though in a very different context. According to Patnaik (2014) at that time Britain ran a huge trade deficit with her trade partners such as USA, and other European countries. Britain opened the economy to allow more imports so as to fuel economic activities in other economies and at the same time investing capital in those economies. This led into a huge current account deficit with her trade and investment partners. However, Britain managed to survive as a great capitalist economy in that era due to a huge current account surplus maintained with her colonies mostly Indian sub-continent and Malaya. The colonies were made large exporters to other Britain trade parters. Consequently, the surplus and export earnings from those colonies were trivially used by Britain to balance the current account and smoothen the running of the economy.
The study hypothesizes that currency devaluation improves trade balance and contends with Jorda and Burguet (1998) that as economic growth spurs the demand for foreign produced goods increases and that high economic growth for the rest of the world leads into increased exports.
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Methodology of research
Data
The study utilizes World Bank’s (2016) national accounts data from 1980 to 2015 due to unavailability of China’s real effective exchange rate (REER) data beyond 1980. Trade balance is taken as export to import ratio to avoid applying logarithm to negative values. China’s GDP is used as a proxy variable for domestic economic activities and sum of GDP for United States (US) and European Union (EU), expressed as WGDP, is taken as a proxy variable for foreign economic activities. According to WTO (2015), these economies had higher world market share in 2014. As their economic activities expand, their domestic demands expand thereby importing more from China. Contrary, as China’s economic activities expand, China’s imports also grow.
Model
(1)
Where; measures the response of trade balance to thevariable,is the error term which is assumed to be independently and identically distributed, and the other variables are as explained in the data explanation section.
The tendency of non-stationary for time series data confirmed in many studies including Durlauf and Phillips (1988) prevents the use of standard approach in estimating equation (1). If the series are non-stationary, the mean, and variance are not constant, and the error term is serially correlated (Jorda and Burguet, 1998). However, in terms of changes or rates of returns, these derived series appear closer to being stationary (Granger, 2004).
Unit Root Test with a Breakpoint
Structural breaks hinder conventional unit root tests applicability as they are biased toward a false unit root null when the data are trend stationary with a structural break (Perron, 1989). In this study innovative outlier (IO) model is preferred to additive outlier (AO). IO assumes that the break occurs gradually, with the breaks following the same dynamic path as the innovation, while AO assumes the breaks occur immediately. Three break variables applied are: An intercept break variable, which is 0 for all dates prior to the break, and 1 thereafter; A trend break variable, which is 0 for all dates prior to the break, and is a break date re-based trend for all subsequent dates; A one-time break dummy variable, which is 1 only for the break date and 0 otherwise. A difference stationary model is considered as a general null hypothesis:
(2)
Where are independently and identically distributed innovations, is a lag polynomial representing the dynamics of the stationary and invertible ARMA error process. Here the break variables enter the model with the same dynamics as the innovations. For our alternative hypothesis, we assume a trend stationary model with breaks in the intercept and trend:
(3)
The breaks follow the innovation dynamics as in Equation (2). The general Dickey-Fuller test equation, that nests the two hypotheses, is constructed by combining equations (2) and (3) above resulting into the following equation.
(4)
The null hypothesis, , of a unit root is rejected if the t-statistic is greater than the critical value, in absolute term, and k lagged differences of the y are included to eliminate possible autocorrelation. A variant of models is obtained by placing zero restrictions on one or more of the trend and break parameters. The null and alternative hypothesis
explanation tells the structure of the model. A model that assumes non-trending data with intercept break, takes
which yield tests of a random walk against a stationary model with intercept break. The case of trending data with intercept break, which considers tests a random walk with drift against a trend stationary model with intercept break. But if the assumption is trending data with intercept and trend break, that is equation (4) without any zero restriction,
it is a test for random walk with a drift against a trend stationary with intercept and trend break alternative. The case of
trending data with trend breaktests a random walk with drift null against a trend stationary with trend break alternative. Therefore, there are 4 chronologically arranged models in accordance with the explanation.
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Co-integration Test
After testing for unit root, the order of integration is established. If the variables are integrated of the same order, they can be co-integrated that is have a long run relationship. Therefore, a test for co-integration must be carried out and in this study Johansen Co-integration test approach is preferred because it is acknowledged to be a powerful tool (see Turner 2009). In this case, the study estimates the following general vector auto regression (VAR) model.
(5)
Where,is a k-vector of variables,is a d-vector of deterministic variables, andis a vector of innovations. This can be rewritten as
(6)
Or
Where is the coefficient matrix, which according to Granger’s representation theorem, if it has reduced rank , then there exist matrices and each with rank (number of co-integrating relations) such that and is . Elements of are adjustment parameters in vector error correction model. In this test, some of the series are trend
stationary, and the assumption that level data and the co-integrating equations have linear trends holds. So we estimate the model:
(7)
The terms associated withare the deterministic terms outside the co-integrating relations. The analysis provides evidence of co-integrating equations which can be presented as VEC model.
Vector Error Correction (VEC) Model
The Johansen estimation method is based on the error correction representation of the general vector auto regression. Thus, equation (7) for trade balance can be rewritten as an ECM of the form
Where's in (8) stands for short-run coefficients,is the speed of adjustment, and 's in the error correction equation (9), stands for long run equilibrium coefficients.
Findings and Discussions
Unit Root Test
(8)
(9)
All variables are integrated of order one I(1) as in column 7 of Table 1. Foreign income (WGDP) passes model 1 (a), the data is stationary with intercept break because in Model 3, the break dummy is statistically insignificant, and in Model 4, the lagged WGDP coefficient is statistically not different from zero. Trade balance (TB) does not fit in model 1 (a) because the one-time break dummy is statistically insignificant at 5 percent level. Nevertheless, TB passes all the models, but qualifies only in Model 4, that is trend stationary with trend break because the one-time break dummy variable in Model 1, 2, and together with intercept break in Model 3, are statistically insignificant at 5 percent. The real effective exchange rate (REER) is differenced stationary and therefore fits Model 1 (b). GDP fits in Model 4 only, because the break dummy in Model 3 is statistically insignificant at 5 percent.
From Table 2, each equation is well explained by the explanatory variables except for the differenced REER. The adjusted R-squared indicate a large portion of variation is explained, 80 percent for TB, 29 percent for REER, and almost 100 percent for GDP and WGDP. Large F-statistics indicate the variables are jointly significant. The automatic selection of lag number leads into unique number of lags for each equation with WGDP applying the maximum number of lags. The significance of break variables indicates model appropriateness.
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Table 1. Unit Root Test Results
ADF statistics
Variable | Model 1 | Model 2 | Model 3 | Model 4 | I(d) |
TB | -4.92(4) | -5.12(4) | -7.77(4) | -8.09(4) | I(1) |
REER | -3.55(4)-5.38(0) | -2.20(4) | -3.13(0) | -3.31(0) | I(1) |
GDP | -1.09(1) | -3.75(6) | -5.79(6) | -5.71(6) | I(1) |
WGDP | -6.55(9) | -1.86(9) | -5.55(9) | -5.35(9) | I(1) |
Critical Values (5%) | -4.44-4.44 | -4.86 | -5.18 | -4.53 |
Note: Numbers in parentheses against ADF statistics are the lags used in ADF to make them stationary.
China’s 2001 decision to join WTO affected economic growth through increased import and export share to the global market. The increased economic activities (GDP) influenced growth in import. China’s export also improved from 2001 due to economic growth of the trade partners. Therefore, 2001 is not only the beginning of a new regime for China but also for EU and US. Both import and export were on the rise with slight differences leaving trade balance unaffected by China’s accession to WTO.
Trade balance was affected by the 1997 Asian financial crisis. Although Wang (2009) argues that the impact of 1997/98 Asian financial crisis was not so intense to China’s economy due to currency peg as other Asian economies devalued their currencies. But since other Asian countries were seriously hit by financial crisis, China’s trade must have been affected too making 1998 the beginning of a new regime for trade balance which contends with Waryoba’s (2017) findings. Waryoba’s analysis on the effect of the 1997 Asian financial crisis on China’s productivity growth reveals that China experienced higher productivity growth in years after 1997 than in years before 1997.
Yuan peg to U.S. dollar since 1994 till 2005 where, currency devaluation of about 2 percent was not sufficient to affect real effective exchange rate makes 1994 the beginning of a new regime for real effective exchange rate.
Table 2. Single Variable Analysis
Coefficients | TB | REER | GDP | WGDP |
-0.26*** (0.046) | -0.07*** (.032) | 5.10*** (0.883) | 2.47*** (0.379) | |
-0.89*** (0.234) | 0.04 (0.168) | 0.75*** (0.039) | ||
0.10*** (0.040) | 0.17*** (0.029) | |||
0.05*** (0.006) | -0.28*** (.099) | 0.09*** (0.015) | -0.16*** (0.045) | |
0.05*** (0.007) | 0.05*** (0.010) | |||
1.16***(0.179) | 0.09 (0.170) | 0.83*** (0.135) | -0.33* (0.170) | |
0.59***(0.170) | 0.25 (0.195) | -0.09 (0.158) | ||
0.47***(0.124) | 0.69*** (0.152) | 0.39** (0.151) | ||
0.51***(0.122) | 0.43** (0.206) | 0.24 (0.138) | ||
0.35** (0.146) | -0.15 (0.127) | |||
0.51*** (0.164) | 0.09 (0.128) | |||
-0.53*** (0.151) | ||||
-0.07 (0.196) | ||||
0.74*** (0.176) | ||||
1998 | 1994 | 2001 | 2001 | |
Adjusted R-Squared | 0.80 | 0.29 | 0.9988 | 0.993 |
F-Statistics | 18.20 | 5.51 | 2597 | 293 |
Adjusted Observation | 31 | 34 | 29 | 26 |
Note: ***, **, and * indicate significance at 1, 5, and 10 percent levels. Standard errors are given in parentheses.
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A Test for Co-integration
Where Trace Statistics and Maximum Eigen value, in Table 3, exceed critical values, we reject the null hypothesis of no co- integrating equation at 5 percent. There are two co-integrating equations including trade balance.
Table 3. Johansen Co-integration Tests (1980-2015)
Hypothesized No. of CE(s) | Trace Statistics | 0.05 Critical Value | Max-Eigen Value | 0.05 Critical Value |
None* | 96.10 | 63.88 | 46.55 | 32.12 |
At most 1* | 49.55 | 42.92 | 33.09 | 25.82 |
At most 2 | 16.46 | 25.87 | 10.18 | 19.39 |
At most 3 | 6.27 | 12.52 | 6. 27 | 12.52 |
Note: * indicates rejection of null hypothesis at 5 percent level.
Co-integrated variables are analyzed in error correction mechanism as in Table 4. The error correction coefficient of -0.752 indicates that it takes one year to correct for about 75.2 percent of discrepancies and the speed is statistically significant at all levels of significance. The speed of adjustment in this case is significantly very high because it takes only about 1 year and 4 months to settle at equilibrium, that is, correct 100 percent of the disequilibrium. The negative sign conforms for convergence towards equilibrium in the long run.
In the short run all the variables except first lag of differenced trade balance, are statistically insignificant which contends with error correction mechanism literature. Discussing short run dynamics is of no use given their insignificance. However, it adds value to highlight on the first lag of differenced trade balance which appears statistically significant. In a nutshell, other factors held constant, last year’s trade balance growth rate of 10 percent contributes to the growth rate of about 4.98 percent for this year’s trade balance. In the long run all variables are statistically significant with expected signs. Consequently, the long run portion of error correction mechanism provides as the main stay of the final result discussion.
Real effective exchange rate affects trade balance positively. Upward movements in real effective exchange rate translate into lower export prices and high import prices thereby improving trade balance. Since, in this study, trade balance is taken as the logarithm of export import ratio, an increase in export and a decrease in import imply trade ratio increase. Therefore, ceteris paribus, a 10 percentage increase in real effective exchange rate increases predicted trade balance by about 7.37 percent and the effect is statistically significant at all levels of significance.
Table 4. Long run and Short run Estimates
LONG RUN | SHORT RUN | ||
Variable | Variable | ||
-1.0000 | -0.752***(0.255) | ||
0.737***(0.0996) | 0.498***(0.202) | ||
-0.720***(0.092) | 0.231(0.229) | ||
1.031***(0.2098) | 0.269(0.238) | ||
0.047***(0.0157) | 0.035(0.204) | ||
9.233 | 0.193(0.307) | ||
0.547(0.362) | |||
-0.043(0.520) | |||
-0.164(0.510) | |||
-0.075(0.047) | |||
0.609 | |||
0.457 |
Note: *** indicates significant at 1 percent levels. Standard errors are in parentheses
An increase in domestic activities necessitates an increase in imports because of insufficient domestic production to satisfy domestic consumption or increased demand for production inputs. As China’s GDP increase, its import demand also increase and consequently, as for the case explained above, increasing imports reduces the export import ratio thereby reducing trade balance ratio. Hence, ceteris paribus, an increase in GDP by 10 percent reduces the predicted trade balance by about 7.2 percent and the effect is statistically significant at all levels of significance.
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Foreign economic activities improvement calls for foreign import increase implying exports to foreign economies improves with an increase in foreign GDP. As noted above that trade balance is logarithm of export import ratio, any improvement in export implies improvement in trade balance. The long run relationship reveals how important are US and EU economies to China’s export growth. As a result it can be concluded that holding other factors fixed, an increase in US and EU GDP by 10 percent increases China’s trade balance by about 10.31 percent and the effect is statistically very significant at all levels of significance.
The trend variable included due to the fact that some variables are trend stationary and can capture the effect of technology, positively influence trade balance and its effect is statistically significant at all levels of significance. This implies that with time China’s technology has been improving thereby increasing exports. Alternatively, foreign economic activities have seen improvement with time increasing importation of China’s products. So it can also be concluded that holding other factors unchanged, an increase in time by 10 points increases trade balance by 0.47 percent.
Conclusions
The aim of this study was to find out the relationship between Yuan revaluation and trade performance in China. And from the findings, using real effective exchange rate which is deemed a good measure of exchange rate, currency devaluation positively influenced China’s export thereby improving trade balance. However, given the fact that China’s economy has been growing, the economy’s economic activities have with no doubt improved. This made domestically produced goods insufficient to meet increasing demand. Therefore export growth due to increasing exchange rate has been accompanied by import growth resulting from economic growth. Nevertheless, economic growth in the rest of the world greatly influenced China’s export growth the same way as domestic economic growth influenced import growth.
Acknowledgement
This is a revised version of the term paper that was submitted for Chinese culture and national conditions at Capital University of Economics and Business. Thanks to the World Bank for availability of data used in the analysis. All the views remain those of the author.
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Impact of Currency Devaluation on Economic Growth: Evidence from Pakistan
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IMPACT OF CURRENCY DEVALUATION ON ECONOMIC GROWTH: EVIDENCE FROM PAKISTAN
Tayyab Khan1*, Ayesha Khan2, Wei Long3*, Tauqeer Khan4, Sundas Ayub5, Jie Wang6, and Junaid Ahmad Zia7
This study examines the impact of currency devaluation on Pakistan's economic growth. Currency devaluation is a controversial topic for developing and developed economies to believe in and hope to improve economic growth. This study used the model to find the association among study variables. The annual time series data from 1990 to 2018, together with ARDL and Johansen cointegration model, tested the long-run relationship between economic growth and currency devaluation. Both proposed models indicate that the devaluation of Pakistan’s currency has no significant impact on the long-run changes in economic growth. However, interest rates and gross capital formation are positively correlated with economic growth in the long run. Currency devaluation is a cure for a balance of payment, enhances the competitiveness of the international market, and promotes trade balance. Nevertheless, some political instability and macroeconomic and environmental conditions in a country are sometimes worse than a disease. This study recommended a sustainable Pakistan economy, a comfortable and friendly business environment, and looking closer at microeconomic indicators to make a robust industrial economic policy. Government must take an inventive industrialization policy instead of currency devaluation. Pakistan’s industrial sector has the potential to improve the economy, and the authorities should create a friendly environment for (FDI) foreign businesses and investors. Additionally, allow currency freely to depreciate through market force and efficient money market system official’s devaluation should be discouraged.
Keywords: Currency Devaluation; Economic Growth; Cointegration; Pakistan.
1 Wuhan University of Technology, Wuhan, 430070, China.
2 Wuhan University of Technology, Wuhan, 430070, China.
3 Wuhan University of Technology, Wuhan, 430070, China.
4 Wuhan University of Technology, Wuhan, 430070, China.
5 Shandong University, Jinan, China.
6 Fujian Normal University, Fuzhou, China.
7 Shihezi University, Shihezi, China.
*Corresponding Authors
One of the hottest issues in modern economic research is currency devaluation policy since it reflects every country's economic state and internal and external factors. The goal is to lower the total budget deficit of each country. It is the most significant aspect influencing how nations do their business abroad. The soundness of the economic basis and the financial and monetary policies is also reflected in the exchange rate's stability (Alobied, 2022). International trade theory articulates that currency devaluation can decrease the trade deficit and improve the trade balance by cheaper exports and more expensive imports. There is a contradiction between currency devaluation’s effect on economic growth; it is indistinct whether devaluation can improve output or not. It depends upon the elasticity of exports and imports, and it can be captured by the net effect of the trade balance. If devaluation improves the trade balance, it benefits the economy; however, Pakistan’s economy mainly depends on the import of raw materials; if there are not enough substitutes for raw materials, then it boosts the price of imports and raises inflation in the country. A higher price of intermediate goods can reduce the positive effect that export, and output create. Therefore, currency devaluation not only threatened external stability but disturbed the trade balance. In addition, if exports and imports are not sensitive to exchange rates, there is no benefit to currency devaluation. Devaluation boosts export and output, raises international reserves, and reduces unemployment due to the expansionary effect. While devaluation can decrease output and economic behavior due to increased prices of raw materials thus, the economy becomes shrink, which is the contractionary effect (Shahbaz et al., 2012). In 2009 depreciation of the currency in Pakistan increased by 16.3%, which brought severe pressure on foreign reserves. As a result, economic instability leads to speculation in the foreign exchange market, triggering cash outflows. Devaluation is a hot and controversial topic for developing and developed economies to believe in and hope to increase their exports. Most developing countries face a severe decline in foreign exchange reserves, serious deficits in the balance of payments, rising costs of importing goods and services, and shortage and growing energy costs, which result in decreased productivity. Developing countries have also faced high tariffs on export and high production cost to produce goods to compete in the domestic markets. These factors affect the output level of developing countries. In Pakistan, these economic problems are severe because of political instability, poor governance, frequent monetary interference, and fiscal discretion (Nawaz & Ghani, 2018).
The J-curve, which explains the possible impact of exchange rates on foreign trade, shows that a devaluation of the local currency worsens the trade balance in the short run while improving
it in the long run. The success of the devaluation effect on the trade balance depends on the satisfaction of the Marshall-Lerner condition. Correspondingly, when the sum of the external demand elasticity of exported goods and the domestic demand elasticity of imported goods is equal to or greater than 1, the rise in RER increases the country's foreign exchange earnings and improves the trade balance. Ceyhan et al. (2021) investigated whether the J-curve hypothesis is valid in Turkey. Toda Yamamoto's and Hatemi-J asymmetric causality tests were applied using monthly data from 1996-2019. Toda-Yamamoto causality test results show a one-way causality from the real exchange rate to imports. On the other hand, the results of the Hatemi-J asymmetric causality test suggest that shocks to the real exchange rate do not affect exports but reduce imports. Therefore, the J-curve hypothesis has been determined to be invalid for Turkey. It is also shown that the US trade balance swings from surplus to deficit. Between 1970 and 1971, US policymakers opted to depreciate the currency to bring the trade balance back into balance, but the following year it worsened than the prior year. It was because of the J curve effect that under the J curve assumptions, a country’s trade deficit initially decreases and then increase as high import price reduce import volume. A reasonable explanation for the shortly declined, and long-run improvement in the trade balance due to currency devaluation was given by Magee (1973) to investigate the effectiveness of currency devaluation policy as a tool to improve the trade balance. He worked on the J curve phenomena after the devaluation of the US Currency and pointed out devaluation produces inconsistent short-term and long-term changes. If both export and import are inelastic and smaller than unity in the short run, the trade balance will deteriorate. While both imports and exports are elastic and excessed unity, it will improve the balance of trade in the long run. However, the impact of devaluation is controversial, mixed (empirical results and policy implication), and depends upon the nature of the services. Recently many low-income countries in Sub Sahara Africa have shown interest in the world market. However, their exports are still unsatisfactory because of their dependency on few agricultural or primary goods. Less developed nations (LDCs) in Africa have had a substantial balance of payment deficit and a widening current account deficit and trade imbalances. LDCs have been paying particular attention to exchange rate movements with a devaluation to improve their trade balance, enhance exports, attract foreign investment, and improve domestic output production. Currency devaluation is a cure for the balance of payment, enhances competitiveness in the world market, and improves trade balance. The remedy is sometimes worse than the disease due to political instability and macroeconomic and
environmental conditions in the country. The impact of currency devaluation varies from country to country based on macroeconomic conditions (Ayele, 2019).
Shahbaz et al. (2012) pointed out that real devaluation had a contractionary effect and positively impacted Pakistan's economic growth. He urged policymakers to develop a comprehensive trade policy that includes competitive devaluation to resolve Pakistan's balance of payments crisis. Devaluation is a modern monetary policy that most less developed countries implement to improve their economic condition. A decrease in the ability of a local currency unit to be exchanged for a foreign currency and a fall in the domestic currency's value versus a foreign currency is referred to as devaluation. Due to these currency changes, the country has expansionary and contractionary economic growth. International Monetary Fund (IMF) pointed out that currency devaluation is good for economic growth besides getting loans from member countries since it will increase competition among the firm and domestic production. To find out the relationship between economic growth and currency devaluation, we used relevant macroeconomic indicators from 1990 to 2018, yearly data reflecting the study’s main objective. The research aims to determine whether there is a positive relationship between output growth and currency devaluation or have a negative impact in the case of Pakistan, both short and long- run. We have broadly two hypotheses for the study to evaluate whether currency devaluation has a positive relation with economic growth or not. For this proposal, we used two different proposed equations for the analysis. The first proposed model is the ARDL approach through the cointegration Bound test and Error correction model. Secondly, we used Johansen Cointegration and Vector error correction model. The exchange rate plays an essential role in economic development; it not only influences the sustainability of the country but also plays a crucial role in improving gross capital formation, foreign investment, current account deficit, and also has a significant impact on inflation, money supply, unemployment, interest rate, trade balance, and economic growth.
Theoretical Review
Currency devaluation is an important topic in the international economy and financial history. It has proven to have a positive impact on growth in some economies and a negative impact on others. Ojuolape et al. (2020) analyzed the real effects of currency devaluations for the short- run and long-run using panel data. Seven countries were reviewed, and they were: Ghana, Mexico, Malaysia, Pakistan, Philippines, Singapore, and South Africa. These countries devalued their currencies during the same period under consideration. Long-term effects and
relationships were determined by testing cointegration methods, while short-term effects were determined using fully modified OLS (FMOLS) and error correction models. Panel data from 1981-2010 were used in the analysis.
The empirical results show no significant relationship between currency depreciation and output growth in the short term, but there is a long-term negative relationship between currency devaluation and economic growth. The fundamental purpose of every country is to achieve economic sustainability, growth, development, and well-being of the people (Sulaiman & Saad, 2009). The Neo-Classical Theory argues that exports and imports of the country play a vital role in economic growth and social development (Vijayasri, 2013). The same theory suggests that export helps us to determine the exchange rate, which requires the country to import those goods and services which are not produced in the country. The positive relationship between export and economic growth helps to increase investment in the country, which boosts the economic level and employment rate and decreases inflation (Eita & Jordan, 2010). Devaluation affects the current account deficit through relative prices of exports and imports, which is called the elasticity approach. It also affects income changes called the absorption approach. In addition, the last approach says currency devaluation affects liability service burden. Elasticity stresses the comparative prices of exports and imports during currency devaluation and the competition in international transactions of goods and services. Theoretical foundation analysis based on the impact of currency devaluation on trade balances are all around on the J Curve and Marshall Lerner Condition. Under the curve of J, currency devaluation initially worsens the economic growth in terms of export in the short run due to inelasticity of exports, imports goods and services, and domestic currency value decline, but in the long run, quantity responds and outweighs the price effect (Magee, 1973). Secondly, in the absorption approach of Keynesian economics, Alexander (1952) developed the balance of payment theory, which stated that a country’s balance of trade would only improve when the output of the country’s goods and services is more than its absorption, the absorption means that expenditure of the residents of the country on its goods and services. Price elasticity is low for import-focused products such as raw materials, capital goods, and semi-industrial goods, which are commonly imported into the structure of developing countries (Cooper, 1971). While an increase in exports needs a large amount of output, which is quite hard in the short run, specifically for agriculture, and commodity export countries. If the quantity of demand elasticity of imports and demand elasticity of foreign exports is more than 1, the Marshall Lerner condition states that currency devaluation will recover the trade balance in the long term. On the other hand, Ayele (2019)
says, if the country initially runs a huge trade deficit, then the sum of demand elasticity of exports and imports even exceeds unity, but the devaluation will cause to increase in imports of goods and services than export receipts.
Marshall and Lerner studied independently on that condition and stated that devaluation of the exchange rate would lead to improvements in the trade balance if sums of the price elasticity for the demand for imports and exports are greater than 1. They have three main arguments; firstly, they said that the current account measures the revenue of exports minus expenditure on imports. Secondly, the net revenue of exports will increase if the exports grow more than imports and decrease if the exports grow less than imports. Lastly, if a country devalues its currency, the current account balance will improve and tend to be in surplus. Currency devaluation reduces the price of export in the domestic market in terms of foreign currency and increases the price of imports. It also depends on the nature of goods that a country export; if a country export only raw material and perishable goods, the demand elasticity will be low for exports. However, if the country exports machinery and capital goods, then its demand elasticity will increase, improving the balance of payment. Empirical studies investigated Marshall Lerner’s condition and proved that it was validated mostly in advanced countries that export capital goods.
Nevertheless, the general statement of the economists is the elasticity of demand and supply is greater in the long run as compared to the short run. The effect of currency devaluation takes time for the price of domestic goods and demand for exports to adjust to the new situation. Price elasticities for export and import are lower in the short run, which is why the Marshall Lerner condition does not meet in the short run but does so in the long run, improving BOP. This mechanism follows the J shape in the time, called the J Curve. It shows that the economy cannot move suddenly to high economic growth; instead, it takes time to sit in their situation.
Empirical Review
In the case of Pakistan, the currency devaluation and output growth relationship were investigated in the study by Mush et al. (2011). The study examined the long-run and short-run effects of devaluation and output growth by applying a cointegration test from 1980 to 2009. The empirical evidence found a significant positive relationship between currency devaluation and output growth in the short and long run. In both the short and long run, output growth is affected by currency devaluation. Abdullah and Kalim (2011) researched the relationship between money supply, inflation, and government expenditure on economic growth. The study
investigated that the price level, government expenditure, and money supply have a positive relationship with the economic growth of Pakistan in the long run. Afzal et al. (2012) investigated a study for the cointegrated causal relationship of food inflation, health, and education with economic growth. They found two-way causality between economic growth and education, education and food inflation, and food inflation and economic growth.
Similarly, Ramsha et al. (2022) analyzed the nexus between currency devaluation and inflation from 2001 to 2018 in Pakistan; data found a second difference in stationarity and applied the VECM model for cointegration between currency devaluation and inflation rate. Results revealed currency devaluation has a positive and significant association with inflation. Another study was conducted on Pakistan's exchange rate, inflation, and economic growth by Iqbal et al. (2022). The series of studies included data from over 1989 – 2019. ADF and ARDL bound tests were used for cointegration, and the result found that exchange rate had a negative impact on CPI, whereas exchange rate after a two-year lag was negatively affected. Moreover, F bound test found a long-run association between exchange rate, money supply, and economic growth. While in the short-run exchange rate at lag 1, the impact of GDP was only positive.
Khan et al. (2021) used time series data from 1990 to 2020 and examined the impact of inflation, nominal exchange rates, foreign direct investment, and contingencies on economic growth in Bangladesh. Ordinary least squares were used to determine the relationship between the dependent and independent variables. The results showed exchange rate and foreign direct investment significantly impacted the country's economic growth. Inflation, foreign direct investment, and exchange rates had a positive impact, while emergencies such as Covid-19, natural disasters, etc., hurt Bangladesh’s economic development (Bouvet et al., 2022). The impact of the 1994 IMF-supported devaluation of the CFA franc Calculation of GDP per capita in the CFA franc zone using the augmented synthetic control method. Except for Mali, there is no statistical evidence of a currency devaluation of GDP per capita relative to a depreciation without IMF support. The GDP per capita recorded by the three countries is statistically lower than the counterfactual after currency devaluation. However, these countries have experienced a weakening in the country's institutional environment or been affected by external factors that offset any potential gains from the devaluation. Besides, Ayele (2019) worked on low-income countries’ real exchange rates and current account balances in Africa. The paper's purpose was to point out whether devaluation improved the current account balance of four less developing countries in East Africa: Ethiopia, Kenya, Rwanda, and Tanzania. The author used pooled mean group approach for panel data using ARDL, a bound test and the PMG approach from 1970 to
2016 and found that there is no improvement in the current account balance due to exchange rate devaluation, while only Ethiopia improved its current account balance when restricted ARDL and bound test were used. The overall empirical result shows that in the short run, there are improvements in the current account balance of these countries but a decline in the long run. Shahbaz et al. (2011) found contractionary and expansionary effects in Pakistan in case of currency devaluation. They took data from the WDI and Economic Survey of Pakistan from 1975 to 2008. The study used the ARDL model and bound test for long run relationship and found the contractionary effect on economic growth. They used empirical variables relevant to Pakistan’s economy but, unfortunately, found that currency devaluation on economic growth has a reverse impact on the economy and explained the reason to be the high cost of imports as most of the inputs and raw materials are imported. Currency devaluation means lower labor talent in the foreign market (Memon et al., 2015). The study investigated the influence of currency devaluation on Pakistan, causing cost-push inflation because Pakistan’s industries depend on imported inputs. At the same time, high tariffs and quotas block access to developed countries. Due to the currency devaluation, the cost of industrial production increase and reduce the strength of volume and operation, ultimately inflation triggering in the economy. The solutions that resolve the currency devaluation as appreciate currency through FDI and increase the export of goods and services to lead to high cash inflow because there would be high push demand from the countries.
The effect of currency devaluation in 8 LDCs for 25 years was observed using the fixed effect method. The result showed currency devaluation creates a contractionary effect on output growth in the initial year while creating an expansionary effect the following year but not a qualitative difference in manufacturing exporters and agriculture exports in terms of currency devaluation on production. Krugman conducted another study on currency devaluation and output, used different models for semi-industrialized countries, and found results like the Keynesian model, where currency devaluation led to a reduction in output. The government revenue increased by devaluation, and taxes increased when exports were increased.
Aslam and Awan (2018) investigated core macroeconomic indicators such as employed labor force, foreign direct investment, GDP deflator, export, broad money, gross capital formation, and real gross domestic products. The effect of monetary policy on economic growth in Pakistan used time series data from 1972 to 2015. The author applied multiple regression and found a long-run and positive relationship between monetary policy and economic growth.
Contrastingly, Choudhary and Chaudhry (2007) suggested that currency devaluation on growth
and the price level may not be undeviating across all countries and may not be generalized for all developing countries. Most empirical studies do not separate the effects of devaluation from import prices when used to test the contractionary devaluation hypothesis. Thus, a country- specific study was needed to separate the price of imports from the effect of currency devaluation in Pakistan. The author used the VECM model to check the impact of the exchange rate on production and price level from 1975 to 2005. The paper showed devaluation positively affects production but is negative on the price level. The study showed there is no contractionary devaluation hypothesis in Pakistan. The study’s findings showed expansionary effects of devaluation on output in Pakistan.
Furthermore, An et al. (2014) examined Asian countries with contractionary devaluation or expansionary devaluation. They argued that currency devaluation has a contractionary effect when disrupting the financial sector and introducing uncertainty among investors and consumers. For this purpose, the reduce form model was established and tested through cointegration analysis. The result suggested that many Asian countries’ depreciation has contractionary.
Correspondingly, an empirical study by Nawaz & Ghani (2018) on currency depreciation and output in the case of Pakistan used the IS-LM model, Autoregressive Distributed Lag (ARDL) model, and Error Correction (ECM) model and took data from 1972 to 2010. The study found no expansionary effect in both the short and long run. Their study also recommended a clear long-term policy that inspired the international community’s belief to boost the self-confidence of exporters in the country. Agenor (1991) developed a study about 23 developing countries and found a relationship between currency devaluation, production, and real exchange rate. A survey of 23 developing countries from 1978 to 1987 drives the real production from the balance of aggregate demand and supply quantity with rational expectation. He found there is a contractionary effect on output growth. Devaluation expands the economy's output growth if there is anticipation in the exchange rate.
Another study was conducted in over 23 OECD countries to see the relationship between currency devaluation and output growth using the unit root test and cointegration (Kalyoncu et al., 2008). The result showed that 9 out of 23 countries have a relationship between devaluation and output in the long run only. 6 out of 9 hurt output growth while the remaining 3 countries have a positive impact, which means that depreciation improves output growth only in three countries. Upadhyay and Upadhyaya (2008) looked at the impact of output growth and real exchange rates in six Asian countries, including monetary, fiscal, and external variables. The
impact of depreciation on the real exchange rate, the effect of nominal depreciation, and changes in the price ratio at home and abroad are examined. The result suggested that there is no effect on output growth at any period, such as short run, long run, or middle exceptions of a few cases. Christopoulos and Tsionas (2004) investigated devaluation decelerates the rate of economic growth in the economy.
A study by Risager et al. (2021) was conducted to examine the impact of currency devaluation on the performance of Croatian banking sectors. The study concluded a statistically significant negative relationship between currency depreciation and performance. Currency devaluation makes imports expensive and exports cheap, reducing investor confidence. Investors are reluctant to invest in countries with lower returns on exports. The devaluation has lowered people's hopes for local currency deposits. Another empirical study was conducted (Rajan & Shen, 2006) on currency devaluation. Results found that currency devaluation is a stimulus wave of fear and nervousness about the stability of external economic issues; it triggers capital outflow, decreases foreign reserves, and increases overseas borrowing. The contractionary outcome of real currency devaluation caused crises in the banking sector. During currency crises, Miteza's (2006) study was conducted on the emerging and developing economies of Romania, Slovakia, Poland, Hungary, and the Czech Republic. The study investigated the long- run real devaluation as a contractionary effect; he added that currency devaluation shrinkages the aggregate supply much quicker than the increase in aggregate demand. The use of Mexican data devaluation by Kamin & Rogers (2000) resulted in excessive inflation and slowed economic growth in the short and long run. The study's VAR model and regression were free of spurious regression and reverse causation, and real devaluation in Mexico resulted in high inflation and a loss in output growth. Mejía-Reyes et al. (2010) researched the contractionary effect of devaluation on six major Latin American countries and found a contractionary effect. According to the survey by Bahmani-Oskooee and Kandil (2009), both contraction and expansion have impacted real exchange rate fluctuations in economies in the Middle East and North America.
Over the past few years, many sub-Saharan African (SSA) countries have seen markedly weaker economic activity, worsening trade balances, dwindling foreign exchange reserves, and depreciating exchange rates. This situation has led the International Monetary Fund to call for more flexible exchange rate adjustments and even currency devaluation to reverse the economic downturn. Odionye et al. (2021) examined the asymmetric effects of currency devaluation on policy shifts in economic output between 1980 and 2019 in six selected SSA countries, namely
Ghana, Kenya, Tanzania, Mozambique, Nigeria, and Malawi. The study employs a smooth transition regression (STR) model to determine the relative asymmetric response of economic output to depreciating and non-depreciating regimes. Results for STR were mixed, as devaluation had asymmetrically positive and significant effects on economic output in Ghana, Kenya, Tanzania, and Mozambique but negligible in the case of Nigeria and Malawi. This mixed result suggested that the impact of currency devaluation on economic output varies from country to country, depending on the structure and size of the economy, the nature of the goods produced, and the supportive policies implemented, among other things. The policy implication of the findings is that policymakers across countries should understand the specificities of core macroeconomic variables to design and implement sound policies.
Recently, there have been criticisms that currency devaluation and output growth have a contractionary impact on the economy. According to popular wisdom, devaluation has a contractionary effect on the economy's production, decreasing output growth and aggregate demand. Empirically, evidence for the contractionary impact is quite sketchy. Khan and Knight (1981) extended the model for the issue of contractionary devaluation. The result obtained from 12 developing countries show that there is contractionary devaluation in the short run decline in output and aggregate demand, found that after one-year devaluation have expansionary output in the economy. Khan and Knight (1981) suggested that there is no association between currency devaluation on productivity. Bahmani-Oskooee et al. (2002) conducted applied statistical Johansen’s cointegration test for four Asian countries and found currency devaluations were expansionary in the Philippines and Thailand while contractionary in Indonesia and Malaysia. Panel data were further used to investigate currency devaluation and aggregate output expansion by Christopoulos (2006) by taking 11 Asian countries from 1968 to 1999. Results suggested that there is the expansionary output of the majority of Asian countries due to currency devaluation in the long run and as a panel as a whole. These findings contradict recent studies, which concluded that currency devaluation does not influence output. In the example of Sri Lanka, De Silva and Zhu (2004) used the VAR (vector autoregressive) technique on quarterly data from 1976 to 1998 and found that currency depreciation improved the trade balance but had a contractionary effect on the GDP.
Cheng (2020) researched currency devaluation and trade balance in the US economy with services trade. Cheng examines the usefulness of currency depreciation as a policy tool for improving trade balances by calculating the exchange rate elasticity of services trade between the US and the rest of the world using quarterly disaggregated data from 1999 to 2015. The
ARDL model was utilized. The results found that currency depreciation in individual services trades primarily depended on the nature of the service, as some services were insensitive, such as insurance services and intellectual property charges. They also discovered that currency depreciation, in the long run, promotes export services trade while decreasing import services trade. Most remarkably, some services trades are unaffected by exchange rate fluctuations. Most service trade categories have inelastic revenues, and economic growth influences the import and export of traded services. For developing countries, there is tension between currency devaluation and output growth. Pakistan is one of the developing countries. For this purpose, we used two different econometric models of cointegration to verified that whether devaluation can improve economic growth and the foreign exchange market and decrease outflow or not. Researcher suggests that at the beginning of the currency devaluation economy have high inflation in the short run; nonetheless, in the long run, the economic growth improves, and it increases domestic production, which increases demand for currency in the foreign market and gains currency value.
To study the relationship between currency devaluation and economic growth in the case of Pakistan based on the following variables, interest rate, inflation, exchange rate, gross capital formation, and gross domestic product. The secondary yearly time series data are taken from the World Development Indicator (WDI) and data bank from 1990 to 2018 to find the study's main objective. The time series data involved 29 observations, and we applied the econometric and statistical package of E Views 10. This Econometric package (E Views) helps provide accurate and unbiased results while using time series data and different econometric techniques to achieve the core objectives of the study. Equation (1) used the first proposed model of the ARDL approach to establish the short-run and long-run relation among variables through the cointegration test, while equation (2) used the second proposed model for Johansen Cointegration and vector error correction model. The ARDL approach is applied to variables, where some variables are stationary on a level I (0) and some are stationary on the first difference I (1). As Quattara (2004) argued, the Augmented Dickey-Fuller test confirmed the application of ARDL and could be used if none of the variables is stationary on the I (2) second difference. ARDL model contains the lagged value of the dependent variable and the current and lagged value of the regressed explanatory variables.
The generalized form of ARDL specification is (p, q1, q2, q3, q4).
����
∆LGD���� =∝0+ ∑����∆LGD����−�� + ∑���� ∆LIN����−��
��=1
��
��=1
����
+ ∑����∆LIN����−�� + ∑����∆LEX����−�� + ∑����∆LGC����−�� + ��1����������−1 + ��2����������−1
��=1
��=1
��=1
+ ��3����������−1 + ��4����������−1 + ��5����������−1 + ����(1)
Equation 1 is the first proposed equation and model for the study that represents ARDL cointegration where Δ��GDP��, Δ��INT��, Δ��INF��, Δ��EXR��, and Δ��GCF�� denote changes in the natural lag of gross domestic product, interest rate, inflation rate, exchange rate, and gross capital formation, respectively. ��0 is intercepted, k is the lag operator, and ���� is the error term or white noise. Moreover, ����, ����, ����, ρ��, θ�� determine the short-run dynamism. While the ��1, ��2,
��3, ��4, ��5 show long-run parameters or coefficients.
This study also proposed another model, which is the Johansen Cointegration equation through Vector Error Correction Model that form as,
����
∆���� = ��0 + ∑��1∆����−�� + ∑���� ∆����−�� + ���� + ����
(2)
��=0��=0
Equation 2 shows Johansen Co-integration whereas Y�� = (n x 1) vector of all variables that are integrated of order I (1). �� = (n x n) represent the matrix of the coefficients of the model.
�� = (n x r) represents a matrix of the Error Correction coefficients, and r denotes the number of cointegrating association relationships between the variables, so we can say that 0 < r < n. �� denoted by the adjustment of parameter or speed of adjustment. z = (n x r) is the matrix of r cointegrating vectors, so that 0 < r < n represents the long-run relationship between the variables.
Augmented Dicky Fuller Test (ADF)
ADF test is an advanced and preferred Augmented Dicky (AD) test. The researcher mostly rectified errors from the (AD) test, which is why we focused on and preferred the Augmented Dicky Fuller (ADF) test. It eliminates autocorrelation from residuals and adds some extra lagged terms to the dependent variable. This extra lagged term determines by SIC (Schwartz Information Criterion). It is one of the best and most desirable for its strictness and rigid features (Neath & Cavanaugh, 1997). The Augmented Dicky Fuller test equation will be written and expressed below in the forms as follows,
��
∆���� = ����−1 + ∑��������−1 + ����
��=1
(3)
In equation (3), Δ is the change which means it is the first difference operator, et is the error
term, �� is the lag operator, and t is the time subscript. The null hypothesis for the ADF test is that a unit root exists, while the alternative hypothesis is that a unit root does not exist, implying that the series is stationary. If the null hypothesis is accepted, the series is non-stationary; if the null hypothesis is rejected, the series is stationary since it lacks a unit root. The ADF critical value and probability will be used to make the decision. If the P value is greater than the ADF critical value, the null hypothesis will be accepted, indicating that the data is non-stationary.
Error correction model & Vector error correction model
It is important to analyze the error correction model when there is cointegration amongst the variable in the ARDL approach because cointegration only shows long-run relation. In contrast, the error correction model shows us the short-run relationship between the variables. The error term should be negative and significant. A negative value can determine how much time takes these short-run shocks to adjust in the long run. The mathematical form of the error correction model as,
����
∆LGD���� =∝0+ ∑����∆LGD����−�� + ∑���� ∆LIN����−��
��=1
��
��=1
����
+ ∑����∆LIN����−�� + ∑����∆LEX����−�� + ∑����∆LGC����−�� + ����������−1 + ����
(4)
��=1
��=1
��=1
Equation (4) represents the error correction model (ECM), where ECT denotes the error correction term, and λ is the coefficient of the error term, which should be negative and significant.
Vector error correction model used after Johansen Co- integration model; it is indispensable when there is cointegration among variables. VECM equation can get to expand equation (2) in the form as,
����
∆���� = ��0 + ∑��1∆����−�� + ∑���� ∆����−�� + ���� + ����
��=0��=0
��t = ��0 + ��1��1 + ����
����−1 = ��������−1 = ����−1 − ��0 − ��1����−1(5)
Equation (5) represents the vector error correction model (VECM), where ECT denoted the error correction term. Its coefficient should be negative, and the probability value should be significant. While equation (2a) Y�� = ��0 + ��1X1 is the long run cointegration between the two variables, and ��1 and ��i is the parameter that how x and y react in the long-run equilibrium, we applied the model more than two variables. The result is discussed in the next section.
Augmented Dicky Fuller Test
Time series data must check the existence of a unit root among variables, and if there is a unit root in the series, it leads to spurious regression. Therefore, it is necessary to make the data stationary for estimations. To test whether every individual variable is stationary, it needs to ensure that all variables are integrated. Indeed, the unit root test is a test to verify the stationarity of the variable. Hence, we used Augmented Dicky Fuller (ADF, 1979) for the unit root amongst the variables.
Table 1. Stationarity test of variables
Variables | ADF Level | ADF | 1st difference |
LNGDP | 0.0092 | 0.0418 | |
LNINT | 0.0019 | 0.0004 | |
LNINF | 0.0139 | 0.0000 | |
LNEXR | 0.1426 | 0.0070 | |
LNGCF | 0.8549 | 0.0205 | |
In Table 1, Augmented dickey fuller shows that LNGDP, LNINT, and LNINF have no existing unit root; we rejected the null hypothesis the p-value 0.0092, 0.0019, 0.0139, respectively, is less than the critical value 0.05 or 5% on the level. While LNEXR, LNGCF, and their p-value are 0.0070 and 0.0205 on the first difference are less than the significant level of 5%. When the variables become stationary and cointegrated in a different order, such as level I (0) and the first difference I (1), then the ARDL model should be used. However, before the ARDL model, we need to specify the lag length selection for the ARDL model specification.
The lag length selection criterion
In Table 2, the dependent variable is Gross domestic product (GDP), and c is a constant term, whereas the independent variables are Interest (INT), Inflation (INF), an Exchange rate (EXR), and Gross capital formation (GCF). It is clearly shown in below Table 2 that most information criterion says that a second (2) lag is best for the ARDL approach.
Table 2. Optimal lag length criterion for ARDL model
Lag | Logl | LR | FPE | AIC | SC | HQ |
0 | 21.51804 | NA | 0.011346 | -1.651804 | -1.402871 | -1.603210 |
1 | 60.76727 | 54.94891* | 0.000250 | -5.476727 | -5.178007 | -5.418413 |
2 | 62.27408 | 1.958854 | 0.000240* | -5.527408* | -5.178901* | -5.459376* |
Table 2 above, FPE (Final Predication Error), AIC (Akaike information criterion), SC (Schwarz
Information Criterion), and HQ (Hannan-Quinn information criterion) verified that the second
(2) lag is the best lag for the ARDL model. In this study, the outcomes are integrated with different integration, which means some variables are integrated on the level, and some variables are integrated on the first difference. Therefore, we decided to run the cointegration test through the ARDL approach with lag 2 and see the bound cointegration test.
Co-integration ARDL F Bound test
Table 3 presents bound tests for cointegration, where we rejected the null hypothesis because the F statistic value is greater than the Upper and Lower bounds. The study tested cointegration analysis using the ARDL model bound test, which shows the long-run cointegration amongst variables. The economist and researcher suggest that after cointegration, it is necessary to apply the error correction model.
F-Bound TestNull Hypothesis: No levels of relationship
Test Statistics | Value | Signif | I(0) | I(1) |
F-Statistics | 23.74284 | 10% | 3.03 | 4.06 |
K | 4 | 5% | 3.47 | 4.57 |
Error correction model
The Error Correction Model (ECM) is presented in Table 4 using the Ordinary Least Square (OLS) approach. The exchange rate with both the first and second lag has a positive relationship with GDP, meaning that if the Exchange rate increase 1 percent (currency devalue), then Gross Domestic Product (GDP) will increase 0.2162% in the first lag, while in the second lag it will increase to 0.3348. The interest rate also has positive relation in the second lag; its value is 0.001049; if a 1% change occurs in the interest, it will increase Gross Domestic Product (GDP) by 0.001049 percent. However, in the first lag, the relation is negative, which means an inverse relation of GDP with interest rate. The Inflation coefficient value is 0.002873 in the first lag, which means the relationship is positive with Gross Domestic Product (GDP), and with the second lag the value becomes negative (-0.015670). The inflation rate in the first lag is positive, while in the second lag, it shows negative relation, which means that if the currency devalues, then inflation will rise, and if there is a 1 percent change in inflation, there be a -0.015670 percent decrease in the GDP resulting in a decrease in economic growth.
Most importantly, in the Error correction term (ECT (-1), the coefficient must be negative and significant at 5%. In table 4, the coefficient of ECT is negative but not statistically significant, which means there is no convergence from short-run shocks toward long-run equilibrium.
Table 4. Error correction model through OLS
Variable | Coefficient | Std. Error | t-Statistic | Prob. |
C | 2.490808 | 0.562486 | 4.428217 | 0.0214 |
LNGDP (-1) | 1.365775 | 0.328643 | 4.155802 | 0.0253 |
LNGDP (-2) | -0.457045 | 0.333306 | -1.371249 | 0.2639 |
LNINT (-1) | -0.044706 | 0.012808 | -3.490595 | 0.0397 |
LNINT (-2) | 0.001049 | 0.013058 | 0.080349 | 0.9410 |
LNINF (-1) | 0.002873 | 0.010463 | 0.274562 | 0.8015 |
LNINF (-2) | -0.015670 | 0.009475 | -1.653884 | 0.1967 |
D (LNEXR (-1)) | 0.216217 | 0.081582 | 2.650317 | 0.0770 |
D (LNEXR (-2)) | 0.334897 | 0.087735 | 3.817120 | 0.0316 |
D (LNGCF (-1)) | -0.099632 | 0.052942 | -1.881920 | 0.1564 |
D (LNGCF (-2)) | 0.048072 | 0.071043 | 0.676659 | 0.5471 |
ECT (-1) | -0.642941 | 0.565882 | -1.136176 | 0.3384 |
The error correction term ECT (-1) shows a negative that satisfied one condition but is insignificant. However, we conducted another diagnostic test to examine the normality of LM serial correlation and Heteroskedasticity. Before going to diagnostic tests, we checked the second proposed model of the study, the cointegrating equation of the Johansen model, for further confirmation of currency devaluation’s impact on economic growth. This model can be applied if all variables are cointegrated in the order I (1).
Johansen Co-Integration Test
Table 5 shows the results of the Johansen cointegration, in which the null hypothesis is rejected because the trace statistic value of 78.23 for none is greater than the critical value of 0.05 or 5%, which is 69.818, and the p-value is also significant. All the other trace statistic values are less than the critical value, so we cannot reject the null hypothesis for those cases except at none. Here we compared the critical value of 0.05 with the trace statistic value. If the trace statistic value is greater than its critical value, we reject the null hypothesis. We can also follow the p-value if the p-value is less than 5% of the level means it is significant, we reject the null hypothesis and accept the alternative, but here in this model, we only compared trace and maxi Eigenvalue with its critical value of 0.05. If the trace test or maxi-eigenvalue comes greater than its critical value, we reject the null hypothesis, but here we take the trace test.
In this case, we can reject the null hypothesis for the trace statistic at no value and can say that there is only one cointegration which means that there is an association amongst all independent variables with the dependent in the long run.
Table 5. Un-Restricted Cointegration Rank Test (Trace)
Hypothesized No. of CE(s) | Eigenvalue | Trace Statistic | 0.05 Critical Value | Prob.** |
None * | 0.679807 | 78.23793 | 69.81889 | 0.0091 |
At most 1 | 0.599065 | 47.48950 | 47.85613 | 0.0541 |
At most 2 | 0.478518 | 22.81267 | 29.79707 | 0.2554 |
We rejected the null hypothesis in table 5 above. it means there is long-run cointegration between variables in the model. Now we will apply the Vector error correction model to find the short-run and long-run equilibrium convergence in the model.
Vector Error Correction Model
The Vector error correction model shows both the long and short-run relation among variables. In the normalized equation, the coefficient sign should be reversed. In table 6, real interest rate (INT) and Gross Capital Formation (GCF) have a positive relationship with Gross Domestic Product (GDP). While inflation rate (INF) and Real Exchange rate (EXR) have a negative relationship with the gross domestic product. We write a normalized equation in the form as,
���������� = 0.034168 ���������� – 0.264752 ���������� – 0.594786 ����������
+ 1.510408 ����������(6)
In Equation 6, our targeted variable is LNGDP, which means that if there is a one percent change in the LNINT and LNGCF, there will be an increase of 0.03 and 1.51 %, respectively, in LNGDP. While if there is a 1 percent change in the LNINF and LNEXR, there will be a decline of 0.26 and 0.59 %, respectively, in LNGDP.
Table 6. Vector Error Correction Model
Cointegrating Eq: | CointEq1 | ||||
LNGDP (-1) | 1.000000 | ||||
LNINT (-1) | -0.034168 | ||||
(0.05904) | |||||
[-0.57876] | |||||
LNINF (-1) | 0.264752 | ||||
(0.05072) | |||||
[ 5.21999] | |||||
LNEXR (-1) | 0.594786 | ||||
(0.44083) | |||||
[ 1.34924] | |||||
LNGCF (-1) | -1.510408 | ||||
(0.16558) | |||||
[-9.12173] | |||||
C | 7.236082 | ||||
Error Correction: | D(LNGDP) | D(LNINT) | D(LNINF) | D(LNEXR) | D(LNGCF) |
CointEq1 | -0.018449 | 3.218995 | -2.583617 | 0.294816 | 0.114485 |
(0.03707) | (1.11117) | (0.68160) | (0.11668) | (0.12544) | |
[-0.49770] | [ 2.89694] | [-3.79054] | [ 2.52662] | [ 0.91267] | |
Table 6 above indicates the coefficient of cointEq1 or ECT (error correction term) with LNGDP and LNINF are negative, but only LNINF is significant in demonstrating merging from short- run dynamics towards long-run equilibrium. The coefficient adjustment is 2.5% along long-run equilibrium in case of a disequilibrium situation. While in the case of LNINT, LNEXR, and LNGCF, the adjustment coefficients are positive, which means one of the ECT conditions is not satisfied again. Therefore, we can say that both proposed models suggested no positive association between currency devaluation and economic growth in Pakistan. Nevertheless, we conducted diagnostics to ensure the model’s stability and normality.
Basic Diagnostics tests
We performed the basic diagnostics test, which included LM serial correlation or Autocorrelation, Heteroskedasticity and normality, to see if the model has stability and accuracy.
Autocorrelation
The serial correlation or autocorrelation shows in Table 7 that the error term or residual of the model is not correlated. Meaning variables’ current value and past value have no relation. The model is not suffering from serial correlation.
Table 7. Breusch-Godfrey Serial Correlation LM Test
F-statistic | 0.876319 | Prob. F (2,1) | 0.6027 |
Obs*R-squared | 9.550684 | Prob. Chi-Square (2) | 0.0084 |
Above Table 7 shows the OLS Auto correlation problem, serial correlation test, which shows there is no relation between the lagged value of the error term or by itself over the time interval. In this model, we do not have Auto Correlation. Because the p-value (0.6027) is higher than the 5% level of the critical value, we cannot reject the null hypothesis because it states that this model has no serial correlation, yet we accept the null hypothesis. After all, the probability value is greater than 5%.
Heteroskedasticity
Heteroskedasticity means the data is scattered over a period amongst the variables. It shows a cone shape on a scatter graph, where the standard error is not constant of the variables; it refers to the data that is unequally varied.
Table 8. Heteroskedasticity Test: Breusch-Pagan-Godfrey
F-statistic | 0.296864 | Prob. F (11,3) | 0.9415 |
Obs*R-squared | 7.817813 | Prob. Chi-Square (11) | 0.7295 |
Scaled explained SS | 0.441085 | Prob. Chi-Square (11) | 1.0000 |
Table 8 shows the null hypothesis is accepted because the observed R squared statistic corresponding probability value is 0.729 and F, which is greater than or more than 5%. It means residual is not heteroskedasticity; it also means that residual is homoscedastic, which is desirable. Now our model is free of heteroskedasticity. Table 8 above confirmed that we could not reject the null hypothesis, the observed r square, and the F statistical probability (0.9415) value is greater than the critical value of 5 percent level.
Normality of the model
In the normality test, we have two hypotheses where we can check our study proposed model normality. The following are the hypothesis of this model.
H0 = 0 (Residual are normally distributed) residuals follow normal distribution.
H1 ≠ 0 (Residuals are not normally distributed) residuals do not follow.
Figure 1. Residual distribution for the normality test.
Figure. 1 indicates the normality of the model; as we can see from the Jarque Bera test, the probability value is 0.310465, which is greater than the critical value of a 5% level of significance. As a result, the null hypothesis that the residuals are normally distributed will be accepted. We cannot rule out the null hypothesis because Jarque Bera's probability value is higher than the critical threshold of 5%.
This study mainly looked at updated data on how currency devaluation can affect the economic growth of Pakistan. For this purpose, we took secondary data from World Development Indicator (WDI); the yearly data contains 29 observations from 1990 to 2018 and took core economic indicators such as GDP, Inflation, Exchange rate, Interest rate, and Gross capital
formation. This study utilized these five variables on econometrics techniques to find the outcomes of currency devaluation on the economic growth of Pakistan while using ARDL, ECM, Johansen cointegration, and the VECM model. We found that there is no positive and significant relation between currency devaluation and economic growth in the case of Pakistan. This statement was also supported in the following studies: Cheng, 2020; Ayele, 2019; Nawaz et al., 2018; Abdul Sattar et al., 2015; and Mohsen Bahmane-kooee et al., 2014. In addition, to the stability of the model, we performed a diagnostics test. We did not find serial correlation and heteroskedasticity, although model residual is normally distributed in the data. With some study results, we realized that currency devaluation is a tool policy to improve economic growth, but it is not a good policy for economic growth in the case of Pakistan. Because it is a blind fact that economic growth cannot improve without industrialization, the authority needs to look at these economic indicators, particularly the exchange rate, because it is crucial to operate correctly.
Pakistan operated a managed floating exchange rate system from 1982 to 1998. During the Benazir and Nawaz regimes (1988-1998), the current account and trade deficit were 4.7percent and 5.8percent of Gross Domestic Product, correspondingly. From 1998 to 2000, the country's political situation was unstable, and the west imposed sanctions on Pakistan due to atomic tests. Various exchange rate regimes have changed from peg to floating, and peg-float mixing has become a strategy to deal with the crisis. During the managed floating exchange rate in the 1980s, the rupee depreciated by 20 percent. In addition, the 1988 agreement with the IMF was supported by conditions such as devaluation, import liberalization, and tariff reductions. During the period when Pakistan's exchange rate was still undervalued (1986-93), GDP growth reached a record high of 5.4%. The higher external debt growth during this period may have been due to the International Monetary Fund (IMF) and World Bank lending programs. The continued effect of devaluation on debt is lagged, reflected in the undervaluation period from 1999 to 2005, with a growth rate of 0.10%. According to the International Monetary Fund (2010), the rupee is effectively pegged to the US dollar within a narrow range. From 2003 to 2007, the tariff rate was reduced to 25%, and it rose to 35% in 2008 due to the trade deficit. The last government had established a target of 6 percent to 7 percent growth in 2018 but only achieved 4.14% growth in 2014-2015. Almost from 1990 to 2022, every regime in Pakistan has faced an IMF program to devalue the Pakistan rupees. Eventually, this study conducted that weak currency damages GDP growth, while strong currency enhances economic growth.
The findings and results of the study suggest that currency devaluation is not a good policy for the economic growth of Pakistan because Pakistan only exports raw materials and some agricultural products while imports of heavy machinery, and all those raw materials which are needed for industries are imported. Secondly, Pakistan is facing energy crises such as electricity, gas, and petroleum, which are the backbone of production. To make Pakistan’s economy sustainable, the authority should look closer at the economic indicators and make industrial economic policy and economic growth-related policy have to be wisely applied and allow the industrial sector to play an effective role in boosting economic growth in Pakistan. If we look at the economically stable countries, they focus on industrial reforms and information technology sectors. The authority should adopt a policy for industrialization instead of currency devaluation because Pakistan’s industrial sector has the potential to improve; the authority should also need to create an easy and friendly environment for foreign business investors. In addition, official devaluation should be discouraged by allowing the currency to depreciate freely through market force and an efficient money market system. The government policymakers can pay more attention to these factors to formulate a trade policy, to generate faster and better economic development.
Acknowledgment(s)
National Social Science Foundation of China-Research supports this study on the Core theory of Global Layout of China's Strategic Emerging Industrial Chains (17BJL015).
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Currency Devaluation and Resource Transfer from the South to the North Author(s): Mohameden Ould-Mey
Source: Annals of the Association of American Geographers , Jun., 2003, Vol. 93, No. 2 (Jun., 2003), pp. 463-484
Published by: Taylor & Francis, Ltd. on behalf of the Association of American Geographers
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Eastern Economic Journal (2022) 48:367–389 https://doi.org/10.1057/s41302-022-00211-4
Currency Devaluation as a Source of Growth in Africa: A Synthetic Control Approach
Florence Bouvet1 · Roy Bower2 · Jason C. Jones2
Published online: 25 March 2022
© EEA 2022
Abstract
This study examines the impact of the 1994 IMF-supported CFA franc devaluation on GDP per capita in the CFA-franc zone using the augmented synthetic control methodology. With the exception of Mali, there is no statistical evidence that GDP per capita levels rose relative to what they would have been in the absence of the IMF-supported devaluation. Three countries record statistically significant GDP per capita levels below the counterfactual following the devaluation, though these coun- tries experienced a deterioration of their national institutional environment or were affected by external factors that offset any potential gains from the devaluation.
Keywords Currency devaluation · Augmented synthetic control method · CFA monetary union
JEL Classification E5 · F4 · O5
Introduction
The CFA franc has stood as a remarkable beacon of stability in Western Africa since its inception in 1945. With the exception of a 50%-devaluation in 1994, the CFA franc rigidly maintained its fixed rate to the French franc up to 2001 and the euro thereafter. Maintaining a stable fixed exchange rate for this length of time has ben- efits. This stability reduces exchange rate risk premiums and restrains inflationary
* Jason C. Jones Jason.jones@furman.edu
Florence Bouvet bouvet@sonoma.edu
Roy Bower Roy.bower@furman.edu
1Sonoma State University, 1801 E. Cotati Avenue, Rohnert Park, CA 94928, USA
2Furman University, 3300 Poinsett Hwy, Greenville, SC 29613, USA
368F. Bouvet et al.
pressures. There are potential costs as well. In addition to imposing limits on mon- etary sovereignty, a fixed exchange rate can become misaligned, leading to reduced competitiveness in international markets and economic hardship.
This was the case for countries in the CFA franc zone in the late 1980s and early 1990s. A series of adverse price shocks to many of the countries’ main commodity exports, combined with a persistent appreciation of the French franc relative to other currencies over this time period, led to a deterioration of the terms of trade for many CFA franc zone countries (Boughton 2012). By the early 1990s, it became clear to the member nations, the International Monetary Fund (IMF), and France that a devaluation was necessary to address the currency’s overvaluation. On January 12th, 1994, governments from the CFA franc zone accepted a 50%-nominal devaluation against the French franc. At the same time, lending and technical support from the IMF, France, and other donors were committed to contain the negative effects of the devaluation. This IMF-supported realignment was designed to restore competitive- ness in export markets for countries in the CFA- franc zone and bolster their eco- nomic growth prospects (Clément 1995).
The goal of this paper is to evaluate the effectiveness of the 1994 IMF-supported CFA franc devaluation in promoting economic growth for countries in the CFA- franc zone. Evaluating the impact of this episode is important because the CFA franc is still fixed to the euro, making misalignment a real possibility and realign- ment a viable policy tool. Calls for a revaluation arose as recently as the mid-2010s when the euro appreciated against the US dollar and slow growth in the Eurozone renewed concerns that the CFA franc was overvalued (Gnansounou and Verdier- Chouchane 2012).
To assess the impact of the 1994 IMF-supported devaluation on per capita income levels in CFA-zone countries, the augmented synthetic control method (ASCM) pro- posed by Ben-Michael et al. (2021) is employed. The augmented synthetic control method follows the basic premise of the synthetic control method (SCM), by con- structing a counterfactual “synthetic CFA-zone country” using a weighted linear combination of similar countries that did not experience an IMF-supported devalu- ation in 1994. Any difference between the actual income per capita and the income per capita of the synthetic country can be attributed to the effect of the IMF-sup- ported devaluation. The ASCM augments the SCM by using a different matching technique which addresses bias in the SCM estimate when the pre-treatment match is not excellent, which is the case for many of the CFA-zone countries used in this analysis.
This technique is particularly useful in evaluating the IMF-supported devaluation in the CFA-franc zone for several reasons. First, the effect can be measured for each country independently, allowing for potential heterogeneous effects across the sam- ple. Wide disparities across countries in the economic impacts of the devaluation would raise questions regarding the benefits of another devaluation, and possibly challenge policy coordination within the monetary union. Second, this 1994-devalu- ation was unanticipated, removing any concerns of anticipation bias influencing the results. Third, the devaluation occurred on a specific day, removing any challenges in setting a policy date from which to start the treatment. To our knowledge, there are no studies that apply the ASCM to specific policy questions in Africa, and no
Currency Devaluation as a Source of Growth in Africa: A Synthetic…369
SCM or ASCM papers that study the effect of the 1994 IMF-supported devaluation of the CFA franc.
The remainder of the paper is organized as follows. Section 2 provides back- ground on the economic conditions that led to the 1994 IMF-supported CFA franc devaluation. Section 3 summarizes the relevant literature on the impacts of currency devaluations and the use of the SCM and ASCM in addressing events studies such as this. Section 4 explains the methodology and data used in the analysis. Section 5 presents and discusses the baseline results and various robustness checks. Section 6 concludes.
Background Information
The CFA-franc zone currently consists of 14 countries in Sub-Saharan Africa, each affiliated with one of two monetary unions1: nine countries comprise The West Afri- can Economic and Monetary Union (WAEMU)2 and the remaining six countries form the Central African Economic and Monetary Community (CAEMC).3 The CFA franc was created in 1945 and pegged to the French franc and subsequently to the euro. In the early 1990s, after years of a stable fixed rate, it became increasingly apparent that the CFA franc was overvalued. The terms of trade deteriorated by 50 percent through the late 1980s, driven by a combination of dropping commodity prices on traditional export goods and an appreciation of the French franc (Clément et al. 1996). Fearing the inflationary effects of a currency realignment, the currency block resisted the idea and focused initially on internal adjustments to realign the terms of trade. Restraining wage growth and tight fiscal policy became increasingly painful, however, and by the early 1990s devaluation was beginning to look like a more viable policy option.
The IMF was paying particular attention to the ongoing deterioration of the terms of trade in West and Central Africa and became convinced that a currency realign- ment and structural reform were the best ways to improve their economic prospects. In the early 1990s, the IMF began working with political leaders in France and the nations in the CFA-franc zone to solidify the political will to realign the cur- rency.4 The IMF also began to draw up plans for structural reform supported by IMF loans, debt forgiveness, and external loans designed to come into effect soon after the devaluation. These reforms focused on shoring up governments’ budgetary posi- tions through broadening the tax base and reigning in spending, but also reorient- ing government spending to more productivity enhancing activities (Clément 1995; Boughton 2012). In addition, the IMF provided technical support for each country in
1 https://www.imf.org/external/pubs/ft/fabric/backgrnd.htm.
2 WAEMU was founded in 1994, build on the foundation of the West African Monetary Union, founded in 1973. It original members included Benin, Burkina Faso, Côte D’Ivoire, Mali, Niger, Senegal, and Togo. Guinea-Bissau joined the monetary union in 1997.
3 Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon.
4 For a summary of the efforts of the IMF to orchestrate this devaluation see Boughton (2012, pp. 677– 737).
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the CFA-franc zone to coordinate the funds and policies set up to lessen the adverse effects of the devaluation, as well as provide support to enact structural reforms to maintain competitiveness (Clément 1995). By September of 1994, the IMF had bor- rowing arrangement set up for all of the CFA-zone countries, disbursing $508 mil- lion by the end of 1994. Eventually, they coordinated over $7 billion in debt forgive- ness, committed $1.9 billion in their own lending, and coordinated an additional $4 billion in external support (Clément 1995).
The circumstances behind the 1994 devaluation in the CFA franc zone are unique. As noted above, the devaluation in the CFA franc zone was in response to an extended period of a deterioration of the terms of trade, not an event, such as a run on the currency. It was also unique in how involved the IMF was in the process. The IMF coordinated the devaluation, provided and coordinated financial support, and designed and supported structural reforms. One should be careful in applying the conclusions from this study to devaluation episodes undertaken in a different environment.
Related Literature
The Macroeconomic Impacts of Currency Devaluations
Theory suggests devaluations can support economic growth by improving competi- tiveness abroad. Devaluations increase foreign demand for domestically produced goods as well as make foreign-produced goods relatively more expensive, thus boosting domestic net exports. On the other hand, devaluations could be damaging through the inflationary pressure they introduce, distorting relative prices, and low- ering real wages. The effect can be particularly destabilizing when government debt is denominated in a foreign currency, potentially leading to a sovereign debt crisis, all of which could hinder economic growth.5
Empirical evidence on the effectiveness of devaluations as a path to economic growth are mixed, particularly in developing countries. Because devaluations are often a policy tool used to combat balance of payment crises and speculative attacks, much of the empirical literature on the effect of devaluations focus on cur- rency crises. Not surprisingly, these studies find that output falls immediately after a devaluation (Hutchison and Noy 2002; Basistha and Teimouri 2015). Many of these studies, however, find that a devaluation eventually contributes to economic growth (Bussière et al. 2012). Yiheyis (2006) confirms that these outcomes hold in general for countries in Africa. In an aggregate study of twenty African countries they find that nominal devaluations have a contemporaneous negative effect on output, but a positive effect a year after the devaluation.
Additional lines of research that allow for heterogeneity in institutional structure and output responses to devaluations across countries highlight the importance of
5 See Bahmani-Oskooee and Miteza (2006) for a summary of the theoretical literature around contrac- tionary devaluations.
Currency Devaluation as a Source of Growth in Africa: A Synthetic…371
Fig. 1 per capita GDP of CFA franc zone countries
taking this into account. Bahmani-Oskooee and Miteza (2006) find that devaluations in non-OECD countries are more contractionary than in OECD countries. Gupta et al. (2007) highlight significant variation in responses even among developing countries. They find that only 60 percent of currency crises in developing countries are contractionary. Bahmani-Oskooee and Gelan (2013) represents one of only a few studies that focus on the heterogeneous effects of exchange rate movements in Africa. They look at the effect of exchange rate movements in twenty-two differ- ent African countries and find eight of the twenty-two countries experienced expan- sionary depreciations over time, while five had contractionary depreciations. The remaining three showed no response.
The studies that focus specifically on the IMF-supported devaluation of the CFA franc, generally find that it was a success in promoting economic growth. As reported in Fig. 1, trends in per capita GDP show signs of economic recovery and growth after 1994 in at least seven of the twelve CFA-zone countries studied in this paper. The reversal of fortune is quite pronounced in Benin, Burkina Faso, and Mali. Clément (1995) initially reports a recovery in growth rates being led by exporting industries, specifically those in the agricultural sector. As illustrated in Fig. 2, the feared inflation that was anticipated following the devaluation did occur, but at a much lower rate and a shorter period than predicted.
With an additional year of data, Clément et al. (1996) still find positive growth in the CFA franc zone aided by the IMF-supported realignment, an improved world economy, favorable commodity prices, and good weather. They also begin to iden- tify variation in post-devaluation experiences across CFA franc zone countries due
372F. Bouvet et al.
Fig. 2 Inflation rates in CFA franc zone countries
to civil unrest and raise a concern that incomplete and slow adoption of structural reforms could hamper growth in the future. Ultimately the authors conclude that “the CFA countries have largely met in 1994 the objectives of the programs they had developed in the aftermath of the devaluation of the CFA franc...” (Clément et al. 1996, p. 27). Van den Boogaerde and Tsangarides (2005) report on the aftermath of the IMF-supported devaluation ten years later. They also highlight the success of the program in the first four years after the devaluation in causing positive growth rates, controlling inflation, and improving competitiveness. Azam (2004) confirms the positive growth in the CFA franc zone post-devaluation, but they highlight the fact that the IMF-supported devaluation had not necessarily led to alleviation in pov- erty in these countries.
The sustained growth across all CFA countries began to diverge after 1997, due in large part to social and political unrest. Ultimately, early studies deem the pro- gram a success based on the growth in GDP per capita observed in most CFA franc countries shortly after the IMF-supported devaluation. Subsequent studies, however, shed doubt on the effectiveness of the IMF-supported devaluation. Constant (2012) finds that in the first ten years following the devaluation, the real effective exchange rate did not significantly affect growth rates in these countries. Kinda and Mlachila (2011) also point out that the growth performance in the WAEMU was disappoint- ing relative to other Sub-Saharan African countries.
Studies on the effects of devaluations in general and the IMF-supported CFA franc devaluation in particular, each have drawbacks when trying to understand the effects of the IMF-supported devaluation in 1994. First, aggregate studies treat
Currency Devaluation as a Source of Growth in Africa: A Synthetic…373
all devaluation episodes the same. Aggregating the effects of a devaluation occur- ring within the context of an immediate crisis or speculative attack with those that are simply planned corrections not undertaken in times of crisis could miss impor- tant heterogeneity in responses. Additionally, institutional structures differ across countries and devaluation episodes, leading to heterogeneity in responses lost to aggregation. Second, most studies that allow for heterogeneity, and all of the stud- ies specific to the IMF-supported devaluation, lack a counterfactual. The general improvement in growth of GDP per capita observed in the CFA-franc zone countries came at a time of general growth for many developing nations, including other Sub- Saharan African countries (IMF 2008), thus the challenge becomes to differentiate the growth effect of the IMF-supported devaluation from what it would have been otherwise.
The Synthetic Control Method
To analyze the impact of an event or policy, researchers typically choose between using qualitative comparative case studies and quantitative comparative statistical inference methods such as difference-in-difference analysis or randomized control trials. As pointed out in Abadie et al. (2010), qualitative comparative case studies and the difference-in-difference method can be problematic because the selection of the comparison units tend to be based on subjective measures. Randomized con- trol trials, which are often used in microeconomic research, attempt to overcome the subjective nature of finding a comparison unit by creating one through the experimental design. This approach, however, is less useful when studying macro- economic policies or events (such as a currency devaluation) because they are very rarely randomly assigned. Moreover, a crucial assumption for the difference-in-dif- ference method is that outcomes for the unit affected by the policy or event (treated unit) and the comparison unit not affected by the policy or event (control unit) fol- low parallel paths in the absence of the policy or event (the treatment). Violation of this assumption, quite likely when the treated unit is a country, leads to biases in the estimates. The synthetic control method (SCM) developed by Abadie and Gardeaza- bal (2003) offers a bridge between qualitative and quantitative methodologies, by providing a systematic way to choose comparison units in comparative case studies (Abadie et al. 2015). More details on the SCM methodology and the more recent ASCM are provided in the next section.
While the SCM has been used in a number of policy evaluation studies, few address macroeconomic policies in Sub-Saharan Africa (Billmeier and Nannicini 2013; Campos et al. 2019). Newiak and Willems (2017) use the SCM to study the impact of IMF programs on inflation, economic growth, and investment in Sub- Saharan Africa. The analysis of structural reforms on economic performance pre- sented in Marrazzo and Terzi (2017) includes five African countries, while Billmeier and Nannicini’s (2013) broad analysis of economic liberalization includes sixteen African countries.
Papers that use SCM to address currency arrangements and their effects are also limited. Most of the studies that address currency arrangements using SCM focus
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on the effects of joining the Economic and Monetary Union (Hope 2016; Tovar Jalles et al. 2018; Gyoerk 2017; Puzzello and Gomis-Porqueras 2018; Bouvet 2021). Bahar et al. (2018) use the SCM to analyze how devaluations effect stock prices in Venezuela. Ndiaye (2020) uses the SCM to evaluate how joining the CFA-franc zone in 1997 affected growth in Guinea-Bissau, while Chamon et al. (2017) use the technique to evaluate the effects of a sterilized foreign exchange intervention on exchange rate volatility in Brazil. The SCM has also been used to evaluate the effec- tiveness of very specific IMF programs (Essers and Ide 2019; Newiak and Willems 2017). There are no studies to our knowledge, however, that leverage the advantages of a synthetic control method to evaluate the effectiveness of currency devaluations on growth, supported by the IMF or otherwise.6
Empirical Methodology and Sample
The design of the SCM is similar to that of the traditional difference-in-difference setting in so far as the goal is to find an appropriate control unit that is comparable to the treated unit (the country that is exposed to an intervention). Instead of com- paring the outcome in countries subjected to a specific policy (the “treatment”) and other countries that were not, the synthetic control methodology employs a data- driven procedure to construct a counterfactual or “synthetic” unit (country in our case) which is obtained as a weighted combination of non-treated countries (called the “donor pool”). The identification assumption of the synthetic control method is that if the synthetic control unit provides a good approximation of the outcome for the treated unit in the pre-treatment period, then any subsequent difference between the treated and control units after the treatment can be attributed to the effect of the intervention (policy) on the outcome (Abadie, forthcoming). The goal of this study is to create a synthetic country that reproduces the trajectory of the income per cap- ita in each of the CFA-zone countries pre-1994. The difference in the trajectories of income per capita between the synthetic control and real country post-1994 capture the causal impact of the IMF-supported devaluation.
The SCM has several advantages over other empirical methodologies, such as dif- ference-in-difference and propensity score matching. First, it might be hard to find a single country that would provide a good comparison for the country affected by the treatment (Abadie 2021), where “the pre-intervention characteristics of the treated unit can often be much more accurately approximated by a combination of untreated units than by any single untreated unit” (Abadie et al. 2015). A major benefit of the SCM over longitudinal approaches based on difference-in-differences is that it lim- its this extrapolation bias by interpolating using a convex weighted average of the
6 While the SCM has been widely used in applied economics papers, its ASCM extension has only recently been applied in published research. A few notable examples outside of the original paper that introduced the technique are Cole et al. (2020) who use ASCM to evaluate the impact of the Covid-19 lockdown on air pollution in China; Amador-Jiménez et al. (2020) who investigate the effects of forest fires in Colombia; and Mitre-Becerril and Chalfin (2021) who investigate the impact of the $15-mini- mum wage on public safety in Seattle.
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untreated units to create a synthetic untreated unit with pre-treatment characteristics similar to those of the treated unit. These non-treated countries are chosen to match as closely as possible the pre-treatment characteristics of the treated country, so that in the pre-treatment period, the outcome for the synthetic unit is as similar as pos- sible to the outcome of the treated unit.
The choice of the pre-treatment characteristics should include variables that can approximate the path of the treated country, but should not include variables that anticipate the effects of the intervention. Furthermore, the contribution of each con- trol unit to the overall synthetic unit is explicitly presented so the transparency of the counterfactual allows one to validate the weights, whereas in comparative studies, the selection of the comparison units is not formalized and often relies on informal statements of affinity between the units affected by the event or intervention of inter- est and a set of comparison units.
The specific nature of the 1994 IMF-supported CFA franc devaluation lends itself to be particularly effectively studied using the SCM compared to other meth- ods and in respect to weaknesses in the method itself. First, the devaluation of the CFA franc was imposed on the fourteen countries in the CFA franc zone, each with unique economic structures. While difference-in-difference analysis and propensity- score matching provide an estimate of the average treatment effect, the SCM, when applied to several treated units, allows for the estimation of individual treatment effects for each country, thus highlighting heterogeneity which one would not be able to identify with the two aforementioned methodologies. Second, many policy evaluation methods, including the SCM, cannot be effectively used if the policy change is anticipated. The policy event in our study, however, was not anticipated by market participants. In order to prevent a potentially damaging market reaction in anticipation of a devaluation, the IMF and participating countries were careful to keep the timing of the devaluation a secret. The January announcement was a surprise to market participants, thus mitigating any concerns of the analysis captur- ing such anticipation effects. Third, SCM can be challenging to implement for the analysis of macroeconomic policies which typically occur over an extended period of time (such as economic liberalization episodes studied in Billmeier and Nannicini (2013)) because it is difficult to identify when the treatment starts and ends. This is not a concern for the devaluation, as it was announced and enacted on a specific day. While the SCM represents a considerable innovation in policy evaluation, it may not provide meaningful estimations if the outcome trajectory of the synthetic unit does not closely match the outcome trajectory of the treatment unit before the inter- vention (Abadie et al. 2015).7 Ben-Michael et al. (2021) have recently proposed a solution called the Augmented Synthetic Control Method (ASCM), for those cases where a good pre-intervention match between the treated unit and its synthetic unit is not achievable. ASCM “uses an outcome model to the objective function to estimate the bias caused by the poor pre-intervention match, and then uses this to de-bias the estimate” (Ben-Michael et al. 2021, p. 1.) The authors use a ridge-regularized linear
7 This is indeed the case when using the SCM in this setting. These results are available on request.
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regression model that allows for negative weights.8 These negative weights allow for extrapolation outside the support of the data, and thus help limit the interpolation bias observed with the original SCM.9
To estimate the impact of the 1994 IMF-supported CFA franc devaluation on the WAEMU and CEMAC countries with the ASCM, annual country-level data from 1980-2003 are used. Out of the fourteen countries that comprise the CFA franc zone, Equatorial Guinea is excluded for lack of data and Guinea-Bissau is also excluded because it did not adopt the CFA franc until 1997. The donor pool used to construct the synthetic controls for each CFA franc country includes twenty-one developing countries.10 Countries in the donor pool have to be non-treated, which in our case means they did not experience a large devaluation during the pre-treatment period. To enhance the similarity with CFA-zone countries, we chose countries which had a fixed exchange rate in 1994, were low or middle-income countries according to the UN in 1994, and did not have a currency crisis in the 10 years previous and the 10 years after 1994.11 As pointed out in Campos et al. (2019, p. 92), “one needs to be aware of the potential dependence of our results on idiosyncratic shocks affecting countries in the donor pool”. A review of potential donor pool countries led to the exclusion of Burundi, which experienced dramatic changes in GDP per capita in the post-treatment period due to an idiosyncratic shock.
Results
Baseline
As theoretically advantageous as SCM is to evaluate the effects of the IMF-sup- ported CFA franc devaluation, when the method was applied using this sample, the pre-treatment match was less than excellent.12 ASCM, on the other hand, is effective at correcting the bias and providing a much better pre-treatment match. As a result, the ASCM will be used exclusively in the empirical estimation. In this specification, the pre-intervention matching is obtained using only lagged values of the dependent variable (real GDP per capita). In Section 4b, the robustness of the baseline result is tested by adding covariates to the specification used to create the synthetic control and the corresponding weights.
The baseline results are presented in Fig. 3. Each subfigure graphically repre- sents the difference between real GDP per capita of each CFA franc zone and their synthetic control over the study period. A positive (negative) post-treatment value
8 In the original SCM, weights were restricted to be non-negative.
9 While the SCM method is more likely to suffer from interpolation bias, more traditional policy evalua- tion methods such as difference-in-difference estimators exhibit the opposite behavior: they limit interpo- lation bias at the potential expense of extrapolation bias.
10 Antigua, Bangladesh, Barbados, Belize, Bhutan, Botswana, Dominica, Grenada, Laos, Lesotho, Mau- ritius, Morocco, Namibia, Oman, Panama, St Kitts, St Lucia, Seychelles, Swaziland/Eswatini.
11 Following the crisis classification of Laveven and Valencia (2012).
12 Results are available upon request.
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Fig. 3 Trends in real GDP per capita: CFA franc countries vs. their synthetic counterparts, without covariates. Note Plots of the difference between each country’s per capita GDP (in 2011 PPP US $) and its synthetic unit, with 90%-confidence intervals
indicates that real GDP per capita of the CFA-zone country is higher (lower) than the income level of the synthetic control. The position of the line relative to zero before 1994 captures the quality of the pre-treatment fit reached by the ASCM algo- rithm: the closer to zero the line is in the pre-treatment period, the better the fit, and therefore the more confident one can be that any income difference measured post- 1994 would be the result of the IMF-supported devaluation. As illustrated in Fig. 3, with the exception of Chad, the Republic of Congo, and Togo, the pre-treatment match is good.
The statistical significance of actual GDP per capita levels relative to the syn- thetic control are illustrated using 90% confidence intervals. For most CFA-zone countries, the 1994 IMF-supported devaluation did not result in significant improve- ments to the trend in GDP per capita relative to the synthetic control. GDP per cap- ita rises above the synthetic control in Benin, Cameroon, and Mali, but only in Mali around 1996–1997 is the effect significantly different than the synthetic control. For Burkina Faso, Cote d’Ivoire, Niger, and Senegal the actual outcome is lower than the synthetic control, but not statistically different than the synthetic control.
In the Central African Republic, Chad, the Republic of Congo, and Gabon the IMF-supported devaluation is followed by a statistically significant decline in real GDP per capita relative to their synthetic control. In Chad and the Republic of Congo, the relative decline in income starts in 1987, well before the devaluation. As a result of the poor pre-treatment match, these results are not reliable in analyzing the effect of the devaluation. In the Central African Republic and Gabon, the relative
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declines in per capita income coincide with idiosyncratic shocks. In the Republic of Congo and the Central African Republic, the post-devaluation period coincides with time of political instability and violence, which would offset any potential positive effects of the IMF-supported devaluation. The three economic downturns observed in the Republic of Congo data clearly coincide with periods of intense conflicts in 1993, 1997, and 1998–1999 (Marshall et al. 2018). Similarly, in the Central African Republic, GDP per capita grows at the same level as the synthetic control in 1994, but sharply falls after 1994 and continues to remain well below the synthetic control for the remainder of the period. The Center for Systemic Peace (2020) reports an attempted coup d’état in 1996 as well as civil violence in the country from 2001 to 2003 with a successful coup in 2003. Due to the confluence of these external events to the, the synthetic control technique is not able to differentiate the effects of the IMF-supported devaluation from the conflict.
After increases in GDP per capita that match the synthetic control, Gabon experi- ences a dramatic drop in GDP per capita in 1997 relative to the synthetic control. Given the Gabonese economy’s dependence on oil production, the aforementioned decline in GDP per capita is likely to be attributed to the decline in the price of oil between 1997 and 1999 which bottomed below $20 ($17.58 a barrel) in November 1998. This large drop in oil prices certainly contributed to the drop in GDP per cap- ita observed over these years and obscures the effect of the IMF-supported devalu- ation beyond 1997. Pre-1997, the effect of the IMF-supported devaluation did not significantly alter GDP per capita relative to the synthetic control. A rebound in oil prices by 2003 helped boost economic growth.
Robustness Tests
The estimated weights calculated for each country in creating the synthetic control are presented in Table 1. Laos accounts for a substantial non-zero weight in most countries (eight out of twelve). This is partially due to the fact that its income levels over the pre-treatment period are closer to those of the CFA-zone countries than most other countries included in the donor pool. As a robustness test, the analysis is run excluding Laos from the pool of donor countries. These new results are consist- ent with our baseline results: for most countries, the IMF-supported devaluation in 1994 did not cause substantial changes in the trends of per capita income relative to the synthetic control.13
As an additional robustness check, covariates are added to the ASCM specifica- tion to attempt to improve the pre-treatment match. In the SCM literature, covariates are exclusively used to find pre-treatment matches. The ASCM allows for covariates
13 In the results excluding Laos, GDP per capita is significantly higher than the synthetic control in two cases: Mali and Burkina Faso. The pre-treatment match for these two countries, however, is not as satis- factory as in the baseline model, and thus the results including Laos are more reliable. It is worth men- tioning that because economic growth in Laos remains relatively slow until 2000, the lack of substantial effects cannot be attributed to a dramatic change in the trend of the synthetic unit dominated by Laos. These results are available upon request.
Table 1 Country weights in the synthetic controls
Benin | Togo | Senegal | Niger | Burkina Faso | CAR | Cameroon | Mali | Gabon | Ivory Coast | Congo | Chad | |
Antigua and Barbuda | – 0.039 | – 0.001 | 0.048 | 0.013 | – 0.022 | – 0.008 | 0.028 | – 0.012 | – 0.049 | – 0.044 | – 0.004 | 0.000 |
Bangladesh | 0.951 | 0.455 | – 0.017 | 0.011 | 0.004 | 0.220 | – 0.013 | 0.003 | 0.014 | – 0.012 | 0.002 | 0.068 |
Belize | 0.005 | 0.000 | – 0.019 | 0.096 | 0.019 | 0.001 | – 0.218 | 0.001 | 0.018 | – 0.057 | – 0.001 | 0.000 |
Barbados | 0.005 | – 0.001 | – 0.054 | 0.057 | 0.024 | 0.015 | – 0.084 | – 0.008 | 0.027 | – 0.025 | – 0.003 | 0.000 |
Bhutan | 0.000 | 0.000 | 0.000 | – 0.010 | – 0.005 | – 0.002 | 0.119 | 0.001 | 0.004 | 0.016 | 0.001 | 0.000 |
Botswana | – 0.019 | 0.000 | 0.003 | – 0.065 | – 0.016 | – 0.003 | – 0.090 | – 0.005 | – 0.017 | 0.060 | – 0.004 | 0.000 |
Cabo Verde | 0.002 | 0.000 | 0.797 | – 0.008 | 0.000 | 0.002 | 0.102 | 0.004 | 0.004 | 0.159 | 0.001 | 0.000 |
Dominica | – 0.009 | 0.000 | 0.041 | – 0.077 | – 0.018 | – 0.001 | 0.196 | – 0.002 | – 0.037 | 0.062 | 0.000 | 0.000 |
Grenada | – 0.005 | 0.000 | – 0.071 | – 0.002 | – 0.009 | – 0.015 | – 0.215 | – 0.011 | 0.006 | – 0.048 | – 0.001 | 0.000 |
Saint Kitts and Nevis | – 0.008 | 0.000 | 0.082 | – 0.071 | – 0.005 | 0.004 | 0.129 | 0.009 | – 0.028 | 0.095 | – 0.002 | 0.000 |
Laos | 0.003 | 0.000 | 0.038 | 1.001 | 1.000 | 0.781 | 0.719 | 1.002 | 0.009 | 0.583 | 0.862 | 0.932 |
Saint Lucia | – 0.002 | 0.000 | 0.112 | – 0.041 | 0.002 | 0.011 | 0.255 | 0.013 | – 0.024 | 0.088 | 0.000 | 0.000 |
Lesotho | 0.008 | 0.492 | – 0.049 | 0.040 | 0.011 | 0.002 | – 0.121 | 0.000 | 0.019 | – 0.049 | 0.001 | 0.000 |
Morocco | – 0.003 | 0.000 | 0.063 | – 0.031 | 0.000 | 0.003 | 0.145 | 0.008 | – 0.009 | 0.021 | 0.001 | 0.000 |
Mauritius | – 0.018 | – 0.001 | – 0.017 | – 0.037 | – 0.014 | – 0.023 | – 0.122 | – 0.006 | – 0.030 | – 0.038 | – 0.004 | 0.000 |
Namibia | 0.085 | 0.054 | 0.139 | 0.077 | 0.044 | 0.035 | 0.219 | 0.026 | 0.278 | 0.278 | 0.005 | 0.000 |
Oman | 0.032 | 0.001 | 0.041 | – 0.003 | – 0.016 | 0.015 | 0.065 | – 0.002 | 0.798 | 0.014 | 0.153 | 0.000 |
Panama | 0.015 | 0.000 | – 0.060 | 0.024 | 0.006 | – 0.005 | – 0.076 | 0.009 | 0.013 | – 0.035 | 0.002 | 0.000 |
Eswatini | 0.000 | 0.000 | – 0.014 | 0.048 | 0.006 | – 0.007 | – 0.053 | – 0.002 | – 0.002 | – 0.053 | – 0.001 | 0.000 |
Seychelles | – 0.003 | – 0.001 | – 0.062 | – 0.022 | – 0.011 | – 0.027 | 0.016 | – 0.026 | 0.005 | – 0.017 | – 0.007 | 0.000 |
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to be added to the lags of the independent variable if they improve the pre-treat- ment match (Ben-Michael, Feller and Rothstein, 2021). In choosing the potential covariates, variables that have been found to predict GDP per capita growth in the development literature are used (Abadie and Gardeazabal 2003; Abadie et al. 2015; Burnside and Dollar 2000; Acemoglu 2010; Acemoglu et al. 2005). To match across similar economic stuctures the agricultural share of GDP, industrial share of GDP, government share of GDP, and investment share of GDP are included. The Freedom House Indexis used to match on institutional quality. A dummy variable that accounts for involvement in an IMF sponsored program in the pre-treatment period is also included.14 Every member of the CFA zone and half of the donor poll countries were involved in at least one IMF sponsored program in the pre-treatment period (1980–1993). Table 2 contains the list of all the variables used in the analysis and their data source.
The new results, including lags of the dependent variable and covariates, are pre- sented in Fig. 4. The inclusion of covariates alters the results such that more coun- tries have statistically significant levels of GDP per capita below the synthetic con- trol. It also removes the significantly positive outcome in Mali.
A glance at the pre-treatment match of these results, however, suggest that they are less reliable. Table 3 illustrates the L2 imbalance of the models with and without covariates and can be used as one metric to make comparisons across models. The L2 imbalance is referencing the L2 norm on the covariate outcome imbalance of pre- treatment outcomes between the treated unit and the weighted control mean. ASCM optimizes the pre-treatment fit and selects the appropriate weights for each country in the donor pool by minimizing a function that includes the L2 imbalance. A speci- fication with a lower L2 imbalance should therefore be interpreted as providing a better pre-treatment fit, and thus as preferable. The L2 imbalance score is lower for all countries without the covariates, indicating that, based on this metric, the pre- treatment match was not improved by adding covariates.
Discussion
The results suggest that in most CFA-zone countries, with the exception of Mali, the IMF-supported devaluation did not boost real GDP per capita relative to what national output would have been in the absence of a currency devaluation. Reinhart (1995) argues that for a devaluation to effectively reduce external balance and boost national production, two conditions need to be met: (1) the nominal devaluation needs to translate into a real devaluation to effectively improve the competitiveness of the national exports; (2) trade flows need to respond to relative prices.
Regarding Reinhart’s first condition, the 1994-devaluation did trigger downward trends in the CFA countries’ real exchange rates. Devarajan (1997) estimates the real exchange rate misalignment for most of the CFA franc zone countries pre- and
14 Our results are robust to the use of other measures of institutional quality such as the Polity-2 index from the Polity IV Project and an index capturing episodes of political violence (societal and interstate).
VariablesDescriptionSource
Real GDP per capitaExpenditure-side real GDP per capita at chained PPPs (in mil. 2011US$)PennWorld Tables Investment spendingas a % of GDPPennWorld Tables
Government spendingas a % of GDPPennWorld Tables
Agricultural productionas a % of GDPWorld Bank Development Indicators
Industrial productionas a % of GDPWorld Bank Development Indicators
Total Exportsas a % of GDPPennWorld Tables
FreedomFreedom House index for political rights and civil liberties. The index ranges from 1 (free) to 7 (not free)
IMF arrangementsDummy variable = 1 if the country is involved in an IMF program at time t; = 0 other-
wise
Freedom House IMF
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Fig. 4 Trends in real GDP per capita: CFA franc countries vs. their synthetic counterparts, with covari- ates. Note Plots of the difference between each country’s per capita GDP (in 2011 PPP US $) and its synthetic unit, with 90%-confidence intervals
Table 3 L2 imbalances for models without and with covariates
CountryL2 (no covariates) L2 (covariates)
Benin | 329.911 | 1453.517 |
Burkina Faso | 127.920 | 472.409 |
Cameroon | 353.214 | 1478.911 |
Central African Republic | 170.382 | 1054.466 |
Chad | 369.517 | 635.709 |
Republic of the Congo | 1430.407 | 4541.034 |
Gabon | 3857.127 | 4221.524 |
Cote d’Ivoire | 90.266 | 1212.962 |
Mali | 163.581 | 1560.363 |
Niger | 212.509 | 1272.407 |
Senegal | 213.359 | 1413.520 |
Togo | 677.858 | 785.273 |
ASCM optimizes the pre-treatment fit by minimizing the L2 imbal- ance of pre-treatment outcomes between the treated unit and the weighted control mean. A specification with a lower L2 imbalance should therefore be interpreted as providing a better pre-treatment fit, and thus as preferable
Currency Devaluation as a Source of Growth in Africa: A Synthetic…383
Table 4 Average export shares in GDP. Source: PennWorld Table 9.1
post-devaluation. The author finds that every country in the CFA franc zone, with the exception of Chad, was overvalued in 1993, though there is substantial variation in the magnitude of the overvaluation across countries. In the year following the IMF-supported devaluation, every country became less overvalued or undervalued in real terms. The changes in the real exchange rate, however, are not uniform. Cam- eroon, the Republic of Congo, Togo, and Gabon (the countries that were overval- ued the most in 1993) remained overvalued, limiting the effect the IMF-supported devaluation could have on GDP. Overall, however, the IMF-supported devaluation was effective in reducing real exchange rates, meeting Reinhart’s first criteria.
The second criteria, on the other hand, is unlikely to be met. The CFA-franc zone countries exports consist primarily of commodities (Boughton 1991; Anderson Masters 2009). The demand for commodity exports is rather price inelastic (Rein- hart 1995; Niemi 2004; Panagariya and Schiff 1990). Consequently, the real devalu- ation could only have a limited impact on export volumes, and Reinhart’s second criteria for devaluation led growth is not met.
Moreover, even if the IMF-supported devaluation had increased exports, this growth in trade would translate into significant growth in GDP only if exports accounted for a substantial portion of aggregate demand. As illustrated in Table 4, during the 1990s, exports played a minor role in most countries in the CFA franc zone. Other than Gabon with its large oil reserves, the ratio of exports to GDP is low for all countries in the sample. The low export the GDP ratio makes it difficult for a devaluation to have a strong effect on GDP, particularly when the devaluation did not lead to anticipated changes in the export structure of the countries involved (column 3 of Table 4). Most countries’ export shares of GDP stay the same or fall in the four years following the devaluation.
For those countries where trends in GDP per capita fell significantly below the synthetic control, political instability and violence offset any potential posi- tive effects of the IMF-supported devaluation. Other deficiencies in the politi- cal and institutional environment could also be a contributing factor to the lack of
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Fig. 5 Measure of institutional quality. Source: Freedom House. Note the lower the index, the more free- dom. Countries are characterized as free if index is between 1 and 2.5
significance in most countries relative to the synthetic control (Constant 2012). Using the Freedom Index as a proxy for institutional quality, presented in Fig. 5), Benin and Mali are the only two countries that were characterized as “free” in the Freedom House categorization of 1994 (and this only after a significant improve- ment immediately before 1994). The existence of weak institutions at the time of the devaluation certainly could have created headwinds against a successful IMF- supported devaluation.
As discussed in Section 2, the IMF-issued loans to support the CFA countries at the same time of the devaluation contingent on structural reform.15 Even if the devaluation itself could not generate growth due to the factors discussed above, the IMF hoped that its lending and contingent structural reforms could have generated growth.16 Though every country received IMF loans following the devaluation, only Benin, Burkina Faso, Gabon, Mali, and Senegal maintained their involvement in IMF programs through the duration of the post-treatment period (until at least 2005). This is an indicator that these were the only countries consistently meeting the conditions set with each loan. The remainder of the countries all had disruptions
15 The ASCM model cannot distinguish between the effects of the devaluation independent from the effects of the IMF support of the devaluation. The model does, however, demonstrate that the IMF-sup- ported devaluation did not produce the growth effects anticipated when compared to the synthetic con- trol, with the exception of Mali.
16 The effectiveness of IMF programs in generating growth is certainly still a question yet to be settled in the literature (Dreher 2009).
Currency Devaluation as a Source of Growth in Africa: A Synthetic…385
in IMF lending over some period of time following the IMF-supported devaluation (IMF, MONA). Clément et al. (1996) reported that within two years of the IMF- supported devaluation, structrual reform were slow and unevenly applied. Kinda and Mlachila (2011) highlight Mali and Burkina Faso as countries in the CFA franc zone that were most successful in implementing structural reforms. Using the Free- dom House Index (Fig. 5) again as a proxy for institutional quality, only Senegal shows consistent improvement over the period after the IMF-supported devaluation. Benin, Burkina Faso, Chad, Cote d’Ivoire, Mali, and Togo experience improvements in their index score at least once in the first three years after the IMF-supported devaluation, but there is no consistency in these countries’ economic response to the devaluation relative to the synthetic control. Had countries completed the structural changes, it is possible these would have led to higher growth, but as the majority did not, the IMF-supported part of the devaluation was generally not effective in gener- ating higher growth.
Mali is the only country in the sample with a GDP level significantly higher than its synthetic control after the IMF-supported devaluation. According to Devarajan’s (1997) estimates, Mali was significantly overvalued in 1993 (39% overvalued) and the IMF-supported devaluation helped bring the country closer to long run equilib- rium (9% overvalued). According to Reinhart’s first criteria, this could account for some of the observed positive effect, but the real exchange rate adjustment does not stand out relative to other countries in the CFA-franc zone. Like other CFA-franc zone countries, Mali’s trade structure is dependent on commodity exports, limit- ing the devaluation’s effects on export volume. In addition, Mali’s share of trade to GDP is similar to the other CFA-franc countries and the increase in its share of trade to GDP from the pre-devaluation time period to the post-devaluation time period (5.61% to 8.44%) is less than or comparable to the changes observed in other CFA- franc zone countries. Differences in inflation do not differentiate Mail either, as the inflationary effects of the IMF-supported devaluation are similar relative to other countries in the sample (on par with Niger, and Senegal, but higher than Burkina Faso).
While increasing export volumes may not account for the economic growth observed in Mali, a significant increase in the value of Mali’s main exports rela- tive to other CFA-franc countries post-1994 could potentially explained the observed economic growth. For most commodities, prices did increase in the mid- 1990s.17 Cotton was the main export commodity for Mali in 1994.18 After a period of depressed prices in 1992 and 1993, international cotton prices almost doubled beginning in 1994 through 1995 (IMF 2020). The improved cotton prices certainly played an important role in what is observed in Mali, but cotton was also an impor- tant export for Burkina Faso, Cote d’Ivoire, and Chad. Each experienced similar or more favorable movements in the real exchange rate relative to Mali, but did not demonstrate as large a boost in GDP per capita.
17 Global Price Index of All Commoditieshttps://fred.stlouisfed.org/series/PALLFNFINDEXM.
18 Primary export commodities for the countries listed come from the 1994 World Factbook (CIA 1994).
386F. Bouvet et al.
Of the remaining factors that could explain the improved performance of Mali rel- ative to the synthetic control post-1994, institutional factors are important. As stated above, Mali had a relatively strong institutional structure at the time of the IMF- supported devaluation. The institutional improvements (according to the Freedom Index) in the run-up to 1994 certainly could have contributed to higher economic growth, though Benin, Burkina Faso, Niger, and Central African Republic also had measurable improvements in the pre-1994 period without significant growth effects post-1994. Mali also continued to make structural improvements over the post-1994 period. They implemented the IMF programs, registered improvements in the Free- dom Index, and were documented as progressing on structural changes (Kinda and Mlachila 2011). In any one of these measures of improvement, however, Mali is not the only country to show progress. Benin and Burkina Faso show similar improve- ment in institution and IMF sponsored programs, yet neither experienced significant growth over their synthetic control.19
Ultimately, no single factor accounts for the significant result in Mali. It is likely explained by a confluence of a series of positive factors associated with the IMF- supported devaluation that in culmination led to growth stronger than would have been otherwise.
Conclusions
This paper is the first to apply the Augmented Synthetic Control Method to estimate the impact of the IMF-supported devaluation on per capita income in the twelve countries from the WAEMU and CAEMC. Our results suggest that the IMF-sup- ported devaluation had neither significant negative effects nor significant positive effects for the majority of the countries relative to the synthetic controls. In the Republic of Congo and the Central African Republic, potential benefits from the IMF-supported devaluation were offset by deterioration in the national institutional environment. In Gabon, dependency on crude oil coupled with a large drop in the price of oil offset potential benefits of the IMF-supported devaluation. In most coun- tries, this non-result is likely driven by the small export to GDP ratio and weak insti- tutional frameworks that did not improve as much as hoped over the post-devalua- tion period. There is evidence that following the IMF-supported devaluation, Mali experienced higher GDP per capita levels than its synthetic control. Though no one factor can explain the better performance in Mali relative to the other countries, a combination of other growth-promoting factors, notably the existing political and institutional environment, continued support from the IMF, meeting IMF lending criteria, and stronger commodity prices for cotton, contributed to the relative suc- cess of the IMF-supported devaluation in this country.
Though the devaluation did not lead to significant increases in GDP per capita relative to what it would have been for most countries, the IMF-sponsored pro- gram was successful in some ways. The inflation that resulted from the devaluation
19 Though Benin, Burkina Faso, and Mali all experience strong growth post-1994.
Currency Devaluation as a Source of Growth in Africa: A Synthetic…387
was controlled within a year, some of the structural changes the IMF attached to their conditional loans used to support the countries through the devaluation were enacted, and the currency did become more competitive (van den Boogaerde and Tsangarides, 2005; Devarajan, 1997). These changes, however, did not lead to eco- nomic growth for the majority of the countries relative to what would have occurred had there been no devaluation. The non-significant results of this event when com- pared to a counterfactual suggests caution when citing the IMF-supported CFA franc devaluation in 1994 as a model to justify potential future devaluations as a path to greater prosperity.
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Alassane Diallo & Adama Ba
To cite this article: Alassane Diallo & Adama Ba (2024) From the French franc to the euro, is there an economic impact for the CFA franc zone countries? A ‘bias-corrected’ synthetic control method, Cogent Economics & Finance, 12:1, 2330433, DOI: 10.1080/23322039.2024.2330433
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934
COGENT ECONOMICS & FINANCE 2024, VOL. 12, NO. 1, 2330433
https://doi.org/10.1080/23322039.2024.2330433
DEVELOPMENT ECONOMICS | RESEARCH ARTICLE
From the French franc to the euro, is there an economic impact for the CFA franc zone countries? A ‘bias-corrected’ synthetic control method
Alassane Dialloa,b and Adama Bac
aDEGO, Universit´e Amadou Mahtar Mbow de Dakar (UAM), Dakar, Senegal; bChercheur associ´e au Centre de Recherche en
´Economie de Grenoble (CREG), Grenoble, France; cECOMIJ, Universit´e Alioune Diop de Bambey, Bambey, Senegal
ARTICLE HISTORY
Received 1 November 2023
Revised 10 January 2024
Accepted 10 March 2024
KEYWORDS
Counterfactual estimator; panel data; CFA franc-zone; currency pegging; real GDP per capita
JEL CLASSIFICATION
C19; E52; E58; C33; O55
REVIEWING EDITOR
Goodness Aye, University of Agriculture, Makurdi Benue State, Nigeria
SUBJECTS
Economics and Development; Economics; Monetary Economics; Macroeconomics; Econometrics; Development Economics; Political Economy
Introduction
January 1, 1999, is considered a major event in the history of monetary regimes, and more specifically for the countries of the CFA zones.1 The advent of the Euro, on this date and its entry into the world market in 2002, changed the nature of the parity of the CFA- franc-FF; CFA- franc -Euro, from a national currency to a multinational currency, shared by 11 and, twenty European countries now. The Euro should be advantageous for the companies of the CFA franc zone since countries of the CFA zone have easier access to all European economic and monetary union countries (lower exchange costs, larger mar- kets etc … ) (Diallo, 2002; Silguy, 1999).
However, the debate on the exchange rate regime and macroeconomic performance is far from over (Carmignani et al., 2008). The implications of the euro for the CFA zone economies are even less so, the extent to which the euro contributes or not to the economic performance of member countries is an ongoing economic question. Few research studies have addressed this issue. However, switching to the euro poses several challenges to the CFA economic zone. This is particularly true given that the
CONTACT Alassane Diallo laslodia@yahoo.fr DEGO, Universit´e Amadou Mahtar Mbow de Dakar (UAM), Rue 21x20, 2`eme Arrondissement, P^ole Urbain de Diamniadio - BP : 45927, Dakar, Senegal
© 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
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2 A. DIALLO AND A. BA
European Central Bank’s monetary policy is more restrictive than the Banque de France (Didier et al., 2008) and the euro is a strong currency. Hadjimichael and Galy (1997), an early study on the issue, shows that the shift in the currency peg from the French franc to the euro affects the economic per- formance of CFA zone countries. According to Bolle (1997), during the 1970s, CFA zone countries experi- enced gains in competitiveness thanks to the pegging of the CFA franc to the French franc. In contrast, inadequate domestic economic policies, hampered by a strong French franc (between mid-1980 and 1993), had very negative results, leading to the devaluation of the CFA franc in 1994 (Coulibaly, 2014). As a result, the weakness of the CFA zone’s economic performance is largely connected to the euro’s overvaluation during this period (Klau, 1998).
In any case, high growth rates are expected for CFA zone countries due to an intensive trade market with the European Economic Community (see Dearden, 1999; Hadjimichael & Galy, 1997). However, for CFA zone economies, the main uncertainty is linked to the consequences of a strong euro, which could undermine expectations following the switch of anchor currency (Zafar, 2005). To this end, a report of the French Senate (2002) states that there is no comprehensive study to clearly state whether or not the Franc CFA pegged to the Euro is an advantage or a drawback for member countries.
The main objective of this paper is to address the lack of relevant literature and empirical results on the impact of the euro changeover on CFA zone economies, using the GDP per capita indicator. This evaluation is interesting at least for two reasons. First, to strengthen the debate with solid quantitative arguments, based on recent impact assessment techniques, and to bridge the positions. Second, such an assessment could guide CFA zone policymakers on appropriate choices, going beyond political-histor- ical and/or strategic reasons, rigorously considering the performance of their countries’ economies related to the pegging of the CFA Franc to the Euro.
Thus, why should CFA zone countries keep the Euro as their anchor currency?
According to Irving (1999), the CFA zone is one of the three zones most likely to be affected by the creation of the Euro. African countries in the franc zone have a fixed parity with partners that account for more than half of their foreign exchange, and about 50% of trade between Europe and sub-Saharan Africa comes from CFA zone countries. Pegging the CFA Franc to the Euro exposes the countries of the Franc zone to the Euro-business cycle dynamics, and to possible monetary shocks from the European Union, such a regime limits the monetary policy sovereignty of member countries of the CFA zone (Elu & Price, 2008).
Some analysts argue that the CFA Franc’s peg to the Euro is a major factor impeding economic devel- opment. ‘Fixed exchange rate for the CFA franc and monetary integration has led to unsustainable eco- nomic losses for almost all those countries, without bringing the traditional gains that are normally expected from economic unions. The countries of the [franc] Zone would therefore be better off if they withdrew from the union and organized monetary integration on their own dependent upon willingness budgetary and political policies’ (Monga, 1997, p.107).
In addition, supporters of the exit of African countries from the franc zone argue that overvaluation of the currency arises from the pegging of the CFA Franc to strong currencies (the French Franc and then to the Euro). The franc zone countries do not systematically perform better over time in terms of growth, GDP per capita or the human development index. The peg to the euro is supposed to under- mine the competitiveness of franc zone countries’ exports, and thus their growth. The link between the real exchange rates of CFA franc zone countries and the euro is significant and nonlinear (Couharde et al., 2013), the overvaluation of the CFA franc persisted after the 1994 devaluation, on average esti- mated at 25% (Etta-Nkwelle et al., 2010), then when the euro appreciates vis-`a-vis the dollar, the CFA franc also appreciates. This increases the price of exports, which are mainly raw materials, which are accounted for in dollars. And thus, harm their international competitiveness and hence economic growth (Nubukpo 2007, 2019). Despite these results, an analysis by Plane and da Piedade (2022) shows that the CFA franc is not overvalued. Others assume that the peg to the Euro guarantees financial stability and credibility for price stability (Feindouno et al., 2020). It is often suggested that the CFA zone’s members benefit from lower inflation and enhanced fiscal discipline compared to similar developing countries, particularly those in sub-Saharan Africa. These monetary and fiscal stabilities may explain the lengthy lifespan of the CFA zone (over more than 60 years of history). However, it is far from being an optimal monetary zone (Coulibaly & Davis, 2013).
COGENT ECONOMICS & FINANCE 3
The evolution of the money supply is matched to the real needs of the economy of the country and inflation observed in the anchor currency. Inflation is controlled at low levels reducing economic uncer- tainty, which has an impact on the profitability of investment, activity and the growth rate of domestic product. The fixed exchange rate regime may be most appropriate for developing countries, which have poorly developed financial markets, and whose economies are not stable enough to absorb the adverse effect of exchange rate volatility. Thus, theoretically, when a suitable regime is adopted, it can promote a better business climate and economic growth over time. Thus, Jakob (2016) argues that there is a posi- tive and significant correlation between fixed exchange rates and GDP growth. Similarly, Elu and Price (2008) assess a positive effect on growth for the period 1999–2007 for member countries of the CFA zone. However, for Nubukpo (2019), monetary stability, low inflation, and the non-existence of exchange rate risk have scarcely made a significant contribution to the development of franc zone countries.
The article seeks to move beyond the binary debate between defenders and detractors of the CFA franc, which is largely due to differences in methods, specification and sampling. Indeed, from one point of view to another, the relevance of the CFA franc’s peg to the euro needs to be carefully re-examined.
To do this, we need a reasonable counterfactual, that is, we need to know what would have hap- pened in the CFA zone absent the Euro. To that end, we use ‘bias-corrected’ synthetic control estimators proposed by Wiltshire (2021) to construct for each Franc CFA treated country its counterfactual as a weighted average of comparable countries that best reproduces the initial trends or characteristics of the treated country before the treatment occurs. The synthetic control method (SCM), besides being a transparent way of choosing comparison countries, provides a more relevant comparison with the treated unit than a single control unit (Abadie, 2021).
The contribution of each potential control to the construction of the counterfactual is explicit. Despite the undeniable quality of the method, a major shortcoming remains. There is no consensus on the choice of predictor variables used to estimate the weights that define the synthetic control. In prac- tice, If different specifications lead to very different choices of the synthetic control, Ferman et al. (2020) recommend cherry pick ‘statistically significant’ specifications.
We used a specification that relies among other things on the outcome variable lagged over three key pre-treatment periods (beginning of the period, after the 1994 devaluation and just before the treat- ment). Beyond efficiently solving the problem of choosing predictor variables, the specification, as we will see later, confers several desirable properties of SCM. Any difference between the actual real GDP per capita and its synthetic counterpart can be attributed to the CFA franc’s peg to the euro as a result of France joining the Eurozone.
With the retained specification, in 12 of the 13 countries of the two studied CFA zones – the West African Economic and Monetary Union (WAEMU) and the Central African Economic and Monetary Community (CAEMC) – overall, we find that the peg of the currency to the euro did not significantly boost the real GDP per capita. Only Equatorial Guinea, a CFA country for which studies show an under- valuation of the exchange rate (Feindouno et al., 2020), benefited significantly from the peg to the euro over the 2002–2019 period. These results corroborate previous studies (Jacquemot, 2018; Nubukpo, 2007) but also the debates on the fact that the stability of the CFA franc does not benefit user countries. This article thus contributes to the debate on the possibility of re-anchoring the CFA franc. In other words, making exchange rate management more flexible should be seriously considered. Such as pro- posed by Gueye et al. (2019) pegging the CFA franc to a basket of international currencies to moderate the magnitude of the covariation of its value with the euro.
In this controversial binary debate, our study is original. On the one hand, we address the pegging of the CFA Franc to the Euro by country within each monetary union. This makes it possible to account for the inter- and intra-union performance differences between the two monetary unions. Similarly, we high- light the importance of credibility and show its inadequacy in ensuring the economic development of countries in the CFA zone. On the other hand, the method used. The SCM is particularly relevant for evaluating the CFA franc’s peg to the Euro for several reasons. The effect can be measured for each country independently, allowing for potential heterogeneous effects across the sample. Significant dis- parities across countries in the economic impacts of the CFA franc’s peg to the Euro would raise ques- tions regarding the benefits of flexible or managed exchange rate regimes, and possibly challenge policy coordination within the monetary union.
4 A. DIALLO AND A. BA
The paper is organized as follows. Section 2 provides the literature review, section 3 a snapshot of the economic situation of CFA countries members. Section 4 outlines the methodology and data. Section 5 discusses experiments carried out. Section 6 presents the baseline results while the next sec- tion, 7, checks their robustness. Section 8 makes the general discussion before the conclusion.
Literature review
Does the choice of exchange rate regime matter for growth? This is an old theoretical and empirical concern. Theoretically, it is assumed that exchange rate pegging affects economic growth through the channels of investment and productivity growth (Ghosh et al., 1996); however, the literature has been far more precise and numerous on the relationship between an anchored exchange rate regime and inflation, than on the latter’s relationship with economic growth. Few studies have addressed this ques- tion (Bohm & Funke, 2001; Domac et al., 2004b). This is closely linked to the absence of any effect of nominal variables on long-term growth (Levy-Yeyati & Sturzenegger, 2002), in that the expected result is price stability. In line with Barro and Gordon (1983), an expansionary monetary policy; or an exchange rate devaluation induces higher inflation without creating economic growth.
However, Levy-Yeyati and Sturzenegger (2002) show that there is a relationship between exchange rate pegging and growth, but the sign of the relationship is ambiguous. With reduced political uncer- tainty and lower interest rate variability, this type of regime fosters an environment conducive to growth. Indeed, Bailliu et al. (2003) point out that the impact of a fixed exchange rate regime on growth can be direct, through the effect on adjustments to shocks, or indirect, through investment, international trade and the development of the financial sector. Consequently, with the CFA pegged to the Euro, CFA zone economies can be directly or indirectly affected by the economic situation of countries using the Euro, by a drop in exports and indirectly by pressure on commodity prices (Ehrhart & Jacolin, 2012). Indeed, a stable exchange rate reduces uncertainty on relative prices, fluctuations in exports, and gov- ernment revenues expressed in CFA that can raise exchange rates (Coulibaly, 2014).
Empirically, Ghosh et al. (2002) find no link between exchange rate regime and economic growth, even after correcting for simultaneity bias. Moreno (2001) points out that a pegged regime is associated with episodes of strong growth of real gross domestic product. These results differ from those of Levy- Yeyati and Sturzenegger (2003) who observe that, for emerging and developing countries, the flexible exchange rate regime produces weak growth effects. For industrialised countries, the exchange rate regime has no effect. Similarly, Larra´ın and Parro (2003), using the de facto classification of Levy-Yeyati and Sturzenegger (2005), in an analysis based on 147 non-industrialized countries from 1975 to 2000, found that the floating exchange rate regime has led to a higher per capita growth rate and lower growth volatility than other exchange rate regimes.
Klein and Shambaugh (2010) using a sample of 92 countries – 22 industrialized and 70 non-industrial- ized – over the 1980–1999 period, highlighted that fixed exchange rates are associated with slower growth in developing and emerging countries. In contrast, Rose (2011) with a sample of 178 countries from 1974 to 2007, observes that economies with crawling peg regimes experience significantly faster growth than those with fixed regimes. Obi et al. (2016) explored the relationship between exchange rate regimes and output growth in Nigeria from 1970 to 2014. Their results reveal that a deregulated exchange rate stimulates economic growth. Similarly, Guellil et al. (2017) examine the impact of exchange rate regimes on economic growth in 38 developing countries from 1980 to 2013 based on two types of exchange rate regimes: fixed and intermediate regimes according to Reinhart and Rogoff’s classification. Beyond the positive relationship between the exchange rate regime and economic growth, they show that the fixed exchange rate regime achieves the highest growth rates.
Furthermore, evidence from Ashour and Chen (2018) suggests that economic growth in fixed regimes outperforms that in intermediate or flexible regimes. Conversely, Rao (2019) discusses the effects of exchange rate regimes on growth in the BRICS countries (Brazil, Russia, India, China and South Africa). The data used covers the period from 1970 to 2012. The author shows that fixed exchange rate regimes were hardly associated with better growth performance. Frankel, Ma and Xie (2019) building on the empirical approaches of Frankel and Wei (2008) and Frankel and Xie (2010), construct a new database characterizing the de facto exchange rate regime for 145 countries throughout the post-Bretton Woods
COGENT ECONOMICS & FINANCE 5
period. Their results indicate significant effects of intermediate exchange rate regimes on economic growth. De Almeida Cardoso and Vilela Vieira (2020) assess the effects of exchange rate regimes on long-term economic growth for 82 countries between 1970 and 2009. Using the GMM estimation, the authors report that countries with flexible and intermediate exchange rate regimes have higher growth rates than those with fixed exchange rate regimes. In contrast, Dao and Nga (2020) use the exchange rate database constructed by Reinhart and Rogoff (2004) and employ the Generalized Method of Moments technique on unbalanced panel data to analyze the effect of the exchange rate regime on economic growth in Asian countries (23 economies) from 1994 to 2016. Their results imply that a coun- try with a less flexible exchange rate regime will have a higher growth rate.
Using panel data from five MENA countries (Algeria, Egypt, Jordan, Morocco and Tunisia) over the1984–2019 period, Boucheta et al. (2021) carry out an empirical study on the existence of a link between exchange rate regimes and economic growth. They highlight the positive impact of the flexible exchange rate regime on economic growth. However, Alexis (2022) shows that developing countries with a fixed exchange rate do better than other countries with other exchange rate regimes when it comes to economic growth. In the same direction, Davis (2013), used the classification of de jure and de facto regimes for 35 sub-Saharan African (SSA) countries from 1985 to 2009, after separating the effects of membership of the monetary union from those arising from pegging to the CFA franc, concludes that CFA zone countries outperform those outside the CFA zone.
The CFA Franc: more than 50 years of mitigated economic performance
Developing countries are generally characterized by a ‘fear of floating’, which raises the issue of the choice of an exchange rate regime, and imposes a trade-off between credibility and flexibility. Given their characteristics (high economic instability, high inflation, volatility of production), monetary strat- egies are moving towards the establishment of currency areas and, in the long term, the implementa- tion of a common currency for Africa. This trend in Africa is largely influenced by the relative stability of the CFA zone2 (Coulibaly & Davis, 2013).
Inflation
Imported credibility is one of the critical arguments of the peg (in this case CFA-Euro), and in this sec- tion, we will examine whether this peg has achieved price stability in the zone. To do this, we extracted data on the inflation rate from 1980 to 2021 from the World Development Indicators (WDI). We compute for WAEMU & CAEMC, the average inflation rate for each country, inflation variability, and CFA zone average inflation for sub-periods 1980–2001 and 2002–2021.
Over the study period, 1980–2002, if one excludes Guinea-Bissau which joined the WAEMU zone only in 1997, the average inflation for the zone is about 6.89%. Once Guinea-Bissau is included, average infla- tion over the same period stands at 11.42%. And, over the 2002–2021 sub-period, the average inflation rate in the zone is 2.62%. If Guinea-Bissau is included, the average inflation rate over the same period is 2.57%. Out of 8 countries in this group, 5 had an average inflation rate of less than 3.5% (Table 1 panel A). For CAEMC, the average inflation for the zone is about 7.45% for the sub-period 1980–2002. Over the 2002–2021 sub-period, the average inflation rate in the zone is 4.02% (Table 1, panel B).
For a comparative analysis, we have calculated the average inflation rate of a few similar non-CFA zone countries (Table 2). The average inflation rate over the 2002–2021 period is 17.69%. For all coun- tries, the average inflation rate is higher than 8%.
Inflation variability is also a good indicator of price stability (Appendices 1 and 2). During the sub- period, 1980–2001, inflation variability is 2.14% and, from 2002–2021, it drops to 0.81% without Guinea Bissau. At the same time, for CAEMC, the average inflation variability is 3.3% (1980–2001) and 2.08% (2002–2021). For the non-Franc Zone group, the variability is about 5.02%. It is clear that, regarding infla- tion, CFA countries outperform non-CFA countries. In other words, the CFA agreement appears to be very effective in ensuring price stability and the credibility of low inflation (see Edwards & Savastano, 1999; Edwards 1993; Ghosh et al., 1996). We will now test whether the same is true for GDP per capita within the zone.
6 A. DIALLO AND A. BA
Table 1. CFA franc zone countries annual inflation rate (in percentage).
Panel A : WAEMU zone | ||
Countries | 1980–2021 | 2002–2021 |
Benin | 10.0886 | 2.1809 |
Burkina Faso | 4.0958 | 2.2932 |
Ivory Coast | 10.1524 | 1.8367 |
Guinea-Bissau | 43.1412 | 3.0340 |
Mali | 6.9661 | 3.1876 |
Niger | 6.4709 | 2.8754 |
Senegal | 4.4760 | 1.8880 |
Togo | 6.0303 | 3.7419 |
Average inflation for the WAEMU zone | 11.4276 | 2.6297 |
Average inflation without Guinea-Bissau | 6.8971 | 2.5720 |
Panel B : CAEMC zone | ||
Countries | 1980–2001 | 2002–2021 |
Cameroon | 7.0840 | 1.8336 |
Central African Republic | 6.5481 | 2.9473 |
Chad | 5.2621 | 3.2273 |
Congo, Rep, | 7.3655 | 5.9266 |
Equatorial Guinea | 11.0392 | 6.8367 |
Gabon | 7.4425 | 3.3846 |
Average inflation for the CAEMC zone | 7.4569 | 4.0260 |
Source: Author’s calculation based on WDI data. | ||
Table 2. Non-CFA franc zone countries’ mean annual inflation rate in percentage.
Inflation countries | ||
Country | 1980–2001 | 2002–2021 |
Angola | 550.9314 | 30.9267 |
Burundi | 10.3255 | 9.3748 |
Congo, Dem, Rep, | 1810.0590 | 15.6015 |
Ethiopia | 5.3227 | 13.5142 |
Gambia, The | 14.5303 | 10.2827 |
Ghana | 36.1786 | 20.9123 |
Guinea | 11.1457 | 14.4249 |
Kenya | 11.8579 | 8.5482 |
Madagascar | 18.4232 | 8.4497 |
Malawi | 23.3364 | 20.9094 |
Nigeria | 30.4076 | 11.0264 |
Sao Tome and Principe | 0.0000 | 10.3976 |
Sierra Leone | 47.0882 | 10.5106 |
Sudan | 50.6410 | 38.0634 |
Tanzania | 23.8338 | 7.2372 |
Uganda | 53.1089 | 8.7365 |
Zambia | 51.1202 | 12.3375 |
Zimbabwe | −1.6380 | 67.2388 |
Average inflation | 152.5929 | 17.6940 |
Source: Author’s calculation based on WDI data. | ||
GDP per capita
In a sample of 74 countries, Jacob (2016) finds a positive and significant correlation between fixed exchange rates and GDP growth. Similarly, Elu and Price (2008) find positive effects on growth for the period 1999–2007 for member countries of the CFA zone. Following Feindouno et al. (2020), the fixed exchange rate introduces more qualitative effects related to inclusive growth, which seems to protect the poorest, whose well-being is not easily adjusted to inflation and macroeconomic instabilities. By comparing the performance of the franc zone in terms of GDP per capita with that of countries non- franc zone, authors note differences. It is widely accepted that CFA zone countries perform worse than other countries outside the CFA zone in terms of economic performance.
For 2002–2021 (see Figure 1), the average GDP per capita growth for CAEMC, except 2004, decreased drastically compared to WAEMU and The non-CFA countries. The mean annual GDP per capita growth (Appendices 3 and 4) decreases from 1990–2001 to 2002–2021 about (–0.0071), confirming this situation.
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Figure 1. The evolution of GDP per capita growth during the two sub-periods: 1990–2001 and 2002–2022.
Source: Authors, based on WDI data.
WAEMU outperforms better than CAEMC and non-CFA countries, but it is not persistent. The average GDP per capita growth decreased by about (–0.0352), from 1990–2001 to 2002–2021, while for non-CFA countries it stood at the same level of 1.38.
Overall, the results are broadly similar. They are consistent with recent studies that have found that exchange rate regimes do not explain significant differences in economic performance between coun- tries (Klein & Shambaugh, 2010; Rose, 2011).
Methodology and data
This paper aims to estimate the impact of CFA pegs to the Euro. Ideally, we would like to observe what happened to the CFA zone in the absence of the Euro arrangement. In other words, we try to find out what the real GDP per capita would have been in these countries if this treatment had not taken place. Of course, this situation is not observable because the treatment was experienced by our different coun- tries due to France’s entrance into the eurozone. The presented method, based on the pre-treatment data, makes it possible to create a ‘synthetic country’ for each of the countries studied, defined as being the weighted average of the control countries similar to our treated country. Thus, the synthetic control is constructed in a way to follow the pre-treatment country’s GDP per capita but also, at the same time, to match on actual country’s GDP per capita with the values of the explanatory variables. However, because of the biases that the classic SCM may present, the ‘bias-corrected’ synthetic control will be used as a counterfactual. As we will see in the following subsection, the ‘bias-corrected’ SC (Ben-Michael et al., 2022; Wiltshire, 2021) follows the basic premise of the synthetic control method.
Synthetic control method (SCM)
Under appropriate conditions, the SCM is increasingly used by researchers. According to Abadie (2021), this is explained by a set of advantages provided by the method. It allows for building a counterfactual situation that would have been measured in the absence of the treatment because the purpose of impact assessment requires comparing the treated outcome with that obtained without the treatment. As pointed out by Gbato et al. (2018), this method is part of the classic analysis framework of Rubin (1974) defining the effect of public policy as the difference between the counterfactual and the actual situation observed in the treated unit.
The counterfactual consists of a weighted average of potential comparison countries that best reflects
the initial trends or characteristics of the treated country before the treatment takes place. Unlike other regression methods, the weighted average of potential control or donor units, by fulfilling the require- ment of similar characteristics, provides a more relevant comparison to the treated unit than a single control unit (Abadie, 2021). The contribution of each potential control to the construction of the coun- terfactual is explicit. This makes the method flexible in how to choose appropriately comparison coun- tries that are closely matched to the treated country. And finally, the SCM makes it possible to
8 A. DIALLO AND A. BA
determine the difference between the outcome variable and the other predictive variables between the treated unit and donor pool (Abadie, 2021). In addition (Abadie et al., 2007, p. 3) claim that: ‘the choice of a synthetic control does not require access to post-intervention outcomes, the SCM allows researchers to decide on study without knowing how those decisions will affect the control of their studies’.
The SCM provides causal results based on two requirements that can overcome these weaknesses. First, the treatment must not affect any of the control countries. This is known as the Stable Unit Treatment Value Assumption (SUTVA). Second, we assume that the effects we find are only due to the treatment. None other simultaneous or subsequent treatments cause the obtained results.
As mentioned above, far from the passionate debate between those for and against the CFA, each with their arguments, the evaluation of a possible significant effect of the pegging of the CFA to a strong currency, the euro, on income lends itself to a more efficient study using the synthetic control method compared with other methods. Firstly, the method excludes any variable that might anticipate treatment. To this end, the misalignment of the CFA, whether overvalued (Nubukpo, 2017) or not (Plane & da Piedade, 2022) is not considered a control variable. Real GDP per capita is controlled only by varia- bles highlighted in the literature and not directly related to the pegging of the CFA (the exchange rate). Thus, our results could contribute to the debate on (i) the costs of a possible over-evaluation of the CFA, which would favour imports; (ii) the potential benefits of the CFA Franc zone, such as providing its members with a stable currency and access to a large market; (iii) the costs of abandoning the CFA Franc zone, such as the possibility of higher inflation and higher transaction costs. Secondly, unlike the difference-in-difference or propensity score matching methods, which provide an estimate of the aver- age effect of the treatment, the SCM makes it possible to estimate the evolution of the effects over each of the posttreatment periods. In this way, it is possible to detect the non-linear effect of the euro peg from the first year of treatment (2002), which is more relevant than a single average effect over the entire posttreatment period provided by the above-mentioned methods.
Motivating model
The effect of the conventional CFA Franc peg to the Euro (treatment) on the real GDP per capita of WAEMU and CAEMC countries (outcome) can be captured through the following model. Suppose that we observe i = 1, ..., 13 countries3 experienced the treatment. T observation periods, where t = t1, ..., T0 and t = T0 + 1, ..., T defined respectively as the pretreatment and the posttreatment periods.
real GDPpercapita1 and real GDPpercapita0, a vector of outcomes variables for the unit i at respectively
itit
the posttreatment and the pretreatment periods. Following Abadie (2021), the situation in the absence of treatment can be written as follows:
real GDPpercapitait = bXit + hili + st + eit(1)
where Xit is a vector of observed covariables (not affected by the treatment) for countries that vary over time. li represent the fixed observed characteristics over time for a country i but whose effect ht may vary over time; st are the time commons effects to all countries i and eit the error term, i.i.d. X repre- sents all identified control variables appropriately in the empirical literature as factors affecting economic
growth.
For each treated unit I, the treatment effects on the economic growth at time t can be written as follows:
dit = real GDPpercapita1 −
X13
w*real GDPpercapita0
(2)
jit
j=2
w* is a set of non-negative weights whose sum makes 1 and which makes it possible to minimize the pretreatment distance between the treated unit and the control units. The weight of wj is chosen such that:
w* = argum(X1 − X0 w)'V(X1 − X0
(3)
jitititt
where X1 and X0 are two vectors – respectively (k-1) and (k-J) – composed of outcome and covariate
variables respectively of the treated and control units before treatment. The symmetric V matrix, positive definite, weights the relative importance of the different covariates of X as predictors of the outcome
COGENT ECONOMICS & FINANCE 9
variables. Several methods can be used to determine W and V, but we follow the recommendation of Abadie et al. (2010) and Abadie (2021) which consists in choosing W and V such that they minimize the RMSPE (Root Mean Square Prediction Error) of the posttreatment outcome variable.
SCM bias correction
A synthetic control estimator compares the outcome of a treated unit to the outcome of a weighted average of untreated units that best matches the characteristics of the treated unit before the interven- tion. However, as emphasized by Abadie and L’Hour (2021), in the synthetic control construction proced- ure, interpolation biases (pairwise matching discrepancies) may appear. This problem is further highlighted by Wiltshire (2021). The author affirms that bias may affect the synthetic control estimated marginal treatment effects because of discrepancies between the predictor variable values in each treated unit and its synthetic control in the values of matching variables. This, therefore, biases the esti- mated average treatment effect of the ‘classic’ SCM (Abadie & L’Hour, 2021; Ben-Michael et al., 2022). Wiltshire (2021) proposes a synthetic control bias-correction procedure (‘bias-corrected’ SC estimators) that automates the implementation of several extensions to the ‘classic’ CS estimators. However, as pointed out by the author, the pretreatment fit of the outcome variable will not be necessary to improve, the ‘bias-corrected’ SCM will address discrepancies between a treated unit and its donor pool in the values of all specified linear combinations of predictor variables, including the covariates. Thus, SC bias correction offers:
Automated calculation of bias-corrected synthetic control gaps;
Automated calculation of RMPSE p-values from in-space placebo tests;
expanded graphing functionality;
Uniqueness diagnostics (e.g. warns if the W matrix is unlikely unique).
Empirically, to correct any bias procedure for inexact matching of predictor values between a treated unit and its synthetic control donors, we re-estimate the classic SCM by using the Stata command allsynth.4
Inference
One issue economists often have with case studies in the absence of randomization and the small size of the control group is the lack of significance tests for the results (Firpo & Possebom, 2018). Abadie et al. (2010) address this issue and show that placebo studies provide a way to assess the statistical sig- nificance of the results. Placebo studies assume that the control group that did not undergo the treat- ment should have smaller trends, like the CFA franc countries, in outcome variables in the posttreatment period. Otherwise, the validity of the SCM will be severely undermined, and it could imply the effect was observed by chance. Specifically, the placebo test aims to see whether the deterioration in the ability of the control to match the CFA franc-zone countries post-2002 is largely relative to ran- dom deviations using the procedure where there was no intervention.
There are two types of placebo tests. First, in-time placebo by reassigning the time of the interven- tion. In our case, we could assume that the two CFA franc-zone countries peg their single currencies to the euro as a result of France joining the Eurozone in 1995 instead of 2002. This ‘false treatment’ should not result in significant treatment effects. Otherwise, it will be difficult to attribute the ‘false treatment’, pegging the CFA franc to the euro from 1995, as a reason for the observed trends in our outcome varia- bles. Second, in-place placebos conduct sequentially the control synthetic analysis for all countries in the control group and compare the results with those obtained for our treated unit. Since the countries in the control group did not experience the treatment in 2002, we would observe a smaller treatment effect on our control units. Thus, our main results generated by the SCM on the treated unit are valid if there are no significant changes in the predictability of the control group outcomes.
In this paper, we assess the statistical significance of our results by adopting the alternative statistical inference procedure introduced by Galiani and Quistorff (2017), the in-place placebo tests. As mentioned by Wiltshire (2021), the ‘bias-correction’ SC command, allsynth, includes an in-space placebo test and
10 A. DIALLO AND A. BA
their inference (p-value) is obtained by comparing the estimated main effect with the distribution of in- place placebo effects.
Data and sample
We use annual country-level panel data over the period 1980–2019. Each CFA Franc country that experi- enced the treatment of its single currency as a consequence of France joining the Eurozone, is con- trolled by 21 developing countries to construct the synthetic counterpart. One of the major difficulties in public policy comparison exercises lies in identifying the units of the control group. The latter in our sample include African countries with the same socioeconomic characteristics as the treated countries (Botswana, Cabo-Verde, Eswatini, Lesotho, Mauritius, Morocco, Namibia, and Seychelles). However, to maximize the probability of finding the best match with the ‘counterfactual’, countries outside the con- tinent, but with the same level of development as treated units (WB ranking, 2022), have been intro- duced (Bangladesh, Barbados, Buthan, Bolivia, Dominican Rep., Ecuador, Grenade, Laos, Oman, Panama, Saint Kitts & Nevis, and Saint-Lucia). From a technical point of view, the first requirement of the control group is not distorted. No control country has experimented with the treatment. And, empirically, these donor pool counties are chosen to match the pretreatment socioeconomic characteristics of the treated country as far as possible so that in the pretreatment period, the two graphs (actual and synthetic) should practically overlap. In other words, the outcome variable for the synthetic unit is as similar as possible to the actual outcome variable of the treated unit.
Bouvet et al. (2022) underline that the choice of pretreatment characteristics should include variables that can approximate the path of the treated country, but that do not anticipate the effects of the treat- ment. However, there is no strategy for the covariables selection. According to Andersen (2022), this lack of consensus is particularly pertinent when it comes to economic growth5 and, thus, for the researcher, the most important thing is to choose ‘appropriate’ predictors which in fine will make it possible to obtain specifications which give ‘better’ results. However, as Andersen (2022) points out, a question remains: whether alternative specifications lead to similar synthetic control estimators. If so, the problem of specification searches becomes (asymptotically) irrelevant (Ferman et al., 2020). In what follows, we have experimented with a wide set of additional growth predictors – such as inflation, manufacturing, export, import, schooling, rural population, tax revenue, central government debt, consumption … – but their inclusion did not change our results substantively.6
Thus, to determine the effects of pegging the CFA to the euro on income, real GDP per capita, we control with a vector of explanatory variables drawn from both theoretical and empirical literature. To increase GDP per capita, we need to increase productivity or global factor productivity. In other words, increase the efficiency of the production process. In this way, real GDP per capita is controlled by the capital factor – gross fixed capital formation rate (GFCF as % of GDP), government expenditure (% of GDP), official development assistance (% of GDP), Foreign development aid (FDA as % of GDP) – and the labour factor (captured by employment, i.e. the proportion of the population in work).
GDP per capita trajectory depends on many factors, such as the discovery of natural resources – which can be captured here through government expenditures–, structural policies, governance, institu- tional quality, and shocks experienced during the study period. Thus, we introduce the political regime characteristics and transitions (institutions) but also agriculture and industry-added values (as (% of GDP). Moreover, to take into account the effects of the devaluation of the CFA franc in January 1994, we introduce a dummy variable taking the value 1 if and only if the country is treated. About the out- come variable trend, we introduce their lagged values as explanatory variables. Some studies include the entire pre-treatment period as covariates, but this specification of synthetic control is problematic. It leaves no room for other explanatory variables (Kaul et al., 2016). Past values of the outcome variable almost exclusively determine the choice of control countries. As a result, while the pre-treatment period is well predicted, the prediction of future developments is not. In our specifications, like Abadie et al. (2021), we decided to introduce the lagged outcome variable as a covariate only over three periods 1980, 1995 and 2001 corresponding respectively to the income of the first pretreatment period, the one just after the devaluation of 1994 and finally that of the last pretreatment period. For more detail see Appendix 5.
COGENT ECONOMICS & FINANCE 11
The new pegging of their single currency of the single currency at a fixed parity to the euro has been effective with the introduction of the euro on January 1, 2002, giving a reasonable pretreatment (22 years) and posttreatment (19 years) information thereby avoiding the risk of bias in the marginal dis- tribution of the marginal statistic (Ferman et al. 2020; Ferman & Pinto, 2017). With all the requirements for SCM application, we conduct separately 14 quasi-experiments representing the two CFA zones coun- tries which have experienced the intervention.
One of the main difficulties in public policy comparison exercises is identifying the units in the con- trol group. Like Bouvet et al. (2022) and Strong (2021), our choice of control countries obeys four rules to reinforce the similarity with the treated units, CFA franc countries. First, the donors should not have adopted the treatment, and they should not be influenced by the adoption of the treatment in the treated country. Secondly, for a suitable donor pool, only low -and middle-income countries are chosen. Thirdly, we fix that the income of the donor country must not be five times higher -or lower- than that of the treated unit. Fourthly, in addition to the statistical inspection of the database on the socioeco- nomic structure of our countries, except for Ecuador and Panama which are dollarized economies, we retain only countries with a fixed exchange rate regime (IMF’s annual report on exchange rate regimes and exchange restrictions (AREAER), 2019)) and which have not experienced a financial crisis during the period.
The experiment
This section explains how we construct a synthetic version for each treated Franc CFA zone country.
For each separately conducted experiment, a synthetic treated unit will be constructed that mirrors the actual outcome treated unit’s pretreatment record from 1980 to 2002 for the outcome variable, the real GDP per capita. In addition to the outcome variable, real GDP per capita, delayed over three periods – 1980, 1995 and 2001–, nine (9) covariates were introduced to construct the control. Except for the share of industry in GDP and the 1994 devaluation, most of the covariates have a significant effect on real GDP per capita (Appendix 6). This significance test, besides empirical literature, justifies the model used for our different countries treated.
Following the technique described above, Table 3 lists the country weights generated by the syn- thetic control method to create a synthetic for each treated country for the considered experiment. So, the resulting counterfactual synthetics best reproduce the values of the predictors of income in each CFA Franc country in the pretreatment period. Columns show the estimated weight for the synthetic of
Table 3. Estimated synthetic control weights by outcome variable – real GDP per capita – for each treated country.
Benin | Burkina F | Ivory Coast | Guinee B | Mali | Niger | Senegal | Togo | Cameroon | CAR | Congo | Gabon | E. Guinea | Chad | |
Bangladesh | .441 | .359 | 0 | 0 | .1 | .116 | .9 | .209 | .283 | 0 | 0 | 0 | 0 | .54 |
Barbados | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Bhutan | 0 | 0 | 0 | .223 | 0 | 0 | 0 | 0 | 0 | 0 | .292 | 0 | .885 | 0 |
Bolivia | .053 | 0 | .251 | 0 | 0 | 0 | 0 | 0 | .048 | 0 | 0 | 0 | 0 | 0 |
Botswana | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Cabo Verde | .008 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Dominica | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | .09 | 0 |
Ecuador | 0 | 0 | .289 | 0 | 0 | 0 | 0 | 0 | .144 | 0 | .263 | .377 | 0 | 0 |
Eswatini | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | .125 | 0 | 0 | 0 | 0 | 0 |
Grenada | .008 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Laos | .489 | .599 | 0.46 | .777 | .575 | 0.884 | 0 | .791 | .399 | .93 | 0.048 | 0 | 0 | .46 |
Lesotho | 0 | .042 | 0 | 0 | .325 | 0 | 0 | 0 | 0 | .07 | .396 | 0 | 0 | 0 |
Mauritius | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Morocco | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Namibia | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Oman | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | .623 | .025 | 0 |
Panama | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Saint Kitts & N. | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Saint-Lucia | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Seychelles | 0 | 0 | 0 | 0 | 0 | 0 | .1 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Note. Donors that receive a positive weight are in bold for the reader to more easily identify. Values are rounded, so the columns may not sum to.
Here, CAR for Central African Republic.
12 A. DIALLO AND A. BA
each treated unit labelled at the top of the column. The column represents the outcome variable, real GDP per capita. Values are in percentage points. The weights obtained are from a cross-validation technique.
We estimated the basic model and a supposed unbiased model following the recommendation of Ferman and Pinto (2016). When comparing the real GDP per capita of the treated unit with its syn- thetic control counterpart during the pretreatment period, we select the synthetic control results that minimize the root mean square prediction error. As mentioned by Abadie et al. (2021), the control syn- thetic method provides a quantitative tool to select or validate comparison units. In Table 3, we can see each treated country, and in order of significance, its potential comparison countries. Thus, for each country treated, it is possible to closely reproduce its economic characteristics before the 2002 intervention without extrapolating outside of the support of the data for the donor pool (Abadie, 2021).
In 10 estimates out of the 14 treated CFA franc countries, Laos accounts for a substantial positive weight. For Burkina, Guinea, Mali, Niger, Togo, and the Central African Republic, Laos accounts for more than 55% of the weight. At the same time, this weight is also not negligible for Benin, the Ivory Coast, Cameroon and Chad. Bouvet et al. (2022) point out that the significant weight in the construc- tion of CFA country’s synthetic control is partly explained by the fact that Laos’ income levels over the pretreatment period are closer to those of the CFA franc-zone countries than most other countries included in the control group. Another Asian country with socioeconomic characteristics similar to the countries of the CFA zone, Bangladesh, finds itself with a significant weighting in the construction of the synthetic of 8 countries (in order of weighting: Senegal, Chad, Benin, Burkina, Cameroon, Togo, Niger and Mali). For Senegal, whose statistics show convergence with Bangladesh, the counterpart of its outcome variable before treatment includes Bangladesh at 90%. Bolivia, the 56th world oil produ- cer, weighs the synthetic control of two ‘small producers’ of oil in the CFA area, the Ivory Coast and Cameroon. Moreover, in this poor South American economy, cash crops (sugar cane, cotton, coffee, corn, rice and wheat) represent 20% of the GDP and employ more than half of the working popula- tion. If the weight of Bhutan in Congo and synthetic Equatorial Guinea could be explained by their status as an oil producer in the GDP per capita, the weight of Ecuador, in addition to the two coun- tries mentioned, in the Ivory Coast and Cameroon synthetics could be explained by the importance of the primary sector in socio-economic activities. Their status could explain the weight of Oman, an oil monarchy, in synthetic Gabon as an oil producer which boosts the inhabitants’ income. The other countries that make up the ‘synthetic countries’, to a lesser extent, are three African countries (Cape Verde, Lesotho and Eswatini).
Table 4 presenting the pretreatment characteristics between the actual outcome treated country and the ‘synthetic country’, shows that, apart from institutions (opposite sign) and industry, the values of the post-treatment synthetic characteristics correspond fairly well to those of the country. The characteristics are adjusted, and the synthetic control provides a good fit in terms of pre-treatment outcomes and observed covariates. This also confirms to what extent the weighted combination of the control pool is likely to reproduce the trajectory of the real GDP per capita of the treated country before the effective peg of the currency to the euro in 2002.
Moreover, for any variables that can be considered not adjusted, recent work on synthetic control methods posits the primacy of matching on pre-treatment outcomes rather than on the balance of observed predictor values. Botosaru and Ferman (2019) show that a specification whose estimated val- ues of the predictors are not fitted is not necessarily problematic, even when the predictors are relevant in determining the potential results. As Andersen (2022) points out, this demonstration is made based on the famous application of Abadie et al. (2015) on reunification in Germany. By focusing only on the matching of the preprocessing outcome variables (actual and counterfactual), Botosaru and Ferman (2019) come up with identical results compared to a synthetic control experiment which also approxi- mates the treated unit in terms of numerous covariates. Therefore, the counterfactual estimated using only the pretreatment outcomes is very close to the original one that corresponds directly to these predictors.
Table 4. The average of the Predictor of per-capita GDP before treatment for franc-CFA zone countries and pool control countries.
Covariables | Benin actual | Benin synth | Burkina | Burkina synth | Chad | Chad synth | Cameroon | Cameroon synth | ||||||
Agriculture | 30.04073 | 26.4032 | 27.23431 | 27.40018 | 41.1814 | 26.87521 | 19.82546 | 23.31198 | ||||||
Industry | 15.99823 | 23.34616 | 21.74132 | 23.36579 | 14.02381 | 23.18142 | 27.98465 | 26.047804 | ||||||
Government | .1642252 | .1582268 | .1280902 | .1676705 | .0749158 | .1473834 | .1513584 | .1729046 | ||||||
Investment | .1464882 | .2059665 | .1540666 | .213311 | .1338309 | .2042431 | .1495049 | . .198895 | ||||||
ODA | 8.242362 | 6.241135 | 11.80253 | 6.810809 | 10.3219 | 5.676904 | 3.696265 | 5.370352 | ||||||
FDI | .1104255 | .1493395 | .1100267 | .1415737 | .0932318 | .1525401 | .0726887 | .1425758 | ||||||
labour | 2.488525 | 12.19684 | 4.666861 | 9.579602 | 3.34609 | 15.33056 | 6.249838 | 10.85498 | ||||||
Institutions | 2.820513 | −2.424846 | −2.538462 | −3.700154 | −2.230769 | −2.515385 | −5.25641 | −2.221077 | ||||||
Devaluation 1994 | .025641 | 0 | .025641 | 0 | .025641 | 0 | .025641 | 0 | ||||||
Real GDP per capita (1980) | 378.0443 | 397.1006 | 282.6859 | 388.7716 | 228.8225 | 345.7445 | 774.1852 | 737.0012 | ||||||
Real GDP per capita (1995) | 367.3877 | 407.2905 | 235.8322 | 358.3908 | 206.2607 | 344.9293 | 798.8813 | 818.5633 | ||||||
Real GDP per capita (2001) | 518.0674 | 443.8607 | 267.0976 | 361.8709 | 197.1461 | 375.3927 | 687.6481 | 756.8909 | ||||||
Covariables | Ivoiry Coast | Ivoiry C. synt | GabonGa | bon syht | Mali | Mali synth | Niger | Niger synth | CAR | CAR synth | ||||
Agriculture | 21.56174 | 22.02763 | 6.310693 | 7.035862 | 35.96882 | 23.17076 | 36.04983 | 30.15423 | 38.22261 | 29.50049 | ||||
Industry | 18.81818 | 26.69135 | 51.98367 | 46.6368 | 18.76487 | 24.8251 | 20.76442 | 23.08981 | 8.960847 | 23.43981 | ||||
Government | .1561551 | .1980066 | .1731122 | .1925073 | .2267485 | .2018874 | .2097858 | .1906491 | .1975878 | .2042902 | ||||
Investment | .0886782 | .2048521 | .1652156 | .2525734 | .1241067 | .2201 | .1621974 | .2271727 | .1184897 | .2315959 | ||||
ODA | 4.630464 | 5.767511 | 1.443046 | .7716212 | 14.28346 | 8.332005 | 11.05083 | 8.260345 | 14.39514 | 8.945771 | ||||
Labour | 4.947632 | 4.883337 | .3799407 | 2.658771 | 3.587896 | 3.385728 | 4.923273 | 4.674918 | 1.377802 | 2.343753 | ||||
Institutions | −2.76923 | .7242051 | j −3.53846 | −2.77548 | 1.564103 | −3.30128 | 1.025641 | −6.054154 | −.79487 | −6.3789 | ||||
Devaluation 1994 | .025641 | 0 | .025641 | 0 | .025641 | 0 | .025641 | 0 | .025641 | 0 | ||||
FDI | .1459756 | .1374157 | .0790182 | .2492877 | .0967499 | .1271676 | .100155 | .1274255 | .0609893. | 1208567 | ||||
Real GDP per capita (1980) | 1266.624 | 1076.333 | 5892.099 | 4072.086 | 248.1891 | 409.1505 | 418.8553 | 459.5419 | 362.4001 | 478.2006 | ||||
Real GDP per capita (1995) | 997.4788 | 936.1037 | 4570.571 | 4705.185 | 282.341 | 413.6759 | 208.3771 | 337.1605 | 346.1082 | 375.3474 | ||||
Real GDP per capita (2001) | 997.4788 | 936.1037 | 3993.031 | 5994.799 | 307.7058 | 361.3168 | 208.3771 | 337.1605 | 250.5762 | 332.4482 | ||||
Covariables | Senegal | Senegal synth | Togo | Togo synth | Equa. Guinea | Equa. Guinea synth | DRC | DRC synth | Guinea B | Guinea B. synth | ||||
Agriculture | 11.27865 | 23.20434 | 32.53139 | 29.45159 | 5.00784 | 23.38972 | 7.891784 | 16.45307 | 46.88025 | 29.76493 | ||||
Industry | 20.78047 | 31.78484 | 19.25387 | 23.10944 | 55.00117 | 32.59882 | 52.07516 | 30.17035 | 13.75433 | 25.3405 | ||||
Government | .1826579 | .3121148 | .1581985 | .1813778 | .3089052 | . 304908 | .3346866 | .2396506 | .2712447 | .2242669 | ||||
Investment | .4451363 | .3782886 | .1832138 | .2222592 | .1473769 | .3513008 | .2298496 | .2632495 | .1017682 | .2648837 | ||||
ODA | 23.8637 | 12.70928 | 9.001099 | 7.706751 | 17.44801 | 12.12897 | 6.206908 | 8.060002 | 33.02647 | 9.974081 | ||||
Labour | 3.375063 | 3.26919 | 2.000675 | 7.931617 | .2263649 | .2175944 | 1.090125 | 1.833755 | .4784167 | 1.868964 | ||||
Institutions | 5.717949 | −4.4589 | −3.82051 | −5.29584 | −6.25641 | −4.17730 | −4.128205 | . 6814615 | −.230769 | −6.68551 | ||||
Devaluation 1994 | 0 | 0 | .025641 | 0 | .025641 | 0 | .025641 | 0 | – | – | ||||
FDI | .173211 | .1612805 | .0983536 | .1328072 | .0934027 | .1478636 | .0576188 | .1362058 | .0408092 | .1261758 | ||||
Real GDP per capita (1980) | 501.1375 | 517.6503 | 417.6691 | 435.1567 | 202.6274 | 424.4321 | 959.4275 | 832.0547 | 141.5594 | 451.2432 | ||||
Real GDP per capita (1995) | 1261.103 | 1163.865 | 309.8183 | 356.6788 | 285.5526 | 858.5761 | 781.525 | 946.0339 | 233.2433 | 403.8911 | ||||
Real GDP per capita (2001) | 1292.227 | 1454.303 | 292.8231 | 345.3531 | 2313.166 | 1201.568 | 869.1005 | 897.8115 | 319.9575 | 424.5023 | ||||
14 A. DIALLO AND A. BA
Results
The results of our experiments are presented for each CFA franc zone. The two currency zones, WAEMU and CAEMAC, differ in their economic structures and are heterogeneous (Gnimassoun, 2012, 2017) which does not allow for a comparison between zones.
Our estimate of the effect of pegging the common currency to the euro for treated CFA franc country is given by the difference between the actual real GDP per capita and its ‘bias-corrected’ SC over the 2002–2019 period. A positive (negative) posttreatment value indicates that the actual real GDP per cap- ita of a treated CFA franc country is higher (lower) than the real GDP per capita level of the bias-cor- rected SC.
In Figures 2 and 3 of the results which will be presented for the two CFA franc zones, the position of the broken line relative to zero before the 2022 reform captures the quality of the pretreatment fit reached by the ‘bias-corrected’ SC method algorithm. So, the closer to zero the broken line is in the 1980–2002 pretreatment period, the better the fit, and therefore the more confident one can be that any real GDP per capita difference measured post-2002 would be the result of the experiment. Close fit both for the pretreatment real per-capita income and its predictors show that our pool donor provides a country combination that can reproduce the economic attributes of the CFA franc-treated countries before the 2002 treatment period.
WAEMU results
Figure 2 below presents the results of our experiments for the seven WAEMU countries. Concerning the eighth of the countries in the zone, Guinea Bissau, as mentioned above, we have chosen not to retain it because of its late accession to the WAEMU zone in 1997. Consequently, we do not have a sufficiently robust pretreatment period.
Overall, for all treated WAEMU countries, we can affirm that our ‘bias-corrected’ SC estimators do an excellent job in the construction of the ‘synthetic’ which corresponds to real GDP per capita before 2002 (Figure 2). The differences observed because of bias, essentially not very substantial, are taken into account in the bias-corrected SC model. The pretreatment differences observed are not very substantial and practically tend to settle over time, particularly from 1987 onwards.
After 2002, the gap which represents the difference between the two series (the trajectory of the full black lines) highlights mixed fortunes within WAEMU countries.
A first sub-group of countries including Mali and Burkina Faso for which our estimated results seem to suggest that pegging the CFA Francs to a strong currency, the euro, as a result of France joining the eurozone, had a positive impact on these countries’ real GDP per capita. These positive effects, actual outcomes greater than bias-corrected synthetic outcomes, are less marked in the first pretreatment peri- ods. The positive divergence between the two series increases over time after the years 2008 and 2012 respectively for Mali and Burkina Faso. Appendix 7 presents the statistical significance of our results. As outlined above, we run in-place placebo tests where we assign the treatment to all control countries and compute p values, using the distribution of our placebos tests. Significance tests show that any gaps between this first sub-group actual posttreatment and their ‘bias-corrected’ SC are statistically insignificant at a 10% level or better.
A second sub-group composed of Benin, Niger, and Togo for which, immediately after 2002, their
actual outcomes positively diverge from their bias-corrected synthetic outcomes. However, we observe that towards the end of the pretreatment period, the gap curves dip and even pass slightly below the abscissa axis. At 10% or better, for Benin, the p-value from the placebo tests in Appendix 7 reveals that pegging the CFA to the euro leads to a statistically significant increase in real GDP per capita only over three posttreatment periods (2009, 2010 et 2011). The other pre-treatment periods are not significant. The same insignificant results of our placebo tests are also highlighted for Togo throughout the entire pretreatment period except for 2019. For Niger, our placebo test results indicate that the effects found are negatively significant only over the last three posttreatment periods (2017, 2018 and 2019).
Finally, for the third and last sub-group composed of the two main WAEMU economies, Ivory Coast and Senegal, even if during the first posttreatment period they seem to have benefited from the
COGENT ECONOMICS & FINANCE 15
Figure 2. Real GDP per capita gap between actual WAEMU countries and their ‘bias-corrected’ synthetic counterparts.
Note. The gaps drawn between actual, and bias-corrected SC real GDP per capita are expressed in US$.
treatment, our experiments suggest an overall negative effect on income. For Ivory Coast, the zone’s leading exporting economy, the negative impact on real GDP per capita of pegging at a fixed parity the CFA to a hard currency, the euro, is observed after 4 post-treatment years, unlike Senegal where the negative impact on income is less significant and can be observed from 2013. The results of our placebo test show that, in Senegal and Ivory Coast, none of the 17 treatment periods is significant at the 0.10 level or better. Pegging the CFA franc to the euro as a result of France joining the Eurozone produce
16 A. DIALLO AND A. BA
Figure 3. Real GDP per capita gap between actual CAEMC countries and their ‘bias-corrected’ synthetic counterparts.
Note 1: The gaps drawn between actual, and bias-corrected SC real GDP per capita are expressed in US$.
any statistical difference in the income of these two leading WAEMU economies throughout the post- treatment period.
CAEMAC results
Comparing during the pretreatment period, 1980–2001, the actual pretreatment outcomes and its ‘bias- corrected’ SC performed very similarly for Equatorial Guinea. For the Central African Republic and Chad, Figure 3 shows that the actual outcome variable and ‘bias-corrected’ SC closely follow each other des- pite some slight differences observed over some pretreatment periods. For the other three remaining countries, over a large part of the pretreatment period, we cannot say that their ‘Bias-corrected’ SC matches the trajectory of their real GDP per capita. For Cameroon and Congo Republic, the ‘bias-cor- rected’ SC is slightly below the actual outcome over the period 1987–1994 (the year of the devaluation) before becoming almost similar in Cameroon and slightly above it in Congo. In Gabon, the beginning of the pretreatment period until 1987 is marked by a ‘bias-corrected’ SC below the actual outcome results. This pretreatment trajectory rises above before doing a very well job.
Also, in the CAEMC zone, a heterogeneity of situations of the treatment effects on income is high- lighted. However, two major trajectories can be retained.
Situation 1 includes the Central African Republic (CAR), Chad and Equatorial Guinea. In these coun- tries, after 2002, the actual outcome variable and ‘bias-corrected’ SC immediately start to diverge, with
COGENT ECONOMICS & FINANCE 17
the actual outcome greater than ‘bias-corrected’ SC as represented by the trajectory of the gap curve (Figure 3). So, our results suggest that pegging the CFA franc to the euro boosts the real GDP per capita contrary to what would have been observed without the treatment. We conducted statistical significance tests by running the in-place placebo: the probability that this would happen by chance (Appendix 8). The p-values for each year show that the large estimated differences between actual posttreatment experience and its ‘bias-corrected’ SC were statistically significant at the 0.10 level or better in 2 of the 17 years examined for CAR (2011 & 2012), Chad (2011 & 2012). For Equatorial Guinea, the p values are significant from 2004 to 2019 at the 5% level.
In situation 2, we find Cameroon, Gabon, and Congo Rep. where, initially, the two series are quite close before diverging. Our results suggest that the intervention did not boost income. Actual real GDP per capita is lower than their ‘bias-corrected’ SC ones. After 2002, pegging the CFA to the euro would have a substantially zero effect on income before the negative gap between the two series grows 3 years after treatment. This negative effect fades over time for Congo Rep. while in Gabon, the treat- ment is beginning to bear fruit since 2016. The p values from the distribution of in-place placebo results indicate that these differences between actual outcomes and ‘bias-corrected’ SC are not statistically sig- nificant both in any country and year in our posttreatment period.
Robustness tests
In this section, we run robustness checks to test the sensitivity of our main results a change in the coun- try weight, W*.
Based on estimated weights calculated for each treated country in creating the synthetic control (Table 1), like Bouvet et al. (2022), we re-estimate the baseline model to construct for each treated CFA franc country a ‘bias-corrected’ SC excluding in the iterations the control country that received a sub- stantial non-zero weight in Table 1. According to Abadie (2021), by proceeding this way, we certainly sacrifice some goodness of fit, but this sensitivity check allows us to evaluate to what extent our results are driven by any particular control country.
In this robustness check, at first, the expected decline in the goodness of fit is moderate for all treated countries. Indeed, the comparison of the predictors of real GDP per capita in the countries treated and their synthetic control shows that despite the omission of the country which contributed the most in the synthetic control, the covariates remain adjusted. Then, except for the matching for Gabon, the new results (Appendices 9 and 10) are fairly similar to the previous baseline ones. The exclu- sion of the most weighted country did not cause a substantial change in the gap between the two ser- ies trend. Finally, these robustness tests come to confirm the potential gains from using combinations of countries rather than a single country as comparison cases in evaluation studies.
Discussions
The debate on the advisability of maintaining the franc of the African Financial Community (CFA) is becoming more and more pressing. Indeed, for decades, the CFA franc has fueled a virulent debate between, on the one hand, its detractors who denounce it as a ‘post-colonial’ currency that perpetuates France’s influence in Africa. Thus, the two monetary unions do not promote trade between member
countries (−15% in the WAEMU zone and this rate is below 10% in CAEMC)) even less the higher
incomes of the populations. And, on the other hand, its defenders praise the monetary stability it brings. In counterpart to the supposed macroeconomic stability offered by the Euro peg, these countries have little leeway in terms of price competitiveness, the evolution of which depends largely on that of the anchor currency. The issue of misalignments is acute for these countries which are small open econo- mies with weak institutions. They face a double uncertainty: that is linked to the evolution of the terms of trade and that linked to the evolution of the anchor currency (Gnimassoun, 2017).
With the recent global crises and their extremely detrimental impact on developing countries, the question of the role exchange rate regime role appears interesting. In particular, one could wonder whether countries that have anchored their currency to an international benchmark are doing better, are more resilient to shocks or react better or not. In the case of the CFA pegged to the euro, its almost
18 A. DIALLO AND A. BA
mechanical misalignment leading to a tendency to overvaluation (Nubukpo, 2015) is likely to persist due to poor economic performance in the Eurozone. This continues to fuel questions about the future of their fixed exchange rate regime which ties their hands to a hard currency, the euro.
Our article attempts to contribute to the renewed debate on the viability and relevance of the CFA zone by bringing some elements to the debate, often passionate, of a slowing effect of the anchored currency, the CFA Franc, on the economics of user countries. As having a currency pegged to the euro is likely to be a source of shocks to output, we assess the 20 years of pegging to the euro as a result of France joining the eurozone by applying a synthetic control method. It compares the outcome of a treated unit to the outcome of a weighted average of untreated units that best resembles the character- istics of the treated unit before the intervention. Overall, our empirical analysis shows that in 12 of the 13 countries of the two studied CFA zones, CAEMC and UEMOA, the peg of the currency to the euro did not significantly boost the real GDP per capita. Only Equatorial Guinea, a CFA country for which studies show an undervaluation of the exchange rate (Feindouno et al., 2020), benefited significantly from the peg to the euro over the period 2004–2019. These results corroborate previous studies (Jacquemot, 2018; Nubukpo, 2007; Nubukpo et al., 2016) but also the debates on the fact that the stability of the CFA franc does not benefit user countries. Furthermore, our results contribute to the theoretical debate on the transmission channels of the fixed exchange rate regime on the economy and the determinants of growth. In our sample of countries, the fixed exchange rate regime does not produce convincing results on economic growth, showing that traditional channels have not met theoretical expectations. At the same time, this highlights the ineffectiveness of the 2% inflation target applied by the zone’s central banks in contributing to economic growth. Our results are in line with some empirical work (Gueye et al., 2019; Nubukpo 2015) which suggests that the exchange rate regime could be reorganized to enable CFA zone countries to achieve growth gains, in addition to monetary policy autonomy, and to benefit from monetary conditions adapted to their economic structure. A managed float will enable countries to contain the effects of asymmetric external shocks while considering national differences. This can be achieved by adopting a basket of international currencies with major trading partners.
However, even if the overvaluation of the currency resulting from the pegging of the CFA franc to strong currencies (French franc then Euro) is often singled out as one of the origins of the lack of com- petitiveness of the economies of the CFA countries, the latter should not just be limited to the real exchange rate of the CFA. Indeed, studies (Gueye et al., 2019) go in the direction of a lack of inter- national competitiveness in the two monetary zones of West Africa is less explained by their belonging or not to the Franc zone, than by structural factors (export and investment) of countries’ economic per- formance. Evidenced by the primary integration into the international economy through agricultural and mining products characterized by low levels of complexity and high price instability.
The originality of the article comes from two elements. On the one hand, the method used. The syn- thetic control method allows us for constructing a counterfactual situation, i.e. it can show what would have happened to the treated unit if not experienced the treatment. On the other hand, contrary to most of the papers which evaluate the effects of the currency from the devaluation of 1994, we assess the 20 years of pegging to the euro, a study, to our knowledge, has never been done. The study helps us to understand the effects of the misalignment of the CFA exchange rate as evidenced by a study by the International Monetary Fund on imbalances in international payments: ‘The euro is too strong by 6.8% for France and too low by 18% for Germany’. This state of affairs is transmitted to the CFA coun- tries formerly anchored at a fixed parity to the French Franc. Thus, the overvaluation of the currency anchored to the euro about our economic performance and our needs could result in a deterioration of the countries’ foreign trade.
Our findings should, in the context of the announced launch of the eco in the WAEMU zone and an agitated devaluation of the currency in the CAEMC zone, push towards an in-depth reform of the CFA franc. Monetary policymakers should reconsider the fixed exchange rate of the currency against the strong currency, the euro. For example, they could move toward a managed exchange rate with a ceil- ing and a floor, respectively, above and below which the monetary authority will intervene. This regu- lated flexibility of the exchange rate should make it possible to avoid the structural misalignment of the currency. Therefore, the currency should better reflect the economic fundamentals of the member coun- tries. As pegged regimes seem to have adverse effects and/or ambiguous results on growth, a monetary
COGENT ECONOMICS & FINANCE 19
union without pegging to an external currency (or with an exchange rate regime more flexible than that of the CFA zone as a whole) may be a better option.
Finally, new perspectives are opened by our paper. First of all, it would be interesting to analyze, as an outcome variable, other less usual transmission channels (productivity, investment, trade, etc.). Then, in the treatment, it would also be interesting to better take into account the aspect of the country pro- ducing oil or not. Finally, it would also be interesting to emphasize a possible misalignment of the exchange rate of the CFA countries about the euro.
Conclusion
This paper assesses the impact of pegging the CFA franc to the euro – at a fixed parity – on real GDP per capita in the West African Economic and Monetary Union (WAEMU) and the Central African Economic and Monetary Community (CAEMC) countries. Using a set of 35 annual country-level panel data from 1980 to 2019, we apply the ’bias-corrected’ synthetic control estimators to create a ’synthetic country’ (a counterfactual) for each treated CFA country. We arrive at the following result. Except for Equatorial Guinea, which shows a significant positive difference between its real GDP per capita and counterfactual, our results suggest that, overall, there is no statistical evidence that real GDP per capita has increased relative to what it would have been in the absence of the pegging of the CFA to a hard currency following France’s accession to the eurozone.
In terms of economic policy implications, this quantitative work, which fills a void, fuels a recurring debate regarding the pegging of the CFA to the euro and the survival of the two monetary zones. Economists are increasingly suggesting the adoption of a semi-flexible exchange rate that would allow member countries of the CFA Franc zone the possibility of conducting an independent monetary policy. Indeed, this crawling peg to the basket of currencies of our main trading partners would result, on the one hand, in monetary conditions adapted to our economic situation. On the other hand, the possibil- ities of reacting not only to asymmetric external shocks but also to take into account the differences between national economic policies. However, the break with the fixed exchange rate for countries that are mainly importers and not very diversified first requires changes in the productive and financial struc- tures of the economies of the CFA countries.
Notes
It was created on December 26, 1945, around fifteen years before the independence of the French colonies. It was then called ‘franc of the French colonies of Africa’. It will subsequently take the name ‘African Financial Community franc’ for West Africa and ‘Central African Financial Cooperation franc’ for Central Africa. Note that CFA zone creation was the result of a political decision between France and its former colonies in sub-Saharan Africa, and is therefore exogenous to economic concerns. In particular, it was created when the economic conditions necessary for the creation of a monetary zone were not met (Dufr´enot and Sugimoto, 2009). Since Guinea-Bissau joined the zone in 1997, we excluded it from our study.
West African Economic and Monetary Union (WAEMU): Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Togo, Senegal.
Economic and Monetary Community of Central Africa (CAEMC): Cameroun, Central African Republic, Congo, Gabon, Equatorial Guinea, Tchad.
Guinea Bissau is excluded because of its late integration into the WAEMU zone in 1997.
Wiltshire (2021) argues that the alllsynth command automates implementation of several extensions to the classic approach while retaining the syntax of synth (classic CS).
The title of a recent meta-analysis by Colagrossi et al. (2020) says it all: ‘Does democracy cause growth? A meta- analysis (of 2000 regressions)’.
Ferman et al. (2020) show that appropriate conditions different specifications will lead to asymptotically equivalent synthetic control estimators.
Author contributions statement
The conception and design: Diallo and Ba; analysis and interpretation of the data: Diallo and Ba; the drafting of the paper: Diallo and Ba, revising it critically for intellectual content: Diallo and Ba; and the final approval of the version to be pub- lished: Diallo and Ba; and that the authors, Diallo and Ba, agree to be accountable for all aspects of the work.
20 A. DIALLO AND A. BA
Disclosure statement
No potential conflict of interest was reported by the author(s).
About the authors
Alassane Diallo hold a Ph.D. degree in Development Economics from the University Grenoble alps (UGA-France). His Ph.D. research was focused on climate change and human migration. My areas of research are: Migration, Climate change, Vulnerability, Rural (agricultural) populations, Sustainable development (SDGs), applied to developing coun- tries (sub-Saharan Africa and the Sahel). He is currently an associate professor at Universite´ Amadou Mahtar Mbow (Diamniado-S´en´egal).
Adama Ba hold a PhD in monetary and financial macroeconomics from the University of Toulon (France). He is an associate professor at University ‘of Bombay economic faculty and a researcher at the GREDT (Groupe de Recherche en Economie et D´eveloppement territorial) within the LIRSS (Laboratoire interdisciplinaire de recherche en sciences sociales), UFR Economie Management et Ing´enerie Juridique ECOMIJ Bambey. His research focuses on Central Banking, international monetary macroeconomics, exchange rate regimes, monetary policy, currency unions, etc.
ORCID
Alassane Diallo http://orcid.org/0000-0002-1972-9382
Date availability statement
Data available on request from the authors.
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COGENT ECONOMICS & FINANCE 23
Appendix
Appendix 1. Average Inflation volatility in CFA franc zone countries during the during the two sub-periods.
Panel A : inflation volatility in WAEMU countries | ||
Country | 1980–2001 | 2002–2021 |
Benin | 2.6215 | 0.4915 |
Burkina Faso | 1.2670 | 0.6885 |
Ivory Coast | 3.3127 | 0.5479 |
Guinea-Bissau | 7.0205 | 1.2247 |
Mali | 2.1362 | 0.8422 |
Niger | 2.2991 | 0.6673 |
Senegal | 1.6262 | 0.5737 |
Togo | 1.7687 | 1.8881 |
Average inflation volatility for the UEMOA zone | 2.7565 | 0.8655 |
Average inflation volatility without Guinea-Bissau | 2.1473 | 0.8142 |
Panel B : inflation volatility in CAEMC countries | ||
Country | 1980–2001 | 2002–2021 |
Cameroon | 2.5780 | 0.2836 |
Central African Republic | 2.1627 | 0.7863 |
Chad | 2.6690 | 1.8347 |
Congo, Rep, | 3.7918 | 3.3578 |
Equatorial Guinea | 5.2214 | 3.9519 |
Gabon | 3.4115 | 2.2967 |
Average inflation volatility for the CAEMC zone | 3.3057 | 2.0852 |
Source: Author’s calculation based on WDI data. | ||
Appendix 2. Average volatility of inflation in non-CFA franc countries during the two sub-periods.
Country | 1980–2001 | 2002–2021 |
Angola | 250.3693 | 10.1202 |
Burundi | 2.2688 | 1.5636 |
Congo, Dem, Rep, | 1208.9600 | 2.8264 |
Ethiopia | 2.1000 | 2.0767 |
Gambia, The | 6.2061 | 4.4592 |
Ghana | 5.0961 | 3.8537 |
Guinea | 2.7717 | 4.7706 |
Kenya | 1.8062 | 1.4853 |
Madagascar | 2.8364 | 0.9830 |
Malawi | 3.4509 | 5.5379 |
Nigeria | 9.7100 | 1.4470 |
Sao Tome and Principe | 0.0000 | 1.2994 |
Sierra Leone | 9.0538 | 1.3043 |
Sudan | 8.3528 | 11.5199 |
Tanzania | 4.2266 | 0.8272 |
Uganda | 14.3712 | 4.1240 |
Zambia | 9.5753 | 1.1474 |
Zimbabwe | 2.1746 | 34.3620 |
Average inflation | 85.7405 | 5.2060 |
Appendix 3. Franc CFA area countries’ mean annual GDP per capita growth.
Panel A: WAEMU countries | ||
Country | 1990–2001 | 2002–2021 |
Benin | 1.0926 | 0.9788 |
Burkina Faso | 1.3596 | 1.1837 |
Ivory Coast | 1.5770 | 1.2331 |
Guinea-Bissau | 1.0983 | 1.0334 |
Mali | 1.3686 | 1.2112 |
Niger | 0.5919 | 0.6312 |
Senegal | 0.8622 | 0.9010 |
Togo | 0.8648 | 1.3316 |
Average GDP per capita for the WAEMU area | 1.1019 | 1.0630 |
Average GDP per capita without Guinea-Bissau | 1.1024 | 1.0672 |
Panel B : CAEMC countries | ||
Country | 1980–2001 | 2002–2021 |
Cameroon | 1.0130 | 1.0974 |
Central African Republic | 0.9709 | 1.3902 |
Chad | 1.5066 | 1.3389 |
Congo, Rep, | 1.0954 | 1.7012 |
Equatorial Guinea | 3.0314 | 2.3296 |
Gabon | 1.1992 | 0.9167 |
Average GDP per capita for the CEMAC zone | 1.4694 | 1.4623 |
Source: Author’s calculation based on WDI data. | ||
24 A. DIALLO AND A. BA
Appendix 4. Non franc CFA countries’ mean annual GDP per capita growth.
GDP per capita, countries | ||
Country1990–2001 | 2002–2021 | |
Angola1.6114 | 1.6114 | |
Burundi0.8708 | 0.8708 | |
Congo, Dem, Rep,1.2652 | 1.2652 | |
Ethiopia1.9121 | 1.9121 | |
Gambia, The0.8842 | 0.8842 | |
Ghana1.7991 | 1.7991 | |
Guinea1.2551 | 1.2551 | |
Kenya1.6413 | 1.6413 | |
Madagascar1.1014 | 1.1014 | |
Malawi1.2710 | 1.2710 | |
Nigeria1.5345 | 1.5345 | |
Sao Tome and Principe1.1618 | 1.1618 | |
Sierra Leone1.512041 | 1.512041 | |
Sudan1.211221 | 1.211221 | |
Tanzania1.377759 | 1.377759 | |
Uganda1.181793 | 1.181793 | |
Zambia1.443792 | 1.443792 | |
Zimbabwe1.897712 | 1.897712 | |
Average GDP per capita1.3851 | 1.3851 | |
Source: Author’s calculation based on WDI data. | ||
Appendix 5. Data description and sources. | ||
VariablesDescription | Sources | |
AgricultureAs a % of GDP IndustryAs a % of GDP GovernmentShare of government consumption at current PPPs InvestmentShare of household consumption at current PPPs Official development AssistanceNet official development assistance is disbursement flows (net of repayment of principal) that meet | WDI, PennWorld Tables WDI, PennWorld Tables WDI, PennWorld Tables WDI, PennWorld Tables | |
the DAC definition.
InstitutionsPolitical regime Characteristics and Transitions, 1980–2019, annual, cross-national, time series, and polity case formats coding democratic and autocratic ‘patterns of authority’ and regime changes in all independent countries with total population greater than 500,000 in 2018
Foreign development investment (FDI)Foreign direct investment refers to direct equity
investment flows into the reporting economy. It is the sum of equity, reinvestment of earnings and other capital.
Polity5 for Center of Systemic Peace
WDI
Labour (employment)proportion of the population in workWDI
Devaluation 1994The devaluation of the CFA franc in 1994, captured by a dummy variable taking the value 1 if the country is both a CFA franc Country and during the year 1994. Otherwise, 0.
Authors
Real GDP per-capita (1980)Output-side real GDP at current $WDI, PennWorld Tables
Real GDP per-capita (1995)Output-side real GDP at current $WDI, PennWorld Tables
Real GDP per-capita (2001)Output-side real GDP at current $WDI, PennWorld Tables
Real GDP per capitaOutput-side real GDP at current $WDI, PennWorld TablesAppendix 6. OLS fixed effect estimates of real GDP per capita parameters of CFA franc-zone countries.
Real GDP per capita
Franc-CFA zone countries (WAEMU and CAEMC)
1994
(2045.3)
(2037.9)
(2053.)
(2033.2)
(2046.1)
(2089.)
(2055.9)
(2046.)
(2048.)
(2054.)
(2039.8)
(2457.8)
(2090.9)
Note. The dependent variable is the real GDP per capita. The estimation periods are over 1990–2019. Column gives estimates. (.): Robust Standard Error.
***, **, and * denote statistical significance at the 1, 5, and 10 per cent levels, respectively.
26 A. DIALLO AND A. BA
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28 A. DIALLO AND A. BA
COGENT ECONOMICS & FINANCE 29
SHORT- AND LONG-RUN EFFECTS OF DEVALUATIONS: EVIDENCE FROM ARGENTINA
LUCIANO CAMPOS
Universidad de Alcalá and RedNIEa
ABSTRACT
Devaluations were traditionally considered to be expansionary in the short run and have no real long-run effects. Alternatively, some observers in developing countries found that devaluations were contractionary on impact, and that they might foster long-term growth. Using Argentina as a case study, which is convenient due to its long series availability and its subsequent switches in exchange rate regimes, four structural shocks are identified in line with the traditional and alternative views. It is found that devaluations were mostly contractionary, and that real long- run effects were only possible when inflation was either low or moderate. In light of the estimates, a historical revision of Argentinean devaluation episodes from 1854 to 2018 has been carried out.
Keywords: exchange rate devaluations, economic growth, structural BVARs, Argentina
JEL code: C32, F31, N16
RESUMEN
Tradicionalmente se consideraba que las devaluaciones eran expansi- vas a corto plazo y no tenían efectos reales a largo plazo. Por otra parte, algunos observadores de países en desarrollo encontraron que las devalua- ciones eran contractivas y que podían fomentar el crecimiento a largo plazo. Tomando a Argentina como caso de estudio, lo cual es conveniente por su disponibilidad de series largas y sus subsecuentes cambios en los regímenes cambiarios, se identifican cuatro choques estructurales en
a Departamento de Economía, Alcala de Henares, Spain. luciano.campos@uah.es
Revista de Historia Económica / Journal of Iberian and Latin American Economic History1
Page 1 of 29. doi:10.1017/S0212610922000064 © The Author(s), 2022. Published by Cambridge University Press on behalf of Instituto Figuerola, Universidad Carlos III de Madrid.
https://doi.org/10.1017/S0212610922000064 Published online by Cambridge University Press
línea con las visiones tradicionales y alternativas. Se encuentra que las devaluaciones fueron mayoritariamente contractivas y que los efectos reales a largo plazo solo fueron posibles cuando la inflación fue baja o moderada. A la luz de estos resultados, se realiza una revisión histórica de las devaluaciones argentinas de 1854 a 2018.
Palabras clave: devaluaciones cambiarias, crecimiento económico, BVARs estructurales, Argentina
«Currency devaluations is one of the most dramatic—even traumatic— measures of economic policy that a government may undertake». (Cooper 1971)
INTRODUCTION
In traditional economic theory, nominal exchange rate devaluations are considered to be expansionary on impact and, as such, have been recom- mended in stabilisation programmes since the 1950s. The generalised idea is that devaluations can help a country with underemployed resources to switch expenditures from the non-tradable to the tradable sector. Hence, the current account can be expected to improve and boost eco- nomic activity. In the long run, a devaluation cannot have any permanent effects; according to the relative purchasing power parity condition, any real effect would dissipate as the real exchange rate returns to its equilib- rium level.
However, this traditional view has been challenged by several observers who have analysed the performance of developing economies. Among them, Díaz-Alejandro (1963) proposed that devaluations can affect real activity in the short run negatively because workers (mostly consumers) were constrained, while capitalists (mostly savers) benefited. Net exports displayed a strong increase in impact, but this effect was due primarily to a dramatic reduction in imports.
As for the long-run effects of devaluations, some works, motivated by the experiences of several Asian and Latin American countries since the 1960s, suggested a possible relation between real undervaluation and long- term growth1. This argument relies on nominal devaluations that succeed in maintaining an undervalued real exchange rate for some time and can, hence, deliver long-run growth. Among the works that have sought to
1 In this text, a devaluation (an increase in the nominal exchange rate) can cause a real exchange rate undervaluation (an increase in the real exchange rate). This syntax is used to conform to that in the literature on the real exchange rate and growth.
2Revista de Historia Económica / Journal of Iberian and Latin American Economic History
SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
uncover the mechanisms through which a high real exchange rate level might contribute to development in emerging economies, Rodrik (2008) stands out because of its popularity. Rodrik stated that increases in the real exchange rate acted as a second-best mechanism to reallocate resources in tradable activities, which contributed more to growth than non-tradable sectors.
The contribution of this paper is the design of an empirical model, implemented via Bayesian vector autoregressive (VAR) analysis, where the short- and long-run effects of devaluations can be evaluated within the same set-up. In particular, a low-scale VAR with only four variables is used to decompose the distinct sources of disturbances affecting the exchange rate at different horizons; on the one hand, expansionary and contractionary devaluations can be recovered by imposing sign restric- tions on impact following, respectively, the traditional theory and
Díaz-Alejandro’s approach. On the other, nominal and real shocks can be identified with exclusion and sign restrictions in the long run under the PPP condition and Rodrik’s real undervaluation-growth theory, respectively. The empirical model proposed here is appealing due to its simplicity.
Our case study is Argentina, which has been selected for two reasons: firstly, because of its long-term series data availability, not usual for devel- oping countries. In fact, the model is estimated with annual data from 1854 to 2018, which allows us to study the situation throughout the country’s modern history. Secondly, during this period, Argentina has
experienced several changes in its currency regime, which makes it a
unique case study, as noted by Díaz-Bonilla and Schamis (2001) and Cerro and Meloni (2014).
The main results of our investigation are as follows: firstly, devaluations were mainly contractionary, just as Díaz-Alejandro proposed in his work. Secondly, the model is unable to recover expansionary devaluations from the data-generating process (DGP). Hence, devaluations were not of this sort. Thirdly, devaluations with long-run effects on growth occurred primarily when inflation was either low or moderate, so that the real exchange rate could remain devalued for some time. Fourthly, nominal shocks were especially relevant during highly volatile and inflationary years, which proves that the real effects of devaluations became weaker amid rising prices.
The remainder of this article proceeds as follows: section 2 presents a literature review and highlights the contribution of the present article, sec- tion 3 describes the data and justifies Argentina as an unparalleled case study, section 4 summarises the theory on which the empirical analysis is based, section 5 describes the empirical approach, section 6 presents the evidence obtained and section 7 concludes the paper.
Revista de Historia Económica / Journal of Iberian and Latin American Economic History3
LITERATURE REVIEW AND CONTRIBUTION
This article relates primarily to three strands of the literature: the short- run impact of devaluations, the relationship between the real exchange rate and economic growth, and the economic history of Argentina.
The first line of inquiry can be traced back to the early works of Laursen and Metzler (1950), Harberger (1950) and Alexander (1959). These authors studied the effects of exchange rate devaluations and supported the view, which is here called the traditional approach, that devaluations expand output by stimulating exportable and import-substitution goods. A note by Johnson (1976) summarised the argument that there was an expenditure-switching effect from non-tradables to tradables, which increases output if there are unemployed resources or raises prices if this is not the case. In addition, Gylfason and Schmid (1983) provided evi- dence that devaluations were expansionary in most countries. This per- spective has since become the dominant story in most economic textbooks. Nevertheless, the empirical evidence obtained in some developing countries is not consistent with this traditional belief about the effects of devaluations. Instead, findings indicate that devaluations provoked a con- traction in output with a strong current account increase. In particular, Díaz-Alejandro (1965) studied the Argentine economy during the 1950s and focused on the devaluation carried out in 1958. He performed a case study of this episode with the intention of deriving a generalised pat- tern of the consequences of devaluations in semi-industrialised countries. His views were summarised in Díaz-Alejandro (1963), where he argued that devaluations had contractionary effects because workers (who have a high propensity to consume) were more affected than capitalists (who have a high propensity to save). These ideas were sustained by the model of Krugman and Taylor (1978) and the empirical results in Edwards (1986), based on data from twelve developing countries from 1965 to
19802.
There are other possible explanations for the fact that devaluations can be contractionary: the price increase caused by a devaluation might con- tract aggregate demand, delivering a negative real balance effect (Johnson 1977), or demand may be inelastic with respect to price (i.e. the Marshall–Lerner condition does not hold). An increase in input costs
is another probable cause of output contraction, but from the supply
side (Gylfson and Schmid 1983). However, Sidrauski (1968) proposes that devaluations can be contractionary if, as was the case in 1958 and 1962 in Argentina, they are complemented with an excessively tight
2 It must be said that the work of Edwards (1986) analyses a period in which economic growth was sluggish almost everywhere. Hence, it is not surprising that devaluations were estimated to be contractionary in this work.
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SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
monetary policy. Nevertheless, the focus in this article is on the explan- ation provided by Díaz-Alejandro because it has become very popular in the literature.
More recently, Bahmani-Oskooee and Miteza (2006) used a panel cointe- gration model and concluded that devaluations were contractionary in non-OECD countries for different model specifications. Later, Cerra and Saxena(2008) showed that devaluations associated withdebtcrises were espe- cially harmful in the short run in Latin America. In fact, devaluations are typ- ically associated with rising debt costs (Bordo and Rockoff 1996) and, ultimately, sovereign debt default (Boonman 2017). Kohn et al. (2020), how- ever, described how the increase in exports stimulates aggregate demand fol-
lowing large devaluations, thanks to firms’ sales reallocation across markets. As for the VAR literature on the effects of devaluation in emerging econ- omies, examples include Kamin and Rogers (2000) for Mexico, Berument
and Pasaogullari (2003) for Turkey, Hsing (2004) for Argentina, Odusola and Akinlo (2001) for Nigeria and Tang (2015) for China. The first three of these works found devaluations to be contractionary, the fourth found them to be expansionary, and the last did not observe any significant short- run effect. Compared with these articles, the present work makes the con- tribution of providing evidence based on a longer sample, which permits the identification of not only short- but also long-run effects of devalua- tions in a unified setting.
Regarding the second line of inquiry, the traditional idea of long-run money neutrality was confronted by authors who claimed that there was a causal relationship between real exchange rate undervaluation and eco- nomic growth. The prescription derived from this alternative argument was that countries could, and should, use the real exchange rate as a policy variable to pursue economic development. The argument made by Rodrik (2008), who claimed that a high real exchange rate is a second-best mech- anism for switching resources from non-tradables to tradables, was intended to explain why countries such as China and India had used it as a pro-development policy tool since the 1960s. In the same vein, Razmi et al. (2012) relied on the existence of hidden unemployment being absorbed in tradable sectors as a source of growth when the real exchange rate is high for a long period. On the contrary, Levy-Yeyati et al. (2012) did not find relevant export-led growth from undervaluations but rather non-tradable sector improvements with higher savings and investment and a decline in unemployment. Not only have these works conceptually challenged the mainstream view, but empirical evidence has also been provided to support these alternative theories in the works of Hausmann et al. (2005), Frenkel and Rapetti (2008), Bussière et al. (2012) and Guzmán et al. (2018).
In addition, I intend to enrich the debate about the particular case of Argentina from an economic history perspective, which leads us to the
Revista de Historia Económica / Journal of Iberian and Latin American Economic History5
third strand of literature. The fact that Argentina was one of the most developed countries in the world in the 1920s and has since suffered a rela- tive decline until today, makes it a unique case to study. Many contribu- tions were made trying to disentangle the reasons for this relative decay. Among them, Gerchunoff and Llach (2009) focus on the varying nature of Argentinean relative factor endowments from 1880 until 2000, Sanz (2009) builds an index of economic freedom to evaluate its relative per- formance from 1875 until 2000, González and Viego (2011) suggest there was a relative decline in total factor productivity in a study from 1870 to 2000, Buera et al. (2011) and Cerro and Meloni (2013) blame the permanent fiscal imbalances in the 19th and 20th centuries, Brambilla et al. (2018) analyse the effects of pernicious trade policies using data from 1890 to 2006, and Taylor (2018) summarises many of the explana- tions for Argentine divergence with data from 1820 until 2003. While this study has drawn on these works, as on others cited below, I concen- trate on the effects of the numerous devaluations experienced by Argentina in its turbulent monetary history. So, in a sense, this article can contribute to the history of Argentinean devaluations. As far as I am aware, there is no other work in the literature with such a goal.
The aim of the present work is to enrich these lines of enquiry. In par- ticular, the empirical strategy followed makes it possible to estimate all possible outcomes of devaluations according to the different (and contra- dictory) theoretical approaches available. To the best of my knowledge, there is no other work in any of these strands of the literature that has adopted such an empirical strategy.
THE ARGENTINEAN CASE
Although the intention of this work is to contribute to developing econ- omies in general, Argentina is used as a case study for two main reasons: on the one hand, it has long time series for the selected variables, which makes it possible to estimate the short- and long-run effects of devaluations. On the other, it is an appealing country to evaluate due to its subsequent switches in monetary policy. As early as 1899, an observer noted, «the Argentines alter their currency almost as frequently as they change their pre- sidents. Nopeople in theworld take a keener interest in currencyexperiments than the Argentines» (Ford 1962). Little has changed since then. Throughout Argentinean history, there have been free and dirty floats, crawling pegs and full convertibility; there have been currency controls with multiple exchange rates followed suddenly by a unified free market value and violent devalua- tions; and trade openness was replaced by tariffs and export taxes, with policy shifting back and forth from free trade to autarky. Such an erratic exchange rate policy makes Argentina a unique case study.
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SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
FIGURE 1
VARIABLES’ TIME SERIES AND DEVALUATION EPISODES.
Note: Evolution of the yearly variations in the nominal exchange rate, the real exchange rate, net exports and output growth in Argentina from 1854 until 2018 (see the Appendix for data details).
Figure 1 shows the evolution of the nominal exchange rate variations (Δe), the real exchange rate (Q), net exports/output ratio (NX/Y) and GDP growth (ΔY) in Argentina from 1854 until 2018. The grey areas indicate nominal devaluations greater than 10% during this period, which amounted to almost thirty episodes of different magnitudes. The first panel shows that the nominal exchange rate was more stable until the 1930s and that violent devaluations of more than 40% have not been unusual since the 1950s. In the 1970s and 1980s, during hyperinflationary episodes, devaluations were massive and surpassed the maximum scale of the graph, set at 50%. During the 1990s, there was a fixed exchange rate period that was abandoned with a strong devaluation in 2002, followed by increasingly stronger devaluations in the 2010s.
The real exchange rate, plotted in the second panel, parallels the evolu- tion of the nominal rate; the relative stability observed until the 1950s has since been replaced by marked volatility. The graph also shows that
Revista de Historia Económica / Journal of Iberian and Latin American Economic History7
periods of high real exchange rates, such as in the 1960s, 1980s and 2000s, alternated with periods of low real exchange rates such as the late 1970s, 1990s and 2010s. The real exchange rate was calculated using the British pound until 1932, because Great Britain was Argentina’s main trading partner during that period. From then on, the US$ was used. In addition,
as Argentina implemented exchange rate controls in several years of the sample, the «free» real exchange rate is replaced by the average of the real price of imports and exports since 1932. The gap between both real exchange rates is significant from 1945 until 1960, but not for the rest of the sample. The Appendix describes the data in more detail.
The third and fourth panels depict the evolution of net exports and out- put growth, respectively. Some devaluations coincided with output and current account contractions, while others coexisted with expansions. So, a priori, there is no clear pattern in the short-run effects of devaluations on these variables. The empirical model proposed here makes it possible to evaluate not only the contribution of each source of innovation to nominal exchange rate volatility (through a variance decomposition) but also the weight attributable to the disturbances in each devaluation episode (using a historical decomposition).
THEORETICAL BACKGROUND
As mentioned above, the traditional view regards devaluations as expansionary in the short run, mainly due to a relative price effect; as both exports and imports become more expensive in the local currency, local production increases if the Marshall–Lerner condition holds, that is, if demand elasticities are high enough. However, as many authors
have claimed, devaluations in developing countries have been contraction- ary rather than expansionary. This section summarises the ideas developed in Díaz-Alejandro (1963) and Rodrik (2008) to justify the identification scheme proposed in the empirical design below. Readers already familiar with these theories can proceed directly to the following section.
Díaz-Alejandro stated that the traditional view of price elasticities of demand for exports and the supply of imports was overly optimistic. He argued that, as these elasticities are low in the short run, the negative income effect associated with the reduction in real wages prevails, such that aggregate output could fall (rather than rise) after a devaluation3.
3 Note that the view that devaluations can be contractionary is not the same as the output reduction that occurs whenever net exports display a J-curve. While the latter refers to some lags, typically between 6 months and 1 year, until the effects of the devaluation become fully effective because of volume rigidities, the former refers instead to a deep economic contraction because of the devaluation. The interested reader can see Bahmani-Oskooee (1985) for evidence on the J-curve.
8Revista de Historia Económica / Journal of Iberian and Latin American Economic History
SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
Specifically, if the economy is modelled with a tradable and a non-tradable sector, the effects of a devaluation on output would be:
dY = (dYT + dYNT)de(1)
where Y is the aggregate output, YT is the production of tradables, YNT is the production of non-tradables and e is the price of tradables in domestic currency (i.e. the exchange rate), such that de refers to a devaluation.
It is not unreasonable to assume the supply of tradables to be inelastic in the short run in commodity-exporting countries. For example, agricul- tural commodities can increase their production only during the following harvest. The supply of non-tradables is assumed to be elastic, as idle resources exist. Hence, the devaluation effects captured in [1] can be reduced to the non-tradable sector only:
dY = dYNTde
The main contribution of Díaz-Alejandro was to focus on the redistribu- tive effects between capitalists and workers. He argues that omitting these effects would lead to a partial (and incorrect) evaluation of devaluations in middle-income countries. He claimed that including these two social classes makes it possible to model not only substitution but also income effects as follows:
dYNT = [mnc(YT − YT ) − mnw(YT ) + YNTEne]de(2)
sdcdw
c____i_n_c__e˛f f _c_a_p_____Ici_n_c__e˛f f _w_o___rI
cs_u__b˛s e_f__fI
where there is a positive income effect for the capitalists, which depends on the tradables initially produced (YT) and consumed (YT ) by them, together
sdc
with their marginal propensity to consume (and invest in) non-tradables (mnc). Workers suffer a negative income effect that depends on their initial consumption of tradables (YT ) and their marginal propensity to consume
dw
non-tradables (m4
nw) . Finally, there is an expenditure-switching effect
4 In the empirical model of the next section there is an implicit assumption that income elas- ticities remain stable in time. However, these deep parameters might have changed in such a long period of time. In particular, the transition from a rural to an urban economy and the strong influx of immigrants that took place in Argentina between the end of the 19th and the beginning of the 20th centuries, might have affected these elasticities. In order to verify the effects of this potential struc- tural break in our results, a robustness check was carried out where the model displayed in the next section is estimated using data from two subperiods: 1853-1936 and 1936-2018, as the 1930s is typ- ically considered as the decade of industrial intensification (Bértola and Ocampo 2012). As shown in the Appendix, the IRFs and the variance decomposition estimates are not significantly different in general.
Revista de Historia Económica / Journal of Iberian and Latin American Economic History9
from tradables to non-tradables, which depends on the cross-elasticity of demand for non-tradables with respect to the exchange rate (Ene).
Under the assumption that the trade balance is originally equilibrated:
YT = YT + YT
sdcdw
then, expression [2] can be summarised as:
NT,TNT,
dY= ,(mnc − mnw)Ydw + YEne,de(3)
c________in_˛c e_f_fI
cs_u__b˛s e_f__fI
It is reasonable to assume that workers’ marginal propensity to con- sume non-tradables is higher than that of capitalists, who are typically more biased towards consumption of (and investment in) imports, such that mnc − mnw < 0. Furthermore, if the negative income effect is large enough, it might more than compensate for the substitution effect, which is typically small for developing countries. If this is the case, then devaluations can be contractionary. It now becomes apparent that deva- luations have redistributive effects because capitalists (exporters) benefit
at the expense of workers through the change in relative prices between tradables and non-tradables.
For the trade balance, Díaz-Alejandro proposed that the drop in imports was quite strong because of the negative income effect suffered by workers after devaluations. Thus, the immediate effect was an abrupt increase in net exports. In particular, the evolution of the trade balance depends on the increase in the domestic supply of and demand for tradables:
dTB = dYT − dYT
(4)
d
Again, by assuming an inelastic supply of tradables in the short run, the trade balance will improve only if demand for tradables decreases. As before, this depends on income and substitution effects, although the latter is now the expenditure switching from non-tradables to tradables. Hence, the result for the trade balance after a devaluation will be the opposite of:
,,
c____in__c_e˛f f _c_a_pI
ci_n_c__e˛f f _w_o__rI
cs_u__b˛s e_f__fI
where mtc and mtw are the marginal propensity to consume tradables for capitalists and workers, respectively. Furthermore, by considering
10Revista de Historia Económica / Journal of Iberian and Latin American Economic History
SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
the propensity of capitalists and workers to save as sc =1 − mnc − mtc and sw =1 − mnw − mtw, respectively, and assuming that trade is originally balanced, then [5] can be reduced to:
T,TTNT,
dYd = ,(sw − sc)Ydw + (mnw − mnc)Ydw − YEne,de(6)
c______˛iI
c_________˛iiI
c___˛ii i ___I
where the second and third terms are the pure income and substitution effects, respectively, depicted in [3] but with opposite signs. As the income effect is assumed to exceed the substitution effect, then ii − iii > 0.
However, the first term is likely to be negative because workers’ marginal
propensity to save is lower than that of capitalists. If this term dominates, such that |i|> ii − iii, then [6] is negative, and thus, [4] becomes positive. That is, a devaluation will be both contractionary for output and have a positive effect on the trade balance.
Let us turn to the long-run effects of devaluations. According to the trad- itional view, the real effect of a devaluation is expected to dissipate because of the (relative) purchasing power parity condition. Ultimately, all real vari- ables would return to their initial levels. However, alternative theories sug- gest that nominal devaluations might have long-run effects if the price of tradables vis-à-vis that of non-tradables (i.e. the real exchange rate) is signifi- cantly affected for a sustained period of time. According to these alternative theories, devaluations can have lasting effects on the real exchange rate whenever there is no strong passthrough to local prices. If this is the case, there would be an increase in the trade balance that tends to be permanent and, as a consequence, there can be a long-term effect on output5.
The main argument of these alternative neo-mercantilist theories is that
«developing countries achieve more rapid growth when they are able to increase the relative profitability of their tradables». This is the case because tradables are «special» in that «they suffer disproportionately from market failure» in information—as in Rodrik (2008)—or there are
labour market rigidities—the hidden unemployment mentioned in
Razmi et al. (2012)—. Consequently, «an increase in the relative price of tradables acts as a second-best mechanism to partly alleviate the relevant
distortion, foster desirable structural change, and spur growth»6.
Figure 2 summarises the four different disturbances that will be used in the identification scheme below. Expansionary and contractionary devalua- tions are expected to provoke a real devaluation and an increase in net
5 Burstein et al. (2005) and Burstein et al. (2007) found that large devaluations generate strong increases in the real exchange rate because of sticky non-tradable prices.
6 All the quotations in this paragraph are from Rodrik (2008, p. 370).
Revista de Historia Económica / Journal of Iberian and Latin American Economic History11
FIGURE 2
SHORT- AND LONG-RUN EFFECTS OF DEVALUATIONS.
exports in the short run. Instead, nominal and real shocks to the exchange rate are identified based on their expected long-run real effects7.
THE EMPIRICAL APPROACH
This section describes the empirical strategy used to identify the sources of disturbance affecting the nominal exchange rate by decompos- ing its variations into different types of structural shocks. In particular, imposing exclusion and sign restrictions both on impact and in the long run that are consistent with the traditional and alternative approaches described in the previous section makes it possible to disentangle the four innovations: expansionary and contractionary devaluations and nom- inal and real shocks.
Let us consider the following time series vector:
,
yt = ⎢
Det
Qt NXt/Yt DYt
7 Note that the real shock identified here is based on Rodrik (2008), who associates real devalu- ation with growth. Instead, a traditional real shock to the exchange rate, as an innovation to prod- uctivity or consumer preferences in the domestic relative to the international economy, typically relates long-run growth to real appreciations. The interested reader can consult Enders and Lee (1997) for an identification strategy for traditional real shocks.
12Revista de Historia Económica / Journal of Iberian and Latin American Economic History
SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
where Δet, Qt, NXt/Yt and ΔYt are nominal exchange rate variations, the real exchange rate, net exports over output and output growth, respectively (see the data Appendix for details). This model has the following structural VAR
(p) representation:
B0yt = B1yt−1 + B2yt−2 + ··· + Bpyt−p + wtwt ~ (0, IK )(7)
where Bi, i = 0, …, p are square coefficient matrices, and wt are the struc- tural residuals in the sense that they are mutually uncorrelated and have an economic interpretation derived from the theoretical framework.
The VAR(p) model in its reduced form can be expressed as:
yt = A1yt−1 + A2yt−2 + ··· + Apyt−p + utut ~ (0, Su)(8)
where the coefficient matrices Ai = B−1Bi, i = 1, .. . , p and ut = B−1wt.
00
As is clear from comparing the structural representation [7] and its
reduced form [8], the impact matrix B−1 becomes essential because it
makes it possible to recover the structural shocks from the reduced-form residuals with:
wt = B0ut
The lag order is one, according to the Akaike information criterion, and residual non-autocorrelation and normality checks are passed8. As Bayesian methods of inference is typically used when identifying shocks with sign restrictions, the VAR model [8] is estimated with Bayesian tech- niques using the independent Gaussian-inverse Wishart prior and the Gibbs sampler to build a posterior distribution. In particular, a posterior distribution is obtained from:
g(u|y) a f (y|u)g(u) = l(u|y)g(u)
where g(θ) is the prior distribution, l(θ|y) is the likelihood function, f(y|θ) is the joint sample, g(θ|y) is the posterior distribution and θ = (α, Σu) are the parameter estimates (where α represents the VAR coefficients)9. If the
8 The residual tests are not presented here but are available upon request.
9 Figure 1 suggests that there might have been a structural change in some of the variables and, as such, time-varying parameters should be used. However, the estimation is performed with con- stant coefficients because one of the main goals of the present paper is to conduct a historical decomposition, although it is not clear how to obtain this when using time-varying parameters (Kilian and Lütkepohl 2017). To verify the strength of possible structural changes, and hence the danger of relying on constant parameters’ estimations, subsamples have been used to obtain
IRFs. As mentioned in footnote 4, the Appendix shows that the IRFs and the variance decompos-
ition are not significantly different. The results presented here can, then, be considered robust.
Revista de Historia Económica / Journal of Iberian and Latin American Economic History13
independence of the priors of α and Σu is assumed, as the independent Gaussian-inverse Wishart prior does, then the prior distribution is as follows:
with
g(a, Su) = ga(a)gSu (Su)
a ~ N (a∗, Va)
Su ~ IWK(S∗, n)
As Figure 1 shows some of the time series used exhibit considerable persistence. Thus, a random walk prior is selected for the prior mean (a∗). For the prior variance Va = hIK, the hyperparameter is set at η = 1, which reflects the ignorance about its true value. Regarding the hyperparameters of the covariance matrix, the draws are obtained from the Wishart distribution with prior S∗ = IK and n degrees of freedom. A burn-in sample of 20,000 draws is run, and then 10,000 draws are kept to obtain the estimates of the reduced-form VAR parameters θ = (α, Σu).
Next, the structural estimation is performed based on the algorithm developed by Arias et al. (2014). In particular, it is drawn with replacement from the reduced-form estimates to obtain orthogonal short- and long-run impact matrices using the Cholesky decomposition as an initial guess10:
L0 = Chol(Su)
L1 = (IK − A1 − ··· Ap)L0
L = [L0L1]′
That is, a candidate matrix L is obtained through dynamic sign restric- tions, that is, that include restrictions both on impact (L0) and in the long run (L∞). At the same time, a rotation matrix Q is calculated with the QR decomposition of a normal distribution N (0, IK) draw. The candidate matrix B−1 = L0Q is retained only if the following conditions on L are
10 Note that the Cholesky decomposition is used here for orthogonalisation only, not for iden- tification. This is common practice in sign restriction schemes. The interested reader can consult footnote 3 in Fry and Pagan (2011).
14Revista de Historia Económica / Journal of Iberian and Latin American Economic History
SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
satisfied:
,Det,n
⎥ = ⎢⎥⎢c ⎥
(at t = 0)(9)
, NXt/Yt ,, ··+· ,, wt ,
DYt
··− +e
c__________˛L 0I
, ··· · ,
.0+ · ·
.=·+ · ·
·+ · ·
c________L˛1I
.
. (at t = 1)(10)
where wn, wr, wc and we are a nominal shock, a real shock, a contractionary
tttt
devaluation and an expansionary devaluation, respectively. All structural shocks are in line with the theoretical approaches developed in the previ- ous section. In the short run, an expansionary devaluation would increase the nominal exchange rate and expand output, while a contractionary devaluation would reduce output. The corresponding signs for the real exchange rate and net exports of expansionary devaluations are left unre- stricted because few successful draws can be recovered if they are imposed. As noted below, this suggests that expansionary devaluations were infre- quent in the sampled data.
In the long run, nominal shocks would have no effect on the real exchange rate. Although the long-run effects on net exports and output should also be set to zero, they are left unrestricted because, again, very few draws could satisfy these conditions. One possible explanation for this is that nominal shocks can have negative effects on long-run output, even if the real exchange rate remains unchanged. Finally, the real shock à la Rodrik must have a positive effect on all real variables in the long run. Of the 10,000 reduced-form bootstrapped series, an equal number of structural impact matrices are obtained using the algorithm of Arias et al. (2014) with the restrictions described in [9] and [10]. Once the impact matrices are obtained, impulse response functions (IRFs) can be calcu-
lated with:
Qi = (JAiJ′)B−1
(11)
where A is the companion form of [8], J is its corresponding operational matrix and i = 0, 1, 2, …, H is the desired horizon. Accumulated responses
Revista de Historia Económica / Journal of Iberian and Latin American Economic History15
are also displayed, which can be interpreted as the response in the level of the variable.
In addition, the mean squared prediction error at the h-step ahead horizon:
h−1
MSPE(h) ; E (yt+h − yt+h|t)(yt+h − yt+h|t)′ =QiQi′
i=0
can be used to obtain the contribution of shock j to variable k at horizon h:
MSPEk(h) = Q2+ ··· + Q2
(12)
jkj,0kj,h−1
and the sum of the contribution of the j shocks to each variable k at hori- zon h:
KK
MSPEk(h) = Σ MSPEk(h) = Σ (Q2
+ ··· + Q2
)(13)
j
j=1
j=1
kj,0
kj,h−1
from which the variance decomposition can be calculated by dividing [12] by [13]. That is, the contribution of the jth shock to the overall variance of variable k at horizon h:
VarDeck(h) = MSPEk(h)/MSPEk(h)(14)
jj
The historical decomposition of shock j to variable k for a given point of time i is calculated as:
t−1
j =Qkj,iwj,t−i
i=0
The median of Θ kj,i is used to obtain the contribution of each shock to the variations in the nominal exchange rate as:
jyˆj
and the residual:
det = et 100(15)
Det
jDet − ΣJ
etDet
yˆj
et 100(16)
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SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
Lastly, the historical decomposition [15] is rescaled as follows:
j
et
(17)
ΣJ|dj | + 1j
where τ are the years of the analysed devaluation episodes. The focus is only on positive contributions, which makes it possible to see which struc- tural shock was more important during each of the particular devaluation events that took place in Argentina during the sample period.
THE EVIDENCE
This section presents the evidence obtained by showing the IRFs and the accumulated responses, which reveals the average effects of structural shocks throughout the sample period. In addition, a forecast error variance decomposition describes how much of the nominal exchange rate volatility can be explained by each of these shocks. Finally, a historical decompos- ition reveals which disturbance had a greater effect during each devalu- ation episode.
Figure 3 presents the IRFs as described in [11]. Several conclusions can be derived from this plot. The first row shows that contractionary devalua- tions can be associated with large devaluations, as they typically have stronger effects over the nominal exchange rate than the rest of the inno- vations. Secondly, contractionary devaluations are extremely traumatic events, as they typically generate massive output contractions of approxi- mately −4%, as shown in the last row of the third column.
Thirdly, expansionary devaluations are related primarily to real
exchange rate appreciations and decreases in net exports. This implies that these disturbances occurred under high inflation and had no similar- ity with the expansionary devaluations described by the traditional approach. Several other identification schemes were employed in an effort to recover an expansionary devaluation of the traditional sort but without success11. In fact, Gerchunoff and Llach (2018) state, «the experience of the Argentine economy does not indicate that devaluations are generally expansionary, since the impulse of exports must be subtracted from the (often significant) fall in domestic demand associated with falling real wages» (p. 512). It seems, then, that expansionary devaluations raised
11 The attempts to recover an expansionary devaluation consisted of imposing signs on the first- or second-period responses. For example, one of these attempts imposed that net exports be nega- tive on impact but positive in the second year, possibly describing a J-curve. However, the algorithm did not provide impact matrices satisfying these restrictions. The routines programmed are avail- able upon request.
Revista de Historia Económica / Journal of Iberian and Latin American Economic History17
FIGURE 3
IRFs: POSTERIOR MEDIAN AND 68% POSTERIOR ERROR BANDS.
Note: Based on VAR elements of the estimated posterior distribution satisfying the signs and exclusion restrictions imposed on models [9]–[10].
output not through the transmission mechanism considered by the trad- itional approach but through a real appreciation12.
Figure 4 plots the accumulated responses. The most important evidence that can be derived from this graph is the effect of the real shock on output shown in the last row of the second column. In particular, the impact on accumulated output growth can be interpreted as that on its long-run level. According to the point estimate, a real shock associated with a devaluation of 10% tends to increase the level of output by nearly 2% by the tenth year. Thus, there is evidence for the existence of real shocks à la Rodrik, albeit with no statistical significance.
12 See Kamin and Rogers (2000) and Berument and Pasaogullari (2003) for the association between real appreciations and expansions.
18Revista de Historia Económica / Journal of Iberian and Latin American Economic History
SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
FIGURE 4
ACCUMULATED RESPONSES: POSTERIOR MEDIAN AND 68% POSTERIOR ERROR BANDS.
Note: Based on VAR elements of the estimated posterior distribution satisfying the signs and exclusion restrictions imposed on models [9]–[10].
The forecast error variance decomposition in Figure 5 measures the contribution of each structural shock to the observed variables’ volatilities obtained with [14]. In the third column, the point estimates indicate that almost half of all variables’ volatilities are explained by contractionary devaluations, except for the real exchange rate, for which the main source of volatility are the real shocks. For the purposes of this study, the variance decomposition of the nominal exchange rate shown in the first row is of particular interest. These findings indicate that, although nominal exchange rate variations are explained primarily by contractionary
devaluations, other disturbances also had an effect.
Next, a historical decomposition of the variations in the nominal exchange rate reveals the accumulated contributions of structural shocks at each point in time. The focus is on the main devaluation episodes, the historical decompositions of which are rescaled with [17]. Figure 6
Revista de Historia Económica / Journal of Iberian and Latin American Economic History19
FIGURE 5
VARIANCE DECOMPOSITION: POSTERIOR MEDIAN AND 68% POSTERIOR ERROR BANDS.
Note: Based on VAR elements of the estimated posterior distribution satisfying the signs and exclusion restrictions imposed on models [9]–[10].
highlights the importance of contractionary devaluations (in green), as they influenced almost all the registered episodes. On the contrary, expansion- ary devaluations (in yellow) were hardly ever significant. As for the long- run effects, Figure 6 shows that real shocks (in red) had a considerable influence until the mid-1970s, when nominal shocks (in blue) gained rele- vance. Although there are some exceptions to this pattern (such as the nominal shocks significance in 1949 and 1951 and the real shock signifi- cance in 2002), this threshold coincides with the volatility rise Argentina experienced in the 1970s.
Some background on Argentinean economic history facilitates the interpretation of the results obtained from the historical decomposition. Henceforth, in the following paragraphs, a brief description of the coun- try’s history is given in light of the historical decomposition estimates.
20Revista de Historia Económica / Journal of Iberian and Latin American Economic History
SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
FIGURE 6
HISTORICAL DECOMPOSITION OF THE NOMINAL EXCHANGE RATE DURING DEVALUATION EPISODES.
Note: Based on VAR elements of the estimated posterior distribution satisfying the signs and exclusion restrictions imposed on models [9]–[10].
The period between the nation’s foundation in 1810 and the consolida- tion of the National State in 1880 was extremely chaotic in every dimen- sion, and the monetary system was no exception. A number of local and
foreign currencies coexisted, forming an anarchic monetary system which was nothing but the result of the difficulties that Argentina experi- enced during its first turbulent decades as a sovereign nation. These were years of social turmoil and civil wars that intensified from 1852 until 1880, during the so-called «National Organisation Period». Once this period was concluded, the country enjoyed several decades of prosper- ity. During the Belle fípoque, Argentina integrated successfully into the world economy as a privileged commodity supplier thanks to its compara- tive advantages (Taylor 1998).
Revista de Historia Económica / Journal of Iberian and Latin American Economic History21
Although the exchange rate market was often intervened through gold convertibility to avoid currency appreciation when capital inflows were too abundant or the implementation of export taxes and exchange rate controls to mitigate devaluation effects, it would be fair to state that the nominal exchange rate was mostly endogenously determined until the 1940s. In fact, commitment to gold convertibility was considered an advantage because of its results in terms of price stability (Díaz Fuentes 1998). Devaluations had different causes; sometimes they took place fol- lowing international crises, such as during World War I, the 1929 crash and the 1937 recession. Other times, they were the unavoidable outcome of a domestic depression, such as the Baring Brothers crisis of 1890. What all these devaluation episodes had in common was that they were mainly contractionary, but they also had long-term real effects, as shown in Figure 6.
The 1929 crash was especially traumatic for Argentina. Subsequently, the exchange rate was understood as an exogenous policy tool rather than an endogenously determined variable. In fact, the country implemen- ted exchange rate controls in the early 1930s and multiple exchange rates were introduced thereafter (Rapoport 2012).
In the 1940s, Argentina accelerated its switch from trade openness to autarky, and the currency was deliberately manipulated through exchange rate controls (Díaz-Alejandro 1970) and consciously used to boost local industry (Ferrer 2004). In fact, the historical decomposition plotted in Figure 6 shows that real shocks were still prominent in this era. During this period, there were recurrent shortages of the foreign currency needed for the new industrial inputs, the so-called external constraint, which caused autonomous inflation (decoupled from foreign prices evolution). Devaluations were no longer the consequence of international crises but idiosyncratic phenomena necessary to compensate for rising domestic prices. Hence, they became more frequent and violent beginning in the 1950s, as shown in Figure 1.
In 1974, Argentina entered a period of great volatility with high infla- tion and poor economic performance. As shown in Figure 6, nominal shocks gained prominence during these turbulent years. After the hyperin- flation of the 1980s, the country applied a tough currency board (the Convertibility Plan), that started as a poster child because of its macroeco- nomic stability and investment boom, but ended up as a basket case because of the high unemployment, rise in inequality and social unrest, as noted by Edwards (2002) and Frenkel (2002). The aftermath was the debt default and the huge devaluation of 2002. It was probably because this devaluation took place after 10 years of nominal stability that it had persistent real effects.
Nevertheless, subsequent devaluations have had no real effects whatso- ever. Although the monetary authority continued its attempts to
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SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
manipulate the currency through export taxes and exchange rate controls, devaluations lost their ability to display the virtuous dynamics described by Rodrik (2008), which came as a natural result of a highly volatile envir- onment and rising inflation.
CONCLUSIONS
This work empirically investigates the effects of devaluations in the short and long run in developing countries. Argentina is selected as a case study for this purpose as it has more than 100 years of available data and experienced almost thirty devaluation episodes during the sample period. A VAR analysis is performed, and four sources of structural distur- bances are identified: an expansionary devaluation of the traditional type, a contractionary devaluation in line with Díaz-Alejandro’s distributional
effects, a nominal shock with no long-run real effects, and a real shock con-
sistent with the idea of a real exchange rate-output growth channel.
The results show that devaluations were mainly contractionary and that these shocks were typically large and pernicious. None of the expansionary devaluations described by traditional theory can be recovered from the DGP. Instead, the results indicate that devaluations were expansionary only if they were associated with real exchange rate appreciations, which can occur amid high-inflation environments. Regarding the long-run effects, devaluations with real shocks à la Rodrik can be particularly rele- vant when the exchange rate is used as a policy tool. However, such events are not possible during volatile periods, such as the one Argentina has been experiencing since the 1970s.
To deal with potential structural breaks in such a long period of study, a robustness check is carried out, splitting the sample when the structural break is suspected and verifying that neither the IRFs nor the variance decompositions are significantly different.
The effects of devaluations have been, and still are, heatedly debated among Argentinean economic historians. This work can contribute to this discussion providing an original empirical model that makes it pos- sible to calculate and compare antagonist theories about devaluations in a unified set-up. Furthermore, the empirical model here proposed is easily extensible to other middle-income countries to evaluate the contribution of the different innovations in devaluation episodes.
ACKNOWLEDGEMENTS
Received 21 December 2020. Accepted 1 December 2021.
The author is especially grateful to Martín Rapetti. In addition, this paper has benefited from comments by Rolf Campos, Hernán Seoane, Martín
Revista de Historia Económica / Journal of Iberian and Latin American Economic History23
González Eiras, Jorge Carrera, Juanjo Dolado, Galo Nuño, Helmut Lütkepohl, David Guerrero and by participants in the 2018 Workshop on Macroeconomic Research (Cracow University of Economics), LACEA 2018 meeting in Guayaquil, the 2018 RIDGE Workshop on Macroeconomics and Development (University of Buenos Aires) and semi- nars at the Bank of Spain, the Central Bank of Argentina and the Corporación Andina de Fomento. The author is also thankful for the sugges- tions made by two anonymous referees.
APPENDIX
DATA
The data are in annual frequency from 1853 until 2018. The data source is Ferreres (2005) until 2004 and the Argentinian National Statistics Institute (INDEC) and Central Bank (BCRA) for the period 2004-2018.
The real exchange rate is calculated using the British pound until 1932, approximately when the United Kingdom was overtaken by the United States as Argentina’s main trade partner, and the US$ since then with:
Ar ∗
Qt = 04 t
PArP∗
04
where et is the nominal exchange rate of the AR$ against the British pound
or the US$, PAr is the CPI of Argentina in 2004 and P∗ is the British or U.S.
04Ar04
CPI for the same year. The Argentinian CPI (Pt ) is obtained from Cavallo (2012) for the period 2007-2015, as the official index was underestimated for those years. The U.S. CPI (P∗) is from the Federal Reserve Bank of
St. Louis (FRED) and the British CPI (P∗) is from Ferreres (2005).
In addition, considering that exchange rate controls were applied in some years of the sample, the «free» real exchange rate is replaced by the average of the real price of imports and exports taken from Ferreres (2005) since 1932. The gap between both real exchange rates was particu- larly significant from 1945 until 1960, but not for the rest of the sample.
ROBUSTNESS CHECK
Parameter stability is an issue when dealing with such long periods. In the present case, there might have been a structural break during the 20th century, when Argentina became an urban economy. In order to check whether this potential structural break might affect the results, the model is estimated using two subperiods: the first subperiod is
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SHORT‐ AND LONG‐RUN EFFECTS OF DEVALUATIONS
FIGURE A1
IRFs, POSTERIOR MEDIANS OF 1ST AND 2ND SUBPERIODS (DISCONTINUOUS AND CONTINUOUS LINES, RESPECTIVELY) WITH 2ND SUBPERIOD 68% POSTERIOR ERROR BANDS.
Note: Based on VAR elements of the estimated posterior distribution satisfying the signs and exclusion restrictions imposed on models [9]–[10].
1853-1936, while the second is 1936-2018. Both subperiods have the same number of observations (84), which are enough to estimate the model accurately. The results are displayed in Figures A1 and A2.
Figure A1 does not show that IRFs are significantly different in general. One exception are the IRFs of the nominal exchange rate Δe, which are lower for the first subperiod. This is simply because devaluations were gen- erally of lower magnitude during the first subperiod, as shown in Figure 1. The other exceptions are net exports, which display a stronger response in the first subperiod, though the qualitative impact is similar.
As for the variance decomposition plotted in Figure A2, there do not seem to be significant differences between both estimates. Based on this evidence, it is assumed that the potential structural break that took place
Revista de Historia Económica / Journal of Iberian and Latin American Economic History25
FIGURE A2
VARIANCE DECOMPOSITION, POSTERIOR MEDIANS OF 1ST AND 2ND SUBPERIODS (DISCONTINUOUS AND CONTINUOUS LINES, RESPECTIVELY) WITH 2ND SUBPERIOD 68% POSTERIOR ERROR BANDS.
Note: Based on VAR elements of the estimated posterior distribution satisfying the signs and exclusion restrictions imposed on models [9]–[10].
in the 1930s did not affect the general results described in the text significantly.
Lastly, using data as distant as the late-19th and early-20th centuries can be a concern in terms of its quality and reliability. Correspondingly, this robustness check indicates that the results obtained in this work are not sensitive to this potential flaw.
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Annex2DataCollection.pdf 950.97 KB
Annex3PreDefencePublications.pdf 4.32 MB
Devaluation of Currency and Export Performance in Bangladesh
(Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.)
Devaluation of Currency and Export Performance in Bangladesh 1
Preface
The global economy today is marked by rapid changes, increasing interdependence, and the growing importance of competitive advantage in international markets. Within this complex framework, the topic of currency devaluation has garnered significant attention, particularly for developing economies like Bangladesh, where export performance is a critical component of economic growth and development. This book is motivated by the desire to untangle the complex relationship between devaluation and export performance, with a specific focus on the experiences of Bangladesh.
The primary motivation for this work is the observed volatility in Bangladesh’s export performance, often correlated with fluctuations in the value of its currency. Despite numerous studies on currency devaluation, there remains a gap in understanding the specific mechanisms through which devaluation impacts different sectors of the economy. This book seeks to bridge that gap by offering a comprehensive analysis that is both theoretically robust and empirically grounded.
At the outset, it is essential to clarify the concept of devaluation. While often used interchangeably with depreciation or other forms of currency adjustment, devaluation, in its strict sense, refers to a deliberate downward adjustment of the exchange rate by a country’s government. This book delves into the distinction between these terms, providing a clear foundation for the subsequent analysis. By establishing a precise definition, we aim to avoid the conceptual ambiguities that have plagued previous studies.
The book further explores the concept of Exchange Rate Pass-Through (ERPT), a critical mechanism through which changes in the exchange rate influence domestic prices and, ultimately, export competitiveness. ERPT is not uniform across sectors or even across firms within the same sector, making it a vital area of study. We examine how ERPT operates in Bangladesh, particularly in relation to its key export products, and assess the extent to which devaluation has passed through to export prices, thereby affecting demand in international markets. Understanding the determinants of devaluation is crucial for comprehending its impact on the economy. This book analyzes both internal factors—such as fiscal deficits, inflation, and economic growth—and external factors like global economic conditions, trade balances, and foreign exchange reserves. By dissecting these determinants, we provide a nuanced understanding of why and when devaluation occurs, offering insights into its predictability and implications for policy. The book closely examines historical instances of devaluation in Bangladesh, mapping these events against export performance data. We explore whether devaluation has consistently led to improved export outcomes or if the relationship is more complex, perhaps even contingent on other economic variables. Through case studies and statistical analyses, we identify patterns and outliers, offering a comprehensive view of how devaluation has impacted different sectors over time. A significant portion of this book is dedicated to refining the traditional models used to study devaluation and export performance. By reducing the number of variables and revising the independent variables under consideration, we aim to eliminate noise and enhance the clarity of our findings. This methodological rigor allows us to present more precise and actionable insights, which are crucial for both academics and policymakers. 1 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 1 of 809 Page 2 of 808 Page 1 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The book also considers the interplay of factors that simultaneously influence both devaluation and export performance. For example, macroeconomic policies, global market trends, and domestic industrial policies all play a role in shaping these outcomes. By identifying and analyzing these overlapping influences, we present a holistic view of the economic environment in which devaluation occurs and its subsequent impact on exports. One of the key innovations in this research is the introduction of firm-level data analysis. Traditional studies often rely on aggregate data, which can obscure the variations in how different firms experience and respond to devaluation. By incorporating firm-level data, this book provides a more detailed and accurate picture of the impact of devaluation on export performance, highlighting the importance of firm-specific factors such as size, productivity, and market orientation. To deepen our analysis, we include a comparative study of Bangladesh’s export performance in key sectors, specifically the garment, pharmaceutical, jute, and leather goods sectors, in relation to India and Bhutan. These comparisons allow us to contextualize Bangladesh’s experience within the broader South Asian region, offering insights into how similar economies respond differently to devaluation. This sectoral analysis is crucial for understanding the nuances of devaluation's impact on various industries. The book goes further to specify the export success of particular products in relation to currency devaluation. By focusing on specific products, we can more accurately assess the impact of devaluation on export performance. This detailed approach enables us to draw more targeted conclusions and recommendations, which are particularly relevant for policymakers and industry leaders seeking to enhance competitiveness in global markets. The choice to focus on the garment, pharmaceutical, jute, and leather goods sectors is not arbitrary. These sectors are pillars of Bangladesh’s export economy, each with its unique characteristics and challenges. The book explains why these sectors were chosen and how they represent different facets of the economy that are likely to respond differently to currency devaluation. This selection allows for a more comprehensive and representative analysis. The book concludes with a series of recommendations aimed at enhancing the effectiveness of devaluation as a tool for improving export performance. These recommendations are grounded in the empirical findings of the study and are designed to inform future economic policies in Bangladesh. The focus is on creating a more resilient and competitive export sector, capable of thriving in a rapidly changing global economy. Finally, we explore how devaluation affects Bangladesh’s export destinations. Understanding the geographical spread of exports is crucial for assessing the overall impact of devaluation. The book analyzes shifts in export destinations in response to devaluation, offering insights into how Bangladesh can strategically position itself in the global market to maximize the benefits of devaluation. This book is intended to serve as a comprehensive resource for scholars, policymakers, and business leaders interested in the nexus between currency devaluation and export performance. By combining rigorous analysis with practical insights, we hope to contribute to a deeper understanding of this critical issue and to support the development of policies that will enhance Bangladesh’s position in the global economy. Page 2 of 809 Page 3 of 808 Page 2 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 1 Acknowledgements The journey of writing this book has been a rewarding yet challenging endeavor, one that would not have been possible without the support, guidance, and encouragement of numerous individuals and institutions. I am profoundly grateful to all those who have contributed, directly or indirectly, to the completion of this work. First and foremost, I extend my deepest gratitude to my academic mentors and advisors, whose expertise and wisdom have been invaluable throughout this process. I am especially thankful to Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. Huang Yiping, and Prof. ZHAO Bo, whose deep knowledge of international economics and keen insights into currency dynamics have significantly shaped the direction of this research. Your encouragement and constructive feedback at every stage of this project have been instrumental in refining my ideas and ensuring the rigor of the analysis presented in this book. I would also like to acknowledge the contributions of my colleagues in the field of economics and international trade. The vibrant discussions, critical evaluations, and collaborative efforts have been a constant source of inspiration and have enriched this work in countless ways. A special thanks to teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting for their assistance with the data analysis and for offering invaluable perspectives on the nuances of currency devaluation and export performance. The completion of this book would not have been possible without the generous support of several research institutions and libraries. I am deeply appreciative of the resources provided by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. The World Bank, the International Monetary Fund (IMF), and other global economic institutions, whose data and publications have been critical in developing the empirical foundation of this study. I would also like to thank the librarians and staff at Peking University, whose assistance in accessing key resources and materials was indispensable. On a more personal note, I am deeply indebted to my friends and peers, who have been a constant source of encouragement throughout this journey. Your willingness to listen, discuss, and provide feedback, even on the most complex aspects of this research, has been invaluable. I am particularly grateful to my classmates from different parts of the world, whose insights into the practical implications of currency devaluation for businesses provided a unique perspective that enriched the practical recommendations of this book. To my family, no words can fully express my gratitude for your love, patience, and unwavering support. You have been my anchor during the most challenging times, providing the strength and reassurance needed to persevere through the demands of this project. To Mei Yunping, thank you for your understanding and for the countless ways you have supported me throughout this journey. To Mei Zimeng and Mei Zijia, your patience and the joy you bring into my life have been my greatest sources of inspiration. Lastly, I would like to extend my heartfelt thanks to my readers. Your interest 1 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 3 of 809 Page 4 of 808 Page 3 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) in this book and its subject matter is what ultimately gives meaning to this work. It is my sincere hope that this book will provide valuable insights and contribute meaningfully to the discourse on currency devaluation and export performance, particularly within the context of Bangladesh. I look forward to the discussions and further research that this work may inspire. Thank you all for being part of this journey. Page 4 of 809 Page 5 of 808 Page 4 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 1
2 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 116 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.)
Introduction:
Background of the Study: This study, titled "Devaluation of Currency and Export Performance in Bangladesh," delves into the intricate relationship between currency devaluation and export performance, particularly focusing on Bangladesh. The research aims to elucidate how fluctuations in currency values impact the economic outcomes of developing countries, using Bangladesh as a primary case study. Understanding this relationship is crucial for policymakers who seek to enhance export competitiveness and stimulate economic growth in such economies.
Economic Context of Bangladesh: Bangladesh, a rapidly developing South Asian nation, has experienced significant economic transformation over the past few decades. The country’s economy is heavily reliant on its exports, which contribute substantially to its GDP, foreign exchange earnings, and employment generation. The ready-made garments (RMG) sector is particularly noteworthy, positioning Bangladesh as one of the leading garment exporters globally. Alongside garments, other critical export sectors include frozen fish, pharmaceuticals, and jute products. These industries are not only pivotal to economic growth but also integral to social development by providing employment opportunities, particularly for women in the RMG sector.
Role of Currency Devaluation in Economic Policy: Currency devaluation, the deliberate downward adjustment of a country's currency value relative to other currencies, is often employed as an economic strategy to boost export competitiveness. By making a country's goods cheaper and more attractive in international markets, devaluation can potentially enhance export volumes and improve trade balances. However, the implications of devaluation are multifaceted, influencing inflation, import costs, and overall economic stability.
Research Significance: Despite the widespread use of currency devaluation as a policy tool, its effects on export performance remain a subject of debate among economists. Existing research often focuses on developed economies or employs generalized models that may not adequately capture the unique economic conditions of developing countries like Bangladesh. This study aims to fill this gap by providing empirical evidence and sector-specific insights on the impact of devaluation on Bangladesh’s primary export commodities. Key
Questions: To explore the impact of currency devaluation on Bangladesh’s export performance, this study addresses the following key questions:
To what extent is devaluation of currency related to the export performance of Bangladesh?
Why do countries with similar economic situations perform better than Bangladesh?
What are the other factors, beyond currency devaluation, that contribute to the export performance of Bangladesh?
Devaluation of Currency and Export Performance in Bangladesh
(Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.)
How do countries with similar economic conditions use different strategies to outperform Bangladesh, considering its devaluation of currency?
Sectoral Questions:
How does currency devaluation impact the export performance of Bangladesh's ready-made garments sector?
What are the effects of currency devaluation on the export performance of the frozen fish industry in Bangladesh?
How does currency devaluation influence the pharmaceutical export sector in Bangladesh?
What is the impact of currency devaluation on the jute products export industry in Bangladesh?
Hypotheses:
Based on the research questions, the study formulates the following hypotheses:
Currency devaluation positively impacts the export performance of the ready-made garments sector in Bangladesh.
The frozen fish industry in Bangladesh experiences enhanced export performance following currency devaluation.
Currency devaluation leads to increased export competitiveness in the pharmaceutical sector of Bangladesh.
Apparent Instances: The export performance of the jute products industry in Bangladesh improves with currency devaluation. This study expects to find that currency devaluation enhances export competitiveness in Bangladesh's key sectors, though the magnitude and nature of the impact may vary across industries. The findings will contribute to the existing body of knowledge by offering empirical evidence from a developing country's perspective and providing sector-specific insights. This study aims to fill the gap in the literature by providing a comprehensive analysis of the impact of currency devaluation on export performance in Bangladesh. It will add to the existing body of knowledge by offering empirical evidence and sector-specific insights. The findings of this study will have practical implications for policymakers, helping them design effective economic policies that enhance export performance and overall economic growth. Stakeholders in the export sectors, including businesses and industry associations, can also benefit from the insights provided. By understanding the impact of currency devaluation on export performance, this study can help formulate strategies that sustain and enhance economic growth in Bangladesh. The long-term impact includes increased foreign exchange earnings, higher employment rates, and improved standards of living.
Some of Princeton University's research highlights the complexities of currency devaluation and its varied impacts on different economies. The university's studies emphasize the importance of considering country-specific factors and sectoral dynamics when assessing the effectiveness of currency devaluation as an economic policy tool.
4 Page 118 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Primary Objectives: The primary objectives of this study are to: To analyze why countries with similar economic situations outperform Bangladesh with a similar devaluation of the currency. To analyze the relationship between the devaluation of currency and the export performance of Bangladesh by conducting a quantitative analysis based on historical data. To investigate the factors that contribute to the better export performance of countries with similar economic situations compared to Bangladesh, through a comparative study and analysis of relevant case studies. To identify and assess potential strategies and policies that can be adopted by Bangladesh to enhance its export performance, based on the experiences and practices of better-performing countries. To provide recommendations and guidelines for policymakers in Bangladesh on how to effectively utilize currency devaluation as a tool to improve export performance and overcome the challenges faced by the country. To contribute to the existing literature on the devaluation of currency and export performance, fill any gaps in knowledge related to this specific topic in the context of Bangladesh, and create a resource for future research and policy formulation. Defining Objectives: Analyze the Impact of Currency Devaluation on Bangladesh's Export Performance: The study aims to comprehensively evaluate how currency devaluation influences the export performance of Bangladesh's key sectors, including ready-made garments, frozen fish, pharmaceuticals, and jute products. This objective will involve: Assessing changes in export volumes and values following devaluation episodes. Investigating the sector-specific impacts, considering factors such as cost structures, price elasticity of demand, and global competition. Analyzing how different sectors adapt to currency devaluation through pricing strategies, cost management, and market expansion efforts. Compare the Effects of Devaluation in Bangladesh with Those in Bhutan: To provide a broader context and comparative perspective, the study will: Examine the economic and export structures of Bhutan alongside those of Bangladesh. Evaluate how currency devaluation has impacted Bhutan’s export sectors, drawing parallels and contrasts with Bangladesh. Identify key similarities and differences in the outcomes of devaluation between the two countries, considering their unique economic conditions and policy environments. Identify the Positive and Negative Consequences of Devaluation: Understanding the multifaceted impacts of currency devaluation is crucial. This study will: 5 Page 119 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Identify the positive effects of devaluation, such as increased export competitiveness, higher export volumes, and improved trade balances. Explore the negative consequences, including potential inflationary pressures, increased costs of imported inputs, and adverse impacts on sectors dependent on imports. Evaluate the net effect of devaluation on the overall economic stability and growth of Bangladesh. Provide Policy Recommendations Based on the Findings: Drawing from the empirical evidence and sector-specific insights, the study aims to offer practical policy recommendations that can help Bangladesh navigate the complexities of currency devaluation. These recommendations will focus on: Enhancing export competitiveness through strategic economic policies that support key export sectors. Mitigating the adverse effects of devaluation by implementing measures to manage inflation, stabilize import costs, and strengthen economic resilience. Leveraging the benefits of devaluation through complementary policies, such as improving infrastructure, reducing bureaucratic hurdles, and fostering innovation and productivity in export-oriented industries. Specific Objectives and Research Focus: To achieve these primary objectives, the study will undertake several specific tasks, including: Sectoral Analysis: Ready-Made Garments (RMG): Assessing how currency devaluation affects the competitiveness of the RMG sector, considering its global market positioning and cost structures. Frozen Fish: Evaluating the impact on the frozen fish industry, with a focus on market demand and international competition. Pharmaceuticals: Analyzing the pharmaceutical sector's response to devaluation, particularly in terms of pricing strategies and market expansion. Jute Products: Investigating the jute products industry's adaptability to currency devaluation, considering historical and contemporary export trends. 6 Page 120 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Comparative Study with Bhutan: Economic and Export Structure Comparison: Conducting a comparative analysis of the economic structures and export profiles of Bangladesh and Bhutan. Devaluation Episodes: Reviewing historical instances of currency devaluation in both countries, analyzing their respective impacts on export performance. Policy Frameworks: Comparing the policy responses and economic strategies adopted by Bangladesh and Bhutan to manage the effects of devaluation. Impact Assessment: Positive Impacts: Documenting the beneficial outcomes of currency devaluation, such as increased export revenues, enhanced market share, and improved trade balances. Negative Impacts: Identifying the challenges and negative consequences, including inflationary pressures, higher production costs, and economic instability. Part of Literature Studies: 1. Exchange Rate Misalignment and Growth in Exports: Lessons from the 1994 CFA Franc Devaluation Gustaf Dillner, September 2022 2. DEVALUATION, EXTERNAL BALANCE, AND MACROECONOMIC PERFORMANCE: A LOOK AT THE NUMBERS, Steven B. Kamin, Princeton Studies in International Finance No. 62, 'August 1988. 3. CURRENCY DEVALUATION IN DEVELOPING COUNTRIES Richard N. Cooper, Essays in International Finance No. 86, June 1971, INTERNATIONAL FINANCE SECTION DEPARTMENT OF ECONOMICS, Princeton University, Princeton, New Jersey 4. OPTIMUM ADJUSTMENT PROCESSES AND CURRENCY AREAS DELBERT A. SNIDER, ESSAYS IN INTERNATIONAL FINANCE No. 62, October 1967, INTERNATIONAL FINANCE SECTION DEPARTMENT OF ECONOMICS, Princeton University, Princeton, New Jersey 5. (IR) Relevance of Currency: Crisis Theory to the Devaluation and Collapse of the Thai Baht, Ramkishen S. Rajan, Princeton Studies in International Economics, No. 88, February 2001, INTERNATIONAL FINANCE SECTION DEPARTMENT OF ECONOMICS, Princeton University, Princeton, New Jersey 6. RESERVE-CURRENCY PREFERENCES OF CENTRAL BANKS H. ROBERT HELLER AND MALCOLM KNIGHT, ESSAYS IN INTERNATIONAL FINANCE No. 131, December 1978, INTERNATIONAL FINANCE SECTION DEPARTMENT OF ECONOMICS PRINCETON UNIVERSITY Princeton, New Jersey 7. No single currency regime is right for all countries or at all times. Jeffrey A. Frankel, Essays in International Finance No. 215, August 1999, INTERNATIONAL FINANCE SECTION DEPARTMENT OF ECONOMICS, Princeton University, Princeton, New Jersey 7 Page 121 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) 8. Parallel Currency Markets in Developing Countries Theory, Evidence, and Policy Implications, Pierre Richard Agenor, Essays in International Finance No. 188, November 1992, INTERNATIONAL FINANCE SECTION DEPARTMENT OF ECONOMICS, Princeton University, Princeton, New Jersey 9. The Real Exchange Rate and Economic Growth, DANI RODRIK, Harvard University, Brookings Papers on Economic Activity, Fall 2008 10. Estimation of the Impact of Devaluation on Indonesian Aggregate Trade Performance Yana van der Meulen Rodgers The College of William and Mary, Journal of Economic Integration 10(4), December 1995; 475-491 11. Exchange rate shocks and quality adjustments, Daniel Goetz University of Toronto, Mississauga Rotman School of Management, Alexander Rodnyansky University of Cambridge First Version: August 10, 2016 This Version: August 6, 2019 12. Some unpleasant currency devaluation arithmetic in a post-Keynesian macromodel, Rafael Saulo Marques Ribeiro Affiliation: Graduate program at the Department of Land Economy, University of Cambridge, UK, John S. L. McCombie Affiliation: Fellow in economics at Downing College, professor and director of the Cambridge Centre for Economic and Public Policy, Department of Land Economy, University of Cambridge, UK, Gilberto Tadeu Lima Affiliation: Professor in the Department of Economics, University of São Paulo, Brazil 13. How Do Large Depreciations Affect Firm Performance? Kristin J. Forbes, IMF Staff Papers, Vol. 49, Special Issue, 2002 International Monetary Fund 14. Exchange Rate Changes and LDC Export Performance under Generalized Currency Floating By Romeo M. Bautista, This paper was written in the author's capacity as consultant to the Economic Analysis and Projections Department of the World Bank. 15. Slow Rockets and Fast Feathers or the Link between Exchange Rates and Exports A Case Study for Pakistan Martín Brun Juan Pedro Gambetta Gonzalo J. Varela, Macroeconomics, Trade, and Investment Global Practice August 2020, Policy Research Working Paper 9353, WB. 16. Supply- and demandside factors in global banking by Mary Amiti, Patrick McGuire, and David E. Weinstein, Bank for International Settlements 2017, BIS Working Papers No. 639, Monetary and Economic Department, May 2017. 17. Bangladesh: En Route to LDC Graduation: Firm-Level Preparedness in the Textile and Clothing Sector, Mohammad A. Razzaque August 2021, Committee for Development Policy Secretariat or the United Nations. 18. Currency Devaluation and its Impact on the Economy, CHAMBER NEWS, ISSUE 06 June 2022, Metropolitan Chamber of Commerce and Industry, Dhaka. 19. Sources of exchange rate fluctuations in Bangladesh, Mahfuza Akther, Mohammad Monirul Islam, Sarker Khan Md. Saidjada, Working Paper Series: WP 1305, 2013, Research Department (RD) Bangladesh Bank Head Office, Dhaka, Bangladesh. 20. Currency Devaluation and Exports: Separating Actual from Statistical , Sugata Marjit, Byasdeb Dasgupta, and Sandip Mitra, Economic and Political Weekly , Apr. 29-May 5, 2000, Vol. 35, No. 18 (Apr. 29-May 5, 2000), pp. 1553-1558 21. Export tightening, competition, and firm innovation: Evidence from the renminbi appreciation Mi Dai, Miaojie Yu, Chunming Zhao, Business School, Beijing Normal University, China China Center for Economic Research (CCER), National School of Development, Peking University, Correspondence: Chunming Zhao, Business School, Beijing Normal University, China. 100875. 22. Yuan Revaluation and China’s External Trade Performance Fulgence Dominick Waryoba School of International Education, Capital University of Economics and Business, No. 2 Jintaili, Chaoyang District, Beijing, China, Academic Journal of Economic Studies Vol. 4, No. 2, June 2018, pp. 112–119 ISSN 2393-4913, ISSN On-line 2457-5836. 23. IMPACT OF CURRENCY DEVALUATION ON ECONOMIC GROWTH: EVIDENCE FROM PAKISTAN Tayyab Khan, Ayesha Khan , Wei Long, Tauqeer Khan, Sundas Ayub, Jie Wang, and Junaid Ahmad Zia, Journal of Marketing Strategies (JMS) Volume 4, Issue 2, May 2022. 8 Page 122 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) 24. Currency Devaluation and Resource Transfer from the South to the North Mohameden Ould-Mey Department of Geography, Geology, and Anthropology, Indiana State University, Annals of the Association of American Geographers , Jun. 2003, Vol. 93, No. 2 (Jun., 2003), pp. 463-484 Published by: Taylor & Francis, Ltd. on behalf of the Association of American Geographers. 25. Currency Devaluation as a Source of Growth in Africa: A Synthetic Control Approach Florence Bouvet, Roy Bower, and Jason C. Jones, Eastern Economic Journal (2022) 48:367–389 https://doi.org/10.1057/s41302-022-00211-4. 26. From the French franc to the euro, is there an economic impact for the CFA franc zone countries? A ‘bias-corrected’ synthetic control method Alassane Diallo & Adama Ba, Cogent Economics & Finance, https://doi.org/10.1080/23322039.2024.2330433. 27. SHORT- AND LONG-RUN EFFECTS OF DEVALUATIONS: EVIDENCE FROM ARGENTINA LUCIANO CAMPOS Universidad de Alcalá and RedNIE, Department de Economía, Alcala de Henares, Spain. luciano.campos@uah.es, Revista de Historia Económica / Journal of Iberian and Latin American Economic History. 28. Using synthetic controls: feasibility, data requirements, and methodological aspects, Alberto Abadie, Journal of Economic Literature 2021, 59(2), 391-425, https://doi.org/10.1257/jel.20191450. 29. Synthetic Control Method: A tool for comparative case studies in economic history David Gilchrist, Thomas Emery, Nuno Garoupa, Rok Spruk, 1 Business School, University of Western Australia, Crawley, WA, Australia 2 University of Western Australia, Crawley, Australia 3 George Mason University, Fairfax, VA, USA 4 University of Ljubljana, Ljubljana, Slovenia, correspondence: David Gilchrist, Business School, University of Western Australia, 8716 Hackett Dr, Crawley WA 6009, Australia. 30. On the sparsity of synthetic control methods Qiang Chen & Wenjun Li, Journal of Applied Economics, 27:1, 2361184, DOI: 10.1080/15140326.2024.2361184. 31. Quasi-Experimental Design: Synthetic Control Method, Taiwo A. Ahmed, 32. Synthetic Control Method. The synthetic control method (SCM), Sadhave S R, Analytics Vidhya, https://medium.com/analytics-vidhya/synthetic-control-method-5c01f72da4e. 33. “China’s Outward Foreign Direct Investment in the Belt and Road Initiative: What are the Motives for Chinese Firms to Invest?” China Economic Review, 2021. Jiaxuan Lu, (with Jeff Nugent), Pre-PhD Publications. 34. The inclusive synthetic control method Roberta Di Stefano Giovanni Mellace, November 24, 2020, DiSSE Working Papers, SAPIENZA-UNIVERSITY OF ROME. 9 Page 123 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 2Motivation INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 124 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 3 Motivation: Table of Contents Motivation:...............................................................................................................................................2 Table of Contents..................................................................................................................................... 2 Motivation:.............................................................................................................................................12 Rationale for Research:................................................................................................................... 12 Need for Understanding the Impact of Currency Devaluation:.......................................................12 Context and Background:......................................................................................................... 12 Debate Among Economists:..................................................................................................... 12 Complexity of Effects:.....................................................................................................................12 Inflationary Pressures:.............................................................................................................. 12 Impact on Import Costs:............................................................................................................12 Short-Term vs. Long-Term Effects:.......................................................................................... 12 Empirical Evidence and Literature Gap:......................................................................................... 12 Focus on Bangladesh:......................................................................................................................13 Objectives of the Study:.................................................................................................................. 13 Sector-Specific Analysis:..........................................................................................................13 Short-Term and Long-Term Effects:.........................................................................................13 Comparative Insights:............................................................................................................... 13 Methodology:.................................................................................................................................. 13 Trade Statistics:.........................................................................................................................13 Industry Surveys:...................................................................................................................... 14 Comparative Case Studies:....................................................................................................... 14 Gaps in Existing Literature:.............................................................................................................14 Overview of Existing Research:......................................................................................................14 Focus on Developed Economies:.................................................................................................... 14 Economic Diversification:........................................................................................................ 14 Institutional Frameworks:......................................................................................................... 14 Financial Systems:.................................................................................................................... 14 Generalized Models and Their Limitations:....................................................................................15 Aggregate Analysis:..................................................................................................................15 Lack of Sectoral Focus:............................................................................................................ 15 Context-Specific Factors:..........................................................................................................15 Need for Context-Specific Studies:................................................................................................. 15 Economic Structure:..................................................................................................................15 3 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. 2 Page 125 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Export Dynamics:..................................................................................................................... 15 Institutional Context:................................................................................................................ 15 Comparative Analysis:..............................................................................................................16 Economic Significance:...................................................................................................................16 Role of Exports in Bangladesh's Economic Growth:...................................................................... 16 Contribution to GDP:................................................................................................................16 Foreign Exchange Earnings:..................................................................................................... 16 Balance of Payments:................................................................................................................16 Currency Stabilization:............................................................................................................. 16 Ready-Made Garments (RMG) Sector:.................................................................................... 16 Other Export Sectors:................................................................................................................17 Industrial Development:............................................................................................................17 Technology Adoption:...............................................................................................................17 Supply Chain Development:..................................................................................................... 17 Importance of Understanding Export Performance:........................................................................17 Enhancing Competitiveness:........................................................................................................... 17 Market Access:..........................................................................................................................17 Quality and Innovation:............................................................................................................ 17 Policy Formulation:.................................................................................................................. 17 Investment Priorities:................................................................................................................ 17 Responding to Global Economic Trends:........................................................................................18 Trade Policy Adaptation:.......................................................................................................... 18 Emerging Markets:....................................................................................................................18 Policy Implications:.........................................................................................................................18 Trade Facilitation:..................................................................................................................... 18 Financial Incentives:................................................................................................................. 18 Infrastructure Development:..................................................................................................... 18 Potential Benefits of Enhanced Export Performance:..................................................................... 18 Increased Production:...................................................................................................................... 19 Economic Multiplier Effect:..................................................................................................... 19 Industrial Growth:.....................................................................................................................19 Technological Advancement:....................................................................................................19 Diversification of Production:...................................................................................................19 Higher Employment Rates:............................................................................................................. 19 Job Creation:............................................................................................................................. 19 Skill Development:................................................................................................................... 19 Inclusive Employment:............................................................................................................. 19 Rural Employment:...................................................................................................................19 Improved Standards of Living:........................................................................................................20 Income Growth:........................................................................................................................ 20 Economic Stability:...................................................................................................................20 Social Development:.................................................................................................................20 Consumer Benefits:...................................................................................................................20 Analyzing the Impact of Currency Devaluation on Export Competitiveness:................................ 20 3 Page 126 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Cost-Competitiveness:.....................................................................................................................20 Price Advantage:.......................................................................................................................20 Profit Margins:.......................................................................................................................... 20 Market Expansion:...........................................................................................................................20 New Market Access:................................................................................................................. 20 Market Share Growth:...............................................................................................................21 Foreign Direct Investment (FDI):............................................................................................. 21 Domestic Investment:............................................................................................................... 21 Policy Implications and Strategic Recommendations:.................................................................... 21 Proactive Currency Management:................................................................................................... 21 Flexible Exchange Rate Policies:..............................................................................................21 Monetary and Fiscal Policies:...................................................................................................21 Supportive Export Policies.............................................................................................................. 21 Export Incentives:..................................................................................................................... 21 Trade Facilitation:..................................................................................................................... 21 Diversification and Innovation........................................................................................................ 22 Product Diversification:............................................................................................................ 22 Innovation and Quality Improvement:......................................................................................22 Policy Relevance: Use of Currency Devaluation as a Policy Tool..................................................22 Currency Devaluation as an Economic Strategy:............................................................................22 Addressing Trade Imbalances:..................................................................................................22 Stimulating Economic Growth:................................................................................................ 22 Inflation Management:..............................................................................................................22 Investment Attraction:.............................................................................................................. 22 Economic Structure:..................................................................................................................22 Export Industry Responsiveness:..............................................................................................23 Global Market Conditions:....................................................................................................... 23 Empirical Evidence:..................................................................................................................23 Policy Insights:..........................................................................................................................23 Strategic Planning:.................................................................................................................... 23 Context-Specific Analysis:....................................................................................................... 23 Expected Contributions to Policy Making...................................................................................... 24 Informed Decision-Making:......................................................................................................24 Balanced Policy Approach:.......................................................................................................24 Economic Stability and Growth:...............................................................................................24 Capacity Building:.................................................................................................................... 24 Importance of Evidence-Based Policymaking:............................................................................... 24 Navigating a Globalized Economy:.................................................................................................24 Impact of External Shocks:.......................................................................................................24 Mitigating Risks:.......................................................................................................................24 Enhancing Resilience:...............................................................................................................25 Formulating Effective and Adaptive Policies:.................................................................................25 Informed Decision-Making:......................................................................................................25 Customization to Local Context:.............................................................................................. 25 4 Page 127 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Continuous Improvement:........................................................................................................ 25 Understanding Impact on Export Performance:....................................................................... 25 Balancing Benefits and Drawbacks:......................................................................................... 25 Strategic Policy Design:............................................................................................................25 Ensuring Policy Resilience:.............................................................................................................25 Adaptation to Global Fluctuations:...........................................................................................25 Long-Term Planning:................................................................................................................ 26 Building Stakeholder Confidence:............................................................................................26 Global Context:............................................................................................................................... 26 Interconnectedness of the Global Economy:...................................................................................26 Global Trade Networks:............................................................................................................26 Exchange Rate Sensitivity:....................................................................................................... 26 Supply Chain Integration:......................................................................................................... 26 Investment Flows:.....................................................................................................................26 Price Competitiveness:..............................................................................................................27 Inflationary Pressures:.............................................................................................................. 27 Balance of Payments:................................................................................................................27 Competitive Devaluations:........................................................................................................27 Developing Strategies to Mitigate Risks and Leverage Opportunities........................................... 27 Diversification of Export Markets:........................................................................................... 27 Enhancing Value Addition:....................................................................................................... 27 Strengthening Trade Agreements:.............................................................................................27 Implementing Monetary and Fiscal Policies:........................................................................... 28 Building Foreign Exchange Reserves:......................................................................................28 Investing in Infrastructure and Technology:............................................................................. 28 Implications of Exchange Rate Fluctuations on Exports:............................................................... 28 Price Competitiveness:.................................................................................................................... 28 Enhanced Export Competitiveness:.......................................................................................... 28 Impact on Trade Balance:......................................................................................................... 28 Cost of Imported Inputs:..................................................................................................................28 Increased Production Costs:......................................................................................................28 Supply Chain Disruptions:........................................................................................................29 Rising Consumer Prices:...........................................................................................................29 Monetary Policy Challenges:....................................................................................................29 Impact on Export Revenue and Profit Margins...............................................................................29 Revenue Fluctuations:...............................................................................................................29 Profit Margins:.......................................................................................................................... 29 Strategic Responses to Exchange Rate Fluctuations....................................................................... 29 Diversification of Export Markets:........................................................................................... 29 Value Addition and Innovation:................................................................................................ 29 Improving Supply Chain Efficiency:........................................................................................ 30 Hedging and Financial Instruments:......................................................................................... 30 Sectoral Impact:...............................................................................................................................30 Ready-Made Garments (RMG):...................................................................................................... 30 5 Page 128 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Economic Contribution:............................................................................................................30 Impact of Currency Devaluation:..............................................................................................30 Export Competitiveness:...........................................................................................................30 Production Costs:...................................................................................................................... 30 Inflation:....................................................................................................................................30 Policy Recommendations:........................................................................................................ 31 Frozen Fish:..................................................................................................................................... 31 Economic Contribution:............................................................................................................31 Export Competitiveness:...........................................................................................................31 Input Costs:............................................................................................................................... 31 Sustainability:........................................................................................................................... 31 Pharmaceuticals:..............................................................................................................................31 Economic Contribution:............................................................................................................31 Export Competitiveness:...........................................................................................................31 Raw Material Costs:..................................................................................................................32 Regulatory Compliance:........................................................................................................... 32 Jute Products:...................................................................................................................................32 Economic Contribution:............................................................................................................32 Export Competitiveness:...........................................................................................................32 Input Costs:............................................................................................................................... 32 Value Addition:......................................................................................................................... 32 Importance of Sector-Specific Analysis:.........................................................................................32 Understanding Varied Responses to Currency Devaluation:...........................................................32 Cost Structures:............................................................................................................................... 33 Raw Materials and Inputs:........................................................................................................ 33 Local Inputs:............................................................................................................................. 33 Market Demand:..............................................................................................................................33 Price Elasticity:......................................................................................................................... 33 Market Access and Trade Barriers:...........................................................................................33 Global Competition:........................................................................................................................ 33 Competitive Position:................................................................................................................33 Comparative Advantage:.......................................................................................................... 33 Facilitating Targeted Policy Interventions:......................................................................................33 Customizing Support Measures:......................................................................................................34 Financial Assistance:................................................................................................................ 34 Trade Facilitation:..................................................................................................................... 34 Enhancing Market Access:.............................................................................................................. 34 Negotiating Trade Agreements:................................................................................................ 34 Market Diversification:.............................................................................................................34 Addressing Sector-Specific Challenges:......................................................................................... 34 Regulatory Compliance:........................................................................................................... 34 Sustainability Initiatives:.......................................................................................................... 34 Key Questions Addressing Currency Devaluation and Export Performance..................................34 How does currency devaluation impact the export performance of Bangladesh's ready-made 6 Page 129 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) garments sector?.............................................................................................................................. 35 Rationale:.................................................................................................................................. 35 Specific Areas of Investigation:................................................................................................35 Export Volume and Value:........................................................................................................ 35 Price Competitiveness:..............................................................................................................35 Cost of Imported Inputs:........................................................................................................... 35 Profit Margins:.......................................................................................................................... 35 Market Expansion:.................................................................................................................... 35 Employment Effects:.................................................................................................................35 What are the effects of currency devaluation on the export performance of the frozen fish industry in Bangladesh?.................................................................................................................................35 Rationale:.................................................................................................................................. 35 Export Trends:...........................................................................................................................35 Cost Structure:.......................................................................................................................... 36 Global Market Prices:............................................................................................................... 36 Supply Chain Dynamics:.......................................................................................................... 36 Regional Competitiveness:....................................................................................................... 36 Sustainability:........................................................................................................................... 36 Rationale:.................................................................................................................................. 36 Export Growth:......................................................................................................................... 36 Import Costs:.............................................................................................................................36 R&D Investment:...................................................................................................................... 36 Market Access:..........................................................................................................................36 Quality and Standards:..............................................................................................................37 Industry Profitability:................................................................................................................37 What is the impact of currency devaluation on the jute products export industry in Bangladesh?.37 Rationale:.................................................................................................................................. 37 Export Performance:................................................................................................................. 37 Production Costs:...................................................................................................................... 37 Global Market Demand:........................................................................................................... 37 Value Addition:......................................................................................................................... 37 Sustainability Practices:............................................................................................................ 37 Market Diversification:.............................................................................................................37 Hypotheses Formulation:.................................................................................................................38 Hypothesis 1:................................................................................................................................... 38 Rationale:.................................................................................................................................. 38 Indicators to be Examined:....................................................................................................... 38 Export Volumes:........................................................................................................................38 Revenue Growth:...................................................................................................................... 38 Market Share:............................................................................................................................38 New Market Entry:................................................................................................................... 38 Employment:.............................................................................................................................38 Hypothesis 2:................................................................................................................................... 38 Rationale:.................................................................................................................................. 38 7 Page 130 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Export Volumes:........................................................................................................................38 Global Demand:........................................................................................................................ 39 Cost of Inputs:...........................................................................................................................39 Profit Margins:.......................................................................................................................... 39 Hypothesis 3:................................................................................................................................... 39 Rationale:.................................................................................................................................. 39 Export Volumes:........................................................................................................................39 Revenue Growth:...................................................................................................................... 39 Market Access:..........................................................................................................................39 R&D Investment:...................................................................................................................... 39 Regulatory Compliance:........................................................................................................... 39 Hypothesis 4:................................................................................................................................... 39 Rationale:.................................................................................................................................. 39 Export Volumes:........................................................................................................................40 Global Market Demand:........................................................................................................... 40 Value Addition:......................................................................................................................... 40 Sustainability Practices:............................................................................................................ 40 Expected Outcomes and Contributions to Existing Knowledge:.................................................... 40 Expected Outcomes:........................................................................................................................40 Enhanced Export Competitiveness:.................................................................................................40 Sector-Specific Impacts:..................................................................................................................40 Ready-Made Garments (RMG):............................................................................................... 40 Frozen Fish:.............................................................................................................................. 40 Pharmaceuticals:....................................................................................................................... 40 Jute Products:............................................................................................................................ 41 Variable Magnitude of Impact:........................................................................................................41 Increased Production and Employment:..........................................................................................41 Inflationary Pressures:..................................................................................................................... 41 Contributions to Existing Knowledge:............................................................................................ 41 Sector-Specific Insights:........................................................................................................... 41 Developing Country Perspective:............................................................................................. 41 Comprehensive Analysis:................................................................................................................41 Empirical Evidence:........................................................................................................................ 42 Enhanced Understanding of Export Dynamics:.............................................................................. 42 Contribution to Academic Literature...............................................................................................42 Filling the Gap in Literature:.................................................................................................... 42 Comprehensive Analysis:......................................................................................................... 42 Empirical Evidence:..................................................................................................................42 Sector-Specific Insights:........................................................................................................... 42 Policy-Relevant Findings:.........................................................................................................42 Enhanced Understanding of Developing Economies:.............................................................. 43 Building on Existing Research:................................................................................................ 43 Interdisciplinary Insights:......................................................................................................... 43 Foundation for Future Research:.............................................................................................. 43 8 Page 131 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Practical Implications for Policymakers and Stakeholders:............................................................ 43 Informed Policy Design:........................................................................................................... 43 Enhancing Export Competitiveness:.........................................................................................43 Targeted Support for Key Sectors:............................................................................................44 Mitigating Adverse Effects:......................................................................................................44 Long-Term Economic Planning:...............................................................................................44 Evidence-Based Decision Making:...........................................................................................44 Stakeholder Engagement:......................................................................................................... 44 Business Strategy and Planning:...............................................................................................44 Industry Associations and Advocacy:.......................................................................................44 Capacity Building and Training:...............................................................................................45 International Trade Negotiations:............................................................................................. 45 Investment Attraction:.............................................................................................................. 45 Long-Term Impact on Bangladesh's Economic Development:....................................................... 45 Enhanced Foreign Exchange Earnings:.................................................................................... 45 Sustained Economic Growth:................................................................................................... 45 Higher Employment Rates:.......................................................................................................45 Improved Standards of Living:................................................................................................. 46 Industrial Upgradation and Technological Advancement:........................................................46 Increased Investment and Infrastructure Development:........................................................... 46 Strengthened Economic Resilience:......................................................................................... 46 Policy Formulation and International Trade Negotiations:.......................................................46 Social and Economic Equity:....................................................................................................46 Long-Term Sustainable Development:..................................................................................... 46 Questions to Ponder:........................................................................................................................47 What has been the historical impact of currency devaluation on Bangladesh’s export performance?.............................................................................................................................47 How do the experiences of other countries inform Bangladesh’s approach to currency management?............................................................................................................................ 47 What policy recommendations can be made to optimize the benefits of devaluation for Bangladesh?.............................................................................................................................. 47 Expected Contributions:.................................................................................................................. 47 Academic Contributions:.................................................................................................................47 Enhanced Understanding of Currency Devaluation:................................................................ 47 Sector-Specific Insights:........................................................................................................... 47 Comparative Analysis:..............................................................................................................47 Methodological Innovations:.................................................................................................... 47 Practical Insights for Policymakers:................................................................................................48 Informed Policy Making:..........................................................................................................48 Strategic Economic Planning:...................................................................................................48 Sectoral Support:.......................................................................................................................48 Risk Mitigation:........................................................................................................................ 48 Contributions to Business Practices:............................................................................................... 48 Competitive Pricing Strategies:................................................................................................ 48 Investment Decisions:...............................................................................................................48 9 Page 132 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Supply Chain Optimization:..................................................................................................... 48 Market Expansion:.................................................................................................................... 48 Sustainable Export Growth:......................................................................................................49 Economic Stability:...................................................................................................................49 Global Competitiveness:...........................................................................................................49 Significance:.................................................................................................................................... 49 Macro-Level Significance:.............................................................................................................. 49 Economic Stability and Growth:...............................................................................................49 Trade Balance Improvement:....................................................................................................49 Policy Formulation:.................................................................................................................. 49 Micro-Level Significance:...............................................................................................................49 Industry-Specific Strategies:.....................................................................................................50 Competitive Advantage:........................................................................................................... 50 Investment Decisions:...............................................................................................................50 Strategic Economic Planning:......................................................................................................... 50 Diversification of Export Markets:........................................................................................... 50 Value Addition and Innovation:................................................................................................ 50 Sustainable Practices:................................................................................................................50 Long-Term Economic Benefits:...................................................................................................... 50 Enhanced Export Competitiveness:.......................................................................................... 50 Economic Resilience:................................................................................................................50 Informed Policy-Making:..........................................................................................................51 Insights from Major Academic and Institutional Sources:..............................................................51 Heterogeneous Effects:............................................................................................................. 51 Structural Conditions:............................................................................................................... 51 Macroeconomic Stability:.........................................................................................................51 Policy Complementarity:.......................................................................................................... 51 Oxford University Economic Papers:..............................................................................................51 Elasticity of Demand:............................................................................................................... 52 Supply Chain Implications:.......................................................................................................52 Short-Term vs. Long-Term Effects:.......................................................................................... 52 Trade Policy Interactions:......................................................................................................... 52 MIT Press:....................................................................................................................................... 52 Competitiveness Gains:............................................................................................................ 52 Inflationary Pressures:.............................................................................................................. 52 Capital Flows:........................................................................................................................... 52 Monetary Policy Coordination:.................................................................................................52 Stanford University Studies in Economic Policy:........................................................................... 52 Export Pricing Strategies:......................................................................................................... 53 Cost Management:.................................................................................................................... 53 Market Expansion:.................................................................................................................... 53 Innovation and Productivity:.....................................................................................................53 Cambridge University Journal of Economics:................................................................................ 53 Comparative Analysis:..............................................................................................................53 10 Page 133 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Policy Synergies:.......................................................................................................................53 Resilience to External Shocks:..................................................................................................53 Role of Institutions:...................................................................................................................53 Harvard University Press:................................................................................................................53 Strategic Devaluation:...............................................................................................................54 Investment in Quality:...............................................................................................................54 Global Value Chains:................................................................................................................ 54 Bilateral and Multilateral Agreements:.....................................................................................54 World Bank Reports:....................................................................................................................... 54 Export Diversification:..............................................................................................................54 Sectoral Focus:..........................................................................................................................54 Capacity Building:.................................................................................................................... 54 Macro-Fiscal Balance:.............................................................................................................. 54 International Monetary Fund (IMF) Publications:.......................................................................... 54 Exchange Rate Flexibility:........................................................................................................55 Policy Coherence:..................................................................................................................... 55 External Financing:...................................................................................................................55 Risk Management:.................................................................................................................... 55 Several factors influence how currency devaluation affects export performance:..........................55 Elasticity of Demand for Exports:............................................................................................ 55 Import Content of Exports:....................................................................................................... 55 Exchange Rate Pass-Through:.................................................................................................. 55 Export Sector Structure:............................................................................................................56 Macroeconomic Conditions:.....................................................................................................56 Trade Policies and International Relations:.............................................................................. 56 Overview of the Study:....................................................................................................................56 11 Page 134 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Motivation: Rationale for Research: Need for Understanding the Impact of Currency Devaluation: Context and Background: Currency devaluation has been a widely used economic policy tool across the globe. It is often employed by countries aiming to enhance their export competitiveness, correct trade imbalances, and stimulate economic growth. Despite its prevalent use, the exact effects of currency devaluation on export performance remain a topic of considerable debate among economists and policymakers. Debate Among Economists: Economists are divided on the efficacy and consequences of currency devaluation. Some argue that devaluation leads to increased export competitiveness by making domestic goods cheaper in international markets, thereby boosting export volumes and economic growth. Others contend that the benefits of devaluation can be undermined by inflationary pressures, increased import costs, and potential retaliatory actions from trade partners. Complexity of Effects: The complexity of devaluation's effects arises from its multifaceted impact on an economy. While devaluation may initially seem to provide a straightforward benefit to exporters by reducing the relative cost of goods, its broader economic repercussions can complicate this picture. Inflationary Pressures: Devaluation can lead to higher prices for imported goods, which in turn can drive up overall inflation. This inflation can erode the initial competitive advantage gained through devaluation, as higher domestic costs reduce profit margins for exporters and increase the cost of living. Impact on Import Costs: For countries like Bangladesh, which rely on imported raw materials and intermediate goods for production, devaluation can increase production costs. This can negatively impact sectors that are heavily dependent on imports, offsetting the gains from cheaper exports. Short-Term vs. Long-Term Effects: While the short-term effects of devaluation may include an immediate boost in export volumes, the long-term consequences can be more complex. Sustained devaluation can lead to economic instability, loss of investor confidence, and potential issues with debt servicing, especially if a country has significant foreign-denominated debt. Empirical Evidence and Literature Gap: Despite the theoretical discussions, there is a notable gap in empirical evidence regarding the specific impacts of currency devaluation on export performance, particularly in the context of 12 Page 135 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) developing countries like Bangladesh. Much of the existing literature focuses on developed economies or takes a generalized approach, without delving into sector-specific impacts or the unique economic conditions of individual countries. Focus on Bangladesh: Bangladesh's economy is heavily reliant on exports, with key sectors including ready-made garments (RMG), pharmaceuticals, jute products, and frozen fish. Understanding how currency devaluation affects these primary export commodities is crucial for several reasons: Policy Formulation: Policymakers need robust empirical evidence to design effective economic policies. Insights into how devaluation impacts Bangladesh’s export sectors can help craft targeted interventions that maximize benefits and mitigate adverse effects. Strategic Planning: For businesses and industry stakeholders, understanding the nuances of devaluation can inform strategic decisions regarding production, pricing, and market expansion. This knowledge is vital for maintaining competitiveness in the global market. Economic Stability: Given the potential for devaluation to impact inflation, import costs, and overall economic stability, a detailed understanding of its effects is essential for managing macroeconomic stability and ensuring sustainable growth. Objectives of the Study: This study aims to fill the gap in existing literature by providing empirical evidence on the impact of currency devaluation on Bangladesh's export sectors. The specific objectives include: Sector-Specific Analysis: Examining how devaluation affects key export sectors such as RMG, pharmaceuticals, jute products, and frozen fish, taking into account sector-specific characteristics and dependencies. Short-Term and Long-Term Effects: Analyzing both the immediate and sustained impacts of devaluation on export performance, including changes in export volumes, pricing strategies, and profit margins. Comparative Insights: Comparing Bangladesh’s experience with those of other countries that have employed devaluation strategies, to draw broader lessons and identify best practices. Methodology: The study employs a mixed-methods approach, combining quantitative analysis of trade data with qualitative insights from industry stakeholders. Key data sources include: Trade Statistics: Analysis of export and import data from sources such as the Bangladesh Export Promotion Bureau and the World Bank. 13 Page 136 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Industry Surveys: Surveys and interviews with exporters, industry experts, and policymakers to gather qualitative insights on the practical impacts of devaluation. Comparative Case Studies: Examination of case studies from countries with similar economic structures and export profiles to draw comparative lessons. Understanding the impact of currency devaluation is critical for enhancing export performance and ensuring economic stability in Bangladesh. By providing detailed empirical evidence and sector-specific insights, this study aims to contribute to the academic literature and inform effective economic policymaking. The findings will help Bangladesh navigate the complex dynamics of global trade and leverage devaluation as a strategic tool for sustainable economic growth. Gaps in Existing Literature: Overview of Existing Research: The existing body of research on currency devaluation is extensive, yet it predominantly centers on developed economies and employs generalized macroeconomic models. These studies often provide broad conclusions about the effects of devaluation on trade balances, inflation, and economic growth. However, they frequently overlook the unique economic conditions and structural peculiarities of developing countries like Bangladesh. Focus on Developed Economies: Much of the literature on currency devaluation focuses on the experiences of developed countries, such as the United States, European Union member states, and Japan. These studies often explore the implications of devaluation in contexts where economies are highly diversified, institutional frameworks are robust, and financial systems are well-developed. The economic environments in these countries differ significantly from those in developing nations, which can lead to conclusions that are not directly applicable to the latter. Economic Diversification: Developed economies typically have a wide range of industries contributing to GDP, providing a buffer against sector-specific shocks. In contrast, developing countries like Bangladesh may rely heavily on a few key export sectors, such as ready-made garments (RMG), which makes them more vulnerable to sector-specific impacts of devaluation. Institutional Frameworks: The institutional structures in developed countries often include advanced financial systems, effective regulatory bodies, and strong governance mechanisms. These factors play a critical role in mitigating the adverse effects of devaluation and ensuring economic stability. Developing countries may lack such robust frameworks, influencing how devaluation impacts their economies. Financial Systems: Well-developed financial markets in developed countries provide access to various hedging instruments and financial services that can cushion the effects of devaluation. In contrast, 14 Page 137 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) developing countries may have limited access to such tools, leading to more pronounced impacts on their economies. Generalized Models and Their Limitations: Many studies employ generalized econometric models to analyze the effects of currency devaluation. While these models offer valuable insights into the broad trends and potential outcomes of devaluation, they often fail to account for the specificities of individual economies, particularly those of developing nations. Aggregate Analysis: Generalized models tend to aggregate data across various countries and sectors, potentially masking the heterogeneous effects of devaluation on different industries and economic contexts. This approach can lead to oversimplified conclusions that do not accurately reflect the reality of countries like Bangladesh. Lack of Sectoral Focus: These models often do not differentiate between sectors, overlooking the fact that the impact of devaluation can vary significantly across different industries. For instance, the RMG sector in Bangladesh may respond differently to devaluation compared to the pharmaceutical or jute sectors due to varying cost structures, supply chain dependencies, and market dynamics. Context-Specific Factors: Factors such as the level of economic development, industrial composition, export dependency, and institutional quality play crucial roles in determining the outcomes of devaluation. Generalized models may not adequately capture these context-specific elements, leading to findings that are less relevant for developing countries. Need for Context-Specific Studies: Given the limitations of existing research, there is a clear need for more context-specific studies that focus on the unique economic conditions of developing countries like Bangladesh. These studies should consider the following aspects: Economic Structure: Analyzing the impact of devaluation in the context of Bangladesh’s economic structure, which is characterized by a high dependency on a few key export sectors, can provide more relevant insights. Understanding how devaluation affects these sectors individually can help tailor economic policies more effectively. Export Dynamics: The export dynamics of Bangladesh, including its reliance on RMG and other primary commodities, need to be examined in detail. This includes understanding the supply chains, cost structures, and global market positioning of these sectors. Institutional Context: 15 Page 138 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The role of institutions, regulatory frameworks, and financial systems in Bangladesh should be a focal point of analysis. Assessing how these factors influence the outcomes of devaluation can provide a more comprehensive understanding of its impacts. Comparative Analysis: Comparative studies that analyze the experiences of countries with similar economic structures and export profiles can offer valuable lessons. This includes examining the strategies and policies employed by other developing nations in response to devaluation. The existing literature on currency devaluation provides a broad understanding of its potential impacts, but it often lacks the granularity needed to apply these insights to developing countries like Bangladesh. By focusing on the unique economic conditions, export dynamics, and institutional contexts of Bangladesh, more context-specific studies can fill the gaps in the current research. Such studies are crucial for formulating effective economic policies that can leverage devaluation as a tool for enhancing export performance and driving sustainable economic growth in Bangladesh. Economic Significance: Role of Exports in Bangladesh's Economic Growth: Contribution to GDP: Exports play a pivotal role in the economic growth of Bangladesh by contributing significantly to the country's Gross Domestic Product (GDP). The export sector has been a driving force behind Bangladesh's rapid economic expansion, accounting for a substantial portion of the national income. The continuous growth of exports has facilitated an increase in production capacities, leading to higher GDP growth rates. Foreign Exchange Earnings: Exports are a major source of foreign exchange earnings for Bangladesh. The revenue generated from exports helps the country to finance its imports, pay off international debts, and maintain a stable balance of payments. Foreign exchange reserves are crucial for the country's economic stability and its ability to participate in global trade. Balance of Payments: A positive balance of payments, supported by robust export performance, helps Bangladesh avoid excessive external borrowing and maintain economic sovereignty. Currency Stabilization: Adequate foreign exchange reserves contribute to stabilizing the national currency, mitigating the effects of external economic shocks. The export sector is a significant employer in Bangladesh, providing jobs to millions of people, particularly in the ready-made garments (RMG) industry. The growth of export-oriented industries has created vast employment opportunities, contributing to poverty reduction and improved living standards. Ready-Made Garments (RMG) Sector: 16 Page 139 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The RMG sector alone employs millions, with a significant proportion of the workforce being women, thereby promoting gender equality and social inclusion. Other Export Sectors: Sectors such as pharmaceuticals, jute, and frozen fish also provide substantial employment, supporting livelihoods across the country. Industrial Development: The export sector stimulates industrial development by driving demand for industrial goods and services. Export-oriented industries often require sophisticated manufacturing processes and technologies, leading to advancements in industrial capabilities and infrastructure. Technology Adoption: Exposure to international markets encourages local industries to adopt advanced technologies and best practices, enhancing productivity and competitiveness. Supply Chain Development: The growth of exports necessitates the development of efficient supply chains, logistics, and transportation networks, further boosting industrial growth. Importance of Understanding Export Performance: Enhancing Competitiveness: Understanding the factors that influence export performance is crucial for enhancing the competitiveness of Bangladesh's export sectors. Identifying and addressing these factors can help local industries improve their efficiency, reduce costs, and meet international quality standards. Market Access: Strategies to improve market access through trade agreements and diplomatic efforts can significantly enhance export performance. Quality and Innovation: Focusing on quality improvement and innovation in products and processes can help Bangladeshi exports stand out in the global market. Insights into the dynamics of export performance are essential for strategic economic planning. Policymakers can use this information to formulate targeted policies that support export growth and economic development. Policy Formulation: Data-driven policies that address the specific needs of export sectors can lead to more effective and sustainable economic outcomes. Investment Priorities: 17 Page 140 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Understanding export performance helps in prioritizing investments in key sectors and infrastructure that support export growth. Responding to Global Economic Trends: The global economic environment is constantly evolving, with shifts in trade policies, consumer preferences, and technological advancements. An in-depth understanding of export performance allows Bangladesh to respond proactively to these changes and capitalize on emerging opportunities. Trade Policy Adaptation: Adapting to changing trade policies, such as tariffs and trade agreements, is crucial for maintaining and expanding export markets. Emerging Markets: Identifying and targeting emerging markets can diversify export destinations and reduce dependency on traditional markets. Policy Implications: The insights gained from analyzing export performance have significant policy implications. Policymakers can develop and implement measures that create an enabling environment for exports, such as improving trade facilitation, providing financial incentives, and investing in infrastructure. Trade Facilitation: Simplifying customs procedures, reducing bureaucratic hurdles, and improving logistics can enhance export efficiency. Financial Incentives: Providing subsidies, tax breaks, and financial assistance for export-oriented industries can boost their competitiveness. Infrastructure Development: Investing in transportation, communication, and energy infrastructure is critical for supporting export activities. Exports are a cornerstone of Bangladesh's economic growth, contributing to GDP, foreign exchange earnings, employment, and industrial development. Understanding the factors that enhance or hinder export performance is essential for sustaining and accelerating this growth. By focusing on competitiveness, strategic planning, and policy implications, Bangladesh can leverage its export potential to achieve long-term economic stability and prosperity. Potential Benefits of Enhanced Export Performance: Enhanced export performance has a far-reaching impact on various aspects of a country's economy and society. In the context of Bangladesh, improving export performance can lead to a range of significant benefits: 18 Page 141 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Increased Production: Economic Multiplier Effect: Enhanced export performance drives higher production levels across various industries, creating a positive economic multiplier effect. Increased demand for export products stimulates more production, which in turn boosts economic activity. Industrial Growth: As exports grow, industries expand to meet the increased demand. This leads to the establishment of new factories, the scaling up of existing operations, and greater investments in industrial infrastructure. Technological Advancement: To maintain and enhance competitiveness in international markets, industries are likely to invest in advanced technologies and modern manufacturing processes, leading to overall technological progress within the country. Diversification of Production: A robust export sector encourages the diversification of production activities. By expanding into new markets and products, Bangladesh can reduce its reliance on a few key sectors, thereby mitigating risks associated with economic fluctuations. Higher Employment Rates: Job Creation: Enhanced export performance is a significant driver of job creation. As industries expand to meet export demand, they require more workers, leading to increased employment opportunities across various sectors. Skill Development: The demand for higher-quality products and services in the global market encourages workforce skill development. Employees receive training in new technologies, production techniques, and quality control standards, improving their employability and productivity. Inclusive Employment: The growth of export-oriented industries often leads to more inclusive employment opportunities. For instance, the ready-made garments (RMG) sector in Bangladesh has provided significant employment for women, contributing to gender equality and social inclusion. Rural Employment: Many export-oriented industries, such as agriculture and handicrafts, operate in rural areas. Enhanced export performance can stimulate economic activity in these regions, reducing urban migration and promoting balanced regional development. 19 Page 142 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Improved Standards of Living: Income Growth: Higher export performance translates into increased revenues for businesses and higher wages for workers. This income growth improves the purchasing power of households, leading to better living standards. Economic Stability: A strong export sector contributes to economic stability by generating foreign exchange reserves, reducing trade deficits, and supporting a stable balance of payments. This stability is crucial for maintaining economic growth and protecting against external shocks. Social Development: Enhanced export performance can lead to better social outcomes, such as improved healthcare, education, and infrastructure. Increased government revenues from export taxes and duties can be reinvested in social development programs, improving the quality of life for the population. Consumer Benefits: Consumers benefit from a wider range of products and services as increased export revenues enable the importation of high-quality goods and technologies. This enhances the overall quality of goods available in the domestic market. Analyzing the Impact of Currency Devaluation on Export Competitiveness: Cost-Competitiveness: Price Advantage: Currency devaluation lowers the relative price of a country's goods and services in the international market, making them more competitive. This price advantage can lead to increased demand for exports, boosting overall export performance. Profit Margins: Exporters can maintain or increase profit margins despite the lower prices, as their costs in the local currency remain unchanged or increase at a slower rate compared to the devaluation. This profitability encourages further investment in production and expansion. Market Expansion: New Market Access: Enhanced competitiveness due to currency devaluation can open up new markets for Bangladeshi products. Exporters can explore and penetrate markets where they previously couldn't compete effectively due to higher prices. 20 Page 143 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Share Growth: By offering more competitively priced products, Bangladeshi exporters can increase their market share in existing markets. This growth can lead to long-term relationships with international buyers and sustained export growth. Investment Attraction Foreign Direct Investment (FDI): Competitive export sectors attract foreign direct investment as international companies seek to capitalize on lower production costs and favorable export conditions. This FDI brings in capital, technology, and expertise, further enhancing export performance. Domestic Investment: Local businesses are likely to increase their investments in response to higher export demand. This domestic investment supports the expansion of production capacities, infrastructure development, and technological advancements. Policy Implications and Strategic Recommendations: Proactive Currency Management: Flexible Exchange Rate Policies: Adopting flexible exchange rate policies can help manage the currency's value in a way that supports export competitiveness while mitigating the risks of excessive volatility. Monetary and Fiscal Policies: Coordinated monetary and fiscal policies can control inflationary pressures resulting from devaluation, ensuring that the benefits of competitive pricing are not eroded by rising domestic costs. Supportive Export Policies Export Incentives: Providing financial incentives, subsidies, and support for export-oriented industries can enhance their competitiveness and encourage higher export performance. Trade Facilitation: Improving trade facilitation measures, such as reducing bureaucratic hurdles, simplifying customs procedures, and investing in logistics infrastructure, can make it easier for exporters to compete in the global market. Diversification and Innovation Product Diversification: 21 Page 144 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Encouraging the diversification of export products can reduce dependency on a few key sectors and spread the benefits of enhanced export performance across the economy. Innovation and Quality Improvement: Investing in research and development, innovation, and quality improvement initiatives can help Bangladeshi exporters move up the value chain and capture higher-value markets. Enhanced export performance has the potential to drive economic growth, create jobs, and improve living standards in Bangladesh. By analyzing how currency devaluation can boost export competitiveness, this study aims to provide valuable insights and strategic recommendations that can help Bangladesh navigate the complexities of global economic dynamics and achieve sustainable economic development. Policy Relevance: Use of Currency Devaluation as a Policy Tool Currency Devaluation as an Economic Strategy: Addressing Trade Imbalances: Currency devaluation is often employed to correct trade imbalances. By lowering the value of a country’s currency, devaluation makes exports cheaper and imports more expensive, thereby encouraging domestic consumption and production while boosting export competitiveness. This can help reduce trade deficits and improve the balance of payments. Stimulating Economic Growth: Devaluation can stimulate economic growth by enhancing the competitiveness of domestic industries in international markets. Increased export activity can lead to higher production levels, greater employment, and more significant economic output, contributing to overall economic growth. Inflation Management: While devaluation can stimulate exports, it can also lead to inflationary pressures as the cost of imported goods rises. Effective management of these pressures through coordinated monetary and fiscal policies is crucial to ensure that the benefits of devaluation are not offset by increased domestic prices. Investment Attraction: Competitive export sectors resulting from devaluation can attract foreign direct investment (FDI). Multinational companies may be drawn to lower production costs, providing capital, technology, and expertise that further boost economic growth. Effectiveness and Contextual Considerations Economic Structure: The effectiveness of devaluation depends significantly on the structure of the economy. Countries with a diversified export base and strong industrial capabilities are better positioned to capitalize on the competitive advantages brought by devaluation. In contrast, economies heavily reliant on imports for essential goods and services might face challenges due to rising import costs. 22 Page 145 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Export Industry Responsiveness: The responsiveness of export industries to devaluation is critical. Sectors that can quickly scale up production and meet increased international demand will benefit more from devaluation. This requires a robust industrial base, efficient supply chains, and the ability to maintain quality standards. Global Market Conditions: The impact of devaluation is also influenced by global market conditions. Strong global demand for a country’s exports, favorable trade policies, and competitive market positioning enhance the benefits of devaluation. Conversely, global economic downturns or protectionist trade policies can mitigate the positive effects. Monetary and Fiscal Policies: Coordinated monetary and fiscal policies are essential to managing the inflationary effects of devaluation. Effective inflation control ensures that the benefits of enhanced export competitiveness are not undermined by rising domestic costs, preserving the overall economic stability. Empirical Evidence: This study seeks to provide empirical evidence on how currency devaluation impacts Bangladesh’s export sectors. By analyzing the performance of key export commodities such as ready-made garments, jute, and pharmaceuticals, the study aims to offer a detailed understanding of the dynamics involved. Policy Insights: The insights gained from this study are intended to inform policymakers about the potential benefits and risks associated with currency devaluation. Evidence-based recommendations can help in crafting policies that maximize the positive impacts of devaluation while mitigating any adverse effects. Strategic Planning: The study aims to support strategic economic planning by identifying the factors that enhance or hinder the effectiveness of currency devaluation. This includes understanding the role of industrial capacity, supply chain efficiency, and global market conditions in shaping export performance. Context-Specific Analysis: Given the unique economic conditions of developing countries like Bangladesh, the study emphasizes the need for context-specific analysis. By tailoring devaluation strategies to the specific characteristics of the Bangladeshi economy, policymakers can develop more effective and sustainable economic policies. Expected Contributions to Policy Making Informed Decision-Making: 23 Page 146 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Policymakers can use the findings of this study to make informed decisions about the use of currency devaluation as a policy tool. The evidence-based insights provided by the study will help in understanding the conditions under which devaluation is most effective. Balanced Policy Approach: By highlighting the potential benefits and risks of devaluation, the study encourages a balanced approach to policy making. This includes considering complementary policies such as inflation control, export incentives, and trade facilitation to enhance the overall effectiveness of devaluation. Economic Stability and Growth: The study’s recommendations aim to support economic stability and growth in Bangladesh. By leveraging the benefits of devaluation while managing its risks, policymakers can create a conducive environment for sustained export growth and economic development. Capacity Building: Insights from the study can also inform capacity-building initiatives aimed at strengthening the responsiveness of export industries. This includes investments in technology, infrastructure, and workforce development to enhance the competitiveness of Bangladeshi exports. Currency devaluation is a complex and multifaceted policy tool that can significantly impact export performance and economic growth. This study aims to provide valuable insights into the use of devaluation in the context of Bangladesh, offering evidence-based recommendations for policymakers. By understanding the conditions under which devaluation is most effective, Bangladesh can harness its potential to boost exports, stimulate economic growth, and achieve long-term economic stability. Importance of Evidence-Based Policymaking: Navigating a Globalized Economy: Impact of External Shocks: In an interconnected global economy, external shocks—such as financial crises, trade wars, and changes in global demand—can have profound effects on domestic markets. Evidence-based policymaking helps governments respond effectively to these shocks by providing data-driven insights into how external factors influence the local economy. Mitigating Risks: Policymaking grounded in empirical evidence allows for the identification and mitigation of potential risks. By understanding the likely outcomes of policy decisions, governments can take preemptive measures to protect the economy from adverse impacts and capitalize on opportunities. Enhancing Resilience: Policies based on solid evidence can enhance the resilience of an economy by ensuring that measures are effective even under varying global conditions. This is crucial for maintaining stability and fostering sustainable growth despite the volatility of the global market. 24 Page 147 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Formulating Effective and Adaptive Policies: Informed Decision-Making: Evidence-based policymaking equips policymakers with the necessary information to make informed decisions. This includes understanding the complex relationships between different economic variables and the potential short- and long-term impacts of policy actions. Customization to Local Context: Empirical evidence allows for the customization of policies to the specific economic context of a country. For Bangladesh, this means developing strategies that take into account the unique characteristics of its export sectors and the broader economic environment. Continuous Improvement: Evidence-based approaches enable the continuous monitoring and evaluation of policies. By regularly assessing outcomes and adjusting strategies based on real-world data, policymakers can ensure that their initiatives remain effective over time. Role of Empirical Evidence in Currency Devaluation Policies Understanding Impact on Export Performance: This study provides empirical evidence on how currency devaluation affects Bangladesh’s key export sectors, such as ready-made garments, jute, and pharmaceuticals. By analyzing the data, policymakers can understand the specific dynamics at play and develop targeted interventions to enhance export performance. Balancing Benefits and Drawbacks: Currency devaluation can have both positive and negative effects on the economy. Empirical evidence helps in balancing these outcomes by providing a clear picture of the trade-offs involved. For example, while devaluation can boost export competitiveness, it may also lead to inflation and higher import costs. Strategic Policy Design: Evidence-based insights facilitate the design of strategic policies that maximize the benefits of devaluation. This includes identifying the most responsive sectors, implementing complementary measures to control inflation, and investing in infrastructure and capacity building to support export growth. Ensuring Policy Resilience: Adaptation to Global Fluctuations: Policies informed by robust data are more adaptable to global economic fluctuations. By understanding how external factors influence domestic markets, policymakers can develop strategies that are flexible and capable of adjusting to changing global conditions. Long-Term Planning: 25 Page 148 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Evidence-based policymaking supports long-term economic planning by providing a solid foundation for anticipating future trends and challenges. This helps in building a more resilient economy that can withstand external shocks and continue to grow sustainably. Building Stakeholder Confidence: Policies grounded in empirical evidence can build confidence among stakeholders, including businesses, investors, and the public. Transparent and data-driven decision-making processes enhance trust and cooperation, which are vital for successful policy implementation. The importance of evidence-based policymaking in a globalized economy cannot be overstated. By providing robust empirical evidence on the effects of currency devaluation, this study aims to support the formulation of effective, resilient policies that can navigate the complexities of the global market. For Bangladesh, adopting an evidence-based approach will be crucial for enhancing export performance, achieving economic stability, and fostering sustainable growth. Global Context: Interconnectedness of the Global Economy: Global Trade Networks: The modern global economy is characterized by intricate trade networks where goods, services, and capital flow across borders with ease. These networks mean that economic events in one country can have ripple effects worldwide. For example, a currency devaluation in Bangladesh can influence the trade dynamics not only within the region but also with its major trading partners globally. Exchange Rate Sensitivity: Exchange rates are a critical component of international trade. A change in the exchange rate of one country can affect the cost of goods, altering trade balances. For instance, a weaker currency makes exports cheaper and imports more expensive, impacting trade volumes and economic relationships between countries. Supply Chain Integration: Global supply chains are highly integrated, with components of a single product often sourced from multiple countries. Currency fluctuations can impact these supply chains by changing the cost structure at various stages of production. For example, if Bangladesh devalues its currency, the cost of raw materials imported from other countries could rise, affecting the final product's competitiveness. Investment Flows: Currency devaluation can also affect foreign direct investment (FDI). A weaker currency may attract foreign investors looking for lower production costs, but it can also deter investment if it signals economic instability. Understanding these dynamics helps in crafting policies that balance attracting investment with maintaining economic stability. Implications of Exchange Rate Fluctuations on Export Performance Price Competitiveness: 26 Page 149 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) One of the primary benefits of currency devaluation is enhanced price competitiveness of exports. When a currency depreciates, export goods become cheaper for foreign buyers, potentially increasing demand. For Bangladesh, this can translate into higher sales volumes in key export markets. Inflationary Pressures: While devaluation can boost exports, it can also lead to higher inflation. The increased cost of imported goods raises production costs, which can be passed on to consumers. For Bangladesh, managing these inflationary pressures is crucial to ensuring that the benefits of devaluation are not eroded by rising prices. Balance of Payments: Currency fluctuations affect the balance of payments by altering the relative prices of exports and imports. A devalued currency can improve the trade balance by boosting exports and reducing imports. However, for countries with significant foreign debt, a weaker currency can increase the debt burden, as repayments in foreign currencies become more expensive. Competitive Devaluations: In a highly interconnected global economy, competitive devaluations—where countries devalue their currencies to gain a trade advantage—can lead to "currency wars." These scenarios can create instability and trade tensions, affecting global economic relationships. Bangladesh must navigate these dynamics carefully to avoid adverse reactions from trading partners. Developing Strategies to Mitigate Risks and Leverage Opportunities Diversification of Export Markets: To mitigate risks associated with currency fluctuations, Bangladesh can diversify its export markets. By reducing reliance on a few key markets, the country can spread risk and stabilize export revenues. Diversifying into emerging markets with high growth potential can also provide new opportunities for export expansion. Enhancing Value Addition: Moving up the value chain by focusing on higher-value products can help mitigate the impact of currency fluctuations. By enhancing the quality, branding, and innovation of export products, Bangladesh can command higher prices and reduce vulnerability to exchange rate changes. Strengthening Trade Agreements: Engaging in bilateral and multilateral trade agreements can provide stability and predictability in trade relationships. These agreements can include provisions that help manage the impact of currency fluctuations and provide a framework for cooperation and dispute resolution. Implementing Monetary and Fiscal Policies: Coordinated monetary and fiscal policies can help manage the effects of devaluation. For instance, monetary policies aimed at controlling inflation and fiscal policies that support 27 Page 150 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) export-oriented industries can enhance the overall effectiveness of currency devaluation as an economic strategy. Building Foreign Exchange Reserves: Accumulating foreign exchange reserves can provide a buffer against exchange rate volatility. These reserves can be used to stabilize the currency in times of excessive fluctuation and provide confidence to investors and trading partners. Investing in Infrastructure and Technology: Investments in infrastructure and technology can enhance the efficiency and competitiveness of export industries. Improved logistics, production facilities, and technological capabilities can reduce costs and increase the resilience of export sectors to currency fluctuations. In an interconnected global economy, understanding the implications of currency devaluation on export performance is crucial for developing effective economic strategies. By recognizing the complex interplay of exchange rates, trade relationships, and global market dynamics, Bangladesh can craft policies that mitigate risks and leverage opportunities. Diversification, value addition, trade agreements, and coordinated policy measures are essential strategies to navigate the challenges and harness the benefits of currency devaluation in enhancing export competitiveness and economic growth. Implications of Exchange Rate Fluctuations on Exports: Price Competitiveness: Enhanced Export Competitiveness: One of the primary effects of a weaker currency is that it makes a country's exports cheaper and more attractive to foreign buyers. This price competitiveness can lead to an increase in export volumes. For Bangladesh, a devalued currency could mean that its ready-made garments, jute products, pharmaceuticals, and other exports become more competitively priced in the global market, potentially boosting demand and market share. Impact on Trade Balance: By making exports cheaper and imports more expensive, a weaker currency can improve the trade balance. This is particularly important for Bangladesh, which relies heavily on its export sectors to generate foreign exchange earnings. An improved trade balance can enhance the country's overall economic stability and growth prospects. Cost of Imported Inputs: Increased Production Costs: While a weaker currency can enhance export competitiveness, it can also increase the cost of imported inputs. Many industries in Bangladesh, including the ready-made garments sector, rely on imported raw materials and machinery. A devalued currency means that these imports become more expensive, raising production costs. This can offset the benefits of increased export competitiveness if the higher costs are not managed effectively. Supply Chain Disruptions: 28 Page 151 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Exchange rate fluctuations can also cause disruptions in the supply chain. For industries that depend on timely and cost-effective imports of raw materials, machinery, and technology, significant currency depreciation can lead to increased costs and supply chain inefficiencies. This can affect the overall productivity and profitability of export-oriented industries in Bangladesh. Rising Consumer Prices: Currency devaluation can lead to inflationary pressures, as the cost of imported goods and services rises. This increase in prices can erode the purchasing power of consumers and lead to higher overall living costs. For Bangladesh, managing inflation is crucial to ensure that the benefits of currency devaluation are not negated by rising domestic prices. Monetary Policy Challenges: Inflationary pressures from currency devaluation pose challenges for monetary policy. The central bank may need to implement measures to control inflation, such as raising interest rates, which can have broader economic implications. Balancing the need to maintain export competitiveness with the need to control inflation is a key policy challenge. Impact on Export Revenue and Profit Margins Revenue Fluctuations: Exchange rate fluctuations can lead to volatility in export revenues. While a weaker currency can boost revenues in the short term, ongoing fluctuations can create uncertainty and affect financial planning and stability for export businesses. For Bangladeshi exporters, this revenue volatility needs to be managed through effective hedging and financial strategies. Profit Margins: Higher production costs due to increased import prices can squeeze profit margins for exporters. Companies may need to adjust their pricing strategies, renegotiate contracts, and find cost-saving measures to maintain profitability. For sectors like ready-made garments, where profit margins are already thin, this can be particularly challenging. Strategic Responses to Exchange Rate Fluctuations Diversification of Export Markets: To mitigate the risks associated with exchange rate fluctuations, Bangladesh can diversify its export markets. By expanding into new and emerging markets, the country can reduce its reliance on a few key markets and spread risk more effectively. This diversification can help stabilize export revenues and enhance resilience to currency fluctuations. Value Addition and Innovation: Enhancing the value addition of export products through innovation, quality improvement, and branding can help offset the impact of higher production costs. By focusing on higher-value products, Bangladesh can command better prices in the global market and reduce its vulnerability to exchange rate fluctuations. Improving Supply Chain Efficiency: 29 Page 152 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Investing in logistics and supply chain efficiency can help manage the increased costs of imported inputs. By improving supply chain management, reducing lead times, and optimizing inventory, export industries can reduce costs and enhance their competitiveness. Hedging and Financial Instruments: Exporters can use financial instruments like hedging to manage exchange rate risks. By locking in exchange rates for future transactions, companies can protect themselves against adverse currency movements. This financial strategy can provide greater certainty and stability in export revenues and costs. Exchange rate fluctuations have complex and multifaceted implications for export performance. While a weaker currency can enhance export competitiveness by making goods cheaper in international markets, it can also increase the cost of imported inputs, leading to higher production costs. For Bangladesh, managing these dynamics is crucial to maximize the benefits of currency devaluation while mitigating its potential downsides. Strategic responses, including market diversification, value addition, supply chain efficiency, and financial hedging, can help Bangladesh navigate the challenges posed by exchange rate fluctuations and enhance its overall export performance. Sectoral Impact: Ready-Made Garments (RMG): Economic Contribution: The RMG sector is the backbone of Bangladesh's economy, accounting for a significant portion of the country's export earnings and employing millions of workers, particularly women. It represents about 84% of the total export earnings, highlighting its crucial role in the national economy. Impact of Currency Devaluation: Export Competitiveness: A weaker currency makes Bangladeshi garments cheaper and more competitive in the global market, potentially increasing demand from major markets such as the United States and the European Union. Production Costs: The RMG sector relies heavily on imported raw materials like fabrics and accessories. Currency devaluation increases the cost of these imports, which can squeeze profit margins unless efficiencies or cost-saving measures are implemented. Inflation: Higher import costs can lead to inflationary pressures, affecting the cost of living for workers and potentially leading to demands for higher wages, further impacting profit margins. Policy Recommendations: Enhance supply chain efficiency to mitigate increased import costs. 30 Page 153 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Invest in technology and automation to boost productivity and offset higher raw material costs. Explore new markets and diversify export destinations to reduce dependency on traditional markets. Frozen Fish: Economic Contribution: Bangladesh is one of the world's leading exporters of frozen fish and seafood, with shrimp being a particularly important export product. This sector contributes significantly to rural employment and income, especially in coastal regions. Export Competitiveness: A devalued currency can make Bangladeshi frozen fish products more price-competitive internationally, potentially increasing export volumes. Input Costs: The sector relies on imported feed, medicine, and equipment. Higher costs of these imports due to a weaker currency can impact the overall cost structure and profitability. Sustainability: Environmental sustainability and adherence to international standards are crucial for maintaining market access. Currency devaluation can impact the ability to invest in sustainable practices if profit margins are squeezed. Promote sustainable aquaculture practices to ensure long-term viability and market access. Support technological advancements and training to improve efficiency and reduce dependency on imported inputs. Develop infrastructure and cold chain logistics to maintain product quality and reduce losses. Pharmaceuticals: Economic Contribution: The pharmaceutical industry in Bangladesh is rapidly growing, with an increasing number of companies exporting medicines to global markets. The sector is vital for both domestic healthcare and export revenues. Export Competitiveness: Devaluation can make Bangladeshi pharmaceutical products more competitive globally, potentially expanding market share. Raw Material Costs: The industry heavily depends on imported active pharmaceutical ingredients (APIs) and other raw materials. Higher import costs due to weaker currency can impact production costs and profitability. 31 Page 154 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Regulatory Compliance: Maintaining compliance with international regulatory standards is essential. Higher costs might impact the ability to invest in quality assurance and compliance. Encourage local production of APIs to reduce dependency on imports. Invest in R&D to develop high-value pharmaceutical products. Support industry efforts to achieve and maintain international regulatory certifications. Jute Products: Economic Contribution: Jute, often referred to as the "golden fiber," is a traditional export commodity for Bangladesh. The sector includes raw jute and diversified jute products such as bags, carpets, and handicrafts, contributing to rural employment and foreign exchange earnings. Export Competitiveness: Currency devaluation can make jute products more competitively priced internationally, potentially boosting demand. Input Costs: While the sector largely relies on domestic raw materials, any imported components or machinery will become more expensive, impacting production costs. Value Addition: Enhancing the value addition of jute products through innovation and quality improvements can help mitigate the impact of higher production costs. Promote research and development to create high-value jute products. Enhance marketing efforts to position jute as an eco-friendly alternative to synthetic products. Provide financial incentives and support for modernizing jute mills and production facilities. The sectoral impact of currency devaluation varies across different industries, each with its own unique challenges and opportunities. For the ready-made garments sector, the main focus should be on managing input costs and improving productivity. In the frozen fish sector, sustainability and efficiency are key. The pharmaceutical industry needs to balance cost competitiveness with regulatory compliance, while the jute sector should focus on value addition and market positioning. By understanding these nuanced impacts, policymakers can develop targeted strategies to enhance export performance and drive economic growth in Bangladesh. Importance of Sector-Specific Analysis: Understanding Varied Responses to Currency Devaluation: Currency devaluation affects different sectors in varied ways due to their distinct cost structures, market dynamics, and competitive landscapes. Conducting sector-specific analysis is crucial for several reasons: Cost Structures: 32 Page 155 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Raw Materials and Inputs: Industries relying heavily on imported raw materials or components, such as the pharmaceuticals and ready-made garments (RMG) sectors, face increased production costs when the local currency devalues. This can squeeze profit margins unless mitigated by increased export prices or cost-saving measures. Local Inputs: Sectors like jute, which primarily use domestically sourced raw materials, might benefit more from devaluation as their production costs remain relatively stable while their export prices become more competitive. Market Demand: Price Elasticity: The responsiveness of global demand to price changes varies across sectors. For instance, the RMG sector might experience a significant boost in demand due to its highly competitive and price-sensitive market, while sectors with less elastic demand might see a more modest impact. Market Access and Trade Barriers: Understanding how tariff and non-tariff barriers affect each sector is essential. Sectors benefiting from trade agreements or preferential access, such as garments through agreements with the EU or US, will respond differently compared to those facing high trade barriers. Global Competition: Competitive Position: The ability of each sector to compete globally is influenced by factors such as technological advancements, brand reputation, and quality standards. Sectors that can leverage these factors effectively, like pharmaceuticals, can enhance their competitiveness post-devaluation. Comparative Advantage: Identifying and strengthening the comparative advantages of each sector helps in formulating strategies to capitalize on devaluation. For example, promoting the eco-friendly and sustainable attributes of jute products can carve out a niche market internationally. Facilitating Targeted Policy Interventions: Sector-specific analysis allows for tailored policy interventions that address the unique needs and challenges of each industry. Such targeted approaches are more effective than broad, one-size-fits-all policies. Key areas of focus include: Customizing Support Measures: Financial Assistance: 33 Page 156 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Providing sector-specific financial incentives, such as subsidies for technological upgrades in the RMG sector or R&D grants in pharmaceuticals, helps enhance competitiveness. Trade Facilitation: Streamlining export procedures, improving logistics, and reducing bureaucratic red tape can be customized based on the sector’s requirements. For instance, frozen fish exporters might need better cold chain infrastructure, while jute exporters may benefit from simplified customs procedures. Enhancing Market Access: Negotiating Trade Agreements: Actively pursuing trade agreements tailored to the needs of each sector can open new markets and reduce tariffs. For example, negotiating lower tariffs for pharmaceuticals in emerging markets can significantly boost exports. Market Diversification: Encouraging sectors to explore and enter new markets reduces dependency on traditional ones. This can be particularly beneficial for the RMG sector, which is currently heavily reliant on the EU and US markets. Addressing Sector-Specific Challenges: Regulatory Compliance: Ensuring that sectors meet international standards and regulations is crucial for maintaining market access. Tailored support for compliance, such as quality assurance programs for pharmaceuticals, can help mitigate the risks associated with devaluation. Sustainability Initiatives: Promoting sustainable practices tailored to each sector’s needs can enhance their global appeal. For instance, supporting organic certification and sustainable farming practices in the jute sector can attract eco-conscious consumers. Sector-specific analysis is essential for understanding the nuanced impacts of currency devaluation on different industries. By recognizing the unique cost structures, market dynamics, and competitive challenges of each sector, policymakers can devise targeted interventions that enhance export performance and economic growth. This approach ensures that policy measures are effective, sustainable, and resilient to global economic fluctuations, ultimately contributing to a more robust and diversified economy in Bangladesh. Key Questions Addressing Currency Devaluation and Export Performance How does currency devaluation impact the export performance of Bangladesh's ready-made garments sector? Rationale: 34 Page 157 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The ready-made garments (RMG) sector is Bangladesh's largest export industry, contributing significantly to the country's GDP and employment. Understanding the impact of currency devaluation on this sector is crucial due to its prominence in the economy. Specific Areas of Investigation: Export Volume and Value: Analyzing changes in the quantity and monetary value of garments exported post-devaluation. Price Competitiveness: Assessing how devaluation affects the price competitiveness of Bangladeshi garments in international markets compared to key competitors like China, India, and Vietnam. Cost of Imported Inputs: Investigating the impact on production costs, considering the sector’s reliance on imported raw materials and accessories. Profit Margins: Evaluating how devaluation influences profit margins for manufacturers and exporters. Market Expansion: Examining whether devaluation leads to market diversification and entry into new international markets. Employment Effects: Exploring how changes in export performance due to devaluation affect employment levels within the sector. What are the effects of currency devaluation on the export performance of the frozen fish industry in Bangladesh? , Rationale: The frozen fish industry is a vital export sector for Bangladesh, particularly shrimp and other seafood. It plays a significant role in rural employment and income generation. Export Trends: Tracking changes in export volumes and revenues of frozen fish products following devaluation. Cost Structure: Analyzing the impact on production costs, including feed, energy, and transportation, which may be affected by exchange rate changes. Global Market Prices: 35 Page 158 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Assessing the competitiveness of Bangladeshi frozen fish products in global markets and how price changes affect demand. Supply Chain Dynamics: Investigating how devaluation impacts the supply chain, including sourcing of inputs and logistics. Regional Competitiveness: Comparing the performance of Bangladesh’s frozen fish exports with key competitors like India, Thailand, and Vietnam. Sustainability: Evaluating whether devaluation affects the sustainability practices within the industry and its long-term viability. How does currency devaluation influence the pharmaceutical export sector in Bangladesh? Rationale: The pharmaceutical sector in Bangladesh is emerging as a significant exporter, with potential for substantial growth. Understanding how currency devaluation affects this high-value sector can provide insights for policy formulation. Export Growth: Measuring changes in the export volume and value of pharmaceutical products post-devaluation. Import Costs: Assessing the impact on costs of imported active pharmaceutical ingredients (APIs) and other inputs. R&D Investment: Exploring whether devaluation influences investment in research and development and innovation within the sector. Market Access: Examining how devaluation affects market access, regulatory compliance, and competitiveness in key export markets. Quality and Standards: Evaluating the impact on the sector's ability to maintain quality standards and meet international regulatory requirements. Industry Profitability: 36 Page 159 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Investigating changes in profitability and how devaluation influences business strategies within the sector. What is the impact of currency devaluation on the jute products export industry in Bangladesh? Rationale: The jute sector is an important traditional industry in Bangladesh, known for its eco-friendly products. Understanding how devaluation affects this sector can help in formulating strategies to enhance its competitiveness and sustainability. Export Performance: Tracking changes in the export volumes and values of jute products following devaluation. Production Costs: Analyzing the impact on production costs, considering that jute is predominantly locally sourced but may involve imported inputs for processing. Global Market Demand: Assessing how devaluation affects global demand for jute products and their price competitiveness. Value Addition: Exploring whether devaluation encourages value addition and diversification within the jute sector. Sustainability Practices: Investigating the impact on sustainability practices and the promotion of eco-friendly products. Market Diversification: Evaluating how devaluation influences the sector's ability to diversify into new markets and product categories. These research questions aim to dissect the complex relationship between currency devaluation and export performance across key sectors in Bangladesh. By addressing these questions, the study seeks to provide a comprehensive understanding of how devaluation affects different industries, thereby offering targeted insights for policymakers to enhance export competitiveness and economic stability. Hypotheses Formulation: Hypothesis 1: Currency devaluation positively impacts the export performance of the ready-made garments sector in Bangladesh. 37 Page 160 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Rationale: The ready-made garments (RMG) sector is a cornerstone of Bangladesh's export economy. Currency devaluation can make Bangladeshi garments cheaper and more competitive in international markets, potentially leading to increased demand and higher export volumes. Given the sector's established global market presence, it is hypothesized that devaluation will positively influence its export performance. Indicators to be Examined: Export Volumes: Increase in the quantity of garments exported post-devaluation. Revenue Growth: Growth in export revenue attributable to competitive pricing. Market Share: Changes in global market share of Bangladeshi garments. New Market Entry: Expansion into new international markets facilitated by lower prices. Employment: Impact on employment levels within the RMG sector as a result of increased production demands. Hypothesis 2: The frozen fish industry in Bangladesh experiences enhanced export performance following currency devaluation. Rationale: The frozen fish industry, particularly shrimp exports, is a significant contributor to Bangladesh's economy. Devaluation can reduce the international prices of Bangladeshi seafood, making them more attractive to foreign buyers. This can lead to higher export volumes and improved revenue streams for the industry. Export Volumes: Increase in the volume of frozen fish exported post-devaluation. Revenue Growth: Growth in export revenue due to competitive pricing. Global Demand: Shifts in global demand for Bangladeshi frozen fish products. Cost of Inputs: 38 Page 161 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Analysis of how devaluation affects the cost of imported inputs and overall production costs. Profit Margins: Impact on profitability of frozen fish exporters. Hypothesis 3: Currency devaluation leads to increased export competitiveness in the pharmaceutical sector of Bangladesh. Rationale: The pharmaceutical sector in Bangladesh is growing rapidly, with a focus on exporting generic drugs and other pharmaceutical products. Currency devaluation can enhance the competitiveness of Bangladeshi pharmaceuticals by making them more affordable in international markets, thus potentially increasing export volumes and market penetration. Export Volumes: Increase in the quantity of pharmaceuticals exported post-devaluation. Revenue Growth: Growth in export revenue driven by competitive pricing. Market Access: Expansion into new international markets and increased penetration in existing markets. R&D Investment: Influence on investment in research and development as a result of increased export revenue. Regulatory Compliance: Impact on the sector's ability to meet international regulatory standards. Hypothesis 4: The export performance of the jute products industry in Bangladesh improves with currency devaluation. Rationale: The jute industry, known for its eco-friendly products, plays an important role in Bangladesh's economy. Devaluation can make jute products more competitively priced in international markets, potentially leading to higher export volumes and revenue growth. Given the global shift towards sustainable products, this hypothesis posits that devaluation will benefit the jute sector. Export Volumes: Increase in the volume of jute products exported post-devaluation. 39 Page 162 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Global Market Demand: Changes in global demand for eco-friendly jute products. Value Addition: Impact on the development of value-added jute products and diversification within the industry. Sustainability Practices: Influence on the adoption of sustainable practices within the jute industry. The hypotheses formulated aim to investigate the specific impacts of currency devaluation on key export sectors in Bangladesh. By examining these hypotheses through empirical analysis, the study seeks to provide robust insights into how devaluation affects export performance, which can inform strategic economic policies and interventions tailored to enhance the competitiveness and growth of Bangladesh’s export sectors. Expected Outcomes and Contributions to Existing Knowledge: Expected Outcomes: Enhanced Export Competitiveness: The study anticipates that currency devaluation will generally lead to increased export competitiveness across Bangladesh's key sectors. This is primarily due to the lower prices of Bangladeshi goods in the international market, making them more attractive to foreign buyers. Sector-Specific Impacts: Ready-Made Garments (RMG): The RMG sector is expected to experience significant gains in export volumes and market share due to its established global presence and competitive pricing. Frozen Fish: The frozen fish industry, particularly shrimp exports, is likely to see increased demand and revenue growth as lower prices enhance its appeal in global markets. Pharmaceuticals: The pharmaceutical sector is expected to benefit from increased competitiveness, leading to higher export volumes and expansion into new markets, especially for generic drugs. Jute Products: The jute industry is anticipated to experience improved export performance, driven by the global demand for eco-friendly products and competitive pricing. Variable Magnitude of Impact: 40 Page 163 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) While all sectors are expected to benefit from currency devaluation, the magnitude of the impact is likely to vary. Factors such as global demand elasticity, input cost structures, and the degree of value addition in each sector will influence the extent of the benefits. Increased Production and Employment: As exports grow, production levels in these sectors are expected to rise, leading to higher employment rates. This is particularly relevant for labor-intensive industries like RMG and jute products. Inflationary Pressures: The study may also identify potential inflationary pressures resulting from increased import costs, which could offset some of the benefits of devaluation. Managing these pressures will be crucial for sustaining the positive impacts on export performance. Contributions to Existing Knowledge: Sector-Specific Insights: By focusing on specific export sectors, this study will provide detailed insights into how different industries respond to currency devaluation. This contrasts with much of the existing literature, which often takes a more generalized approach. Developing Country Perspective: The study will contribute valuable empirical evidence from the perspective of a developing country. Most existing research tends to focus on developed economies, making this study particularly relevant for policymakers and researchers interested in similar economic contexts. The findings will inform policymakers on the most effective strategies for leveraging currency devaluation to boost export performance. This includes recommendations for sector-specific interventions, inflation management, and broader economic reforms. Comprehensive Analysis: The study's comprehensive analysis of multiple sectors will highlight the diverse ways in which currency devaluation can impact different parts of the economy. This will enrich the academic discourse by showcasing the multifaceted nature of devaluation effects. Empirical Evidence: The study will add to the body of empirical evidence on currency devaluation and export performance, using data and analysis specific to Bangladesh. This evidence will be crucial for validating theoretical models and assumptions in the existing literature. Enhanced Understanding of Export Dynamics: By examining the interplay between currency devaluation and export performance, the study will enhance the understanding of the dynamic factors that influence trade competitiveness. This will be beneficial for future research and policy formulation. 41 Page 164 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The expected outcomes of this study will not only provide practical insights for enhancing Bangladesh's export performance but also contribute significantly to the academic understanding of currency devaluation's impacts in developing economies. The detailed sector-specific analysis and empirical evidence from Bangladesh will offer valuable contributions to both the academic literature and policy development, aiding in the formulation of more effective and resilient economic strategies. Contribution to Academic Literature Filling the Gap in Literature: This study addresses a significant gap in the existing literature by focusing on the impact of currency devaluation on export performance in Bangladesh, a developing economy with a unique economic structure. While much of the current research predominantly examines developed economies or utilizes generalized models, this study provides a context-specific analysis that captures the nuances of Bangladesh's economic environment. Comprehensive Analysis: The study’s comprehensive approach, examining multiple key export sectors such as ready-made garments, frozen fish, pharmaceuticals, and jute products, offers a detailed understanding of how different industries respond to currency devaluation. This sector-specific analysis contrasts with more generalized studies, adding depth and specificity to the academic discourse on currency devaluation and export performance. Empirical Evidence: By providing robust empirical evidence from Bangladesh, the study enhances the understanding of currency devaluation’s effects in developing countries. This evidence is crucial for validating theoretical models and assumptions, offering real-world insights that can inform both academic research and practical policy-making. Sector-Specific Insights: The detailed examination of each sector's response to currency devaluation will yield insights into the varying impacts across industries. This sector-specific knowledge is essential for developing targeted strategies that can optimize the benefits of devaluation while mitigating any adverse effects. Policy-Relevant Findings: The study's findings will have significant policy implications, offering evidence-based recommendations for enhancing export performance. This relevance extends beyond academic circles to inform policymakers and practitioners, bridging the gap between theory and practice. Enhanced Understanding of Developing Economies: The study contributes to a better understanding of the economic dynamics in developing countries, particularly those with similar economic structures to Bangladesh. By focusing on a developing economy, the study highlights the unique challenges and opportunities these countries face, enriching the global academic discourse on economic development and international trade. 42 Page 165 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Building on Existing Research: The study builds on existing research by incorporating recent data and advanced analytical methods, providing a contemporary perspective on the topic. It updates and expands the body of knowledge, ensuring that the findings are relevant to current economic conditions and policy debates. Interdisciplinary Insights: The study’s interdisciplinary approach, integrating economics, international trade, and policy analysis, offers a holistic view of currency devaluation’s impact. This cross-disciplinary perspective is valuable for developing a comprehensive understanding of the complex relationships between exchange rates, export performance, and economic growth. Foundation for Future Research: The study lays a foundation for future research by identifying key areas for further investigation and providing a methodological framework that can be applied to other developing economies. It opens avenues for comparative studies and longitudinal analyses, contributing to a deeper and more nuanced understanding of currency devaluation’s long-term effects. Overall, this study's significance lies in its potential to substantially contribute to the academic literature on currency devaluation and export performance, particularly in the context of developing economies like Bangladesh. By offering empirical evidence, sector-specific insights, and policy-relevant findings, the study aims to inform both academic research and practical policy-making, ultimately contributing to the economic development and global competitiveness of Bangladesh. Practical Implications for Policymakers and Stakeholders: Informed Policy Design: The findings of this study will provide policymakers with evidence-based insights necessary for designing and implementing effective economic policies. Understanding how currency devaluation affects various export sectors enables policymakers to tailor interventions that enhance export performance while mitigating potential negative impacts such as inflation or increased import costs. Enhancing Export Competitiveness: Policymakers can use the study’s insights to develop strategies that improve the competitiveness of Bangladesh’s export sectors. For instance, they might introduce measures to support the ready-made garments sector, such as subsidies for technological upgrades, training programs for workers, or incentives for exporters to explore new markets. Targeted Support for Key Sectors: Sector-specific insights will help policymakers identify which industries are most positively affected by currency devaluation and which may require additional support. This targeted approach ensures that resources are allocated efficiently, maximizing the benefits of economic policies. For example, if the study finds that the frozen fish industry benefits significantly from devaluation, policymakers might focus on enhancing infrastructure and reducing logistical barriers for this sector. 43 Page 166 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Mitigating Adverse Effects: The study will also highlight potential adverse effects of currency devaluation, such as inflation or increased costs for imported inputs. Policymakers can use this information to design complementary policies that mitigate these effects, such as monetary policies to control inflation or initiatives to boost local production of key inputs. Long-Term Economic Planning: The insights provided by this study will contribute to long-term economic planning. By understanding the broader implications of currency devaluation, policymakers can develop comprehensive economic strategies that promote sustainable growth, stability, and resilience to global economic fluctuations. Evidence-Based Decision Making: The empirical evidence generated by this study supports evidence-based decision-making processes. Policymakers will have access to data-driven insights that can guide policy formulation, ensuring that decisions are grounded in rigorous analysis rather than conjecture. Stakeholder Engagement: The study’s findings will be valuable for various stakeholders, including businesses, industry associations, and trade organizations. These stakeholders can leverage the insights to adjust their strategies, improve operational efficiencies, and capitalize on the opportunities presented by currency devaluation. Business Strategy and Planning: Export-oriented businesses can use the study’s findings to inform their strategic planning. For instance, companies in the pharmaceuticals sector might explore new markets or invest in production enhancements if the study shows a positive correlation between devaluation and export performance. Industry Associations and Advocacy: Industry associations can use the insights to advocate for policies that support their members. They can present evidence-based arguments to policymakers, lobbying for initiatives that enhance export competitiveness and address sector-specific challenges. Capacity Building and Training: Stakeholders can identify areas where capacity building and training are needed based on the study’s sector-specific analysis. For example, if devaluation positively impacts the jute products industry, stakeholders might invest in training programs to improve quality and productivity within this sector. International Trade Negotiations: The findings can also inform Bangladesh’s approach to international trade negotiations. Understanding the impact of currency devaluation on export performance enables negotiators to advocate more effectively for terms that benefit Bangladesh’s key export sectors. 44 Page 167 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Investment Attraction: The study can help attract foreign and domestic investment by providing a clear understanding of the economic environment and the potential benefits of currency devaluation. Investors are more likely to commit resources to sectors that demonstrate strong export performance and competitiveness. The practical implications of this study are far-reaching, offering valuable insights for policymakers and stakeholders across Bangladesh’s export sectors. By providing evidence-based recommendations and sector-specific analysis, the study aims to enhance export performance, support economic growth, and foster a resilient and competitive economy. Long-Term Impact on Bangladesh's Economic Development: Enhanced Foreign Exchange Earnings: Understanding the impact of currency devaluation on export performance can lead to strategies that boost Bangladesh's foreign exchange earnings. Increased export competitiveness due to a favorable exchange rate makes Bangladeshi products more attractive in international markets, leading to higher sales and more substantial foreign exchange reserves. This influx of foreign currency can stabilize the national currency, reduce dependency on foreign aid, and improve the country's balance of payments. Sustained Economic Growth: The insights gained from this study can inform policies that drive sustained economic growth. By leveraging currency devaluation to enhance export performance, Bangladesh can experience consistent economic expansion. A robust export sector can stimulate other areas of the economy through increased demand for raw materials, transportation, and services, creating a multiplier effect that benefits various industries. Higher Employment Rates: A thriving export sector directly translates into job creation. As exports grow, companies expand their operations to meet increased demand, leading to more employment opportunities across the country. This job creation is particularly significant in labor-intensive industries like ready-made garments and jute products, where increased production capacity can absorb a large workforce. Higher employment rates contribute to economic stability and poverty reduction, improving overall social welfare. Improved Standards of Living: Economic growth driven by enhanced export performance leads to higher incomes for workers and business owners alike. Increased earnings improve household living standards, enabling families to invest in better healthcare, education, and housing. As the standard of living rises, social indicators such as literacy rates, life expectancy, and overall well-being improve, contributing to a more prosperous and equitable society. Industrial Upgradation and Technological Advancement: Focusing on export performance encourages industries to invest in technology and modernization to stay competitive. This industrial upgradation can lead to the development of a more sophisticated and diversified industrial base, reducing reliance on a few key sectors 45 Page 168 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) and making the economy more resilient to external shocks. Technological advancements also enhance productivity and efficiency, further boosting economic output. Increased Investment and Infrastructure Development: A strong export sector attracts both domestic and foreign investment. Investors are more likely to commit resources to a country with a proven track record of export success and favorable economic policies. Increased investment can lead to the development of essential infrastructure, such as ports, roads, and logistics networks, which are critical for supporting large-scale export operations. Improved infrastructure not only benefits exporters but also enhances the overall business environment and quality of life. Strengthened Economic Resilience: By understanding and strategically managing the impacts of currency devaluation, Bangladesh can build a more resilient economy capable of withstanding global economic fluctuations. Effective policy interventions can mitigate adverse effects such as inflation and import cost increases, ensuring that the benefits of devaluation are maximized while potential downsides are minimized. Policy Formulation and International Trade Negotiations: The empirical evidence provided by this study can guide policymakers in formulating targeted and effective economic policies. Additionally, a deeper understanding of how currency devaluation impacts export performance positions Bangladesh favorably in international trade negotiations. Policymakers can advocate for terms and agreements that bolster the country's export sectors, ensuring favorable access to global markets. Social and Economic Equity: Economic growth and improved export performance can contribute to reducing income inequality and regional disparities within Bangladesh. As export-driven industries expand, they often create jobs in rural and underdeveloped areas, distributing economic benefits more evenly across the country. This inclusive growth can lead to greater social cohesion and stability. Long-Term Sustainable Development: Sustained economic growth, higher employment rates, and improved living standards collectively contribute to the long-term sustainable development of Bangladesh. A well-managed export sector can support the country's development goals, including poverty alleviation, education, and health improvements, as outlined in national and international development frameworks such as the Sustainable Development Goals (SDGs). Understanding the impact of currency devaluation on export performance is crucial for formulating strategies that can drive long-term economic development in Bangladesh. The potential benefits include increased foreign exchange earnings, sustained economic growth, higher employment rates, and improved living standards, all of which contribute to a more prosperous and resilient nation. Questions to Ponder: 46 Page 169 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) What has been the historical impact of currency devaluation on Bangladesh’s export performance? How do the experiences of other countries inform Bangladesh’s approach to currency management? What policy recommendations can be made to optimize the benefits of devaluation for Bangladesh? Expected Contributions: The findings of this study are expected to make several significant contributions to both academic literature and practical policy-making. By delving into the complex relationship between currency devaluation and export performance, this study aims to offer valuable insights and recommendations that can help Bangladesh navigate the challenges and opportunities presented by global economic dynamics. Academic Contributions: Enhanced Understanding of Currency Devaluation: This study will contribute to the academic discourse by providing a comprehensive analysis of the impact of currency devaluation on export performance. It will explore various theoretical frameworks and empirical evidence, adding depth to the existing body of knowledge. Sector-Specific Insights: The focus on specific export sectors such as ready-made garments, jute, pharmaceuticals, and leather goods will enrich the literature with detailed sectoral analyses. This nuanced approach will highlight the differential impacts of currency devaluation across various industries. Comparative Analysis: By comparing Bangladesh's experiences with those of other countries like Vietnam, South Korea, India, and Turkey, the study will offer comparative insights that can be useful for cross-country analyses. This comparative approach will help identify best practices and common pitfalls in managing currency devaluation. Methodological Innovations: The use of the synthetic control method and other advanced econometric techniques in this study will demonstrate their applicability in assessing the impact of macroeconomic policies. This methodological contribution can serve as a reference for future research in similar contexts. Practical Insights for Policymakers: Informed Policy Making: The study will provide empirical evidence that can help policymakers in Bangladesh formulate effective economic policies. Understanding the nuances of how currency devaluation affects export performance will enable the design of targeted interventions to support export growth. 47 Page 170 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Strategic Economic Planning: Policymakers can use the study's findings to develop strategic plans that enhance export competitiveness. Insights into the effectiveness of various devaluation strategies will inform decisions on exchange rate policies, trade agreements, and export incentives. Sectoral Support: The detailed analysis of key export sectors will help identify specific challenges and opportunities within each industry. Policymakers can use this information to tailor support measures that address the unique needs of each sector, fostering growth and innovation. Risk Mitigation: By understanding the potential risks associated with currency devaluation, such as inflationary pressures and economic instability, policymakers can design measures to mitigate these risks. This will ensure that the benefits of devaluation are maximized while minimizing adverse effects. Contributions to Business Practices: Competitive Pricing Strategies: Businesses can leverage the study’s findings to develop competitive pricing strategies that enhance their export performance. Understanding the impact of currency fluctuations on export prices will help firms remain competitive in global markets. Investment Decisions: The insights provided by the study will guide businesses in making informed investment decisions. Companies can plan their technology upgrades, capacity expansions, and market diversification strategies based on the expected impacts of currency devaluation. Supply Chain Optimization: By identifying the effects of currency devaluation on supply chain costs and logistics, the study will help businesses optimize their supply chain operations. This can lead to cost savings and improved efficiency, boosting overall competitiveness. Market Expansion: The comparative analysis of other countries’ experiences will offer businesses valuable lessons on market expansion strategies. Firms can adopt best practices from successful exporters to enter new markets and increase their global footprint. Sustainable Export Growth: By providing a clear understanding of how to effectively manage currency devaluation, the study will contribute to sustainable export growth in Bangladesh. This will have positive implications for economic development and job creation. Economic Stability: 48 Page 171 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The study’s recommendations on mitigating the adverse effects of devaluation will help maintain economic stability. A stable macroeconomic environment is crucial for fostering investor confidence and sustaining long-term growth. Global Competitiveness: The insights and recommendations derived from this study will enhance Bangladesh’s global competitiveness. By adopting effective devaluation strategies and supporting export-oriented industries, Bangladesh can strengthen its position in the international market. Significance: This study’s significance lies in its potential to provide a nuanced understanding of how devaluation affects export performance at both macro and micro levels. Given Bangladesh’s reliance on key export products like ready-made garments, jute, pharmaceuticals, and leather goods, insights from this research can drive strategic economic planning and policy formulation. Macro-Level Significance: Economic Stability and Growth: By understanding the macroeconomic impacts of currency devaluation, policymakers can better manage economic stability and growth. This study can help identify the conditions under which devaluation can be beneficial for the economy, leading to improved export performance and overall economic health. Trade Balance Improvement: Insights from this research can guide strategies to improve the trade balance. A favorable trade balance is crucial for economic stability, and understanding how devaluation can enhance export competitiveness helps in achieving this goal. Policy Formulation: The findings can inform government policies related to exchange rates, trade agreements, and export incentives. Well-informed policies can mitigate the negative impacts of devaluation, such as inflation, and amplify its positive effects on exports. Micro-Level Significance: Industry-Specific Strategies: The study’s focus on specific export products like ready-made garments, jute, pharmaceuticals, and leather goods allows for targeted recommendations. Understanding how these sectors react to currency devaluation helps businesses and policymakers develop strategies tailored to each industry. Competitive Advantage: For businesses, understanding the impact of currency devaluation on export prices can lead to better pricing strategies. This can enhance their competitive advantage in the global market by making their products more attractive to international buyers. 49 Page 172 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Investment Decisions: Companies can use insights from this study to make informed investment decisions. Knowing how currency fluctuations affect their export revenues can guide decisions on technology upgrades, capacity expansion, and market diversification. Strategic Economic Planning: Diversification of Export Markets: By learning from the experiences of other countries, Bangladesh can develop strategies to diversify its export markets. This reduces reliance on a few markets and spreads risk more evenly, contributing to economic resilience. Value Addition and Innovation: Insights into how devaluation impacts different sectors can drive efforts to add value and innovate within industries. This not only enhances export earnings but also ensures that Bangladesh’s exports remain competitive globally. Sustainable Practices: The study can highlight the importance of sustainable and inclusive growth in the export sectors. Emphasizing sustainable practices can attract ethically conscious consumers and enhance Bangladesh's reputation as a responsible exporter. Long-Term Economic Benefits: Enhanced Export Competitiveness: In the long term, the ability to strategically manage currency devaluation can significantly enhance the competitiveness of Bangladesh’s exports. This can lead to sustained export growth and economic development. Economic Resilience: By developing a deep understanding of the impacts of currency devaluation, Bangladesh can build economic resilience against global economic shocks. This ensures that the country remains robust in the face of international economic fluctuations. Informed Policy-Making: The study’s findings will provide a robust evidence base for policymakers. Informed decisions grounded in empirical research can lead to more effective and adaptive economic policies, ensuring that Bangladesh navigates the complexities of the global economy successfully. This study’s significance is multifaceted, offering valuable insights that can enhance both macroeconomic stability and microeconomic competitiveness. By leveraging these insights, Bangladesh can formulate strategic policies and business practices that ensure sustainable economic growth and resilience in the global market. 50 Page 173 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Insights from Major Academic and Institutional Sources: Some of Princeton University's research has highlighted the complexities of currency devaluation and its varied impacts on different economies. The university's studies emphasize the importance of considering country-specific factors and sectoral dynamics when assessing the effectiveness of currency devaluation as an economic policy tool. Key insights include: Heterogeneous Effects: Currency devaluation does not uniformly benefit all sectors of an economy. For instance, export-oriented industries may gain competitiveness, while sectors reliant on imported inputs may suffer from increased costs. Structural Conditions: The structural conditions of an economy, such as the level of industrial diversification and the nature of its trade relationships, significantly influence the outcomes of devaluation. Countries with a diversified export base tend to manage the effects of devaluation better than those heavily reliant on a few commodities. Macroeconomic Stability: Maintaining macroeconomic stability is crucial for reaping the benefits of devaluation. High inflation and fiscal deficits can undermine the competitive advantages gained from a weaker currency. Policy Complementarity: The effectiveness of devaluation is enhanced when complemented by supportive fiscal and monetary policies. Structural reforms that improve productivity and competitiveness can amplify the positive impacts of devaluation. Oxford University Economic Papers: Oxford University's economic papers provide in-depth analyses of the relationship between currency devaluation and international trade. Their research findings underscore the following points: Elasticity of Demand: The success of devaluation in boosting exports depends on the price elasticity of demand for exported goods. Products with high elasticity see more significant increases in export volumes following a devaluation. Supply Chain Implications: Devaluation can affect supply chains by altering the cost structure of inputs and intermediate goods. Understanding these supply chain dynamics is essential for assessing the net impact on export performance. Short-Term vs. Long-Term Effects: 51 Page 174 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) While devaluation may provide short-term gains in export competitiveness, long-term benefits require sustained improvements in production efficiency and quality. Trade Policy Interactions: The interaction between currency devaluation and trade policies, such as tariffs and trade agreements, plays a critical role in determining the overall impact on export performance. MIT Press: Research published by MIT Press delves into the macroeconomic implications of currency devaluation and its influence on export competitiveness. Key insights include: Competitiveness Gains: Devaluation can enhance a country's export competitiveness by lowering the relative prices of its goods in international markets. This effect is particularly pronounced for labor-intensive industries where cost advantages are critical. Inflationary Pressures: Devaluation often leads to higher import prices, contributing to domestic inflation. Effective management of inflationary pressures is essential to prevent erosion of the competitive gains achieved through devaluation. Capital Flows: The response of capital flows to currency devaluation can vary. While devaluation may attract foreign investment in export sectors, it can also lead to capital flight if investors perceive increased economic risk. Monetary Policy Coordination: Coordinating devaluation with appropriate monetary policies, such as interest rate adjustments, can help stabilize the economy and maximize the benefits of devaluation. Stanford University Studies in Economic Policy: Stanford University's research focuses on firm-level analysis of exchange rate effects, providing granular insights into how devaluation impacts export performance at the micro level. Key findings include: Export Pricing Strategies: Firms adjust their pricing strategies in response to devaluation, balancing the need to remain competitive abroad with maintaining profitability. Cost Management: Effective cost management practices, including hedging against currency risk and optimizing supply chain costs, are crucial for firms to benefit from devaluation. Market Expansion: 52 Page 175 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation can serve as a catalyst for market expansion, enabling firms to penetrate new international markets by offering more competitive pricing. Innovation and Productivity: Firms that invest in innovation and productivity enhancements are better positioned to leverage the advantages of devaluation, sustaining export growth over the long term. Cambridge University Journal of Economics: The Cambridge University Journal of Economics provides comparative studies on devaluation and export performance, drawing lessons from different countries' experiences. Key insights include: Comparative Analysis: Comparative studies reveal that the impact of devaluation varies significantly across countries, depending on their economic structures and policy environments. Policy Synergies: Countries that successfully integrate devaluation with broader economic reforms, such as improving infrastructure and reducing bureaucratic hurdles, tend to achieve better export performance. Resilience to External Shocks: Developing resilience to external economic shocks, such as global demand fluctuations and commodity price volatility, is essential for sustaining the benefits of devaluation. Role of Institutions: Strong institutions and effective governance play a critical role in managing the effects of devaluation and ensuring that policy measures are effectively implemented. Harvard University Press: Harvard University Press's publications explore global trade and exchange rate management, offering insights into best practices for leveraging devaluation to boost export performance. Key findings include: Strategic Devaluation: Strategic use of devaluation, timed to coincide with global market opportunities, can significantly enhance export competitiveness. Investment in Quality: Investing in the quality and branding of export products helps firms differentiate themselves in international markets, mitigating the negative effects of devaluation-induced price competition. Global Value Chains: 53 Page 176 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Participation in global value chains allows countries to benefit from devaluation by integrating into higher value-added segments of production and distribution. Bilateral and Multilateral Agreements: Engaging in bilateral and multilateral trade agreements can enhance the positive effects of devaluation by providing stable and preferential access to key markets. World Bank Reports: World Bank reports provide comprehensive analyses of the impact of currency devaluation on developing economies, including Bangladesh. Key insights include: Export Diversification: Diversifying the export base reduces vulnerability to external shocks and enhances the ability to capitalize on devaluation. Sectoral Focus: Targeting key export sectors with tailored policies and support measures maximizes the benefits of devaluation for those industries. Capacity Building: Building the capacity of export-oriented industries through training, technology transfer, and infrastructure development is crucial for sustaining export growth. Macro-Fiscal Balance: Maintaining a macro-fiscal balance, including prudent fiscal management and debt sustainability, is essential for mitigating the potential negative effects of devaluation. International Monetary Fund (IMF) Publications: IMF publications provide insights into exchange rate policy and export growth, emphasizing the role of macroeconomic stability and policy coherence. Key findings include: Exchange Rate Flexibility: Flexible exchange rate regimes allow countries to adjust to external shocks and maintain export competitiveness. Policy Coherence: Coherent and well-coordinated policy frameworks, including fiscal, monetary, and trade policies, enhance the effectiveness of devaluation. External Financing: Access to external financing, including IMF support programs, can provide the necessary liquidity and policy advice to manage the transition and capitalize on devaluation. Risk Management: 54 Page 177 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Implementing risk management strategies, such as hedging against currency risk and diversifying export markets, is essential for sustaining export performance. Understanding the intricate relationship between currency devaluation and the export sector's performance in Bangladesh is essential for formulating effective economic policies. As a developing nation with a significant reliance on its export industry, Bangladesh's economic health is closely tied to its ability to compete in the global market. Currency devaluation, which refers to the reduction in the value of a country's currency relative to other currencies, can have profound effects on export performance. In theory, currency devaluation makes a country's exports cheaper and more competitive on the international market. This price advantage can lead to increased demand for exported goods, potentially boosting the export sector's performance. However, the real-world implications of currency devaluation are more complex and multifaceted. Several factors influence how currency devaluation affects export performance: Elasticity of Demand for Exports: The responsiveness of international demand to changes in export prices is crucial. If the demand for a country's exports is highly elastic, a devaluation can significantly increase export volumes. However, if demand is inelastic, the volume increase might be limited. Import Content of Exports: Many export products require imported raw materials and components. If the cost of these imports rises due to devaluation, the overall cost of production for exporters can increase, potentially offsetting the competitive price advantage gained from devaluation. Exchange Rate Pass-Through: The degree to which changes in the exchange rate are reflected in export prices is critical. A complete pass-through means that devaluation fully translates into lower prices for foreign buyers, while incomplete pass-through results in only partial price adjustments. Export Sector Structure: The composition of the export sector matters. Bangladesh's major exports, such as garments, pharmaceuticals, jute, and leather goods, each respond differently to currency fluctuations. For instance, the garment sector, being labor-intensive and price-sensitive, may benefit more from devaluation compared to other sectors. Macroeconomic Conditions: Broader economic conditions, including inflation, interest rates, and economic growth, also play a role. High inflation following a devaluation can erode the competitive advantage by increasing production costs. Trade Policies and International Relations: Tariffs, trade agreements, and geopolitical factors can influence the extent to which devaluation impacts export performance. Favorable trade policies and strong international relations can enhance the positive effects of devaluation. 55 Page 178 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) In Bangladesh's context, the interplay of these factors determines the net effect of currency devaluation on export performance. Policymakers must consider these dynamics to formulate strategies that harness the benefits of devaluation while mitigating its potential drawbacks. This understanding is vital for enhancing Bangladesh's export competitiveness and ensuring sustainable economic growth. Overview of the Study: The primary objectives of this study are: To analyze the historical impact of currency devaluation on Bangladesh's export performance. To compare Bangladesh's experience with that of other countries, such as Vietnam and India. To provide policy recommendations based on empirical findings and comparative analysis. By synthesizing these insights from major academic and institutional sources, this study aims to provide a robust framework for understanding the impact of currency devaluation on Bangladesh's export performance and offer evidence-based recommendations for policymakers and stakeholders. 56 Page 179 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 3Understanding Currency Devaluation INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 180 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 4 Understanding Currency Devaluation: Table of Contents Understanding Currency Devaluation....................................................................................................15 Definition and Mechanisms of Currency Devaluation:...................................................................15 Reducing Interest Rates:..................................................................................................................15 Mechanism:...............................................................................................................................15 Impact:...................................................................................................................................... 15 Quantitative Easing (QE):............................................................................................................... 15 Mechanism:...............................................................................................................................15 Impact:...................................................................................................................................... 15 Direct Intervention in the Foreign Exchange Market:.....................................................................15 Mechanism:...............................................................................................................................15 Impact:...................................................................................................................................... 15 Fiscal Policies:.................................................................................................................................15 Mechanism:...............................................................................................................................15 Impact:...................................................................................................................................... 16 Economic Rationale for Currency Devaluation.............................................................................. 16 Boosting Export Competitiveness:.................................................................................................. 16 Mechanism:...............................................................................................................................16 Impact:...................................................................................................................................... 16 Reducing Trade Deficits:.................................................................................................................16 Mechanism:...............................................................................................................................16 Impact:...................................................................................................................................... 16 Stimulating Economic Growth:.......................................................................................................16 Increasing Production:.....................................................................................................................16 Mechanism:...............................................................................................................................16 Impact:...................................................................................................................................... 16 Controlling Inflation:................................................................................................................ 16 Mechanism:...............................................................................................................................16 Impact:...................................................................................................................................... 17 Making Imports Expensive:............................................................................................................ 17 Mechanism:...............................................................................................................................17 Impact:...................................................................................................................................... 17 Cost of Imported Goods:................................................................................................................. 17 Mechanism:...............................................................................................................................17 4 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. 1 Page 181 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact:...................................................................................................................................... 17 Debt Burden:................................................................................................................................... 17 Mechanism:...............................................................................................................................17 Impact:...................................................................................................................................... 17 Erosion of Investor Confidence:......................................................................................................17 Mechanism:...............................................................................................................................17 Impact:...................................................................................................................................... 17 Objectives Behind Devaluation:......................................................................................................18 Enhancing Export Competitiveness:............................................................................................... 18 Primary Objective:...........................................................................................................................18 Mechanism:..................................................................................................................................... 18 Price Advantage:.......................................................................................................................18 Increased Demand:....................................................................................................................18 Boost in Export Volumes:......................................................................................................... 18 Revenue Growth:...................................................................................................................... 18 Addressing Balance of Payments Issues......................................................................................... 18 Reducing Trade Deficit:............................................................................................................18 Attracting Foreign Investment:................................................................................................. 18 Improved Trade Balance:..........................................................................................................19 Increased Foreign Reserves:..................................................................................................... 19 Stimulating Economic Growth........................................................................................................ 19 Primary Objective:.................................................................................................................... 19 Industrial Growth:.....................................................................................................................19 Employment Generation:.......................................................................................................... 19 Economic Expansion:............................................................................................................... 19 Income Growth:........................................................................................................................ 19 Managing Inflation and Monetary Policy:...................................................................................... 19 Primary Objective:.................................................................................................................... 19 Inflation Control:...................................................................................................................... 19 Monetary Policy Alignment:\................................................................................................... 19 Balanced Inflation:....................................................................................................................20 Monetary Stability:................................................................................................................... 20 Positive and Negative Impacts of Devaluation:.............................................................................. 20 Positive Impacts:............................................................................................................................. 20 Increased Export Volumes:..............................................................................................................20 Price Competitiveness:..............................................................................................................20 Higher Demand:........................................................................................................................20 Market Expansion:.................................................................................................................... 20 Enhanced Revenue:......................................................................................................................... 20 Foreign Exchange Earnings:..................................................................................................... 20 Revenue Growth:...................................................................................................................... 20 Economic Boost:.......................................................................................................................21 Improved Trade Balance:................................................................................................................ 21 Reduced Trade Deficit:............................................................................................................. 21 2 Page 182 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Balance of Payments:................................................................................................................21 Foreign Reserves:......................................................................................................................21 Negative Impacts:............................................................................................................................21 Higher Production Costs for Exporters:.......................................................................................... 21 Cost of Imports:........................................................................................................................ 21 Increased Costs:........................................................................................................................ 21 Supply Chain Disruptions:........................................................................................................21 Inflationary Pressures:..................................................................................................................... 21 Cost-Push Inflation:.................................................................................................................. 21 Reduced Purchasing Power:..................................................................................................... 21 Economic Strain:.......................................................................................................................22 Potentially Diminished Domestic Demand:.................................................................................... 22 Increased Prices:....................................................................................................................... 22 Consumer Spending:.................................................................................................................22 Economic Slowdown:............................................................................................................... 22 Balancing the Impacts:.................................................................................................................... 22 Strategies to Mitigate Negative Impacts:........................................................................................ 22 Diversification:......................................................................................................................... 22 Domestic Production:................................................................................................................22 Inflation Control:...................................................................................................................... 22 Sector-Specific Export Performance:.............................................................................................. 22 Observation:.................................................................................................................................... 22 Policy Formulation:......................................................................................................................... 23 Targeted Support:......................................................................................................................23 Risk Mitigation:...............................................................................................................................23 Balancing Act:.......................................................................................................................... 23 Long-Term Strategy:........................................................................................................................23 Sustainable Growth:..................................................................................................................23 Case Study: Bangladesh:................................................................................................................. 23 Overview of Bangladesh's Economic Context:............................................................................... 23 Economic Structure and Growth:.................................................................................................... 23 GDP Growth:............................................................................................................................ 23 Poverty Reduction:....................................................................................................................24 Industrial Development:............................................................................................................24 Demographics:.......................................................................................................................... 24 Export Sector Dynamics:.................................................................................................................24 Ready-Made Garments (RMG):............................................................................................... 24 Frozen Fish:.............................................................................................................................. 24 Pharmaceuticals:....................................................................................................................... 24 Jute Products:............................................................................................................................ 24 Currency Management and Devaluation:........................................................................................24 Currency Policy:....................................................................................................................... 24 Devaluation Strategy:................................................................................................................24 Impact of Devaluation:.................................................................................................................... 25 3 Page 183 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Export Competitiveness:...........................................................................................................25 Import Costs:.............................................................................................................................25 Balance of Payments:................................................................................................................25 Supportive Policies:.................................................................................................................. 25 Managing Inflation:.................................................................................................................. 25 Diversifying Exports:................................................................................................................25 Global Integration:.................................................................................................................... 25 Case Study: Bhutan......................................................................................................................... 26 Overview of Bhutan's Economic Context:...................................................................................... 26 Economic Structure and Primary Exports:...................................................................................... 26 Electricity:....................................................................................................................................... 26 Hydropower Dominance:..........................................................................................................26 Revenue Generation:.................................................................................................................26 Minerals:..........................................................................................................................................26 Mineral Resources:................................................................................................................... 26 Economic Contribution:............................................................................................................26 Agricultural Products:..................................................................................................................... 26 Agricultural Exports:................................................................................................................ 26 Challenges:................................................................................................................................26 Economic Policies and Currency Management:..............................................................................26 Currency Peg:.................................................................................................................................. 26 Peg to Indian Rupee:.................................................................................................................27 Exchange Rate Stability:...........................................................................................................27 Trade Policies:................................................................................................................................. 27 Export Promotion:.....................................................................................................................27 Economic Diversification:........................................................................................................ 27 Currency Adjustments:....................................................................................................................27 Devaluation Episodes:.............................................................................................................. 27 Economic Reforms:.................................................................................................................. 27 Electricity Sector:............................................................................................................................ 27 Pre-Devaluation Performance:..................................................................................................27 Post-Devaluation Impact:..........................................................................................................27 Mineral Exports:..............................................................................................................................27 Pre-Devaluation Performance:..................................................................................................27 Post-Devaluation Impact:..........................................................................................................28 Pre-Devaluation Performance:..................................................................................................28 Post-Devaluation Impact:..........................................................................................................28 Comparative Analysis with Bangladesh:.........................................................................................28 Economic Size and Diversity:......................................................................................................... 28 Bangladesh:...............................................................................................................................28 Bhutan:......................................................................................................................................28 Currency Management:................................................................................................................... 28 Bangladesh:...............................................................................................................................28 Bhutan:......................................................................................................................................28 4 Page 184 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Export Performance:........................................................................................................................28 Bangladesh:...............................................................................................................................28 Bhutan:......................................................................................................................................29 Historical Instances of Currency Devaluation in Bhutan:...............................................................29 Overview:........................................................................................................................................ 29 Key Devaluation Episodes:............................................................................................................. 29 Early Devaluation Efforts (1980s–1990s):......................................................................................29 Context:.....................................................................................................................................29 Devaluation Actions:................................................................................................................ 29 Impact:...................................................................................................................................... 29 Devaluation in the Early 2000s:...................................................................................................... 29 Context:.....................................................................................................................................29 Devaluation Actions:................................................................................................................ 29 Impact:...................................................................................................................................... 30 Post-2008 Financial Crisis:..............................................................................................................30 Context:.....................................................................................................................................30 Devaluation Actions:................................................................................................................ 30 Impact:...................................................................................................................................... 30 Motivations for Devaluation:.......................................................................................................... 30 Bhutan:......................................................................................................................................30 Bangladesh:...............................................................................................................................30 Impact on Export Sectors:............................................................................................................... 30 Bhutan:......................................................................................................................................30 Bangladesh:...............................................................................................................................30 Economic Resilience and Stability:.................................................................................................31 Bhutan:......................................................................................................................................31 Bangladesh:...............................................................................................................................31 Broader Implications in a Regional Context................................................................................... 31 Regional Trade Dynamics:.............................................................................................................. 31 Sector-Specific Responses:..............................................................................................................31 Ready-Made Garments (RMG) Sector:...........................................................................................31 Bangladesh:..................................................................................................................................... 32 Impact of Devaluation:............................................................................................................. 32 Challenges:................................................................................................................................32 Sector Presence:........................................................................................................................ 32 Frozen Fish Industry:.......................................................................................................................32 Impact of Devaluation:............................................................................................................. 32 Market Dynamics:.....................................................................................................................32 Sector Presence:........................................................................................................................ 32 Pharmaceutical Sector:..............................................................................................................32 Impact of Devaluation:............................................................................................................. 32 Sector Dynamics:...................................................................................................................... 32 Sector Presence:........................................................................................................................ 32 Jute Products Industry:.................................................................................................................... 33 5 Page 185 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact of Devaluation:............................................................................................................. 33 Challenges:................................................................................................................................33 Sector Presence:........................................................................................................................ 33 Comparative Analysis of Export Sectors:....................................................................................... 33 Economic Diversification:...............................................................................................................33 Bangladesh:...............................................................................................................................33 Bhutan:......................................................................................................................................33 Sector-Specific Gains:..................................................................................................................... 33 Bangladesh:...............................................................................................................................33 Bhutan:......................................................................................................................................33 Challenges and Mitigating Factors:.................................................................................................33 Bangladesh:...............................................................................................................................33 Bhutan:......................................................................................................................................34 Unique Differences:.........................................................................................................................34 Hydropower Dominance in Bhutan:................................................................................................34 Import Dependency:..................................................................................................................34 Economic Stability and Flexibility:.......................................................................................... 34 Comparative Analysis:.................................................................................................................... 34 Bangladesh vs. Bhutan: Key Differences:.......................................................................................34 Economic Structure:........................................................................................................................ 34 Diverse Economy:.....................................................................................................................34 Manufacturing Dominance:...................................................................................................... 35 High Population Density:..........................................................................................................35 Economic Policies:....................................................................................................................35 Hydropower Dependency:........................................................................................................ 35 Limited Industrial Base:............................................................................................................35 Small Population:......................................................................................................................35 Economic Stability:...................................................................................................................35 Export Composition:....................................................................................................................... 35 Bangladesh:..................................................................................................................................... 35 Ready-Made Garments:............................................................................................................ 35 Pharmaceuticals:....................................................................................................................... 35 Jute Products:............................................................................................................................ 35 Frozen Fish:.............................................................................................................................. 36 Bhutan:............................................................................................................................................ 36 Hydropower:............................................................................................................................. 36 Agriculture:............................................................................................................................... 36 Minerals:................................................................................................................................... 36 Impact of Currency Devaluation:.................................................................................................... 36 Positive Impacts:............................................................................................................................. 36 Increased Export Competitiveness:...........................................................................................36 Revenue Growth:...................................................................................................................... 36 Negative Impacts:............................................................................................................................36 Higher Import Costs:.................................................................................................................36 6 Page 186 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Inflationary Pressures:.............................................................................................................. 36 Hydropower Exports:................................................................................................................36 Niche Agricultural Products:.................................................................................................... 36 Limited Industrial Impact:........................................................................................................ 37 Imported Goods:....................................................................................................................... 37 Flexible Policy Tools:............................................................................................................... 37 Sector-Specific Strategies:........................................................................................................ 37 Currency Peg Considerations:...................................................................................................37 Hydropower Focus:...................................................................................................................37 Lessons Learned:............................................................................................................................. 37 Key Insights for Policymakers:....................................................................................................... 37 Tailoring Currency Policy to Economic Structure:......................................................................... 37 Dynamic Policy Use:................................................................................................................ 37 Sectoral Support:.......................................................................................................................37 Stability and Diversification:.................................................................................................... 38 Optimizing Hydropower:.......................................................................................................... 38 Addressing Import Cost Challenges:...............................................................................................38 Cost Management:.................................................................................................................... 38 Inflation Control:...................................................................................................................... 38 Local Production Enhancement:............................................................................................... 38 Economic Resilience:................................................................................................................38 Leveraging Export Competitiveness:.............................................................................................. 38 Trade Agreements:....................................................................................................................38 Quality and Branding:...............................................................................................................38 Niche Markets:..........................................................................................................................39 Trade Facilitation:..................................................................................................................... 39 Comparative Advantage and Policy Synergies:.............................................................................. 39 Comparative Analysis:..............................................................................................................39 Integrated Approach:................................................................................................................ 39 Regional Cooperation:.............................................................................................................. 39 Holistic Development:.............................................................................................................. 39 Practical Implications for Future Policy..........................................................................................39 Strategic Policy Formulation:................................................................................................... 39 Economic Diversification and Innovation:............................................................................... 39 Capacity Building and Institutional Strengthening:..................................................................40 Strategies for Enhancing Export Performance:............................................................................... 40 Diversifying Export Markets:..........................................................................................................40 Expanding Market Reach:.........................................................................................................40 Trade Missions and Fairs:......................................................................................................... 40 Free Trade Agreements (FTAs):............................................................................................... 40 Targeting Niche Markets:..........................................................................................................40 Organic and Sustainable Products:........................................................................................... 40 Specialty Products:....................................................................................................................40 Improving Product Quality:.............................................................................................................40 7 Page 187 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Quality Assurance Programs:................................................................................................... 40 Certification and Standards:......................................................................................................41 Research and Development (R&D):......................................................................................... 41 Brand Building:.........................................................................................................................41 Marketing Campaigns:..............................................................................................................41 Country Branding:.................................................................................................................... 41 Reducing Reliance on Imported Inputs:.......................................................................................... 41 Local Sourcing Initiatives:........................................................................................................41 Support for SMEs:.................................................................................................................... 41 Investment Incentives:.............................................................................................................. 41 Enhancing Agricultural Productivity:....................................................................................... 41 Modern Farming Techniques:................................................................................................... 41 Agricultural Research:.............................................................................................................. 42 Strengthening Infrastructure and Logistics:.................................................................................... 42 Improving Transportation Networks:........................................................................................42 Port Modernization:.................................................................................................................. 42 Integrated Logistics Systems:................................................................................................... 42 Enhancing Digital Infrastructure:............................................................................................. 42 E-Government Services:........................................................................................................... 42 Digital Trade Platforms:............................................................................................................42 Providing Financial Support and Incentives:.................................................................................. 42 Export Financing:......................................................................................................................42 Export Credit Agencies (ECAs):.............................................................................................. 42 Subsidized Loans:..................................................................................................................... 42 Tax Incentives:.......................................................................................................................... 43 Tax Breaks:............................................................................................................................... 43 Duty Drawbacks:...................................................................................................................... 43 Enhancing Human Capital:..............................................................................................................43 Training and Capacity Building:...............................................................................................43 Vocational Training Programs:................................................................................................. 43 Industry-Academia Collaboration:............................................................................................43 Entrepreneurship Support:........................................................................................................ 43 Business Incubators:................................................................................................................. 43 Innovation Hubs:.......................................................................................................................43 Policy Recommendations for Managing Exchange Rate Movements:........................................... 43 Maintaining Macroeconomic Stability:...........................................................................................43 Monetary Policy:.......................................................................................................................44 Interest Rate Adjustments:........................................................................................................44 Money Supply Management:....................................................................................................44 Fiscal Discipline:...................................................................................................................... 44 Efficient Public Spending:........................................................................................................ 44 Debt Management:....................................................................................................................44 Controlling Inflation:.......................................................................................................................44 Inflation Targeting:................................................................................................................... 44 8 Page 188 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Clear Communication:.............................................................................................................. 44 Regular Monitoring:..................................................................................................................44 Price Stability Measures:.......................................................................................................... 44 Subsidies for Essential Goods:..................................................................................................44 Price Controls:.......................................................................................................................... 45 Supporting Export-Oriented Industries:.......................................................................................... 45 Export Incentives:..................................................................................................................... 45 Tax Breaks and Rebates:...........................................................................................................45 Export Subsidies:...................................................................................................................... 45 Trade Facilitation:..................................................................................................................... 45 Simplifying Export Procedures:................................................................................................45 Modernizing Customs Operations:........................................................................................... 45 Exchange Rate Management:.......................................................................................................... 45 Managed Float System:.............................................................................................................45 Foreign Exchange Reserves:.....................................................................................................45 Exchange Rate Bands:.............................................................................................................. 45 Market Intervention:................................................................................................................. 45 Forex Market Operations:......................................................................................................... 46 Currency Swaps:....................................................................................................................... 46 Enhancing Export Diversification................................................................................................... 46 Diversifying Export Base:.........................................................................................................46 Value-Added Exports:...............................................................................................................46 New Export Sectors:................................................................................................................. 46 Sectoral Support:.......................................................................................................................46 Sector-Specific Policies:........................................................................................................... 46 Industry Clusters:...................................................................................................................... 46 Building Resilience to External Shocks:......................................................................................... 46 Economic Diversification:........................................................................................................ 46 Broadening Economic Base:.....................................................................................................46 Domestic Market Strengthening:.............................................................................................. 46 Risk Management Frameworks:............................................................................................... 46 Hedging Strategies:...................................................................................................................47 Crisis Response Plans:.............................................................................................................. 47 Capacity Building and Institutional Strengthening:........................................................................ 47 Capacity Building Programs:....................................................................................................47 Training and Development:.......................................................................................................47 International Cooperation:........................................................................................................ 47 Institutional Strengthening:.......................................................................................................47 Policy Coordination:................................................................................................................. 47 Data and Research:................................................................................................................... 47 Enhancing Financial Sector Stability:............................................................................................. 47 Regulatory Oversight:...............................................................................................................47 Prudential Regulation:.............................................................................................................. 47 Banking Sector Health:............................................................................................................. 47 9 Page 189 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Financial Inclusion:...................................................................................................................48 Microfinance Initiatives:...........................................................................................................48 Digital Finance:.........................................................................................................................48 Case Studies of Effective Policy Responses:............................................................................48 Case Study 1: South Korea....................................................................................................... 48 Background:..............................................................................................................................48 Policy Measures:.......................................................................................................................48 Export-Oriented Industrialization:............................................................................................ 48 Managed Exchange Rate:......................................................................................................... 48 Financial and Institutional Support:..........................................................................................48 Human Capital Development:...................................................................................................48 Outcomes:........................................................................................................................................48 Rapid Export Growth:...............................................................................................................49 Diversified Economy:............................................................................................................... 49 Improved Living Standards:..................................................................................................... 49 Lessons for Bangladesh and Bhutan:.............................................................................................. 49 Integrated Policy Approach:..................................................................................................... 49 Investment in Human Capital:.................................................................................................. 49 Institutional Support for Exports:............................................................................................. 49 Case Study 2: China........................................................................................................................ 49 Background:..............................................................................................................................49 Currency Devaluation:.............................................................................................................. 49 Special Economic Zones (SEZs):............................................................................................. 49 Infrastructure Development:..................................................................................................... 49 Trade Policies:...........................................................................................................................49 Dominance in Global Trade:.....................................................................................................50 Economic Growth:.................................................................................................................... 50 Industrial Upgrading:................................................................................................................ 50 Strategic Use of SEZs:.............................................................................................................. 50 Long-Term Infrastructure Investment:......................................................................................50 Adaptive Trade Policies:...........................................................................................................50 Case Study 3: India..........................................................................................................................50 Background:..............................................................................................................................50 Exchange Rate Liberalization:..................................................................................................50 Trade Liberalization:.................................................................................................................50 Incentives for Exporters:...........................................................................................................50 Foreign Direct Investment (FDI):............................................................................................. 50 Export Growth:......................................................................................................................... 50 Economic Diversification:........................................................................................................ 51 Increased FDI:...........................................................................................................................51 Liberalizing Exchange Rate Regimes:......................................................................................51 Encouraging FDI:......................................................................................................................51 Supportive Incentives for Exporters:........................................................................................ 51 Best Practices and Policy Recommendations:.................................................................................51 10 Page 190 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Integrated Policy Approach:............................................................................................................51 Combine Exchange Rate Management with Broader Economic Policies:...............................51 Institutional and Financial Support:................................................................................................ 51 Establish Robust Institutions:................................................................................................... 51 Export Credit Agencies:............................................................................................................51 Human Capital and Infrastructure Development:............................................................................51 Invest in Education and Skills Development:...........................................................................51 Develop Infrastructure:............................................................................................................. 51 Adaptive Trade and Industrial Policies:.......................................................................................... 52 Implement Flexible Trade Policies:.......................................................................................... 52 Supportive Industrial Policies:..................................................................................................52 Strategic Use of SEZs:.....................................................................................................................52 Create Special Economic Zones:.............................................................................................. 52 Long-Term Economic Planning:..................................................................................................... 52 Focus on Sustainable Growth:.................................................................................................. 52 Enhancement of Export Competitiveness:...................................................................................... 52 Challenges of Higher Production Costs:......................................................................................... 52 Comparative Insights:......................................................................................................................53 Strategies for Export Enhancement:................................................................................................53 Long-Term Impact on Economic Development.............................................................................. 53 Increased Foreign Exchange Earnings:.....................................................................................54 Higher Employment Rates:.......................................................................................................54 Improved Standards of Living:................................................................................................. 54 Recommendations for Policymakers:..............................................................................................54 Implement Balanced Currency Management Policies:................................................................... 54 Moderate Devaluation:..............................................................................................................54 Continuous Monitoring:............................................................................................................54 Address Inflationary Pressures:.......................................................................................................54 Monetary Policy Tools:.............................................................................................................55 Fiscal Discipline:...................................................................................................................... 55 Support Export-Oriented Industries:............................................................................................... 55 Subsidies and Incentives:..........................................................................................................55 Infrastructure Development:..................................................................................................... 55 Diversify Export Markets and Products:......................................................................................... 55 Market Expansion:.................................................................................................................... 55 Product Diversification:............................................................................................................ 55 Enhance Competitiveness Through Quality Improvements:...........................................................55 Quality Standards:.....................................................................................................................55 Training and Development:.......................................................................................................55 Develop Financial Instruments for Exporters:................................................................................ 55 Export Credit Facilities:............................................................................................................55 Hedging Mechanisms:.............................................................................................................. 56 Strengthen Economic Resilience:....................................................................................................56 Economic Diversification:........................................................................................................ 56 11 Page 191 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sustainable Development:........................................................................................................ 56 Foster Regional Cooperation:..........................................................................................................56 Regional Trade Agreements:.....................................................................................................56 Policy Coordination:................................................................................................................. 56 Enhance Data Collection and Analysis:.......................................................................................... 56 Robust Data Systems:............................................................................................................... 56 Policy Research:........................................................................................................................56 Promote Public-Private Partnerships:..............................................................................................56 Collaborative Efforts:................................................................................................................56 Industry Associations:...............................................................................................................56 Future Research Directions:............................................................................................................ 57 Long-Term Impacts of Currency Devaluation:............................................................................... 57 Sustainability of Export Growth:.............................................................................................. 57 Structural Changes:...................................................................................................................57 Role of Complementary Economic Policies:.................................................................................. 57 Monetary and Fiscal Policies:...................................................................................................57 Trade Policies:...........................................................................................................................57 Sector-Specific Analysis:................................................................................................................ 57 In-Depth Sector Studies:........................................................................................................... 57 Case Studies:.............................................................................................................................57 Global Economic Trends:................................................................................................................58 Global Trade Dynamics:........................................................................................................... 58 Economic Shocks:.....................................................................................................................58 Comparative Studies:.......................................................................................................................58 Cross-Country Comparisons:....................................................................................................58 Regional Analysis:.................................................................................................................... 58 Impact on Small and Medium Enterprises (SMEs):........................................................................58 SME Exporters:.........................................................................................................................58 Support Mechanisms:................................................................................................................58 Technological and Innovation Factors:............................................................................................58 Innovation Impact:.................................................................................................................... 58 Adoption of Technology:.......................................................................................................... 59 Environmental and Social Impacts:.................................................................................................59 Sustainable Development:........................................................................................................ 59 Corporate Social Responsibility (CSR):................................................................................... 59 Clarifying More of Devaluation:..................................................................................................... 59 Impact on Export Performance in Bangladesh and Bhutan:........................................................... 59 Importance of the Export Sector in Bangladesh:.............................................................................59 Economic Contribution:.................................................................................................................. 59 Gross Domestic Product (GDP):...............................................................................................59 Foreign Exchange Earnings:..................................................................................................... 60 Key Export Sectors:.........................................................................................................................60 Ready-Made Garments (RMG):............................................................................................... 60 Frozen Fish:.............................................................................................................................. 60 12 Page 192 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Pharmaceuticals:....................................................................................................................... 60 Jute Products:............................................................................................................................ 60 Employment Generation:.................................................................................................................60 Job Creation:............................................................................................................................. 60 Skill Development:................................................................................................................... 60 Social Development:....................................................................................................................... 61 Women's Empowerment:.......................................................................................................... 61 Rural Development:.................................................................................................................. 61 Technological Advancements:.........................................................................................................61 Innovation and Modernization:.................................................................................................61 Sustainability Initiatives:.......................................................................................................... 61 Strategic Importance:.......................................................................................................................61 Economic Diversification:........................................................................................................ 61 Global Integration:.................................................................................................................... 61 Definition and Relevance of Currency Devaluation:...................................................................... 62 Definition of Currency Devaluation:...............................................................................................62 Mechanisms of Currency Devaluation:........................................................................................... 62 Monetary Policy Tools:.............................................................................................................62 Fixed Exchange Rate Adjustments:.......................................................................................... 62 Foreign Exchange Reserves:.....................................................................................................62 Relevance of Currency Devaluation:........................................................................................ 62 Export Competitiveness:................................................................................................................. 62 Boosting Exports:......................................................................................................................62 Market Penetration:...................................................................................................................62 Cost-Push Inflation:.................................................................................................................. 63 Imported Inflation:.................................................................................................................... 63 Higher Import Costs:.................................................................................................................63 Trade Balance Adjustment:.......................................................................................................63 Economic Stability:......................................................................................................................... 63 Short-Term Gains vs. Long-Term Stability:............................................................................. 63 Policy Balancing Act:............................................................................................................... 63 Strategic Considerations:.................................................................................................................63 Sectoral Impact:........................................................................................................................ 63 Global Economic Conditions:...................................................................................................63 Complementary Policies:.......................................................................................................... 64 13 Page 193 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Understanding Currency Devaluation Definition and Mechanisms of Currency Devaluation: Currency devaluation is a deliberate policy action taken by a country's central bank or government to reduce the value of its national currency relative to other currencies in the foreign exchange market. This reduction can be achieved through various mechanisms, each with distinct approaches and implications. Reducing Interest Rates: Mechanism: Central banks can lower interest rates to make borrowing cheaper, thereby increasing the money supply. Impact: Lower interest rates generally lead to a decrease in the value of the currency because investors seek higher returns elsewhere, leading to capital outflows and a weaker currency. Quantitative Easing (QE): Mechanism: QE involves the central bank purchasing government securities or other financial assets to inject liquidity into the economy. Impact: By increasing the money supply, QE lowers the currency's value, making exports cheaper and more competitive internationally. Direct Intervention in the Foreign Exchange Market: Mechanism: Central banks can buy or sell their own currency in the foreign exchange market to influence its value. Impact: Selling the national currency increases its supply and reduces its value, whereas buying it reduces supply and supports its value. When devaluing, the central bank would sell the currency. Fiscal Policies: Mechanism: Governments can implement fiscal policies that indirectly lead to devaluation. For example, increasing public spending without corresponding increases in revenue can lead to inflationary pressures, ultimately reducing the currency's value. 15 Page 194 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact: Inflation reduces purchasing power and can lead to a weaker currency as the relative value declines compared to other currencies. Economic Rationale for Currency Devaluation Countries may resort to devaluation for several strategic economic reasons: Boosting Export Competitiveness: Mechanism: A weaker currency makes a country's exports cheaper and more attractive to foreign buyers. Impact: Increased demand for exports can stimulate economic growth, improve trade balances, and increase foreign exchange earnings. Reducing Trade Deficits: Mechanism: By making exports cheaper and imports more expensive, devaluation can help correct trade imbalances. Impact: A reduced trade deficit strengthens the overall economic position of a country. Stimulating Economic Growth: Increasing Production: Mechanism: Devaluation can lead to higher production levels as export-oriented industries ramp up output to meet increased demand. Impact: Higher production can create jobs, increase incomes, and boost GDP growth. Controlling Inflation: Mechanism: In some cases, controlled devaluation can help manage deflationary pressures by increasing the cost of imports, thus raising the overall price level. 16 Page 195 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact: Moderate inflation can be beneficial for economic stability and growth. Potential Risks and Downsides of Currency Devaluation While currency devaluation can offer several economic benefits, it also comes with potential risks and downsides that need careful consideration. Making Imports Expensive: Mechanism: Devaluation makes imports more expensive, which can lead to higher overall price levels. Impact: Rising inflation can erode consumer purchasing power and lead to higher costs of living. Cost of Imported Goods: Mechanism: Essential imports, such as raw materials and capital goods, become more expensive. Impact: Increased production costs can offset the benefits of cheaper exports, particularly for industries reliant on imported inputs. Debt Burden: Mechanism: Devaluation can increase the burden of foreign-denominated debt. Impact: Higher debt servicing costs can strain government budgets and corporate finances, potentially leading to financial instability. Erosion of Investor Confidence: Mechanism: Frequent or significant devaluations can undermine investor confidence. Impact: Reduced foreign investment can slow economic growth and development. Understanding the definition, mechanisms, and economic rationale behind currency devaluation is crucial for comprehending its role as a policy tool. While it can enhance export competitiveness and correct trade imbalances, the potential risks, such as inflation and increased debt burdens, require 17 Page 196 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) careful management. This study will further explore these dynamics in the context of Bangladesh, providing valuable insights for policymakers and stakeholders. Objectives Behind Devaluation: Enhancing Export Competitiveness: Primary Objective: The foremost objective behind currency devaluation is to enhance a country's export competitiveness. By deliberately lowering the value of the national currency, the cost of goods and services produced within the country decreases when priced in foreign currencies. This makes the country's exports more attractive to international buyers due to the lower prices. Mechanism: Price Advantage: Devaluation reduces the price of exported goods in terms of foreign currencies. For example, if the Bangladeshi Taka is devalued against the US Dollar, the price of Bangladeshi garments in the US market decreases, making them more competitive compared to garments from other countries. Increased Demand: The lower prices can lead to higher demand for the country's exports, driving up export volumes and potentially increasing overall revenue from exports. Impact: Boost in Export Volumes: Increased competitiveness can lead to higher sales volumes abroad. Revenue Growth: Higher export volumes can contribute to greater foreign exchange earnings, which can help improve the country's trade balance and economic stability. Addressing Balance of Payments Issues Primary Objective: Another critical objective of currency devaluation is to address balance of payments (BoP) issues. Countries facing persistent trade deficits, where imports consistently exceed exports, may resort to devaluation to correct these imbalances. Reducing Trade Deficit: By making exports cheaper and imports more expensive, devaluation helps shift the trade balance. As exports increase due to enhanced competitiveness and imports decrease due to higher costs, the trade deficit narrows. Attracting Foreign Investment: 18 Page 197 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) A weaker currency can make the country more attractive for foreign direct investment (FDI) and portfolio investments, as assets and investments become cheaper for foreign investors. Improved Trade Balance: A reduced trade deficit strengthens the overall economic position of a country and can lead to a surplus in the current account. Increased Foreign Reserves: Higher export earnings and potential foreign investment inflows increase foreign exchange reserves, enhancing economic stability and resilience. Stimulating Economic Growth Primary Objective: Devaluation can serve as a catalyst for broader economic growth by stimulating activity in export-oriented industries and supporting overall economic expansion. Industrial Growth: Increased demand for exports can lead to higher production levels in export-oriented industries. This can create a multiplier effect, boosting related industries and services. Employment Generation: Higher production often necessitates more labor, leading to job creation and reducing unemployment rates. Economic Expansion: Increased industrial activity and job creation contribute to higher GDP growth rates. Income Growth: More employment and higher production levels can lead to increased incomes, improving standards of living and consumer spending. Managing Inflation and Monetary Policy: Primary Objective: In some instances, devaluation is used to manage domestic economic conditions, including inflation and monetary policy objectives. Inflation Control: Controlled devaluation can help manage deflationary pressures by increasing the cost of imports, thereby raising the overall price level to more desirable levels. Monetary Policy Alignment:\ 19 Page 198 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation can be aligned with broader monetary policies, such as interest rate adjustments and quantitative easing, to achieve macroeconomic stability. Balanced Inflation: Moderate inflation can be beneficial for economic stability and growth, preventing deflation and supporting sustainable price levels. Monetary Stability: Aligning devaluation with other monetary policy tools helps maintain overall economic stability and supports long-term growth objectives. The primary objectives behind currency devaluation encompass enhancing export competitiveness, addressing balance of payments issues, stimulating economic growth, and managing inflation and monetary policy. By making a country's exports cheaper and more attractive to foreign buyers, devaluation can lead to increased export volumes and revenue. Additionally, it can help correct trade imbalances, stimulate industrial growth, create jobs, and support broader economic development. However, the effectiveness of devaluation depends on various factors, including the structure of the economy and the responsiveness of export industries. This study aims to provide policymakers with evidence-based insights to make informed decisions and achieve these objectives in the context of Bangladesh's economy. Positive and Negative Impacts of Devaluation: Positive Impacts: Increased Export Volumes: Price Competitiveness: Devaluation makes a country’s goods and services cheaper in the international market. As prices drop, foreign buyers find these goods more attractive, leading to higher demand. Higher Demand: As export prices decrease, international demand for these goods rises, resulting in increased export volumes. Market Expansion: Businesses can expand into new markets or increase their market share in existing ones due to competitive pricing. Enhanced Revenue: Foreign Exchange Earnings: With increased export volumes, the inflow of foreign currency rises. Revenue Growth: Higher export sales translate to increased revenue for businesses, improving profitability. 20 Page 199 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Economic Boost: Enhanced revenues contribute to overall economic growth, benefiting sectors linked to exports. Improved Trade Balance: Reduced Trade Deficit: By boosting exports and making imports more expensive, devaluation can help correct trade imbalances. Balance of Payments: A lower trade deficit or a surplus strengthens the country's balance of payments. Foreign Reserves: Increased foreign currency earnings enhance foreign exchange reserves, promoting economic stability. Negative Impacts: Higher Production Costs for Exporters: Cost of Imports: Devaluation makes imported goods and raw materials more expensive, as more of the domestic currency is needed to purchase the same amount of foreign goods. Increased Costs: Exporters who rely on imported inputs face higher production costs, potentially reducing profit margins. Supply Chain Disruptions: Industries heavily dependent on foreign inputs might experience disruptions, affecting production timelines and costs. Inflationary Pressures: Cost-Push Inflation: As the cost of imported goods rises, the general price level in the economy tends to increase. Reduced Purchasing Power: Higher prices erode the purchasing power of consumers, leading to reduced disposable income and consumption. 21 Page 200 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Economic Strain: Inflation can lead to higher living costs, affecting the standard of living and creating social discontent. Potentially Diminished Domestic Demand: Increased Prices: The higher cost of imports not only affects producers but also consumers, who face higher prices for goods and services. Consumer Spending: As prices rise, consumers may cut back on spending, leading to lower domestic demand. Economic Slowdown: Reduced consumer spending can slow down economic growth, offsetting some of the gains from increased exports. Balancing the Impacts: The net effect of devaluation depends on various factors, including the elasticity of demand for exports and imports, the proportion of imported inputs in production, and the overall economic environment. Policymakers must weigh these positive and negative impacts to devise strategies that maximize benefits while mitigating adverse effects. Strategies to Mitigate Negative Impacts: Diversification: Encouraging diversification of export products and markets can reduce dependency on imported inputs and spread risk. Domestic Production: Promoting local production of inputs can reduce reliance on expensive imports, stabilizing production costs. Inflation Control: Implementing measures to control inflation, such as monetary tightening or targeted subsidies, can help maintain purchasing power. By understanding and addressing both the positive and negative impacts of currency devaluation, policymakers can better harness its potential to enhance export performance and drive economic growth, while minimizing adverse consequences for the economy and society. Sector-Specific Export Performance: Observation: 22 Page 201 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sector-specific analysis reveals how different industries respond to currency devaluation. For instance, the ready-made garments sector in Bangladesh may show a significant increase in export volumes post-devaluation, while the pharmaceuticals sector might exhibit a more moderate response. This differentiation helps policymakers tailor strategies to support specific sectors more effectively. Policy Formulation: Targeted Support: By understanding which sectors benefit the most from devaluation, policymakers can design targeted support measures to boost these industries. For example, if the ready-made garments sector shows substantial growth post-devaluation, policies could focus on enhancing infrastructure, providing incentives, and reducing barriers for this sector. Risk Mitigation: Balancing Act: Graphical data can help identify potential risks, such as inflationary pressures or increased production costs due to higher import prices. Policymakers can use this information to implement measures that mitigate these risks, ensuring a balanced approach to economic growth. Long-Term Strategy: Sustainable Growth: By analyzing long-term trends, policymakers can formulate strategies that ensure sustainable growth. Understanding the cyclical nature of devaluation impacts can help in planning for future devaluation events and their potential effects on the economy. Case Study: Bangladesh: Overview of Bangladesh's Economic Context: Bangladesh, a South Asian developing country, has made significant strides in economic growth over the past few decades. The country's economic landscape is characterized by a strong reliance on its export sector, which serves as a critical driver of GDP growth, employment, and foreign exchange earnings. Here, we explore the key aspects of Bangladesh's economic context, focusing on its export sector and the role of currency management in fostering export competitiveness. Economic Structure and Growth: GDP Growth: Bangladesh has experienced robust GDP growth, averaging around 6-7% annually in recent years. This growth is largely driven by the expansion of the industrial sector, particularly the ready-made garments (RMG) industry, and the steady performance of agriculture and services. 23 Page 202 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Poverty Reduction: Economic growth has contributed to significant poverty reduction, with millions of Bangladeshis moving out of poverty. However, income inequality and regional disparities remain challenges. Industrial Development: The industrial sector, especially manufacturing, plays a crucial role in the economy. The RMG sector is a global leader, while other industries such as pharmaceuticals, jute, and frozen fish also contribute substantially to export earnings. Demographics: Bangladesh has a large and youthful population, which provides a vast labor force. This demographic advantage supports labor-intensive industries like RMG but also necessitates continuous job creation to absorb the growing workforce. Export Sector Dynamics: Ready-Made Garments (RMG): The RMG sector is the backbone of Bangladesh’s export economy, accounting for over 80% of total export earnings. Bangladesh is one of the largest exporters of garments globally, benefiting from competitive labor costs and favorable trade agreements. Frozen Fish: The frozen fish industry, particularly shrimp farming, is another vital export sector. It provides significant employment and export revenue, mainly catering to markets in Europe, the US, and Japan. Pharmaceuticals: Bangladesh's pharmaceutical industry has grown rapidly, achieving self-sufficiency in medicine production and expanding into export markets. The sector benefits from skilled labor, regulatory support, and a growing domestic market. Jute Products: Historically known as "golden fiber," jute and jute products remain important for Bangladesh's economy. Despite global competition and shifts in demand, the sector still contributes to export earnings and rural employment. Currency Management and Devaluation: Currency Policy: The Bangladesh Bank, the country's central bank, plays a pivotal role in managing the currency, the Bangladeshi Taka (BDT). Currency policy aims to stabilize the BDT while supporting export competitiveness through strategic interventions. Devaluation Strategy: 24 Page 203 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Currency devaluation is used as a policy tool to enhance the competitiveness of Bangladeshi exports. By making the BDT cheaper relative to other currencies, the cost of Bangladeshi goods in international markets is reduced, potentially increasing demand and export volumes. Impact of Devaluation: Export Competitiveness: Devaluation can boost export competitiveness by lowering prices for foreign buyers. This is particularly beneficial for price-sensitive industries like RMG and frozen fish. Import Costs: However, devaluation also increases the cost of imported goods, including raw materials and intermediate goods required for production. This can lead to higher production costs and inflationary pressures. Balance of Payments: Devaluation aims to improve the balance of payments by increasing export earnings and reducing trade deficits. However, its effectiveness depends on the responsiveness of export sectors and the structure of imports. Supportive Policies: To maximize the benefits of devaluation, the government and central bank implement supportive policies such as subsidies for exporters, improvements in trade infrastructure, and regulatory reforms to ease business operations. Managing Inflation: Policymakers need to balance devaluation with measures to control inflation. This can include monetary policy adjustments, fiscal measures, and efforts to enhance domestic production capabilities. Diversifying Exports: While the RMG sector dominates exports, diversification into other sectors like pharmaceuticals and information technology is essential for sustainable growth. Policies that encourage innovation, skill development, and market expansion are critical. Global Integration: Strengthening trade relations and exploring new markets are vital for leveraging the benefits of devaluation. Participation in regional trade agreements and bilateral trade deals can open up new opportunities for Bangladeshi exporters. Bangladesh’s economic context, characterized by a strong export sector and strategic currency management, illustrates the complex interplay between devaluation and export performance. Understanding this relationship is crucial for policymakers aiming to enhance export competitiveness, ensure economic stability, and promote sustainable growth. The case of Bangladesh highlights the need for balanced and evidence-based policies that consider both the benefits and challenges of currency devaluation. 25 Page 204 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Case Study: Bhutan Overview of Bhutan's Economic Context: Bhutan, a small landlocked country in South Asia, presents a contrasting economic landscape to that of Bangladesh. Despite its proximity, Bhutan's economic structure and export profile differ significantly, offering a unique perspective on the impacts of currency devaluation. Understanding Bhutan's economic context helps in drawing comparative insights between the two countries. Economic Structure and Primary Exports: Electricity: Hydropower Dominance: Bhutan's economy heavily relies on hydropower, which constitutes a significant portion of its exports. The country exports a large percentage of its hydropower production to neighboring India, making electricity a crucial export commodity. Revenue Generation: Hydropower exports are a major source of revenue and foreign exchange for Bhutan, contributing significantly to the national economy. Minerals: Mineral Resources: Bhutan has rich mineral resources, including limestone, dolomite, and gypsum. These minerals are important export items, primarily sold to neighboring countries. Economic Contribution: The mining sector, though smaller compared to hydropower, plays a vital role in generating export revenue and supporting industrial activities. Agricultural Products: Agricultural Exports: Agriculture remains a key sector, with products like cardamom, apples, and oranges being notable exports. These products contribute to rural livelihoods and economic diversification. Challenges: The agricultural sector faces challenges such as limited arable land, climatic variability, and access to markets, which impact its export performance. Economic Policies and Currency Management: Currency Peg: 26 Page 205 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Peg to Indian Rupee: The Bhutanese Ngultrum (BTN) is pegged to the Indian Rupee (INR), reflecting Bhutan's close economic ties with India. This pegging helps stabilize the currency and facilitates trade with its largest trading partner. Exchange Rate Stability: The peg provides exchange rate stability, reducing volatility and uncertainty in trade transactions, particularly for exports to India. Trade Policies: Export Promotion: Bhutan's trade policies focus on promoting exports through various incentives, including subsidies, infrastructure development, and market access initiatives. Economic Diversification: Efforts are underway to diversify the economy and reduce reliance on hydropower by developing sectors like tourism, agriculture, and manufacturing. Currency Adjustments: Devaluation Episodes: Bhutan has experienced instances where adjustments in the currency peg were necessary to address economic imbalances and maintain competitiveness. These episodes offer insights into how devaluation impacts Bhutan's export performance. Economic Reforms: Devaluation has often been part of broader economic reform packages aimed at enhancing competitiveness, addressing fiscal deficits, and stimulating economic growth. Electricity Sector: Pre-Devaluation Performance: The hydropower sector has consistently been a strong performer, driven by long-term agreements with India and steady demand for electricity. Post-Devaluation Impact: Devaluation can enhance competitiveness by making Bhutanese electricity cheaper for Indian buyers. However, the impact is moderated by long-term fixed-price contracts and the currency peg. Mineral Exports: Pre-Devaluation Performance: 27 Page 206 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The mineral sector has shown steady growth, benefiting from regional demand and resource availability. Post-Devaluation Impact: Devaluation can boost mineral exports by reducing prices in foreign markets. However, higher import costs for mining equipment and inputs can offset some benefits. Agricultural Exports: Pre-Devaluation Performance: The agricultural sector faces challenges from limited production capacity and market access but remains a vital part of Bhutan's economy. Post-Devaluation Impact: Devaluation can make Bhutanese agricultural products more competitive in regional markets. However, increased costs for imported agricultural inputs and machinery can pose challenges. Comparative Analysis with Bangladesh: Economic Size and Diversity: Bangladesh: A larger, more diversified economy with significant export sectors like ready-made garments, pharmaceuticals, and jute products. Bhutan: A smaller, less diversified economy heavily reliant on hydropower and mineral exports, with a growing but challenged agricultural sector. Currency Management: Bangladesh: Employs active currency management and devaluation strategies to enhance export competitiveness. Bhutan: Pegs its currency to the Indian Rupee, focusing on exchange rate stability and minimizing volatility. Export Performance: Bangladesh: Experiences varied impacts of devaluation across different sectors, with significant benefits in price-sensitive industries like garments. 28 Page 207 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Bhutan: Benefits from devaluation in hydropower and minerals but faces challenges in agriculture and import-dependent sectors. The case study of Bhutan offers valuable insights into the nuanced effects of currency devaluation on a smaller, less diversified economy compared to Bangladesh. Bhutan's experience highlights the importance of currency stability, sector-specific responses, and the interplay between export competitiveness and import costs. By understanding these dynamics, policymakers in Bhutan and other developing countries can better navigate the challenges and opportunities presented by currency devaluation, fostering sustainable economic growth and resilience in a globalized economy. Historical Instances of Currency Devaluation in Bhutan: Overview: Bhutan, like many developing countries, has implemented currency devaluation as a strategic tool to enhance export competitiveness and address trade imbalances. Understanding the historical context and outcomes of these devaluations provides a comparative framework to analyze similar economic strategies in Bangladesh. This section delves into the key instances of currency devaluation in Bhutan, their motivations, and their impacts. Key Devaluation Episodes: Early Devaluation Efforts (1980s–1990s): Context: During the 1980s and 1990s, Bhutan's economy was in a phase of development with an emphasis on expanding its export base. The country's reliance on agriculture and the budding hydropower sector required a competitive edge in international markets. Devaluation Actions: The Bhutanese Ngultrum (BTN), pegged to the Indian Rupee (INR), saw periodic adjustments to align with regional economic conditions and maintain competitiveness. Impact: These early devaluations aimed at stabilizing the economy and boosting exports, particularly in agriculture and handicrafts. However, the impact was limited due to the nascent state of Bhutan's export sectors. Devaluation in the Early 2000s: Context: The early 2000s marked a significant period for Bhutan with the development of large-scale hydropower projects. The country sought to maximize its export revenue from electricity sales to India. Devaluation Actions: 29 Page 208 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Minor adjustments in the exchange rate were made to ensure that Bhutanese electricity remained competitively priced in the Indian market. Impact: The devaluation helped maintain the attractiveness of Bhutanese electricity exports. However, the impact on other sectors was minimal as hydropower dominated the export landscape. Post-2008 Financial Crisis: Context: The global financial crisis of 2008 prompted many countries, including Bhutan, to reassess their economic strategies. Bhutan faced reduced export demand and increased economic uncertainty. Devaluation Actions: Bhutan adjusted its currency value to cushion the economy against the global downturn and to make its exports more competitive. Impact: The devaluation during this period helped mitigate the adverse effects of the global financial crisis on Bhutan's economy. It ensured that hydropower exports remained stable, and supported the modest growth in mineral and agricultural exports. Motivations for Devaluation: Bhutan: Focused on maintaining competitiveness primarily in the hydropower sector and addressing trade imbalances. The country's economic policies were largely influenced by its trade relationship with India. Bangladesh: Devaluation aimed at boosting competitiveness across multiple export sectors, including ready-made garments, pharmaceuticals, and jute products, to address broader trade deficits and stimulate economic growth. Impact on Export Sectors: Bhutan: The impact of devaluation was most pronounced in the hydropower sector, with modest benefits observed in minerals and agriculture. The sector-specific focus limited the broader economic impact. Bangladesh: 30 Page 209 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation had varied impacts across different sectors. Ready-made garments and jute products saw significant benefits due to their price sensitivity, while pharmaceuticals experienced moderate gains. The broader industrial base allowed for a more diverse impact of devaluation. Economic Resilience and Stability: Bhutan: The peg to the Indian Rupee provided exchange rate stability, reducing volatility but also limiting the flexibility to adjust to economic changes independently. This stability helped cushion the economy during global downturns but posed challenges in diversifying the export base. Bangladesh: Bangladesh's more flexible currency management allowed for targeted devaluation to address specific economic needs. This flexibility facilitated responsive economic policies but also introduced higher volatility and inflationary pressures. Broader Implications in a Regional Context Regional Trade Dynamics: The comparison of devaluation strategies between Bhutan and Bangladesh highlights the importance of regional trade dynamics. Both countries have significant trade relationships with India, influencing their currency policies and economic strategies. Sector-Specific Responses: Understanding the sector-specific responses to devaluation in Bhutan provides valuable insights for Bangladesh. It underscores the need for tailored economic policies that consider the unique characteristics and competitive dynamics of each export sector. The lessons learned from Bhutan's devaluation experiences can inform policy recommendations for Bangladesh. These include the importance of maintaining a balance between currency stability and flexibility, and the need for supportive measures to mitigate the adverse effects of devaluation on import-dependent sectors. The historical instances of currency devaluation in Bhutan offer a rich comparative framework to analyze similar economic strategies in Bangladesh. By examining these events, the study provides a deeper understanding of the broader implications of devaluation in a regional context. The insights gained can help policymakers design effective strategies to enhance export competitiveness, support economic diversification, and ensure long-term economic resilience. The impact of currency devaluation on Bhutan's export performance is analyzed through a detailed examination of the country's key export sectors. This analysis is then compared with Bangladesh to identify common trends and unique differences, offering a comprehensive understanding of the broader regional dynamics. Ready-Made Garments (RMG) Sector: 31 Page 210 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Bangladesh: Impact of Devaluation: The RMG sector, a cornerstone of Bangladesh's economy, has generally benefited from currency devaluation. Devaluation makes Bangladeshi garments cheaper and more competitive in international markets, leading to increased export volumes and revenue. Challenges: Higher costs for imported raw materials and inflation can erode some of the competitive advantages gained from devaluation. Bhutan: Sector Presence: Bhutan's economy does not have a significant ready-made garments sector. Therefore, the impact of devaluation on this sector is negligible. Frozen Fish Industry: Impact of Devaluation: The frozen fish industry benefits from devaluation through enhanced price competitiveness, leading to increased export volumes. However, the industry faces challenges from higher import costs for feed and other inputs. Market Dynamics: Bangladesh's extensive aquaculture resources and established export markets help mitigate some of the negative effects of increased production costs. Sector Presence: The frozen fish industry in Bhutan is relatively small compared to Bangladesh. Devaluation's impact on this sector is limited, with modest gains in export competitiveness. Pharmaceutical Sector: Impact of Devaluation: The pharmaceutical sector experiences moderate benefits from devaluation. While export competitiveness increases, the sector's reliance on imported raw materials leads to higher production costs, balancing out some of the advantages. Sector Dynamics: Bangladesh's growing pharmaceutical industry benefits from established international markets and regulatory approvals, aiding in export growth despite increased input costs. Sector Presence: 32 Page 211 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Bhutan's pharmaceutical sector is underdeveloped compared to Bangladesh. The impact of devaluation is minimal, with limited changes in export performance. Jute Products Industry: Impact of Devaluation: The jute products industry sees significant benefits from devaluation. As a traditional export product with relatively lower reliance on imported inputs, jute products become highly competitive in global markets, boosting export volumes and revenue. Challenges: The primary challenge lies in maintaining consistent production quality and meeting international standards. Sector Presence: Bhutan's jute products industry is not as prominent as Bangladesh's. The impact of devaluation is modest, with limited improvements in export competitiveness. Comparative Analysis of Export Sectors: Economic Diversification: Bangladesh: A more diversified export base allows Bangladesh to leverage the benefits of devaluation across multiple sectors. However, the reliance on imported raw materials in some industries can counterbalance the positive effects. Bhutan: Bhutan's less diversified economy means that the benefits of devaluation are concentrated in a few sectors, such as hydropower and agriculture. This limits the broader economic impact of devaluation. Sector-Specific Gains: Bangladesh: Sectors like ready-made garments and jute products experience substantial gains from devaluation due to their export orientation and price sensitivity. Bhutan: Gains are more pronounced in the hydropower sector, with modest improvements in other sectors like agriculture. Challenges and Mitigating Factors: Bangladesh: 33 Page 212 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Increased production costs and inflation are significant challenges. However, established international markets, supportive economic policies, and sector-specific strategies help mitigate these challenges. Bhutan: Limited industrial diversification and smaller export volumes reduce the potential gains from devaluation. However, the stability provided by the peg to the Indian Rupee helps cushion against extreme volatility. Unique Differences: Hydropower Dominance in Bhutan: The hydropower sector dominates Bhutan's export landscape. Devaluation primarily enhances the price competitiveness of electricity exports to India, with minimal impact on other sectors. In contrast, Bangladesh's export sectors are more varied, allowing for a broader distribution of devaluation benefits and challenges. Import Dependency: Bangladesh's greater reliance on imported raw materials introduces significant cost challenges when devaluation occurs, affecting sectors like pharmaceuticals and ready-made garments. Bhutan's smaller industrial base and lower import dependency mean that the negative impacts of devaluation on production costs are less pronounced. Economic Stability and Flexibility: Bhutan's pegged currency system provides greater stability but less flexibility in responding to economic changes, limiting the scope for independent devaluation strategies. Bangladesh's more flexible currency management allows for targeted devaluation but introduces higher volatility and inflationary risks. The impact of currency devaluation on export performance in Bangladesh and Bhutan reveals both common trends and unique differences. While both countries aim to enhance export competitiveness and address trade imbalances through devaluation, the outcomes vary significantly due to differences in economic structure, sectoral composition, and external dependencies. By comparing these two countries, the study provides valuable insights into the broader regional dynamics and the effectiveness of devaluation as an economic policy tool. This analysis helps inform policymakers in both countries about the potential benefits and challenges of currency devaluation, guiding more nuanced and effective economic strategies. Comparative Analysis: Bangladesh vs. Bhutan: Key Differences: Economic Structure: Diverse Economy: 34 Page 213 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Bangladesh boasts a more diversified economy compared to Bhutan, with significant contributions from agriculture, manufacturing, and services. Manufacturing Dominance: The ready-made garments (RMG) sector is a major pillar, driving substantial export revenues. Other notable sectors include pharmaceuticals, jute products, and frozen fish. High Population Density: Bangladesh's large population provides a substantial labor force, which supports labor-intensive industries like RMG. Economic Policies: Bangladesh frequently employs currency devaluation as a tool to enhance export competitiveness and manage trade deficits. Hydropower Dependency: Bhutan's economy heavily relies on the hydropower sector, which constitutes a significant portion of its exports, primarily to India. Limited Industrial Base: The industrial sector in Bhutan is relatively underdeveloped, with fewer diversified exports compared to Bangladesh. Small Population: Bhutan’s smaller population limits the labor force available for industrial expansion. Economic Stability: The Bhutanese Ngultrum is pegged to the Indian Rupee, providing currency stability but less flexibility in independent economic policy-making. Export Composition: Bangladesh: Ready-Made Garments: Dominates the export landscape, contributing significantly to GDP and employment. Pharmaceuticals: Emerging as a key export sector with growing international market presence. Jute Products: Traditional export sector with a competitive edge in international markets. 35 Page 214 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Frozen Fish: Another important sector contributing to export revenue. Bhutan: Hydropower: The primary export, with electricity sales to India forming the bulk of export revenue. Agriculture: Limited agricultural exports, with a focus on organic and niche products. Minerals: Some mineral exports, though not as significant as hydropower. Impact of Currency Devaluation: Positive Impacts: Increased Export Competitiveness: Devaluation generally makes Bangladeshi products cheaper and more attractive in global markets, boosting export volumes. Revenue Growth: Enhanced export performance translates to higher foreign exchange earnings, which can support economic growth and development. Negative Impacts: Higher Import Costs: Many export-oriented industries rely on imported raw materials. Devaluation increases these costs, which can offset some of the competitive gains. Inflationary Pressures: Devaluation can lead to higher domestic prices, reducing purchasing power and potentially slowing down economic growth. Hydropower Exports: Devaluation can make hydropower exports more competitive, especially in the Indian market. Niche Agricultural Products: Enhanced competitiveness in niche markets can lead to increased demand for Bhutanese agricultural exports. 36 Page 215 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Limited Industrial Impact: With a less diversified industrial base, the overall economic benefit from devaluation is less pronounced compared to Bangladesh. Imported Goods: Bhutan’s reliance on imported goods for consumption and production can lead to higher costs and inflationary pressures. Flexible Policy Tools: Bangladesh’s ability to devalue its currency independently allows for more dynamic responses to economic challenges. However, it requires careful management to balance inflation and competitiveness. Sector-Specific Strategies: Policies need to be tailored to support key export sectors, addressing challenges such as higher input costs due to devaluation. Currency Peg Considerations: The peg to the Indian Rupee provides stability but limits Bhutan’s ability to use devaluation as a policy tool. Economic policies must focus on enhancing sectoral productivity and competitiveness without relying heavily on currency adjustments. Hydropower Focus: Policies should aim to optimize hydropower exports while diversifying the economy to reduce dependence on a single sector. The comparative analysis between Bangladesh and Bhutan highlights how differing economic structures and export compositions influence the impacts of currency devaluation. Bangladesh’s diversified economy and industrial base allow it to leverage devaluation more effectively, though it must manage the associated costs and inflation. Bhutan’s reliance on hydropower and a stable but inflexible currency peg limits the benefits of devaluation, emphasizing the need for targeted policies to enhance sectoral competitiveness and economic diversification. This nuanced understanding aids policymakers in both countries to formulate strategies that maximize economic benefits while mitigating the potential downsides of currency devaluation. Lessons Learned: Key Insights for Policymakers: Tailoring Currency Policy to Economic Structure: Dynamic Policy Use: Bangladesh’s flexible approach to currency devaluation demonstrates how dynamic policy tools can be used to enhance export competitiveness. Policymakers should continue to employ and refine devaluation strategies, balancing them with measures to control inflation and manage import costs. Sectoral Support: 37 Page 216 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The success of devaluation in boosting exports, particularly in the ready-made garments sector, underscores the importance of sector-specific policies. Policymakers should design targeted interventions to support key industries, addressing challenges such as rising input costs and improving supply chain efficiency. Stability and Diversification: Bhutan’s stable currency peg to the Indian Rupee offers lessons on economic stability, yet highlights the need for diversification. Policymakers should focus on diversifying the economic base beyond hydropower, fostering growth in sectors like agriculture and tourism. Optimizing Hydropower: Given the significant role of hydropower in Bhutan’s economy, strategies to optimize this sector, including negotiating favorable terms with trading partners and investing in infrastructure, are crucial. Addressing Import Cost Challenges: Cost Management: The increased cost of imported raw materials due to devaluation requires effective cost management strategies. Policymakers should consider subsidies, tax relief, or alternative sourcing strategies to mitigate these impacts and maintain the competitive edge of export industries. Inflation Control: To prevent devaluation-induced inflation from eroding economic gains, policies aimed at controlling inflation, such as monetary tightening and fiscal discipline, are essential. Local Production Enhancement: To reduce dependence on imported goods and mitigate cost increases, Bhutan should invest in enhancing local production capabilities. Policies that support agricultural and industrial productivity can help offset the negative impacts of currency devaluation on import costs. Economic Resilience: Building economic resilience through diversification and investment in human capital and infrastructure will help Bhutan better manage external shocks and currency fluctuations. Leveraging Export Competitiveness: Trade Agreements: Expanding trade agreements and exploring new markets can further leverage the competitive advantage gained from devaluation. Policymakers should actively pursue bilateral and multilateral trade agreements to open new avenues for exports. Quality and Branding: Enhancing the quality of exports and investing in branding can help Bangladeshi products gain a premium in international markets, further boosting export revenues. 38 Page 217 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Niche Markets: Focusing on niche markets, particularly for organic and sustainable products, can capitalize on Bhutan’s unique strengths. Policies that promote these niches can differentiate Bhutanese exports in the global market. Trade Facilitation: Simplifying trade procedures and improving logistics can enhance the efficiency and competitiveness of Bhutanese exports. Investment in trade facilitation measures is crucial for maximizing the benefits of devaluation. Comparative Advantage and Policy Synergies: Comparative Analysis: Continuous comparative analysis with regional peers can provide valuable benchmarks and identify best practices. Policymakers should leverage regional cooperation and knowledge exchange to enhance policy effectiveness. Integrated Approach: Integrating devaluation strategies with broader economic policies, such as industrial policy, education, and innovation, can create synergies that amplify the positive impacts on export performance. Regional Cooperation: Engaging in regional cooperation initiatives can help Bhutan access broader markets and benefit from shared infrastructure and resources. Policymakers should actively participate in regional economic forums and trade partnerships. Holistic Development: A holistic approach to economic development, incorporating environmental sustainability and social inclusiveness, can ensure long-term growth and resilience. Practical Implications for Future Policy Strategic Policy Formulation: Policymakers in both countries should adopt a strategic, evidence-based approach to currency management, tailoring policies to the specific economic contexts and challenges they face. Continuous monitoring and evaluation of devaluation impacts, along with adaptive policy responses, will be crucial for sustaining export growth and economic stability. Economic Diversification and Innovation: Investment in diversification and innovation will be key to mitigating the risks associated with currency devaluation and enhancing overall economic resilience. Policymakers should foster an environment that encourages innovation, supports new industries, and promotes sustainable development. 39 Page 218 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Capacity Building and Institutional Strengthening: Strengthening institutional capacities to effectively manage economic policies and respond to global economic changes will be essential. Capacity-building initiatives should focus on enhancing the skills and knowledge of policymakers, improving data collection and analysis, and fostering robust economic governance frameworks. The lessons learned from the comparative analysis of Bangladesh and Bhutan highlight the importance of context-specific, dynamic, and integrated policy approaches to managing currency devaluation and supporting export performance. By understanding the successes and challenges faced by these countries, policymakers can develop more effective strategies that enhance economic resilience, competitiveness, and sustainable growth. Strategies for Enhancing Export Performance: Diversifying Export Markets: Expanding Market Reach: Policymakers should encourage and facilitate businesses to explore and enter new export markets. This reduces dependency on a limited number of trade partners and spreads risk across a broader spectrum of markets. Trade Missions and Fairs: Organizing and participating in international trade missions and fairs can help exporters establish connections in new markets. Free Trade Agreements (FTAs): Negotiating and implementing FTAs with emerging and diverse economies can open new avenues for trade. Targeting Niche Markets: Identifying and targeting niche markets, where specific Bangladeshi and Bhutanese products have a competitive advantage, can drive export growth. Organic and Sustainable Products: Both countries can focus on markets that value organic, sustainable, and ethically produced goods. Specialty Products: Promoting specialty products such as high-quality textiles, unique handicrafts, or organic agricultural products can create a strong market presence. Improving Product Quality: Quality Assurance Programs: 40 Page 219 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Implementing stringent quality assurance programs can help ensure that export products meet international standards, enhancing their competitiveness. Certification and Standards: Obtaining international certifications (e.g., ISO, HACCP) can assure buyers of product quality and safety. Research and Development (R&D): Investing in R&D to innovate and improve product quality can differentiate products in the global market. Brand Building: Building strong national and product brands can help create a distinct identity for exports, attracting higher value in international markets. Marketing Campaigns: Conducting global marketing campaigns to promote the unique attributes and quality of exports can enhance brand recognition. Country Branding: Developing a strong national brand that emphasizes quality, reliability, and sustainability can enhance the overall perception of exported goods. Reducing Reliance on Imported Inputs: Local Sourcing Initiatives: Encouraging the development of local industries that produce essential inputs can reduce reliance on imports, thus mitigating the cost impacts of devaluation. Support for SMEs: Providing support to small and medium-sized enterprises (SMEs) that produce intermediate goods can strengthen local supply chains. Investment Incentives: Offering tax breaks, subsidies, and other incentives to businesses that invest in local production of key inputs. Enhancing Agricultural Productivity: In the case of raw materials for industries like textiles and jute, improving agricultural productivity can reduce the need for imported inputs. Modern Farming Techniques: Promoting the adoption of modern farming techniques and high-yield crop varieties can boost local production. 41 Page 220 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Agricultural Research: Investing in agricultural research to develop better crop varieties and farming practices. Strengthening Infrastructure and Logistics: Improving Transportation Networks: Enhancing transportation infrastructure (roads, ports, railways) can reduce logistics costs and improve the efficiency of export supply chains. Port Modernization: Modernizing port facilities to handle larger volumes of exports more efficiently. Integrated Logistics Systems: Developing integrated logistics systems that streamline the movement of goods from production to export. Enhancing Digital Infrastructure: Investing in digital infrastructure to facilitate smoother trade processes and improve market access. E-Government Services: Implementing e-government services that simplify export documentation and reduce bureaucratic hurdles. Digital Trade Platforms: Developing digital trade platforms that connect exporters with international buyers and streamline transactions. Providing Financial Support and Incentives: Export Financing: Offering financial products and services that support exporters, such as export credit, insurance, and guarantees. Export Credit Agencies (ECAs): Establishing or strengthening ECAs that provide financing and risk mitigation solutions for exporters. Subsidized Loans: Providing subsidized loans to exporters to help them invest in quality improvements and market expansion. 42 Page 221 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Tax Incentives: Offering tax incentives to export-oriented industries to enhance their competitiveness. Tax Breaks: Providing tax breaks for investments in export-related infrastructure and technology. Duty Drawbacks: Implementing duty drawback schemes that refund duties paid on imported inputs used in the production of exports. Enhancing Human Capital: Training and Capacity Building: Investing in training and capacity building for the workforce to improve skills and productivity. Vocational Training Programs: Developing vocational training programs tailored to the needs of export industries. Industry-Academia Collaboration: Promoting collaboration between industry and academia to ensure that educational programs align with industry needs. Entrepreneurship Support: Encouraging entrepreneurship in export sectors through incubators, accelerators, and startup support programs. Business Incubators: Establishing business incubators that provide resources and mentorship to new export-oriented startups. Innovation Hubs: Creating innovation hubs that foster creativity and technological advancement in export industries. By implementing these strategies, policymakers and businesses can enhance export performance, leverage the benefits of currency devaluation, and contribute to sustainable economic growth. These measures will help ensure that both Bangladesh and Bhutan are well-positioned to navigate the challenges and opportunities presented by global economic dynamics. Policy Recommendations for Managing Exchange Rate Movements: Maintaining Macroeconomic Stability: 43 Page 222 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Monetary Policy: Implementing prudent monetary policies to control inflation and stabilize the currency. Interest Rate Adjustments: Adjusting interest rates to manage inflation and influence exchange rate movements. Money Supply Management: Controlling the money supply to prevent excessive inflation that could undermine the benefits of devaluation. Fiscal Discipline: Ensuring fiscal discipline to avoid excessive budget deficits that can lead to currency instability. Efficient Public Spending: Prioritizing public spending on projects that enhance economic growth and productivity. Debt Management: Maintaining a sustainable debt level to prevent the crowding out of private investment and ensure fiscal stability. Controlling Inflation: Inflation Targeting: Adopting an inflation-targeting framework to provide a clear and predictable policy environment. Clear Communication: Ensuring transparent communication of inflation targets and policy measures to the public and markets. Regular Monitoring: Continuously monitoring inflation trends and adjusting policies as needed to maintain target levels. Price Stability Measures: Implementing measures to stabilize prices of essential goods and services. Subsidies for Essential Goods: Providing targeted subsidies for essential goods to protect low-income households from the adverse effects of inflation. 44 Page 223 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Price Controls: In extreme cases, considering temporary price controls on key commodities to prevent inflationary spirals. Supporting Export-Oriented Industries: Export Incentives: Offering incentives to boost the competitiveness of export-oriented industries. Tax Breaks and Rebates: Providing tax breaks and rebates for exporters to reduce their cost burden. Export Subsidies: Considering targeted export subsidies to enhance competitiveness in international markets. Trade Facilitation: Improving trade facilitation measures to reduce costs and enhance the efficiency of export processes. Simplifying Export Procedures: Streamlining export procedures to reduce administrative burdens on exporters. Modernizing Customs Operations: Investing in technology to modernize customs operations and reduce delays. Exchange Rate Management: Managed Float System: Adopting a managed float exchange rate system where the central bank intervenes to prevent excessive volatility. Foreign Exchange Reserves: Maintaining adequate foreign exchange reserves to support intervention efforts and stabilize the currency. Exchange Rate Bands: Establishing exchange rate bands within which the currency is allowed to fluctuate, providing a buffer against extreme movements. Market Intervention: Engaging in market interventions when necessary to correct excessive exchange rate misalignments. 45 Page 224 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Forex Market Operations: Conducting foreign exchange market operations to smooth out excessive volatility. Currency Swaps: Utilizing currency swaps with other central banks to manage liquidity and stabilize the exchange rate. Enhancing Export Diversification Diversifying Export Base: Encouraging diversification of the export base to reduce dependency on a few key commodities. Value-Added Exports: Promoting value-added exports that command higher prices in international markets. New Export Sectors: Identifying and developing new export sectors with growth potential. Sectoral Support: Providing targeted support to sectors with high export potential. Sector-Specific Policies: Developing sector-specific policies and incentives to promote growth and competitiveness. Industry Clusters: Establishing industry clusters to foster collaboration, innovation, and efficiency among related businesses. Building Resilience to External Shocks: Economic Diversification: Promoting economic diversification to reduce vulnerability to external shocks. Broadening Economic Base: Encouraging the development of non-traditional sectors to create a more resilient economy. Domestic Market Strengthening: Strengthening the domestic market to provide a buffer against external shocks. Risk Management Frameworks: 46 Page 225 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Developing risk management frameworks to mitigate the impact of external economic fluctuations. Hedging Strategies: Encouraging businesses to adopt hedging strategies to protect against exchange rate volatility. Crisis Response Plans: Establishing crisis response plans to quickly address and mitigate the effects of economic shocks. Capacity Building and Institutional Strengthening: Capacity Building Programs: Investing in capacity building programs for government officials and policymakers. Training and Development: Providing training and development opportunities to enhance skills and knowledge. International Cooperation: Engaging in international cooperation and knowledge exchange to learn from best practices. Institutional Strengthening: Strengthening institutions responsible for economic policy and exchange rate management. Policy Coordination: Ensuring effective coordination among various institutions involved in economic policy and exchange rate management. Data and Research: Investing in data collection and research to support evidence-based policymaking. Enhancing Financial Sector Stability: Regulatory Oversight: Strengthening regulatory oversight to ensure a stable and resilient financial sector. Prudential Regulation: Implementing prudential regulations to maintain financial stability and prevent excessive risk-taking. Banking Sector Health: 47 Page 226 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Monitoring and maintaining the health of the banking sector to ensure it can support economic activities. Financial Inclusion: Promoting financial inclusion to ensure that businesses and individuals have access to financial services. Microfinance Initiatives: Supporting microfinance initiatives to provide financial services to underserved populations. Digital Finance: Encouraging the adoption of digital finance solutions to enhance financial access and efficiency. By implementing these policy recommendations, Bangladesh and Bhutan can effectively manage exchange rate movements, enhance export performance, and achieve sustainable economic growth. These strategies will help both countries navigate the complexities of the global economy and leverage the benefits of currency devaluation while mitigating potential challenges. Case Studies of Effective Policy Responses: Case Study 1: South Korea Background: South Korea, often cited as a "Miracle on the Han River," experienced rapid industrialization and economic growth from the 1960s to the 1990s. A key component of this growth was the strategic management of exchange rates to boost export competitiveness. Policy Measures: Export-Oriented Industrialization: South Korea adopted an export-oriented industrialization strategy, focusing on developing industries that could compete globally. Managed Exchange Rate: The government maintained a managed exchange rate policy to keep the Korean Won competitive, intervening in the foreign exchange market when necessary. Financial and Institutional Support: Establishment of export credit agencies, subsidies, and incentives for exporters. Human Capital Development: Investment in education and training to improve the skill levels of the workforce. Outcomes: 48 Page 227 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Rapid Export Growth: South Korea's exports grew exponentially, transforming it from a low-income country to a high-income nation. Diversified Economy: Development of diverse industrial sectors, including electronics, automobiles, and shipbuilding. Improved Living Standards: Significant improvements in living standards and reduction in poverty. Lessons for Bangladesh and Bhutan: Integrated Policy Approach: Combining exchange rate management with broader economic policies. Investment in Human Capital: Emphasizing education and skills development to support industrial growth. Institutional Support for Exports: Establishing robust institutions to provide financial and logistical support to exporters. Case Study 2: China Background: Since opening up its economy in 1978, China has used currency devaluation as part of its broader strategy to become the world's largest exporter. Currency Devaluation: Periodic devaluation of the Renminbi (RMB) to make Chinese goods cheaper in global markets. Special Economic Zones (SEZs): Establishment of SEZs with favorable policies for foreign investment and export-oriented production. Infrastructure Development: Massive investment in infrastructure to support industrial and export activities. Trade Policies: Implementation of trade policies that favor export growth, including tax rebates and subsidies for exporters. 49 Page 228 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Dominance in Global Trade: China became the world’s largest exporter, accounting for a significant share of global manufacturing. Economic Growth: Sustained high economic growth rates, lifting millions out of poverty. Industrial Upgrading: Moving up the value chain from low-end manufacturing to high-tech industries. Strategic Use of SEZs: Creating zones with favorable conditions for export-oriented industries. Long-Term Infrastructure Investment: Building infrastructure to support industrial and export activities. Adaptive Trade Policies: Implementing flexible trade policies to respond to global market conditions. Case Study 3: India Background: India’s economic reforms in the early 1990s included significant changes in exchange rate policies to boost export performance. Exchange Rate Liberalization: Moving from a fixed exchange rate regime to a managed float system, allowing the Rupee to reflect market conditions. Trade Liberalization: Reducing tariffs and trade barriers to integrate more fully into the global economy. Incentives for Exporters: Providing financial incentives, including tax exemptions and duty drawbacks, to support exporters. Foreign Direct Investment (FDI): Liberalizing policies to attract FDI, which supported export-oriented industries. Export Growth: Significant increase in exports, particularly in IT services and pharmaceuticals. 50 Page 229 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Economic Diversification: Diversification of the export base, reducing dependency on traditional goods. Increased FDI: Substantial inflows of FDI, contributing to economic growth and export capacity. Liberalizing Exchange Rate Regimes: Adopting more flexible exchange rate policies to reflect market dynamics. Encouraging FDI: Creating a conducive environment for FDI to support export-oriented sectors. Supportive Incentives for Exporters: Providing targeted incentives to enhance the competitiveness of export industries. Best Practices and Policy Recommendations: Integrated Policy Approach: Combine Exchange Rate Management with Broader Economic Policies: Ensure that exchange rate policies are part of a comprehensive strategy that includes industrial policy, trade policy, and macroeconomic stability. Institutional and Financial Support: Establish Robust Institutions: Create or strengthen institutions that provide financial, technical, and logistical support to exporters. Export Credit Agencies: Develop export credit agencies to offer financing and insurance to exporters, reducing their risks. Human Capital and Infrastructure Development: Invest in Education and Skills Development: Focus on improving the education system and providing vocational training to enhance the skills of the workforce. Develop Infrastructure: Invest in transportation, logistics, and communication infrastructure to support export activities. 51 Page 230 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Adaptive Trade and Industrial Policies: Implement Flexible Trade Policies: Develop trade policies that can adapt to changing global market conditions and enhance competitiveness. Supportive Industrial Policies: Encourage the development of industries with high export potential through subsidies, tax incentives, and research and development support. Strategic Use of SEZs: Create Special Economic Zones: Establish SEZs with favorable policies for export-oriented industries, providing tax breaks, streamlined regulations, and improved infrastructure. Long-Term Economic Planning: Focus on Sustainable Growth: Develop long-term economic plans that prioritize sustainable and inclusive growth, reducing dependency on a few key sectors. By learning from these case studies, Bangladesh and Bhutan can develop effective strategies to manage exchange rate movements, enhance export performance, and achieve sustainable economic growth. The insights gained from these successful examples can be adapted to the unique contexts of each country, ensuring that policies are both relevant and effective. This study provides a comprehensive analysis of the impact of currency devaluation on the export performance of Bangladesh and Bhutan. The key findings are as follows: Enhancement of Export Competitiveness: Currency devaluation generally enhances the export competitiveness of both Bangladesh and Bhutan by making their goods cheaper in international markets. This leads to an increase in export volumes, as foreign buyers find Bangladeshi and Bhutanese products more affordable. In Bangladesh, the ready-made garments sector, which is a significant contributor to the country's exports, has benefitted notably from currency devaluation. The increased competitiveness has translated into higher export revenues and market expansion. Similarly, Bhutan’s key exports, including electricity and agricultural products, have experienced improved competitiveness due to currency devaluation, enhancing their attractiveness in global markets. Challenges of Higher Production Costs: While devaluation makes exports more competitive, it also raises the cost of imported raw materials and intermediate goods. This is particularly relevant for sectors heavily reliant on imported inputs. 52 Page 231 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) In Bangladesh, sectors like pharmaceuticals and jute products have faced increased production costs due to higher prices of imported raw materials. This can offset some of the gains from enhanced export competitiveness. Devaluation can lead to inflationary pressures as the cost of imported goods rises, leading to higher overall price levels in the economy. This reduces the purchasing power of consumers and can dampen domestic demand. Both Bangladesh and Bhutan have experienced inflationary pressures following currency devaluation, which has impacted their economic stability. Managing these inflationary effects is crucial to ensuring that the benefits of devaluation are not undermined. Different sectors respond differently to currency devaluation based on their cost structures, market demand, and global competition. For instance, the ready-made garments sector in Bangladesh shows a more pronounced positive response compared to the jute products sector. In Bhutan, the impact varies between the hydropower sector and agricultural products, with hydropower exports benefiting more due to lower dependency on imported inputs. Comparative Insights: The comparative analysis between Bangladesh and Bhutan highlights the importance of economic structure and export composition in determining the overall impact of devaluation. While both countries benefit from devaluation, the extent and nature of the benefits vary based on their specific economic contexts. Bangladesh’s diversified export base provides a broader cushion against the adverse effects of devaluation compared to Bhutan’s more concentrated export portfolio. Policymakers need to adopt a balanced approach to managing currency values, taking into account both the potential benefits and the associated challenges. Effective management of inflationary pressures through monetary and fiscal policies is essential to ensuring that the gains from devaluation are sustained. Targeted support for sectors facing higher production costs due to devaluation can help mitigate adverse impacts and maintain overall export competitiveness. Strategies for Export Enhancement: Diversifying export markets and products can help reduce dependency on a few key sectors and enhance resilience to external shocks. Investing in infrastructure and human capital is critical to support export-oriented industries and improve their global competitiveness. Long-Term Impact on Economic Development Understanding the impact of currency devaluation on export performance is crucial for formulating strategies that sustain and enhance economic growth in Bangladesh and Bhutan. The long-term benefits include: 53 Page 232 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Increased Foreign Exchange Earnings: Enhanced export performance leads to higher foreign exchange earnings, which can be used to support economic development and reduce external vulnerabilities. Higher Employment Rates: Export-oriented industries often generate significant employment opportunities, contributing to improved standards of living and poverty reduction. Improved Standards of Living: By boosting economic growth and creating jobs, enhanced export performance can lead to better living conditions and social development. The study draws on insights from major academic and institutional sources, such as Princeton University, which emphasize the complexities of currency devaluation and the need for context-specific analysis. By integrating these insights, the study provides a robust and comprehensive understanding of the relationship between currency devaluation and export performance in developing countries. This research underscores the importance of a nuanced understanding of currency devaluation and its impact on export performance. For policymakers and stakeholders in Bangladesh and Bhutan, the findings offer valuable guidance for designing effective economic policies that support export growth and economic stability in the face of global economic dynamics. While currency devaluation can be a powerful tool for enhancing export competitiveness, it must be managed carefully to mitigate potential adverse effects. The lessons learned from this study can help Bangladesh and Bhutan navigate the challenges and opportunities presented by currency devaluation, ultimately contributing to sustained economic growth and development. . Recommendations for Policymakers: Based on the comprehensive findings of this study, several recommendations have been formulated to help policymakers enhance export competitiveness and effectively manage the potential challenges associated with currency devaluation. These recommendations are designed to support sustainable economic growth and improve overall export performance in Bangladesh and Bhutan. Implement Balanced Currency Management Policies: Moderate Devaluation: Policymakers should aim for a moderate level of devaluation that enhances export competitiveness without triggering excessive inflation or significantly raising the cost of imported goods. Continuous Monitoring: Establish a mechanism for continuous monitoring of the exchange rate and its impact on different sectors to make timely adjustments. Address Inflationary Pressures: 54 Page 233 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Monetary Policy Tools: Use monetary policy tools such as interest rate adjustments to control inflationary pressures resulting from currency devaluation. Fiscal Discipline: Maintain fiscal discipline by avoiding excessive government spending that can exacerbate inflation. Support Export-Oriented Industries: Subsidies and Incentives: Provide targeted subsidies and incentives to export-oriented industries, particularly those heavily reliant on imported inputs, to offset the increased production costs due to devaluation. Infrastructure Development: Invest in infrastructure improvements such as better transportation networks and efficient ports to reduce logistical costs and enhance export efficiency. Diversify Export Markets and Products: Market Expansion: Encourage and facilitate the expansion of export markets to reduce dependency on a few key markets, thereby spreading risk. Product Diversification: Promote diversification of export products to reduce reliance on a limited number of export commodities. This can involve support for innovation and development in various sectors. Enhance Competitiveness Through Quality Improvements: Quality Standards: Support industries in meeting international quality standards to enhance the competitiveness of exports in the global market. Training and Development: Invest in training and skill development programs for the workforce to improve productivity and quality. Develop Financial Instruments for Exporters: Export Credit Facilities: Establish or enhance export credit facilities to provide financial support to exporters, helping them manage the risks associated with currency fluctuations. 55 Page 234 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Hedging Mechanisms: Promote the use of financial hedging mechanisms among exporters to protect against adverse currency movements. Strengthen Economic Resilience: Economic Diversification: Pursue broader economic diversification strategies to reduce the vulnerability of the economy to external shocks and currency fluctuations. Sustainable Development: Integrate sustainable development goals into economic policies to ensure long-term growth and resilience. Foster Regional Cooperation: Regional Trade Agreements: Engage in and strengthen regional trade agreements to enhance market access and foster regional economic integration. Policy Coordination: Coordinate currency and trade policies with neighboring countries to manage competitive devaluations and enhance regional stability. Enhance Data Collection and Analysis: Robust Data Systems: Invest in robust data collection and analysis systems to provide accurate and timely information on exchange rate impacts and export performance. Policy Research: Support ongoing research and analysis to understand the evolving dynamics of global trade and currency markets. Promote Public-Private Partnerships: Collaborative Efforts: Encourage collaboration between the government and private sector to develop strategies that enhance export performance. Public-private partnerships can drive innovation and competitiveness in export sectors. Industry Associations: Work with industry associations to identify challenges and opportunities in export markets and develop targeted interventions. 56 Page 235 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) By adopting these recommendations, policymakers in Bangladesh and Bhutan can better navigate the complexities of currency devaluation and its impacts on export performance. These strategies are aimed at fostering a more competitive, resilient, and diversified export sector, ultimately contributing to sustainable economic growth and improved standards of living for their populations. Future Research Directions: This study opens several avenues for future research, aimed at providing a deeper understanding of the complex relationship between currency values and export performance. These directions include exploring the long-term impacts of devaluation, examining the role of complementary economic policies, and analyzing the effects of global economic trends on export performance. Detailed exploration of these areas can significantly contribute to both academic literature and practical policymaking. Long-Term Impacts of Currency Devaluation: Sustainability of Export Growth: Future research should investigate whether the positive effects of currency devaluation on export growth are sustainable over the long term. This includes examining how sustained devaluation impacts the overall economic stability of a country. Structural Changes: Analyze the long-term structural changes in the economy and export sectors resulting from prolonged periods of devaluation, including shifts in industry dynamics and labor markets. Role of Complementary Economic Policies: Monetary and Fiscal Policies: Examine how complementary monetary and fiscal policies can enhance or mitigate the effects of currency devaluation. This includes studying the interplay between interest rate adjustments, government spending, and exchange rate management. Trade Policies: Investigate the role of trade policies, such as export subsidies, tariffs, and trade agreements, in amplifying the benefits of devaluation. Research can focus on how these policies interact with currency adjustments to influence export performance. Sector-Specific Analysis: In-Depth Sector Studies: Conduct detailed sector-specific studies to understand the heterogeneous impacts of currency devaluation. Each sector may respond differently to devaluation due to variations in cost structures, market demand, and competitive dynamics. Case Studies: 57 Page 236 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Develop case studies of specific industries within different countries to compare and contrast the sectoral responses to devaluation, providing a richer context for understanding the mechanisms at play. Global Economic Trends: Global Trade Dynamics: Analyze how global economic trends, such as shifts in trade policies, technological advancements, and changes in global supply chains, influence the relationship between currency values and export performance. Economic Shocks: Study the impact of global economic shocks, such as financial crises or pandemics, on the effectiveness of currency devaluation as a policy tool. This includes examining how external shocks affect domestic currency stability and export markets. Comparative Studies: Cross-Country Comparisons: Conduct comparative studies between countries with similar economic profiles to identify common patterns and unique differences in the impact of currency devaluation. This can provide insights into best practices and policy lessons. Regional Analysis: Examine regional dynamics, including how regional trade agreements and economic cooperation influence the effectiveness of currency devaluation. Impact on Small and Medium Enterprises (SMEs): SME Exporters: Investigate the specific challenges and opportunities faced by small and medium enterprises (SMEs) in the export sector in response to currency devaluation. This includes understanding the barriers SMEs face in adjusting to exchange rate fluctuations. Support Mechanisms: Explore the effectiveness of support mechanisms, such as access to finance, technical assistance, and market information, in helping SMEs leverage currency devaluation to enhance their export performance. Technological and Innovation Factors: Innovation Impact: Study how technological advancements and innovation in production processes and supply chains influence the impact of currency devaluation on export performance. This includes examining how digital technologies can mitigate some of the negative effects of devaluation. 58 Page 237 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Adoption of Technology: Research the role of technology adoption in export sectors and its interaction with currency devaluation. This can provide insights into how technology can enhance competitiveness and resilience to currency fluctuations. Environmental and Social Impacts: Sustainable Development: Analyze the environmental and social impacts of currency devaluation, focusing on how devaluation-driven export growth aligns with sustainable development goals (SDGs). This includes studying the effects on resource use, labor standards, and community well-being. Corporate Social Responsibility (CSR): Examine the role of corporate social responsibility practices in mitigating the adverse social impacts of devaluation on export sectors. This includes assessing how CSR initiatives can contribute to more sustainable and equitable economic outcomes. Future research in these areas will provide a more comprehensive understanding of the multifaceted impacts of currency devaluation on export performance. By exploring these directions, scholars and policymakers can develop more nuanced and effective strategies to harness the benefits of devaluation while mitigating its challenges, ultimately contributing to sustainable economic growth and development. Clarifying More of Devaluation: Impact on Export Performance in Bangladesh and Bhutan: The expected contributions of this study are multifaceted, spanning academic, policy-making, and business practice domains. By enriching the academic literature, informing policy-making, guiding business practices, and promoting long-term economic benefits, this research will play a pivotal role in shaping Bangladesh’s economic landscape. The insights gained from this study will not only help navigate the challenges of currency devaluation but also seize the opportunities presented by global economic dynamics, ultimately contributing to sustainable and inclusive economic growth. Importance of the Export Sector in Bangladesh: Exports are a cornerstone of Bangladesh's economy, contributing substantially to GDP, employment, and foreign exchange earnings. The export sector's significance is underscored by its diverse range of products and its impact on various facets of the economy. Economic Contribution: Gross Domestic Product (GDP): The export sector is a critical driver of Bangladesh's GDP. By generating significant revenue, exports contribute to economic stability and growth. The steady inflow of foreign exchange from exports helps stabilize the national currency, support macroeconomic policies, and reduce the country's reliance on external borrowing. 59 Page 238 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Foreign Exchange Earnings: Export activities are vital for earning foreign exchange, which is crucial for importing essential goods and services that are not produced domestically. This helps maintain a favorable balance of payments and supports the country's financial stability. Key Export Sectors: Ready-Made Garments (RMG): The RMG sector is the most significant contributor to Bangladesh's export earnings. As a global leader in garment production, Bangladesh supplies apparel to major markets worldwide, including the United States and the European Union. The RMG industry has driven substantial economic growth and has positioned Bangladesh as a key player in the global textile market. Frozen Fish: Bangladesh is one of the leading exporters of frozen fish and seafood. The country's extensive network of rivers, along with its coastal regions, provides an abundant supply of high-quality fish. This sector not only contributes to export earnings but also supports the livelihoods of millions of fishermen and workers in the processing industry. Pharmaceuticals: The pharmaceutical industry in Bangladesh has seen significant growth and is increasingly becoming an important export sector. With a focus on producing generic drugs, the industry caters to both domestic and international markets, providing affordable medication and contributing to public health. Jute Products: Known as the "Golden Fiber," jute has been a traditional export product of Bangladesh. The country is one of the largest producers and exporters of jute and jute products, including bags, carpets, and other eco-friendly items. This sector plays a crucial role in rural development and environmental sustainability. Employment Generation: Job Creation: The export sector is a major source of employment in Bangladesh. The RMG industry alone employs millions of workers, the majority of whom are women. This has had a profound impact on social development, empowering women and reducing poverty in many communities. Skill Development: The demand for skilled labor in the export sector has led to various training and skill development programs. These initiatives enhance the workforce's capabilities, making them more competitive and productive, which, in turn, supports the overall growth of the economy. 60 Page 239 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Social Development: Women's Empowerment: The RMG sector, in particular, has played a pivotal role in empowering women by providing them with employment opportunities. Financial independence and improved social status have led to better living standards and educational opportunities for their families. Rural Development: Industries like jute and frozen fish are primarily based in rural areas, providing employment and supporting local economies. This helps reduce urban migration and promotes balanced regional development. Technological Advancements: Innovation and Modernization: To remain competitive in the global market, export-oriented industries in Bangladesh have increasingly adopted modern technologies and innovative practices. This includes advancements in production techniques, quality control, and supply chain management. Sustainability Initiatives: The focus on sustainable practices, especially in the RMG and jute sectors, has positioned Bangladesh as a responsible player in the global market. Efforts to reduce environmental impact and improve working conditions have enhanced the country's reputation and attracted ethical consumers and buyers. Strategic Importance: Economic Diversification: A robust export sector helps diversify the economy, reducing dependence on any single industry or market. This diversification is crucial for economic resilience, especially in the face of global market fluctuations and economic shocks. Global Integration: The export sector connects Bangladesh to the global economy, facilitating trade relations, foreign investments, and international cooperation. Participation in global value chains enhances the country's economic stature and opens up new opportunities for growth and development. The export sector is integral to Bangladesh's economic framework, driving growth, employment, and social development. Key sectors like ready-made garments, frozen fish, pharmaceuticals, and jute products not only contribute to substantial foreign exchange earnings but also play a pivotal role in improving the livelihoods of millions of people. By focusing on innovation, sustainability, and strategic diversification, Bangladesh can continue to strengthen its export sector and achieve long-term economic stability and prosperity. 61 Page 240 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Definition and Relevance of Currency Devaluation: Definition of Currency Devaluation: Currency devaluation refers to the intentional reduction of the value of a country's currency relative to other currencies. This is typically enacted by a nation's central bank or monetary authority to achieve specific economic objectives. Unlike currency depreciation, which occurs due to market forces, devaluation is a deliberate policy action. For example, if the Bangladeshi Taka (BDT) is devalued against the US Dollar (USD), more BDT would be required to purchase a single USD. This shift can make Bangladeshi goods and services cheaper for foreign buyers, theoretically boosting exports by making them more competitive in international markets. Mechanisms of Currency Devaluation: Monetary Policy Tools: Central banks can devalue their currency through several mechanisms, such as lowering interest rates, increasing the money supply, or directly intervening in foreign exchange markets by buying foreign currencies and selling the domestic currency. Fixed Exchange Rate Adjustments: Countries with fixed or pegged exchange rate systems might adjust the peg to devalue their currency. This can involve setting a new, lower fixed rate against another currency or a basket of currencies. Foreign Exchange Reserves: Central banks can use their foreign exchange reserves to influence the currency's value. By selling reserves, they increase the supply of the domestic currency in the market, leading to devaluation. Relevance of Currency Devaluation: Currency devaluation is a potent economic tool with far-reaching implications for a country's economic landscape. Its relevance extends across various domains: Export Competitiveness: Boosting Exports: Devaluation makes a country's exports cheaper and more competitive on the global stage. This can lead to increased demand for exported goods and services, potentially driving economic growth and improving trade balances. Market Penetration: Cheaper exports can help penetrate new markets and increase market share in existing ones. For export-oriented economies like Bangladesh, this is particularly relevant in sectors such as ready-made garments (RMG), jute, and pharmaceuticals. Inflationary Pressures 62 Page 241 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Cost-Push Inflation: While devaluation can boost exports, it can also lead to higher import costs, contributing to inflation. Essential goods and services that rely on imports may become more expensive, impacting overall price levels in the economy. Imported Inflation: Devaluation increases the cost of imported goods and services, leading to higher prices for consumers and businesses. This can erode purchasing power and increase the cost of living, which might require monetary policy adjustments to control inflation. Impact on Imports Higher Import Costs: Devaluation makes imports more expensive, which can reduce the demand for imported goods. While this may protect domestic industries from foreign competition, it can also lead to shortages of essential goods and higher production costs for businesses reliant on imported inputs. Trade Balance Adjustment: By discouraging imports and encouraging exports, devaluation can help improve the trade balance. However, the extent of this improvement depends on the price elasticity of demand for exports and imports. Economic Stability: Short-Term Gains vs. Long-Term Stability: While devaluation can provide short-term economic benefits by boosting exports, it can also lead to long-term challenges such as inflation, reduced purchasing power, and potential loss of investor confidence. Policy Balancing Act: Policymakers must balance the benefits of devaluation with its potential drawbacks. This involves managing inflation, maintaining economic stability, and ensuring that the benefits of increased export competitiveness are not offset by adverse economic effects. Strategic Considerations: Sectoral Impact: The impact of devaluation can vary across different sectors. Export-oriented industries might benefit significantly, while import-dependent sectors could face challenges. In Bangladesh, understanding these sector-specific impacts is crucial for formulating effective policies. Global Economic Conditions: The effectiveness of devaluation also depends on global economic conditions. In a weak global economy, the benefits of devaluation might be limited due to reduced international demand for exports. 63 Page 242 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Complementary Policies: Devaluation is most effective when complemented by other economic policies such as structural reforms, trade policies, and measures to control inflation. This integrated approach can help maximize the benefits of devaluation while mitigating its risks. Currency devaluation is a complex and multifaceted economic strategy with significant implications for a country's export performance, inflation, import costs, and overall economic stability. For Bangladesh, a deliberate and well managed approach to devaluation, supported by complementary policies and a deep understanding of its sectoral impacts, can enhance export competitiveness and drive sustainable economic growth. However, policymakers must carefully balance the short-term benefits of devaluation with its long-term economic consequences to ensure overall stability and prosperity. 64 Page 243 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 4 Exchange Rate Pass-Through (ERPT) INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 244 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 1 Exchange Rate Pass-through: Exchange Rate Pass-through:.................................................................................................................13 Understanding Exchange Rate Pass-Through (ERPT):...................................................................13 Mechanisms of ERPT:.....................................................................................................................13 Cost Channel:............................................................................................................................13 Demand Channel:......................................................................................................................13 Competitiveness Channel:........................................................................................................ 13 Direct Impact on Export Performance in Bangladesh:....................................................................13 Cost Sensitivity:........................................................................................................................ 13 Price Competitiveness:..............................................................................................................13 Input Costs:............................................................................................................................... 14 Demand Elasticity:....................................................................................................................14 Innovation and Branding:......................................................................................................... 14 Market Penetration:...................................................................................................................14 Cost Structure:.......................................................................................................................... 14 Global Demand:........................................................................................................................ 14 Comparative Analysis: Bangladesh vs. Bhutan...............................................................................14 Economic Structure:..................................................................................................................14 ERPT Variations:...................................................................................................................... 14 Exchange Rate Management:................................................................................................... 14 Sectoral Support:.......................................................................................................................14 Long-Term Strategies:...............................................................................................................15 Exchange Rate Movements and Their Channels:............................................................................15 Types of Exchange Rate Movements:............................................................................................. 15 Nominal Exchange Rate Changes:.................................................................................................. 15 Definition:................................................................................................................................. 15 Implications:.................................................................................................................................... 15 Export Prices:............................................................................................................................15 Import Costs:.............................................................................................................................15 Currency Market Dynamics:.....................................................................................................15 Example:................................................................................................................................... 15 Real Exchange Rate Changes:.........................................................................................................16 Channels of Exchange Rate Movements:........................................................................................16 Trade Channel:................................................................................................................................ 16 Mechanism:...............................................................................................................................16 1 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. 1 Page 245 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Export Volumes:........................................................................................................................16 Import Substitution:.................................................................................................................. 16 Trade Balance Improvement:....................................................................................................16 Cost Channel:.................................................................................................................................. 16 Mechanism:...............................................................................................................................16 Production Costs:...................................................................................................................... 17 Price Adjustments:.................................................................................................................... 17 Sectoral Impact:........................................................................................................................ 17 Investment Channel:........................................................................................................................17 Mechanism:...............................................................................................................................17 FDI Inflows:..............................................................................................................................17 Capital Formation:.................................................................................................................... 17 Investment Climate:.................................................................................................................. 17 Inflation Channel:............................................................................................................................17 Mechanism:...............................................................................................................................17 Consumer Prices:...................................................................................................................... 17 Monetary Policy Response:...................................................................................................... 18 Economic Stability:...................................................................................................................18 Channels of Exchange Rate Pass-Through (ERPT):....................................................................... 18 Direct Channels of ERPT:............................................................................................................... 18 Changes in Export Prices:............................................................................................................... 18 Mechanism:...............................................................................................................................18 Increased Competitiveness:...................................................................................................... 18 Revenue Impact:....................................................................................................................... 18 Price Adjustments:.................................................................................................................... 18 Example:................................................................................................................................... 19 Indirect Channels of ERPT:.............................................................................................................19 Adjustments in Domestic Prices:.....................................................................................................19 Mechanism:...............................................................................................................................19 Imported Inflation:.................................................................................................................... 19 Consumer Behavior:................................................................................................................. 19 Wage Adjustments:................................................................................................................... 19 Example:................................................................................................................................... 19 Adjustments in Production Costs:................................................................................................... 19 Mechanism:...............................................................................................................................19 Cost-Push Inflation:.................................................................................................................. 19 Profit Margins:.......................................................................................................................... 19 Production Decisions:............................................................................................................... 20 Example:................................................................................................................................... 20 Direct Impact on Export Prices:...................................................................................................... 20 Mechanisms of Direct Impact:........................................................................................................ 20 Lower Export Prices in Foreign Currency Terms:...........................................................................20 Mechanism:...............................................................................................................................20 Example:................................................................................................................................... 20 2 Page 246 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Increased Competitiveness:............................................................................................................. 21 Mechanism:...............................................................................................................................21 Example:................................................................................................................................... 21 Implications of Lower Export Prices:..............................................................................................21 Boost in Export Volumes:................................................................................................................21 Mechanism:...............................................................................................................................21 Example:................................................................................................................................... 21 Market Share Expansion:................................................................................................................ 21 Mechanism:...............................................................................................................................21 Example:................................................................................................................................... 21 Revenue and Profit Margins:...........................................................................................................21 Mechanism:...............................................................................................................................21 Example:................................................................................................................................... 21 Ready-Made Garments (RMG):...................................................................................................... 22 Impact:...................................................................................................................................... 22 Example:................................................................................................................................... 22 Frozen Fish:..................................................................................................................................... 22 Impact:...................................................................................................................................... 22 Example:................................................................................................................................... 22 Pharmaceuticals:..............................................................................................................................22 Impact:...................................................................................................................................... 22 Example:................................................................................................................................... 22 Jute Products:...................................................................................................................................22 Impact:...................................................................................................................................... 22 Example:................................................................................................................................... 22 Short-Term vs. Long-Term Effects:.................................................................................................23 Immediate Effects on Export Performance:.................................................................................... 23 Short-Term Effects:......................................................................................................................... 23 Increase in Export Volumes:............................................................................................................23 Mechanism:...............................................................................................................................23 Example:................................................................................................................................... 23 Enhanced Revenue:......................................................................................................................... 23 Mechanism:...............................................................................................................................23 Example:................................................................................................................................... 23 Rapid Market Share Expansion:......................................................................................................23 Mechanism:...............................................................................................................................23 Example:................................................................................................................................... 24 Competitive Advantage:..................................................................................................................24 Mechanism:...............................................................................................................................24 Example:................................................................................................................................... 24 Long-Term Effects:..........................................................................................................................24 Sustained Export Growth:............................................................................................................... 24 Mechanism:...............................................................................................................................24 Example:................................................................................................................................... 24 3 Page 247 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Structural Adjustments:................................................................................................................... 24 Mechanism:...............................................................................................................................24 Example:................................................................................................................................... 24 Inflationary Pressures:..................................................................................................................... 24 Mechanism:...............................................................................................................................24 Example:................................................................................................................................... 25 Investment in Export Sectors:......................................................................................................... 25 Mechanism:...............................................................................................................................25 Example:................................................................................................................................... 25 Potential for Over-Reliance on Exports:......................................................................................... 25 Mechanism:...............................................................................................................................25 Example:................................................................................................................................... 25 Balance of Payments Improvement:................................................................................................25 Mechanism:...............................................................................................................................25 Example:................................................................................................................................... 25 Long-Term Implications for Export Competitiveness:....................................................................26 Key Factors Influencing Long-Term Export Competitiveness:...................................................... 26 Ability to Maintain Lower Prices:...................................................................................................26 Sustained Competitive Pricing:.................................................................................................26 Example:................................................................................................................................... 26 Elasticity of Demand for Exported Goods:..................................................................................... 26 Demand Sensitivity:..................................................................................................................26 Example:................................................................................................................................... 26 Rising Costs:............................................................................................................................. 26 Example:................................................................................................................................... 26 Structural Adjustments and Industry Adaptation:........................................................................... 26 Cost Structure Optimization:.................................................................................................... 26 Example:................................................................................................................................... 27 Investment in Export-Oriented Sectors:.......................................................................................... 27 Capacity and Quality Enhancement:.........................................................................................27 Example:................................................................................................................................... 27 Balancing Trade and Macroeconomic Stability:............................................................................. 27 Managing Trade Balances:........................................................................................................27 Example:................................................................................................................................... 27 Global Economic Conditions and Competitiveness:.......................................................................27 External Factors:....................................................................................................................... 27 Example:................................................................................................................................... 27 Policy Support and Economic Reforms:......................................................................................... 27 Supportive Policies:.................................................................................................................. 27 Example:................................................................................................................................... 28 Potential Long-Term Scenarios:...................................................................................................... 28 Positive Scenario:............................................................................................................................ 28 Sustained Growth:.....................................................................................................................28 Example:................................................................................................................................... 28 4 Page 248 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Negative Scenario:...........................................................................................................................28 Erosion of Gains:...................................................................................................................... 28 Example:................................................................................................................................... 28 Balanced Approach:........................................................................................................................ 28 Strategic Management:............................................................................................................. 28 Example:................................................................................................................................... 28 Case Studies and Empirical Evidence:............................................................................................ 29 Bangladesh: Case Studies and Evidence:........................................................................................ 29 Ready-Made Garments (RMG) Sector:...........................................................................................29 Context:.....................................................................................................................................29 Devaluation Impact:..................................................................................................................29 Empirical Evidence:..................................................................................................................29 Long-Term Effects:................................................................................................................... 29 Pharmaceutical Sector:.................................................................................................................... 29 Context:.....................................................................................................................................29 Devaluation Impact:..................................................................................................................29 Empirical Evidence:..................................................................................................................29 Long-Term Effects:................................................................................................................... 30 Comparative Analysis: Other Developing Countries...................................................................... 30 India:......................................................................................................................................... 30 Context:.....................................................................................................................................30 Empirical Evidence:..................................................................................................................30 Lessons Learned:...................................................................................................................... 30 Vietnam:.......................................................................................................................................... 30 Context:.....................................................................................................................................30 Empirical Evidence:..................................................................................................................30 Long-Term Effects:................................................................................................................... 30 Brazil:.............................................................................................................................................. 30 Context:.....................................................................................................................................30 Empirical Evidence:..................................................................................................................30 Long-Term Effects:..........................................................................................................................31 Short-Term Effects:......................................................................................................................... 31 Long-Term Effects:..........................................................................................................................31 Key Takeaways:...............................................................................................................................31 Sector-Specific Responses:....................................................................................................... 31 Policy Support:..........................................................................................................................31 Global Economic Conditions:...................................................................................................31 Complementary Measures:....................................................................................................... 31 Impact on Export Performance Indicators:......................................................................................32 Export Volume:................................................................................................................................32 Definition and Importance:..............................................................................................................32 Effect of Currency Devaluation on Export Volume:....................................................................... 32 Price Competitiveness:..............................................................................................................32 Increased Demand:....................................................................................................................32 5 Page 249 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Share:............................................................................................................................32 Empirical Evidence and Case Studies:............................................................................................ 32 Bangladesh's Ready-Made Garments (RMG) Sector:.....................................................................32 Short-Term Impact:...................................................................................................................32 Long-Term Impact:................................................................................................................... 32 Pharmaceutical Exports................................................................................................................... 32 Short-Term Impact:...................................................................................................................32 Long-Term Impact:................................................................................................................... 33 Other Export Performance Indicators:.............................................................................................33 Export Revenue:.............................................................................................................................. 33 Definition and Importance:....................................................................................................... 33 Effect of Currency Devaluation on Export Revenue.......................................................................33 Short-Term Impact:...................................................................................................................33 Long-Term Impact:................................................................................................................... 33 Trade Balance:.................................................................................................................................33 Definition and Importance:....................................................................................................... 33 Effect of Currency Devaluation on Trade Balance:........................................................................ 33 Improved Trade Balance:..........................................................................................................33 Empirical Evidence:..................................................................................................................33 Employment in Export Sectors:.......................................................................................................33 Definition and Importance:....................................................................................................... 33 Effect of Currency Devaluation on Employment............................................................................ 34 Job Creation:............................................................................................................................. 34 Sustainability:........................................................................................................................... 34 Inflationary Pressures:..................................................................................................................... 34 Definition and Importance:....................................................................................................... 34 Effect of Currency Devaluation on Inflation:..................................................................................34 Imported Inflation:.................................................................................................................... 34 Balancing Act:.......................................................................................................................... 34 Export Value:................................................................................................................................... 34 Definition and Importance:....................................................................................................... 34 Effect of Currency Devaluation on Export Value:...........................................................................34 Short-Term Impact:..........................................................................................................................34 Increased Export Volume:.........................................................................................................35 Improved Competitiveness:...................................................................................................... 35 Long-Term Impact:..........................................................................................................................35 Sustained Demand:................................................................................................................... 35 Pricing Strategies:..................................................................................................................... 35 Terms of Trade:......................................................................................................................... 35 Factors Influencing Export Value:...................................................................................................35 Elasticity of Demand:............................................................................................................... 35 Cost Structures:.........................................................................................................................35 Market Conditions:................................................................................................................... 35 Sector-Specific Dynamics:........................................................................................................35 6 Page 250 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) RMG sector:.................................................................................................................................... 36 Short-Term Impact:...................................................................................................................36 Long-Term Impact:................................................................................................................... 36 Pharmaceutical Export.....................................................................................................................36 Short-Term Impact:...................................................................................................................36 Long-Term Impact:................................................................................................................... 36 Frozen Fish Export:......................................................................................................................... 36 Short-Term Impact:...................................................................................................................36 Long-Term Impact:................................................................................................................... 36 Jute Products Sector:....................................................................................................................... 36 Short-Term Impact:...................................................................................................................36 Long-Term Impact:................................................................................................................... 36 Market Share:.................................................................................................................................. 37 Effect of Currency Devaluation on Market Share:..........................................................................37 Enhanced Competitiveness:...................................................................................................... 37 Increased Demand:....................................................................................................................37 Sustained Competitive Advantage:...........................................................................................37 Market Diversification:.............................................................................................................37 Factors Influencing Market Share Gain:......................................................................................... 37 Price Elasticity of Demand:...................................................................................................... 37 Export Sector Characteristics:...................................................................................................37 Global Competition:..................................................................................................................38 Quality and Brand Perception:..................................................................................................38 Ready-Made Garments (RMG) Sector in Bangladesh:................................................................... 38 Short-Term Impact:...................................................................................................................38 Long-Term Impact:................................................................................................................... 38 Pharmaceutical Sector in Bangladesh:............................................................................................ 38 Short-Term Impact:...................................................................................................................38 Long-Term Impact:................................................................................................................... 38 Jute Products Sector in Bangladesh:................................................................................................38 Short-Term Impact:...................................................................................................................38 Long-Term Impact:................................................................................................................... 38 Comparative Analysis with Bhutan:................................................................................................39 Bhutan's Export Performance:.................................................................................................. 39 Sectoral Differences:.................................................................................................................39 Policy Implications and Strategic Responses.................................................................................. 39 Diversifying Export Markets...........................................................................................................39 Market Research and Identification:.........................................................................................39 Trade Agreements and Partnerships:........................................................................................ 39 Promotion and Branding:..........................................................................................................39 Improving Product Quality..............................................................................................................39 Investment in Technology:........................................................................................................40 Standards and Certifications:.................................................................................................... 40 Research and Development (R&D):......................................................................................... 40 7 Page 251 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Reducing Reliance on Imported Inputs........................................................................................... 40 Local Sourcing and Supply Chains:..........................................................................................40 Substitution and Innovation:..................................................................................................... 40 Capacity Building:.................................................................................................................... 40 Monetary Policy:.......................................................................................................................40 Fiscal Discipline:...................................................................................................................... 40 Supporting Export-Oriented Industries........................................................................................... 40 Export Incentives:..................................................................................................................... 40 Infrastructure Development:..................................................................................................... 41 Export Financing and Insurance:.............................................................................................. 41 South Korea..................................................................................................................................... 41 Diversification and Innovation:................................................................................................ 41 Trade Agreements:....................................................................................................................41 China................................................................................................................................................41 Infrastructure Investment:.........................................................................................................41 Export Incentives:..................................................................................................................... 41 Monetary Policy Management:....................................................................................................... 42 Interest Rate Adjustments:........................................................................................................42 Foreign Exchange Reserves:.....................................................................................................42 Fiscal Discipline:............................................................................................................................. 42 Balanced Budgets:.................................................................................................................... 42 Debt Management:....................................................................................................................42 Inflation Targeting:.......................................................................................................................... 42 Clear Inflation Targets:............................................................................................................. 42 Inflation Monitoring:................................................................................................................ 42 Supply-Side Measures:....................................................................................................................42 Improving Productivity:............................................................................................................42 Reducing Supply Chain Bottlenecks:....................................................................................... 42 Export Incentives:............................................................................................................................43 Tax Breaks and Subsidies:........................................................................................................ 43 Export Financing:......................................................................................................................43 Infrastructure Development:............................................................................................................43 Transportation Networks:..........................................................................................................43 Digital Infrastructure:................................................................................................................43 Trade Agreements:....................................................................................................................43 Market Diversification:.............................................................................................................43 Enhancing Competitiveness through Innovation and Quality Improvement.................................. 43 Research and Development (R&D):................................................................................................43 R&D Investments:.................................................................................................................... 43 Technology Adoption:...............................................................................................................43 Quality Standards and Certifications:..............................................................................................44 International Standards:............................................................................................................ 44 Continuous Improvement:........................................................................................................ 44 South Korea: Balancing Devaluation with Industrial Policy.......................................................... 44 8 Page 252 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Context:.....................................................................................................................................44 Controlled Devaluation:............................................................................................................44 Industrial Policy:.......................................................................................................................44 Export Incentives:..................................................................................................................... 44 Export Growth:......................................................................................................................... 44 Economic Diversification:........................................................................................................ 44 Lessons for Bangladesh:..................................................................................................................45 China: Exchange Rate Management and Export Promotion:..........................................................45 India: Structural Reforms and Exchange Rate Flexibility...............................................................45 Liberalization of Exchange Rates:............................................................................................ 45 Trade Liberalization:.................................................................................................................46 Export Promotion Councils: .................................................................................................... 46 Increased Export Competitiveness:...........................................................................................46 Diverse Export Base:................................................................................................................ 46 Vietnam: Gradual Devaluation and Export Diversification............................................................ 46 Gradual Devaluation:................................................................................................................ 46 Export Diversification:..............................................................................................................46 Trade Agreements:....................................................................................................................46 Sustained Export Growth:.........................................................................................................46 Market Expansion:.................................................................................................................... 46 Sectoral Dynamics:..........................................................................................................................47 Comparative Insights from Bhutan:................................................................................................ 47 Short-Term vs. Long-Term Effects:.................................................................................................47 Policy Implications:.........................................................................................................................47 Implications for Future Research:................................................................................................... 48 Sustained Devaluation Effects:........................................................................................................48 Role of Complementary Economic Policies:.................................................................................. 48 Inflation Control Measures:...................................................................................................... 48 Trade Policy and Export Incentives:.........................................................................................48 Industrial Policy and Import Substitution:................................................................................48 Global Demand Fluctuations:................................................................................................... 49 Comparative Analysis Across Countries:................................................................................. 49 Integration of Technological Advancements:..................................................................................49 Role of Technology in Enhancing Export Competitiveness:....................................................49 E-Commerce and Global Trade:............................................................................................... 49 Final Thoughts:................................................................................................................................49 Key Insights:....................................................................................................................................49 Exchange Rate Dynamics:........................................................................................................ 49 Sector-Specific Responses:....................................................................................................... 49 Policy Implications:.................................................................................................................. 50 Practical Recommendations:........................................................................................................... 50 Enhancing Export Competitiveness:.........................................................................................50 Supporting Export-Oriented Industries:....................................................................................50 Managing Inflationary Pressures:............................................................................................. 50 9 Page 253 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Learning from Global Best Practices:.......................................................................................50 Long-Term Implications:.................................................................................................................50 Long-Term Impacts:........................................................................................................................ 51 Complementary Economic Policies:............................................................................................... 51 Global Economic Trends:................................................................................................................51 Technological Advancements:.........................................................................................................51 Clarity of Exchange Rate Pass-Through:........................................................................................ 51 Definition and Concept:.................................................................................................................. 51 Mechanisms of Exchange Rate Pass-Through:............................................................................... 51 Cost Channel:............................................................................................................................52 Demand Channel:......................................................................................................................52 Pricing-to-Market (PTM) Strategy:.......................................................................................... 52 Market Structure and Competition:.......................................................................................... 52 Currency Invoicing Practices:...................................................................................................52 Factors Influencing Exchange Rate Pass-Through..........................................................................52 Several factors determine the extent of ERPT in an economy, including:......................................52 Economic Structure:..................................................................................................................52 Inflationary Environment:.........................................................................................................52 Monetary Policy:.......................................................................................................................53 Trade Openness:........................................................................................................................53 Firm Characteristics:.................................................................................................................53 Empirical Evidence of ERPT in Bangladesh:................................................................................. 53 Importance of Understanding ERPT:.............................................................................................. 53 Import Prices:.................................................................................................................................. 53 Higher Input Costs for Exporters:.............................................................................................54 Consumer Prices:...................................................................................................................... 54 Export Prices:.................................................................................................................................. 54 Price Competitiveness:..............................................................................................................54 Market Dynamics and Elasticity of Demand:...........................................................................54 Competitive Response:............................................................................................................. 54 Consumer Prices:.............................................................................................................................54 Inflationary Pressures:.............................................................................................................. 54 Domestic Demand:....................................................................................................................55 Wage-Price Spiral:.................................................................................................................... 55 Impact on Different Sectors:............................................................................................................55 Ready-Made Garments (RMG):............................................................................................... 55 Pharmaceuticals:....................................................................................................................... 55 Frozen Fish and Jute Products:................................................................................................. 55 Economic Structure:........................................................................................................................ 56 Diversification:......................................................................................................................... 56 Market Flexibility:.................................................................................................................... 56 Market Competition:.................................................................................................................56 Price Sensitivity:....................................................................................................................... 56 Monopolistic vs. Competitive Markets:....................................................................................56 10 Page 254 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Pricing Strategies:............................................................................................................................56 Cost-Plus Pricing:..................................................................................................................... 57 Strategic Pricing:.......................................................................................................................57 Nature of Traded Goods:................................................................................................................. 57 Essential vs. Luxury Goods:..................................................................................................... 57 Export Composition:.................................................................................................................57 Import Content of Exports:..............................................................................................................57 Cost Structure:.......................................................................................................................... 57 Inflation and Monetary Policy:........................................................................................................57 Inflationary Environment:.........................................................................................................57 Monetary Policy:.......................................................................................................................58 11 Page 255 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Exchange Rate Pass-through: The study focuses on the direct impact via the exchange rate pass-through (ERPT) channel. ERPT is a critical mechanism through which changes in exchange rates affect domestic prices and, subsequently, the competitiveness of export industries. This section delves into the nuances of ERPT and its implications for Bangladesh's export performance. Understanding Exchange Rate Pass-Through (ERPT): ERPT refers to the extent to which fluctuations in the exchange rate are reflected in the prices of domestic goods and services. A high degree of pass-through means that changes in exchange rates lead to significant adjustments in domestic prices, whereas a low degree of pass-through indicates that domestic prices remain relatively stable despite exchange rate fluctuations. Mechanisms of ERPT: Cost Channel: When the domestic currency depreciates, the cost of imported inputs rises. This increase in production costs can lead to higher prices for exported goods if producers pass on these costs to foreign buyers. Conversely, if producers absorb these costs to maintain competitiveness, the impact on export prices might be muted. Demand Channel: A weaker domestic currency makes exports cheaper for foreign buyers, potentially increasing demand for these goods. This can boost export volumes and revenues, enhancing overall export performance. Competitiveness Channel: Devaluation can improve the price competitiveness of a country's exports relative to those of its trading partners. This is particularly crucial for industries where price competition is intense. Direct Impact on Export Performance in Bangladesh: The direct impact of ERPT on Bangladesh's export performance can be analyzed through several key sectors, each with distinct characteristics and responses to currency devaluation: Cost Sensitivity: The RMG sector heavily relies on imported raw materials such as fabrics and accessories. A depreciation of the Bangladeshi Taka (BDT) increases these input costs. However, given the high global demand for Bangladeshi garments, producers might be able to pass on some of these costs to buyers without losing competitiveness. Price Competitiveness: Devaluation makes Bangladeshi garments cheaper in international markets, potentially boosting demand. The RMG sector, being labor-intensive and price-sensitive, can significantly benefit from enhanced price competitiveness. 13 Page 256 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Input Costs: Similar to the RMG sector, the frozen fish industry also depends on imported inputs such as feed and technology. Devaluation can increase production costs, impacting profitability. Demand Elasticity: The frozen fish industry benefits from relatively high demand elasticity. Lower export prices due to a weaker BDT can lead to substantial increases in export volumes. Innovation and Branding: The pharmaceutical sector's response to devaluation is less straightforward due to factors such as innovation, branding, and regulatory standards. While devaluation can reduce export prices, the sector’s reliance on imported active pharmaceutical ingredients (APIs) can offset these gains. Market Penetration: Lower prices can aid in penetrating new markets and expanding market share, but the overall impact depends on the sector's ability to manage increased input costs. Cost Structure: Jute production is less reliant on imported inputs compared to other sectors, which might mitigate the negative cost effects of devaluation. Global Demand: The demand for jute products is relatively stable and less price-sensitive, suggesting that devaluation can primarily enhance competitiveness without significantly altering production costs. Comparative Analysis: Bangladesh vs. Bhutan Economic Structure: Bangladesh’s economy is more diversified and export-oriented compared to Bhutan’s, which relies heavily on hydropower exports. This structural difference influences how devaluation impacts their respective export performances. ERPT Variations: Bhutan’s smaller economy might exhibit different ERPT dynamics, with less pronounced pass-through effects due to limited industrial diversity. The comparative analysis provides insights into how similar policies can yield different outcomes based on economic contexts. Exchange Rate Management: Policymakers need to balance the benefits of enhanced export competitiveness with the potential inflationary pressures arising from higher import costs. Sectoral Support: 14 Page 257 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Tailored support measures for different export sectors can help mitigate the negative impacts of devaluation. For instance, subsidies or tax incentives for sectors heavily reliant on imported inputs can cushion the cost increases. Long-Term Strategies: Developing strategies to increase domestic production of critical inputs can reduce reliance on imports and improve resilience against currency fluctuations. Understanding the ERPT mechanism and its direct impact on export performance is crucial for developing effective economic policies. By examining how devaluation affects key export sectors in Bangladesh, this study provides valuable insights into the complexities of currency management and export competitiveness. The findings highlight the importance of sector-specific analysis and informed policymaking in leveraging devaluation to enhance export performance and drive economic growth. Exchange Rate Movements and Their Channels: Understanding the nuances of exchange rate movements and their channels is crucial for analyzing how currency devaluation impacts export performance. Exchange rates can fluctuate in various ways, each with distinct implications for an economy. Types of Exchange Rate Movements: Nominal Exchange Rate Changes: Definition: The nominal exchange rate represents the market value of a country's currency relative to another currency. It is the rate at which one currency can be exchanged for another in the foreign exchange market. Implications: Export Prices: Changes in the nominal exchange rate directly affect the prices of exported goods in foreign markets. A devaluation in the nominal exchange rate makes a country’s exports cheaper and potentially more competitive internationally. Import Costs: A weaker nominal exchange rate makes imports more expensive. This can increase production costs for industries reliant on imported inputs, impacting overall economic performance. Currency Market Dynamics: Nominal exchange rates are influenced by various factors, including interest rate differentials, political stability, and market speculation. Short-term fluctuations can be significant, affecting trade and investment decisions. Example: If the Bangladeshi Taka (BDT) depreciates against the US dollar (USD), it means more BDT are needed to buy one USD. This makes Bangladeshi exports cheaper in dollar terms, boosting competitiveness in US markets. 15 Page 258 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Real Exchange Rate Changes: Definition: The real exchange rate adjusts the nominal exchange rate for differences in price levels between countries. It reflects the purchasing power of a country’s currency relative to another currency, considering inflation rates. Competitiveness: The real exchange rate is a more accurate measure of a country's international competitiveness. It accounts for inflation differentials, providing a clearer picture of relative cost structures. Inflation Impact: Changes in the real exchange rate can indicate underlying inflation trends. A stable nominal exchange rate with high domestic inflation can lead to real appreciation, eroding export competitiveness. Long-Term Adjustments: Real exchange rate changes often drive long-term adjustments in trade balances and economic policies. They influence decisions on investment, production, and consumption over the long term. Example: Suppose the nominal exchange rate between the Bangladeshi Taka and the US dollar remains constant, but Bangladesh experiences higher inflation than the US. In this case, the real exchange rate appreciates, making Bangladeshi goods relatively more expensive, thereby reducing export competitiveness. Channels of Exchange Rate Movements: Trade Channel: Mechanism: Exchange rate movements affect the trade balance by altering the relative prices of exports and imports. A devaluation (nominal or real) makes exports cheaper and imports more expensive, potentially improving the trade balance. Export Volumes: Devaluation can lead to increased export volumes as foreign buyers find the goods more affordable. Import Substitution: Higher import costs encourage domestic production and consumption of locally produced goods, fostering import substitution. Trade Balance Improvement: By boosting exports and curbing imports, devaluation can improve the trade balance, enhancing foreign exchange reserves and economic stability. Cost Channel: Mechanism: 16 Page 259 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Exchange rate movements influence production costs, especially in industries reliant on imported inputs. Devaluation increases the local currency cost of imported raw materials, machinery, and intermediate goods. Production Costs: Higher costs for imported inputs can squeeze profit margins, especially in price-sensitive export sectors. Price Adjustments: Firms may pass on increased costs to consumers through higher prices, impacting competitiveness and demand. Sectoral Impact: The cost channel's impact varies across sectors depending on their reliance on imported inputs. Sectors with high import dependency are more affected by devaluation. Investment Channel: Mechanism: Exchange rate movements affect foreign direct investment (FDI) flows. A depreciated currency can make investment in the country more attractive due to lower costs and potential for higher returns in foreign currency terms. FDI Inflows: Devaluation can attract FDI by making assets and production costs cheaper for foreign investors. Capital Formation: Increased FDI can boost capital formation, enhancing productive capacity and economic growth. Investment Climate: Stable and competitive exchange rates create a favorable investment climate, encouraging long-term investment and development. Inflation Channel: Mechanism: Exchange rate movements influence domestic inflation rates. Devaluation can lead to imported inflation as the cost of imported goods and services rises. Consumer Prices: Higher import prices contribute to overall inflation, reducing purchasing power and potentially dampening domestic demand. 17 Page 260 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Monetary Policy Response: Central banks may adjust monetary policies, such as interest rates, to control inflationary pressures resulting from devaluation. Economic Stability: Managing the inflationary impact of devaluation is crucial for maintaining economic stability and fostering sustainable growth. Understanding the types and channels of exchange rate movements is essential for comprehending their impact on export performance and overall economic health. Nominal and real exchange rate changes have distinct implications for trade, costs, investment, and inflation. By analyzing these dynamics, policymakers and businesses can develop strategies to manage exchange rate fluctuations, enhance export competitiveness, and achieve sustainable economic growth. This study aims to provide a detailed analysis of these factors in the context of Bangladesh and Bhutan, offering valuable insights for both academic research and practical policy formulation. Channels of Exchange Rate Pass-Through (ERPT): Exchange Rate Pass-through (ERPT) describes how changes in exchange rates affect the prices of goods and services in an economy. ERPT can be categorized into direct and indirect channels, each impacting the economy differently. Understanding these channels is critical for policymakers and businesses to anticipate the effects of currency devaluation on export performance and overall economic stability. Direct Channels of ERPT: Changes in Export Prices: Mechanism: When a country’s currency devalues, the immediate effect is on the prices of its exports in foreign markets. Devaluation makes exported goods cheaper for foreign buyers, potentially boosting demand and export volumes. Increased Competitiveness: Lower prices in foreign currency terms make exports more competitive, potentially increasing market share in global markets. Revenue Impact: While the volume of exports may increase, the revenue in the domestic currency could fluctuate depending on the extent of the devaluation and the price elasticity of demand for the exported goods. Price Adjustments: Exporting firms may adjust their pricing strategies to maintain profit margins or market competitiveness. 18 Page 261 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: If the Bangladeshi Taka (BDT) devalues against the US Dollar (USD), garments exported from Bangladesh become cheaper in USD terms, making them more attractive to US buyers. This can lead to increased orders and higher export volumes for Bangladeshi garment manufacturers. Indirect Channels of ERPT: Adjustments in Domestic Prices: Mechanism: Devaluation affects the prices of imported goods and services, which, in turn, influences domestic price levels. Imported goods become more expensive, contributing to overall inflation. Imported Inflation: Higher import prices can lead to increased costs for consumers and businesses, driving up the general price level and contributing to inflationary pressures. Consumer Behavior: Rising domestic prices can reduce purchasing power and alter consumption patterns, potentially impacting demand for both imported and domestically produced goods. Wage Adjustments: Inflation can lead to demands for higher wages, further increasing production costs and affecting overall economic stability. Example: Following a devaluation of the BDT, the cost of imported raw materials for garment production rises. This can lead to higher production costs, which may be passed on to consumers through increased prices for finished garments in the domestic market. Adjustments in Production Costs: Mechanism: Devaluation raises the cost of imported inputs used in the production process, affecting the cost structure of export-oriented industries. Cost-Push Inflation: Higher input costs can lead to cost-push inflation, where increased production costs result in higher prices for final goods. Profit Margins: 19 Page 262 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Firms may face squeezed profit margins if they are unable to fully pass on increased costs to consumers. Production Decisions: Rising costs can influence production decisions, potentially leading to a reduction in output or a shift towards alternative inputs or production methods. Example: If Bangladeshi garment manufacturers rely on imported fabrics and accessories, the devaluation of the BDT increases their costs. Manufacturers may need to find ways to absorb or pass on these costs, which can affect their competitiveness and profitability. Understanding the channels through which ERPT operates is essential for comprehending the broader economic impact of exchange rate movements. Direct channels primarily involve changes in export prices, enhancing competitiveness in foreign markets. Indirect channels, however, encompass broader economic adjustments, including domestic price levels and production costs, which can have complex and far-reaching effects on the economy. By analyzing both direct and indirect channels of ERPT, this study aims to provide a comprehensive understanding of how currency devaluation impacts export performance in Bangladesh, offering valuable insights for policymakers and stakeholders in the export sectors. Understanding the exchange rate pass-through mechanism is crucial for developing effective policies and strategies to enhance export performance. By examining the direct impact of exchange rate movements on export prices, this study provides valuable insights for policymakers and export-oriented businesses in Bangladesh. Implementing the recommendations derived from this research can help Bangladesh achieve sustainable economic growth and improve its global export competitiveness. Direct Impact on Export Prices: When the Bangladeshi Taka (BDT) devalues, it leads to a direct impact on the prices of Bangladeshi exports in several key ways. This section explores the mechanisms and implications of how a weaker BDT affects export prices and competitiveness in international markets. Mechanisms of Direct Impact: Lower Export Prices in Foreign Currency Terms: Mechanism: Devaluation reduces the value of the BDT relative to other currencies. Consequently, the prices of goods priced in BDT decrease when converted to foreign currencies. Example: If a garment previously priced at 100 BDT was equivalent to 1 USD before devaluation (assuming an exchange rate of 100 BDT/USD), after a 10% devaluation, the same 100 BDT would be equivalent to approximately 0.90 USD (assuming a new exchange rate of 110 BDT/USD). This reduction makes Bangladeshi garments cheaper for foreign buyers. 20 Page 263 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Increased Competitiveness: Mechanism: As export prices drop in foreign currency terms, Bangladeshi goods become more attractive to international buyers, who can now purchase the same products at lower prices compared to goods from countries whose currencies have not devalued. Example: A US buyer who imports garments may find Bangladeshi garments more affordable than those from competing countries like Vietnam or India if their currencies have not similarly devalued. Implications of Lower Export Prices: Boost in Export Volumes: Mechanism: The lower prices can lead to increased demand for Bangladeshi exports as foreign buyers take advantage of the reduced costs. Example: A European retailer might increase orders for Bangladeshi garments to benefit from the cost savings, leading to higher export volumes from Bangladesh. Market Share Expansion: Mechanism: With more competitive pricing, Bangladeshi exporters can potentially capture a larger share of the international market. Example: If the price of jute products from Bangladesh falls due to devaluation, these products may become more competitive compared to similar products from other countries, enabling Bangladeshi exporters to gain a larger market share. Revenue and Profit Margins: Mechanism: While the devaluation makes Bangladeshi goods cheaper in foreign markets, the revenue in BDT may not necessarily increase if the volume increase doesn't offset the lower prices. Profit margins can be maintained or improved if the cost structure remains stable or if the volume increase is significant. Example: 21 Page 264 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) A pharmaceutical company exporting generic drugs might see a surge in orders due to lower prices in USD terms, potentially leading to higher overall revenue despite the lower price per unit in foreign currency. Ready-Made Garments (RMG): Impact: The RMG sector is likely to experience a significant boost in export volumes due to price sensitivity in international markets. Example: Major brands in Europe and North America might increase their procurement from Bangladesh, driven by cost savings from the devaluation. Frozen Fish: Impact: Devaluation can make Bangladeshi frozen fish more competitive, increasing export volumes to markets in the US, EU, and Asia. Example: Seafood distributors in Japan may prefer Bangladeshi frozen fish over more expensive alternatives from other countries. Pharmaceuticals: Impact: The pharmaceutical sector could see an increase in exports, especially for price-sensitive generic drugs. Example: Exporters of generic medicines may find new opportunities in African and South American markets where price is a critical factor. Jute Products: Impact: Jute products, already a significant export item, could become even more competitive globally. Example: Demand for eco-friendly jute bags in Europe could rise as the lower prices make them more attractive compared to synthetic alternatives. The direct impact of currency devaluation on export prices is a crucial factor in enhancing the competitiveness of Bangladeshi goods in international markets. By making exports cheaper in foreign currency terms, devaluation can lead to increased export volumes, expanded market share, and 22 Page 265 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) potentially higher revenues. However, the extent of these benefits depends on various factors, including the elasticity of demand, the ability to manage increased production costs, and the overall global economic environment. Understanding these dynamics is essential for policymakers and businesses aiming to leverage currency devaluation to boost export performance and drive economic growth. Short-Term vs. Long-Term Effects: Understanding the distinction between short-term and long-term effects of currency devaluation is crucial for comprehensively assessing its impact on export performance. Both timeframes present unique dynamics and implications for the economy, particularly for export-oriented industries. Immediate Effects on Export Performance: Short-Term Effects: In the short term, currency devaluation typically results in several immediate and noticeable impacts on export performance: Increase in Export Volumes: Mechanism: The immediate effect of devaluation is the reduction in the price of exported goods in foreign currency terms. This price reduction can make Bangladeshi exports more attractive to international buyers, leading to a spike in demand and export volumes. Example: If the BDT devalues, a European retailer might immediately increase orders for Bangladeshi garments to take advantage of the lower prices, resulting in a surge in export volumes. Enhanced Revenue: Mechanism: The increase in export volumes can lead to higher overall revenue in the short term. Even if prices per unit drop in foreign currency terms, the increase in the quantity sold can compensate for the lower price, boosting total export earnings. Example: A pharmaceutical company exporting generic drugs may see a substantial rise in revenue as foreign buyers increase their purchases due to the lower prices. Rapid Market Share Expansion: Mechanism: As Bangladeshi goods become cheaper, they can quickly capture a larger share of the global market, displacing competitors from other countries whose currencies have not devalued. 23 Page 266 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: Jute products from Bangladesh may rapidly gain market share in eco-conscious markets like Europe, where price sensitivity is high. Competitive Advantage: Mechanism: Exporters gain a competitive edge due to the lower prices, which can be leveraged to enter new markets or strengthen their position in existing ones. Example: The ready-made garments sector might find new opportunities in markets like North America and the Middle East, where lower prices make Bangladeshi garments more attractive compared to alternatives from other regions. Long-Term Effects: In the long term, the impacts of currency devaluation can evolve, presenting both opportunities and challenges: Sustained Export Growth: Mechanism: If the devaluation is managed well, it can lead to sustained growth in export volumes and market share over time, contributing to long-term economic stability. Example: Continuous demand for Bangladeshi garments, driven by competitive pricing, can lead to sustained export growth and a stronger position in the global textile market. Structural Adjustments: Mechanism: Over time, industries may adjust their cost structures, sourcing strategies, and production processes to adapt to the new exchange rate environment. Example: Exporters might seek to reduce reliance on imported inputs by sourcing locally or developing new supply chains to mitigate the cost impacts of a weaker currency. Inflationary Pressures: Mechanism: 24 Page 267 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation can lead to higher import costs for raw materials and intermediate goods, contributing to inflationary pressures in the domestic economy. This can erode the initial competitive advantage gained from lower export prices. Example: If the cost of imported raw materials for the pharmaceutical sector rises, it could lead to higher production costs and potentially higher prices for finished goods, affecting competitiveness. Investment in Export Sectors: Mechanism: Long-term devaluation can incentivize investment in export-oriented industries, leading to modernization, capacity expansion, and improved product quality. Example: Increased revenue from higher export volumes can be reinvested in upgrading manufacturing facilities in the ready-made garments sector, enhancing productivity and quality. Potential for Over-Reliance on Exports: Mechanism: Sustained devaluation may lead to an over-reliance on exports, making the economy vulnerable to external shocks and global market fluctuations. Example: A significant downturn in global demand for textiles could severely impact the Bangladeshi economy if it becomes too dependent on garment exports for foreign exchange earnings. Balance of Payments Improvement: Mechanism: Improved export performance can positively affect the balance of payments, helping to reduce trade deficits and strengthen the country's foreign exchange reserves. Example: Higher earnings from exports can contribute to a healthier balance of payments position, reducing the need for external borrowing and enhancing economic stability. The short-term effects of currency devaluation, such as increased export volumes, enhanced revenue, and rapid market share expansion, provide immediate benefits to export-oriented industries in Bangladesh. However, the long-term effects, including sustained growth, structural adjustments, inflationary pressures, and potential vulnerabilities, require careful management and strategic planning to ensure sustainable economic benefits. Understanding these dynamics helps policymakers and businesses make informed decisions to maximize the positive impacts of devaluation while mitigating potential challenges. 25 Page 268 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Long-Term Implications for Export Competitiveness: Currency devaluation can have profound and multifaceted long-term implications for a country's export competitiveness. These implications depend on a range of factors, including the ability of exporters to sustain lower prices, the elasticity of demand for their goods, and the broader economic environment. While devaluation can initially boost export performance, its long-term success hinges on managing several key challenges and opportunities. Key Factors Influencing Long-Term Export Competitiveness: Ability to Maintain Lower Prices: Sustained Competitive Pricing: The primary advantage of devaluation is the reduction in export prices in foreign currency terms. For long-term competitiveness, exporters must maintain these lower prices to continue attracting foreign buyers. This requires ongoing efficiency improvements and cost management. . Example: The ready-made garments sector in Bangladesh must continually seek ways to reduce costs through technological upgrades, better supply chain management, and enhanced labor productivity to keep prices competitive. Elasticity of Demand for Exported Goods: Demand Sensitivity: The impact of devaluation on export volumes depends significantly on the price elasticity of demand for exported goods. Highly elastic goods will see a more significant increase in demand in response to lower prices. Example: If the global demand for Bangladeshi jute products is highly elastic, a price reduction due to devaluation will result in a substantial increase in export volumes. Rising Costs: Sustained devaluation often leads to higher import costs for raw materials and intermediate goods, which can contribute to domestic inflation. This inflation can erode the initial price advantage gained from devaluation. Example: The pharmaceutical sector, reliant on imported raw materials, may face increased production costs, which could lead to higher prices for exported medicines, offsetting the competitive gains from devaluation. Structural Adjustments and Industry Adaptation: Cost Structure Optimization: 26 Page 269 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Long-term success requires industries to adapt their cost structures. This might involve shifting to local sourcing, improving efficiency, and investing in technology to reduce dependency on costly imports. Example: The frozen fish industry could invest in local aquaculture and processing facilities to reduce reliance on imported feeds and equipment. Investment in Export-Oriented Sectors: Capacity and Quality Enhancement: Long-term devaluation can encourage investment in export-oriented sectors, leading to increased capacity, improved product quality, and enhanced competitiveness. Example: Increased earnings from garment exports can be reinvested in modernizing factories, adopting sustainable practices, and improving worker skills, thereby maintaining long-term competitiveness. Balancing Trade and Macroeconomic Stability: Managing Trade Balances: Effective management of trade balances and maintaining macroeconomic stability are crucial to leveraging the benefits of devaluation without triggering economic instability. Example: Policymakers need to ensure that the positive effects on exports are not negated by widening trade deficits due to increased import costs. Global Economic Conditions and Competitiveness: External Factors: Global economic conditions, such as changes in trade policies, economic growth in key markets, and currency movements of trade partners, also influence long-term export competitiveness. Example: If major trading partners experience economic slowdowns, the demand for Bangladeshi exports may decline, regardless of devaluation benefits. Policy Support and Economic Reforms: Supportive Policies: 27 Page 270 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Government policies, such as subsidies for export-oriented industries, tax incentives, and investment in infrastructure, play a critical role in sustaining long-term export competitiveness. Example: The Bangladeshi government could provide financial incentives for exporters to adopt advanced technologies and improve product quality, ensuring sustained competitiveness. Potential Long-Term Scenarios: Positive Scenario: Sustained Growth: If Bangladesh effectively manages the challenges associated with devaluation, it could experience sustained growth in export volumes and revenue. This growth could lead to higher foreign exchange earnings, improved trade balances, and enhanced economic stability. Example: The ready-made garments sector continues to dominate global markets, leading to substantial economic benefits and job creation. Negative Scenario: Erosion of Gains: If inflationary pressures and rising production costs are not managed, the initial gains from devaluation could be eroded. This scenario could result in reduced competitiveness, declining export volumes, and economic instability. Example: The pharmaceutical sector faces increased costs due to inflation, leading to higher prices and reduced competitiveness in international markets. Balanced Approach: Strategic Management: A balanced approach, where devaluation is accompanied by strategic economic reforms, investment in key sectors, and effective policy support, could maximize the benefits while mitigating risks. Example: The government implements comprehensive economic policies that support exporters, control inflation, and enhance overall economic resilience. The long-term implications of currency devaluation on export competitiveness are complex and multifaceted. While devaluation can initially boost export performance by making goods cheaper in foreign markets, sustained benefits depend on various factors, including maintaining lower prices, managing inflationary pressures, and adapting to structural changes. Policymakers and industry 28 Page 271 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) stakeholders must work collaboratively to address these challenges and leverage opportunities to ensure long-term export competitiveness and economic growth. Case Studies and Empirical Evidence: Incorporating case studies and empirical evidence provides a robust foundation for understanding the multifaceted effects of currency devaluation on export performance. This study examines specific instances from Bangladesh and other developing countries to highlight both the short-term and long-term impacts of devaluation on export competitiveness and overall economic performance. Bangladesh: Case Studies and Evidence: Ready-Made Garments (RMG) Sector: Context: The RMG sector is the backbone of Bangladesh's economy, contributing over 80% to its total exports. Devaluation Impact: Following the devaluation of the Bangladeshi Taka (BDT) in the early 2010s, the RMG sector experienced a significant boost in export volumes due to lower prices in international markets. Empirical Evidence: Studies show that the devaluation led to a 15-20% increase in RMG exports within the first two years. However, this was accompanied by a 5-10% rise in production costs due to higher prices for imported raw materials . Long-Term Effects: In the long term, the sector adapted by improving operational efficiency, investing in technology, and diversifying markets. Despite initial inflationary pressures, the sector sustained its competitive edge by focusing on quality improvements and cost control measures. Pharmaceutical Sector: Context: Bangladesh's pharmaceutical sector is a growing industry with substantial export potential. Devaluation Impact: Currency devaluation made Bangladeshi pharmaceuticals more competitively priced in global markets, leading to increased export orders. Empirical Evidence: An analysis of export data from 2010 to 2015 shows a 12% annual increase in pharmaceutical exports following the devaluation. However, the sector faced challenges due to the higher cost of imported active pharmaceutical ingredients (APIs) . 29 Page 272 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Long-Term Effects: The sector responded by enhancing local production capabilities for APIs and investing in research and development. These measures helped mitigate the negative impacts of devaluation and sustain export growth. Comparative Analysis: Other Developing Countries India: Context: India has also employed devaluation strategies to boost its export sectors, particularly in textiles and information technology. Empirical Evidence: Studies indicate that devaluation led to a significant increase in textile exports, with a 25% growth observed in the first year. However, the IT sector faced mixed outcomes, with increased competition from other countries also devaluing their currencies . Lessons Learned: India's experience underscores the importance of sector-specific strategies and the need for complementary policies to support export-oriented industries. Vietnam: Context: Vietnam, with its rapidly growing manufacturing sector, has leveraged devaluation to enhance export performance. Empirical Evidence: Following the devaluation of the Vietnamese Dong in 2008, the country's exports saw a 30% increase over three years. The electronics and apparel sectors particularly benefited from the price advantage in global markets . Long-Term Effects: Vietnam's success is attributed to strong government support, investment in infrastructure, and efforts to reduce reliance on imported inputs. These measures ensured sustained competitiveness despite initial inflationary challenges. Brazil: Context: Brazil's agricultural and manufacturing sectors have experienced both positive and negative impacts of currency devaluation. Empirical Evidence: 30 Page 273 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The devaluation of the Brazilian Real in the early 2000s led to a 40% surge in agricultural exports. However, the manufacturing sector faced difficulties due to the increased cost of imported machinery and inputs . Long-Term Effects: Brazil's experience highlights the need for balanced policies that address both export growth and the challenges posed by higher import costs. Short-Term Effects: Immediate boost in export volumes due to lower prices. Increased revenue and market share for export-oriented industries. Initial inflationary pressures and higher production costs. Long-Term Effects: Sustained export competitiveness depends on structural adjustments and policy support. Investments in local production capabilities and technology. Enhanced market diversification and product quality improvements. Effective management of inflation and import costs. Key Takeaways: Sector-Specific Responses: Different sectors respond uniquely to devaluation, necessitating tailored strategies to maximize benefits and mitigate challenges. Policy Support: Government interventions, such as subsidies, tax incentives, and investments in infrastructure, are crucial for sustaining long-term export competitiveness. Global Economic Conditions: The effectiveness of devaluation also depends on global economic trends and the competitive actions of other countries. Complementary Measures: Successful devaluation strategies often involve complementary measures, such as improving operational efficiency, enhancing product quality, and reducing reliance on imported inputs. The case studies and empirical evidence from Bangladesh and other developing countries illustrate the complex dynamics of currency devaluation and its impact on export performance. By understanding these dynamics, policymakers can develop more effective strategies to enhance export competitiveness and foster sustainable economic growth. This study provides valuable insights and lessons that can guide future policy decisions and support the continued development of export-oriented industries. 31 Page 274 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact on Export Performance Indicators: Export Volume: Definition and Importance: Export volume refers to the quantity of goods and services that a country sells to foreign markets. It is a crucial indicator of a country's economic health and its competitiveness in the global market. Effect of Currency Devaluation on Export Volume: Currency devaluation generally makes a country's goods and services cheaper for foreign buyers, which can lead to an increase in export volume. This occurs because: Price Competitiveness: Devaluation lowers the prices of exports in foreign currency terms, making them more attractive to international buyers. Increased Demand: The reduced prices can lead to higher demand for the country's products, boosting the volume of exports. Market Share: Enhanced price competitiveness can help the country gain a larger market share in international trade. Empirical Evidence and Case Studies: Bangladesh's Ready-Made Garments (RMG) Sector: Short-Term Impact: Following a significant devaluation in the early 2010s, the RMG sector saw a notable increase in export volume. Data shows a 15-20% increase in export volumes within the first two years post-devaluation. Long-Term Impact: The sustained increase in export volume was supported by improvements in production efficiency and quality enhancements, allowing the sector to maintain its competitive edge despite subsequent inflationary pressures. Pharmaceutical Exports Short-Term Impact: Currency devaluation in Bangladesh led to a 12% annual increase in pharmaceutical exports due to more competitive pricing in international markets. 32 Page 275 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Long-Term Impact: The sector invested in local production capabilities and research and development to mitigate the higher costs of imported raw materials, sustaining growth in export volumes. Other Export Performance Indicators: Export Revenue: Definition and Importance: Export revenue refers to the total income a country earns from selling its goods and services abroad. It is vital for generating foreign exchange reserves, which can be used to pay for imports and stabilize the country's currency. Effect of Currency Devaluation on Export Revenue Short-Term Impact: Devaluation can lead to an immediate increase in export revenue due to higher export volumes and potentially improved profit margins. Long-Term Impact: The overall impact on revenue will depend on the elasticity of demand for the country's exports and the extent to which increased volumes offset higher production costs. Trade Balance: Definition and Importance: The trade balance is the difference between a country's exports and imports. A positive trade balance (surplus) occurs when exports exceed imports, while a negative trade balance (deficit) happens when imports surpass exports. Effect of Currency Devaluation on Trade Balance: Improved Trade Balance: Devaluation can help improve the trade balance by boosting exports and reducing the demand for imports due to higher prices. Empirical Evidence: Bangladesh's trade balance showed improvement in periods following currency devaluation, primarily driven by increased export revenues and reduced import volumes. Employment in Export Sectors: Definition and Importance: 33 Page 276 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Employment levels in export sectors are a key indicator of the economic impact of export performance. Higher export volumes typically lead to job creation, reducing unemployment rates, and improving living standards. Effect of Currency Devaluation on Employment Job Creation: Increased export volumes often require higher production levels, leading to the creation of new jobs in export-oriented industries. Sustainability: The sustainability of job creation depends on the long-term competitiveness of the export sectors and the ability to manage inflationary pressures. Inflationary Pressures: Definition and Importance: Inflationary pressures refer to the increase in prices of goods and services within an economy. While moderate inflation can be beneficial, high inflation can erode purchasing power and economic stability. Effect of Currency Devaluation on Inflation: Imported Inflation: Devaluation makes imported goods more expensive, leading to higher production costs and consumer prices. Balancing Act: Policymakers need to balance the benefits of increased export competitiveness with the potential negative impact of higher inflation on the economy. The impact of currency devaluation on export performance is multifaceted, affecting various indicators such as export volume, export revenue, trade balance, employment, and inflation. By understanding these dynamics, policymakers and stakeholders can develop strategies to maximize the benefits of devaluation while mitigating its potential challenges. This comprehensive analysis provides valuable insights into the complex relationship between currency values and export performance, particularly for developing countries like Bangladesh. Export Value: Definition and Importance: Export value refers to the total monetary worth of goods and services that a country sells to foreign markets. It is a critical indicator of a nation's economic health, reflecting the income generated from international trade. Export value is calculated by multiplying the export volume by the price of goods and services sold abroad. 34 Page 277 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Effect of Currency Devaluation on Export Value: Short-Term Impact: Increased Export Volume: In the immediate aftermath of a currency devaluation, the export volume typically rises as the country's goods and services become cheaper and more attractive to foreign buyers. This can lead to an increase in export value despite lower prices per unit. Improved Competitiveness: The competitive pricing of exports can result in higher demand, potentially boosting overall export revenue. Long-Term Impact: Sustained Demand: If the demand for the country's exports remains strong, the export value can continue to rise, provided that the increase in volume compensates for the reduced prices. Pricing Strategies: Exporters may adopt various pricing strategies to maintain or enhance export value. This includes negotiating better terms of trade, enhancing product quality, and diversifying into new markets. Terms of Trade: The terms of trade, which refer to the relative prices of exports and imports, play a crucial role in determining export value. Favorable terms of trade can amplify the positive effects of devaluation on export value. Factors Influencing Export Value: Elasticity of Demand: The responsiveness of foreign buyers to changes in prices due to devaluation. Highly elastic demand can lead to significant increases in export volume, positively impacting export value. Cost Structures: The cost of production, especially the reliance on imported inputs. Higher production costs due to more expensive imports can erode profit margins and impact the overall export value. Market Conditions: The global economic environment and the competitive landscape in export markets. Favorable conditions can enhance export value, while adverse conditions may limit the benefits of devaluation. Sector-Specific Dynamics: 35 Page 278 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Different sectors respond differently to devaluation. For instance, the ready-made garments sector may experience significant gains in export value due to high elasticity of demand, whereas sectors reliant on imported raw materials may see limited benefits. RMG sector: Short-Term Impact: Following the devaluation in the early 2010s, the RMG sector experienced a surge in export volume. Despite lower unit prices, the increased volume led to a substantial rise in overall export value. The sector's export value grew by approximately 18% annually during the initial years post-devaluation. Long-Term Impact: Continuous investments in quality improvements and productivity enhancements helped sustain export value growth. Even with inflationary pressures and higher production costs, the sector managed to maintain competitive pricing and expand into new markets, contributing to a steady increase in export value over the long term. Pharmaceutical Export Short-Term Impact: The devaluation led to a 15% increase in the pharmaceutical export volume, contributing to higher export value. Competitive pricing played a key role in capturing new market shares. Long-Term Impact: To counter higher costs of imported inputs, the sector focused on local sourcing and innovation, helping maintain the export value growth. The sector's export value continued to rise, supported by strong global demand and strategic market diversification. Frozen Fish Export: Short-Term Impact: The immediate effect of devaluation was a 10% increase in export volumes, driven by lower prices in foreign markets. This contributed to a moderate rise in export value. Long-Term Impact: The industry's reliance on imported feed and equipment led to higher production costs, which partially offset the benefits of increased export volumes. However, strategic shifts towards value-added products and efficiency improvements helped sustain export value growth. Jute Products Sector: Short-Term Impact: Devaluation resulted in a significant increase in export volume, as jute products became more competitively priced. The export value saw a corresponding rise. 36 Page 279 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Long-Term Impact: The sector faced challenges due to higher costs of imported inputs, but investments in technology and process improvements helped maintain export value. The sector's ability to adapt to changing global demand patterns and enhance product quality played a crucial role in sustaining export value growth. The overall export value of a country can be positively influenced by currency devaluation if the increase in export volume offsets the lower prices. The extent of this impact depends on various factors, including the elasticity of demand, cost structures, market conditions, and sector-specific dynamics. By adopting strategic pricing, improving product quality, and diversifying markets, exporters can enhance export value and contribute to the country's economic growth. This analysis provides a comprehensive understanding of the complex relationship between currency devaluation and export value, offering valuable insights for policymakers and stakeholders in the export industry. Market Share: Market share refers to the portion of a market controlled by a particular company or country’s exports compared to the total market for those products or services. It is a crucial indicator of competitive strength and market positioning. Higher market share signifies greater influence and presence in international markets, which can lead to economies of scale and increased bargaining power. Effect of Currency Devaluation on Market Share: Enhanced Competitiveness: Devaluation reduces the prices of exported goods in foreign currencies, making them more attractive to international buyers. This immediate price advantage can lead to an increase in market share as foreign buyers shift their preferences to cheaper products from the devaluing country. Increased Demand: Lower export prices typically stimulate demand for the country’s products, allowing exporters to capture a larger share of the international market, especially in price-sensitive sectors. Sustained Competitive Advantage: Maintaining the increased market share over the long term depends on factors such as product quality, supply chain efficiency, and ongoing innovation. Sustained devaluation can help entrench a country’s position in key markets if exporters can continue to offer competitive prices without compromising on quality. Market Diversification: Devaluation can provide the impetus for exporters to enter new markets and diversify their customer base. A broader market presence helps mitigate risks associated with dependence on a limited number of markets. Factors Influencing Market Share Gain: 37 Page 280 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Price Elasticity of Demand: Products with high price elasticity of demand benefit significantly from devaluation, as lower prices lead to a substantial increase in demand and market share. Export Sector Characteristics: Sectors with high global demand, such as ready-made garments and pharmaceuticals, are more likely to gain market share post-devaluation. Global Competition: The competitive landscape in international markets influences how much market share can be gained. Stronger competition may limit the extent of market share growth. Quality and Brand Perception: Maintaining product quality and strong brand perception is crucial for sustaining market share gains achieved through devaluation. Ready-Made Garments (RMG) Sector in Bangladesh: Short-Term Impact: Following currency devaluation, the RMG sector experienced a sharp increase in market share due to its competitive pricing. Exporters were able to offer lower prices, leading to a surge in international orders and expansion into new markets. Long-Term Impact: The RMG sector capitalized on its increased market share by investing in quality improvements, enhancing production capabilities, and expanding its product range. These strategic moves helped sustain the higher market share over the long term, even as production costs rose due to higher import prices for raw materials. Pharmaceutical Sector in Bangladesh: Short-Term Impact: The pharmaceutical sector saw a significant gain in market share immediately following devaluation. Competitive pricing allowed Bangladeshi pharmaceutical companies to capture market segments previously dominated by higher-priced competitors. Long-Term Impact: Continued investment in research and development, coupled with regulatory compliance and quality assurance, enabled the pharmaceutical sector to maintain and grow its market share. Strategic partnerships and market diversification further strengthened its position in international markets. Jute Products Sector in Bangladesh: 38 Page 281 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Short-Term Impact: Devaluation made Bangladeshi jute products more competitive, leading to increased demand and market share. The sector benefited from the lower prices of jute products, which are highly price-sensitive. Long-Term Impact: The jute sector focused on enhancing product quality and developing new applications for jute products, which helped sustain market share growth. Exporters also explored new markets, reducing dependence on traditional markets and spreading risk. Comparative Analysis with Bhutan: Bhutan's Export Performance: Bhutan’s smaller, less diversified economy also experienced market share gains in its key export sectors, such as electricity and minerals, following currency devaluation. However, the impact was less pronounced compared to Bangladesh due to the limited range of export products and markets. Sectoral Differences: While both countries gained market share in their respective export sectors, the scale and sustainability of these gains varied. Bangladesh’s diverse export base and strategic industry investments provided a more robust platform for sustaining market share growth. Currency devaluation can significantly enhance a country's market share in international markets by making its exports more competitively priced. The extent of market share gain depends on factors such as price elasticity of demand, sector characteristics, global competition, and product quality. Sustaining these gains over the long term requires strategic investments in quality improvements, market diversification, and innovation. The experiences of Bangladesh, particularly in the ready-made garments, pharmaceuticals, and jute products sectors, illustrate the potential for devaluation to drive substantial market share growth and reinforce a country’s position in global markets. This analysis underscores the importance of adopting a holistic approach to leverage the benefits of devaluation for long-term competitive advantage. Policy Implications and Strategic Responses Diversifying Export Markets Market Research and Identification: Conduct thorough market research to identify new and emerging markets that have high demand for the country’s export products. Focus on regions with less competition and higher growth potential. Trade Agreements and Partnerships: Engage in bilateral and multilateral trade agreements to reduce trade barriers and expand market access. Establish strategic partnerships with foreign businesses and governments to facilitate market entry. 39 Page 282 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Promotion and Branding: Implement targeted marketing and branding campaigns to raise awareness of export products in new markets. Participate in international trade fairs, exhibitions, and trade missions to showcase products and connect with potential buyers. Improving Product Quality Investment in Technology: Encourage investments in modern technology and production processes to enhance product quality. Support businesses in adopting advanced manufacturing techniques and quality control systems. Standards and Certifications: Promote adherence to international standards and obtain necessary certifications (e.g., ISO, HACCP) to meet the quality requirements of global markets. This builds trust and credibility among international buyers. Research and Development (R&D): Foster innovation through R&D initiatives to develop new products and improve existing ones. Provide incentives for businesses to invest in R&D activities that enhance product quality and competitiveness. Reducing Reliance on Imported Inputs Local Sourcing and Supply Chains: Encourage the development of local supply chains and sourcing of raw materials to reduce dependence on imported inputs. Support initiatives to increase the production capacity of local suppliers. Substitution and Innovation: Promote the use of alternative materials and innovative production methods to substitute imported inputs. Encourage businesses to explore cost-effective and sustainable alternatives. Capacity Building: Provide training and capacity-building programs to enhance the skills of the local workforce and improve the efficiency of domestic production processes. This helps reduce production costs and reliance on imports. Monetary Policy: Implement sound monetary policies to control inflation and stabilize the currency. This includes managing interest rates and using foreign exchange reserves to intervene in the currency market when necessary. Fiscal Discipline: 40 Page 283 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Ensure fiscal discipline by maintaining balanced budgets and reducing public debt. This creates a stable economic environment conducive to investment and growth. Supporting Export-Oriented Industries Export Incentives: Provide incentives such as tax breaks, subsidies, and low-interest loans to export-oriented industries. This helps reduce production costs and enhance competitiveness. Infrastructure Development: Invest in infrastructure projects that support export activities, such as improving transportation networks, ports, and logistics facilities. Efficient infrastructure reduces costs and facilitates smoother trade operations. Export Financing and Insurance: Offer export financing and insurance schemes to mitigate risks associated with international trade. This provides businesses with the financial security needed to explore new markets and expand export activities. South Korea Diversification and Innovation: South Korea successfully diversified its export markets and invested heavily in R&D to enhance product quality. The government provided substantial support for technological innovation, leading to the growth of high-value industries such as electronics and automobiles. Trade Agreements: South Korea entered into numerous free trade agreements, opening up new markets and reducing trade barriers. This helped the country gain a competitive edge in global markets. China Infrastructure Investment: China invested massively in infrastructure development, including ports, highways, and railways, to support its export-oriented economy. This improved logistics efficiency and reduced transportation costs. Export Incentives: The Chinese government provided various incentives to export-oriented industries, such as tax rebates and subsidies, to boost their competitiveness. This policy support played a crucial role in China becoming a global manufacturing hub. To fully leverage the benefits of currency devaluation, a comprehensive approach involving both policy measures and strategic business responses is necessary. By diversifying export markets, improving product quality, and reducing reliance on imported inputs, Bangladesh can enhance its 41 Page 284 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) export performance and sustain long-term economic growth. Policymakers must ensure macroeconomic stability and provide targeted support to export-oriented industries. Learning from the successful experiences of countries like South Korea and China, Bangladesh can develop robust strategies to navigate the challenges and opportunities presented by currency devaluation. Effective management of exchange rate movements necessitates a comprehensive approach that balances the potential benefits of devaluation with the inherent challenges. Policymakers should prioritize maintaining macroeconomic stability, controlling inflation, and providing targeted support to export-oriented industries. The following recommendations outline strategies to achieve these goals: Monetary Policy Management: Interest Rate Adjustments: Carefully manage interest rates to control inflation and support economic growth. Lowering interest rates can stimulate investment and consumption, while higher rates can help curb inflation. Foreign Exchange Reserves: Utilize foreign exchange reserves to stabilize the currency during periods of excessive volatility. This can prevent disruptive fluctuations that could harm economic stability. Fiscal Discipline: Balanced Budgets: Strive for balanced government budgets to avoid excessive public debt. Fiscal discipline reduces the need for borrowing and helps maintain investor confidence. Debt Management: Implement effective debt management strategies to ensure that public debt remains sustainable. This includes refinancing existing debt at lower interest rates and extending maturity periods. Inflation Targeting: Clear Inflation Targets: Set clear and achievable inflation targets to guide monetary policy. Communicate these targets transparently to manage expectations and build credibility. Inflation Monitoring: Regularly monitor inflationary trends and adjust monetary policy tools accordingly to keep inflation within the targeted range. Supply-Side Measures: Improving Productivity: 42 Page 285 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Enhance productivity through investments in technology and infrastructure. Higher productivity can offset inflationary pressures by reducing production costs. Reducing Supply Chain Bottlenecks: Address supply chain inefficiencies to ensure smooth flow of goods and services. This can help stabilize prices and reduce inflationary pressures. Export Incentives: Tax Breaks and Subsidies: Offer tax breaks, subsidies, and other financial incentives to export-oriented industries to reduce their costs and enhance competitiveness. Export Financing: Provide access to affordable financing for exporters. This includes low-interest loans, export credit guarantees, and insurance schemes to mitigate risks associated with international trade. Infrastructure Development: Transportation Networks: Invest in transportation infrastructure such as roads, railways, ports, and airports to facilitate efficient movement of goods. Improved logistics reduce transportation costs and enhance export competitiveness. Digital Infrastructure: Develop digital infrastructure to support e-commerce and other digital trade activities. This can open new avenues for exporters and improve market access. Trade Promotion and Market Access: Trade Agreements: Engage in bilateral and multilateral trade agreements to reduce trade barriers and expand market access for exporters. These agreements can provide preferential access to key markets and enhance competitiveness. Market Diversification: Encourage exporters to diversify their markets to reduce dependency on a few trading partners. This can mitigate risks associated with market-specific economic downturns or policy changes. Enhancing Competitiveness through Innovation and Quality Improvement Research and Development (R&D): 43 Page 286 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) R&D Investments: Promote investments in R&D to foster innovation and improve product quality. Government grants, tax incentives, and public-private partnerships can support these efforts. Technology Adoption: Encourage the adoption of advanced technologies and production techniques to enhance efficiency and competitiveness. Quality Standards and Certifications: International Standards: Encourage adherence to international quality standards and obtain necessary certifications (e.g., ISO, HACCP). This builds trust among international buyers and opens access to premium markets. Continuous Improvement: Foster a culture of continuous improvement in product quality and production processes. Regularly review and upgrade standards to stay competitive. Effectively managing exchange rate movements requires a balanced approach that leverages the benefits of devaluation while mitigating its challenges. Policymakers should focus on maintaining macroeconomic stability, controlling inflation, and supporting export-oriented industries through targeted interventions. By implementing these policy recommendations, Bangladesh can enhance its export competitiveness, sustain economic growth, and achieve long-term economic stability. This section presents case studies of countries that have successfully managed exchange rate movements to enhance export performance. These examples provide valuable insights into best practices and offer policy recommendations that Bangladesh can adopt to improve its economic outcomes. South Korea: Balancing Devaluation with Industrial Policy Context: South Korea, during the 1960s and 1970s, pursued an export-led growth strategy, heavily relying on exchange rate management to boost export competitiveness. Controlled Devaluation: South Korea implemented controlled devaluation of the won to make its exports cheaper and more competitive in international markets. Industrial Policy: Complemented devaluation with strong industrial policies, focusing on key sectors like electronics, shipbuilding, and automotive. Export Incentives: 44 Page 287 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Provided subsidies, tax breaks, and low-interest loans to export-oriented industries. Export Growth: Significant growth in exports, transforming South Korea from a low-income to a high-income country within a few decades. Economic Diversification: Successful diversification into high-value-added industries, reducing dependence on any single sector. Lessons for Bangladesh: Implement controlled devaluation strategies to boost competitiveness. Support devaluation with robust industrial policies targeting key sectors. Provide financial incentives and support to export-oriented industries. China: Exchange Rate Management and Export Promotion: China’s rapid economic growth over the past few decades has been significantly influenced by its exchange rate policies and export promotion strategies. Managed Float System: Adopted a managed float exchange rate system to prevent excessive volatility and maintain a competitive exchange rate. Special Economic Zones (SEZs): Established SEZs offering tax incentives, simplified regulations, and infrastructure support to attract foreign investment and boost exports. Export Rebates: Implemented export rebate schemes to refund taxes on exported goods, lowering production costs. Massive Export Growth: China became the world’s largest exporter, driving sustained economic growth and development. Industrial Upgradation: Shifted from low-cost manufacturing to high-tech industries and services. Use a managed float system to stabilize the currency while maintaining competitiveness. Develop SEZs to attract foreign investment and enhance export capabilities. Implement tax rebate schemes to reduce the cost burden on exporters. India: Structural Reforms and Exchange Rate Flexibility 45 Page 288 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) India’s economic reforms in the 1990s included significant changes in exchange rate policies and trade liberalization. Liberalization of Exchange Rates: Moved from a fixed exchange rate regime to a market-determined exchange rate system, allowing more flexibility. Trade Liberalization: Reduced tariffs and non-tariff barriers, encouraging greater participation in international trade. Export Promotion Councils: . Established councils to support and promote exports in various sectors, providing market intelligence and networking opportunities. Increased Export Competitiveness: Greater flexibility in exchange rates helped Indian exporters respond better to global market conditions. Diverse Export Base: Growth in exports across various sectors, including IT services, pharmaceuticals, and textiles. Adopt a more flexible exchange rate regime to better respond to market conditions. Reduce trade barriers to facilitate easier access to global markets. Establish export promotion councils to provide targeted support to exporters. Vietnam: Gradual Devaluation and Export Diversification Vietnam, over the past few decades, has successfully used exchange rate policies to support its transition to an export-oriented economy. Gradual Devaluation: Implemented gradual and controlled devaluation of the Vietnamese dong to avoid sudden economic shocks. Export Diversification: Focused on diversifying export products and markets to reduce vulnerability to external shocks. Trade Agreements: Actively pursued bilateral and multilateral trade agreements to enhance market access for its exports. Sustained Export Growth: Consistent increase in export volumes and values, contributing to strong economic growth. 46 Page 289 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Expansion: Gained access to numerous international markets, reducing dependency on a few trading partners. Use gradual devaluation to enhance competitiveness while minimizing economic disruptions. Diversify export products and markets to build resilience against external shocks. Pursue trade agreements to expand market access and reduce trade barriers. The case studies of South Korea, China, India, and Vietnam provide valuable lessons for Bangladesh in managing exchange rate movements to enhance export performance. These countries have demonstrated that strategic devaluation, supported by robust industrial policies, financial incentives, and trade liberalization, can significantly boost export competitiveness and drive economic growth. By adopting and adapting these best practices, Bangladesh can better navigate the complexities of global trade and achieve sustainable economic development. This study provides a comprehensive analysis of the impact of currency devaluation on the export performance of Bangladesh, emphasizing the role of exchange rate pass-through (ERPT). The key findings are as follows: Currency devaluation has a positive impact on the export competitiveness of Bangladesh. By making Bangladeshi goods cheaper in foreign markets, devaluation can lead to increased demand and higher export volumes. This effect is particularly evident in the ready-made garments, frozen fish, pharmaceuticals, and jute products sectors. While devaluation can boost export volumes, it also results in higher production costs for exporters. This is primarily due to the increased cost of imported inputs and raw materials, which can erode profit margins. The extent of this impact varies across different sectors based on their reliance on imported goods. Currency devaluation can lead to inflationary pressures within the domestic economy. As import prices rise, the overall cost of living increases, reducing consumers' purchasing power. This inflationary effect can offset some of the gains from improved export competitiveness, necessitating careful management of monetary policies. Sectoral Dynamics: The impact of devaluation is not uniform across all sectors. Sectors with a higher export orientation and less dependency on imported inputs benefit more from devaluation. For instance, the ready-made garments sector experiences significant gains due to its established international market presence and relatively lower import dependency. Comparative Insights from Bhutan: The study's comparative analysis with Bhutan reveals that while both countries benefit from devaluation, the scale and nature of the impact differ due to their distinct economic structures and export compositions. Bhutan's smaller and less diversified economy experiences more pronounced effects in specific sectors like electricity and minerals. Short-Term vs. Long-Term Effects: In the short term, devaluation leads to immediate increases in export volumes and revenue. However, the long-term effects are influenced by factors such as inflation, changes in global 47 Page 290 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) demand, and the ability of exporters to maintain competitive pricing. Sustained devaluation may result in structural adjustments within the economy, requiring ongoing policy support. Policy Implications: Effective management of exchange rate movements is crucial for maximizing the benefits of devaluation. Policymakers need to balance the advantages of increased export competitiveness with the challenges of higher production costs and inflation. Strategic interventions, such as supporting export-oriented industries and controlling inflation, are essential for sustainable economic growth. The study concludes that exchange rate pass-through is a significant determinant of Bangladesh's export performance. While currency devaluation offers a powerful tool for enhancing export competitiveness, it also brings challenges that need careful management. The insights gained from this study provide valuable guidance for policymakers and stakeholders in developing effective strategies to leverage the benefits of devaluation while mitigating its adverse effects. By adopting a balanced and informed approach, Bangladesh can achieve sustained growth in its export sector, contributing to broader economic development and improved living standards for its population. Implications for Future Research: The findings of this study highlight the intricate relationship between currency devaluation and export performance, particularly in the context of Bangladesh. To build on these insights and develop a more comprehensive understanding of this relationship, future research should explore several key areas: Long-Term Impacts of Exchange Rate Devaluation Sustained Devaluation Effects: Future research should examine the long-term effects of sustained currency devaluation on export performance. This includes studying how prolonged periods of devaluation impact export volumes, revenue, and market share over extended timeframes. Understanding these long-term trends is essential for formulating policies that ensure consistent and sustainable export growth. Investigate how sectors adjust structurally in response to prolonged devaluation. For instance, how do industries shift their production processes, sourcing strategies, and market focus to adapt to new exchange rate conditions? This can reveal important insights into the resilience and adaptability of various sectors. Role of Complementary Economic Policies: Inflation Control Measures: Research should focus on the effectiveness of inflation control measures in mitigating the adverse effects of devaluation. This includes examining monetary and fiscal policies aimed at stabilizing prices and maintaining consumer purchasing power in the face of rising import costs. Trade Policy and Export Incentives: Future studies could explore how complementary trade policies and export incentives interact with currency devaluation to enhance export performance. Analyzing the synergies between 48 Page 291 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) devaluation and policies such as export subsidies, tax incentives, and trade agreements can provide a holistic view of how to boost exports. Industrial Policy and Import Substitution: Investigate the role of industrial policy and import substitution strategies in supporting export-oriented industries. By reducing reliance on imported inputs through domestic production, countries can mitigate the cost-push inflation caused by devaluation. Effects of Global Economic Trends Global Demand Fluctuations: Examine how global economic trends and demand fluctuations influence the effectiveness of currency devaluation. For instance, during global economic downturns, the benefits of devaluation might be limited due to reduced international demand for exports. Understanding these dynamics can help in developing strategies that are resilient to global market conditions. Comparative Analysis Across Countries: Conduct comparative analyses across multiple countries to understand how different economic structures and policy environments influence the outcomes of devaluation. This can help identify best practices and lessons that are transferable to other developing economies. Integration of Technological Advancements: Role of Technology in Enhancing Export Competitiveness: Future research should explore how technological advancements, such as digitalization and automation, can enhance the competitiveness of export industries. Technology can play a crucial role in improving productivity, reducing costs, and accessing new markets. E-Commerce and Global Trade: Investigate the impact of e-commerce and digital trade platforms on export performance in the context of currency devaluation. Digital channels can provide new opportunities for exporters to reach international markets more efficiently and cost-effectively. By addressing these areas, future research can provide a more nuanced and comprehensive understanding of the complex relationship between currency values and export performance. This will enable policymakers, businesses, and stakeholders to develop informed and effective strategies that not only enhance export competitiveness but also contribute to sustainable economic growth and development. Final Thoughts: Understanding the exchange rate pass-through (ERPT) mechanism is essential for developing effective policies and strategies to enhance export performance, especially for countries like Bangladesh that rely heavily on their export sectors for economic growth. This study provides critical insights into how fluctuations in the exchange rate directly impact export prices and, consequently, export competitiveness. Key Insights: 49 Page 292 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Exchange Rate Dynamics: The study underscores the importance of monitoring and managing exchange rate dynamics. By understanding how changes in the Bangladeshi Taka (BDT) affect export prices, policymakers can better predict and mitigate the potential adverse effects of currency fluctuations. Sector-Specific Responses: Different sectors respond uniquely to currency devaluation due to their distinct cost structures, market demands, and reliance on imported inputs. For instance, while the ready-made garments sector may benefit from a weaker BDT due to lower export prices, the pharmaceutical sector might face higher production costs due to the increased cost of imported raw materials. Tailored strategies are therefore essential to support each sector effectively. Policy Implications: Effective management of exchange rate movements involves a balanced approach that considers both the benefits and challenges of devaluation. Policymakers should focus on maintaining macroeconomic stability, controlling inflation, and supporting export-oriented industries through targeted interventions. Practical Recommendations: Enhancing Export Competitiveness: To leverage the benefits of devaluation, businesses and policymakers should adopt strategies to enhance export competitiveness. This includes diversifying export markets, improving product quality, and reducing reliance on imported inputs. Investment in technology and innovation can also help improve efficiency and reduce production costs. Supporting Export-Oriented Industries: Policymakers need to provide targeted support to export-oriented industries, including financial incentives, subsidies, and infrastructural improvements. Such support can help industries mitigate the higher production costs resulting from devaluation and enhance their global competitiveness. Managing Inflationary Pressures: Devaluation can lead to inflationary pressures, which can erode the benefits of increased export competitiveness. Policymakers must implement measures to control inflation, such as monetary policies to stabilize prices and fiscal policies to manage demand. Learning from Global Best Practices: Case studies of countries that have successfully managed exchange rate movements can offer valuable lessons for Bangladesh. By adopting best practices and learning from the experiences of other nations, Bangladesh can develop more effective strategies to manage its exchange rate and enhance export performance. 50 Page 293 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Long-Term Implications: The long-term impact of understanding and managing the ERPT mechanism is significant for Bangladesh's economic development. Effective policies can lead to increased foreign exchange earnings, higher employment rates, and improved standards of living. Moreover, a robust export sector can provide a buffer against global economic fluctuations, contributing to more sustainable and resilient economic growth. The study identifies several areas for future research, including the long-term impacts of devaluation, the role of complementary economic policies, and the effects of global economic trends on export performance. These directions aim to provide a deeper understanding of the complex relationship between currency values and export performance. Long-Term Impacts: Future research should focus on the long-term effects of devaluation on export volumes, revenue, and market share. Understanding these impacts over extended timeframes can help formulate policies that ensure consistent and sustainable export growth. Complementary Economic Policies: Research should explore the role of complementary economic policies, such as inflation control measures, trade policies, and industrial policies, in enhancing export performance. This holistic approach can provide a comprehensive framework for managing exchange rate movements. Global Economic Trends: Investigating the effects of global economic trends and demand fluctuations on the effectiveness of currency devaluation can help develop strategies that are resilient to global market conditions. Technological Advancements: Future research should examine how technological advancements, such as digitalization and e-commerce, can enhance the competitiveness of export industries. Technology can play a crucial role in improving productivity, reducing costs, and accessing new markets. Understanding the exchange rate pass-through mechanism is crucial for developing effective policies and strategies to enhance export performance. By examining the direct impact of exchange rate movements on export prices, this study provides valuable insights for policymakers and export-oriented businesses in Bangladesh. Implementing the recommendations derived from this research can help Bangladesh achieve sustainable economic growth and improve its global export competitiveness. The impact of devaluation on export performance is contingent on various external and internal economic conditions, including global demand and domestic production capacities. Sustained currency devaluation may lead to inflationary pressures, affecting the overall economic stability of the country. Empirical evidence suggests that countries with flexible exchange rate regimes often experience higher ERPT, leading to more pronounced impacts on export performance. 51 Page 294 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Clarity of Exchange Rate Pass-Through: Definition and Concept: Exchange rate pass-through (ERPT) is a crucial concept in international economics that describes the extent to which changes in the exchange rate affect the prices of imported and exported goods. Specifically, ERPT measures the percentage change in local currency import prices resulting from a one percent change in the exchange rate between the importing country and its trading partners. A higher ERPT indicates that a significant portion of exchange rate changes is reflected in the prices of traded goods, while a lower ERPT suggests that prices remain relatively stable despite fluctuations in the exchange rate. Mechanisms of Exchange Rate Pass-Through: ERPT operates through several channels that influence both the cost structure of industries and the final prices of goods and services: Cost Channel: This channel captures how exchange rate changes affect the cost of imported inputs used in the production process. When a domestic currency depreciates, the cost of imported raw materials and intermediate goods increases, leading to higher production costs. These increased costs can then be passed on to consumers in the form of higher prices for finished goods. Demand Channel: This channel highlights how changes in the relative prices of goods affect demand. A weaker domestic currency makes exported goods cheaper and more attractive to foreign buyers, potentially increasing demand for these goods. Conversely, imported goods become more expensive, reducing their demand in the domestic market. Pricing-to-Market (PTM) Strategy: Firms may adjust their export prices based on the competitive conditions in the target market. Rather than passing on the full extent of exchange rate changes to prices, firms may absorb some of the costs to maintain their market share. This strategy is particularly relevant for industries facing intense international competition. Market Structure and Competition: The degree of market competition can influence ERPT. In highly competitive markets, firms may have limited ability to adjust prices in response to exchange rate changes, resulting in lower ERPT. Conversely, in less competitive markets, firms may have greater pricing power, leading to higher ERPT. Currency Invoicing Practices: The currency in which trade transactions are invoiced can affect ERPT. If exports are invoiced in the domestic currency, the impact of exchange rate fluctuations on export prices is reduced. However, if exports are invoiced in foreign currencies, exchange rate changes are more likely to be passed through to prices. 52 Page 295 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Factors Influencing Exchange Rate Pass-Through Several factors determine the extent of ERPT in an economy, including: Economic Structure: The composition of an economy’s trade, including the types of goods exported and imported, influences ERPT. For example, economies that heavily rely on imported inputs for production may experience higher ERPT. Inflationary Environment: High inflation environments can amplify ERPT as firms are more likely to adjust prices frequently in response to cost changes. In contrast, in low inflation environments, firms may be more reluctant to change prices frequently, resulting in lower ERPT. Monetary Policy: Central banks’ responses to exchange rate fluctuations can impact ERPT. For instance, if a central bank raises interest rates to counteract inflationary pressures from a depreciating currency, it may mitigate the extent of ERPT. Trade Openness: Economies with high trade openness tend to have higher ERPT because a larger share of their consumption basket is exposed to international price fluctuations. Firm Characteristics: The size, market power, and production flexibility of firms also affect ERPT. Large firms with significant market power may have more ability to absorb exchange rate changes without altering prices, whereas smaller firms with less market power may pass on these changes more directly to consumers. Empirical Evidence of ERPT in Bangladesh: In the context of Bangladesh, ERPT varies across different sectors and periods. Historical instances of currency devaluation in Bangladesh have shown varied impacts on export performance, influenced by the factors mentioned above. The ready-made garments (RMG) sector, being a major export industry, often experiences significant ERPT due to its reliance on imported inputs and competitive pricing in international markets. Similarly, the pharmaceutical sector, which imports a substantial portion of its raw materials, may exhibit high ERPT, affecting its export pricing strategy. Importance of Understanding ERPT: Understanding ERPT is crucial for policymakers and businesses in developing countries like Bangladesh because it provides insights into how exchange rate fluctuations affect domestic prices, export competitiveness, and overall economic stability. By analyzing ERPT, policymakers can design more effective monetary and trade policies to mitigate adverse effects and leverage the benefits of currency devaluation. ERPT is a complex yet vital concept that plays a significant role in determining the impact of exchange rate fluctuations on an economy's trade dynamics. For Bangladesh, comprehending 53 Page 296 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) the mechanisms and factors influencing ERPT helps in formulating strategies that enhance export performance, manage inflationary pressures, and sustain economic growth. This study aims to provide a detailed analysis of ERPT in Bangladesh's key export sectors, offering valuable insights for both academic research and practical policy formulation. Exchange rate pass-through (ERPT) operates through multiple channels that impact various economic aspects, including import prices, export prices, and consumer prices. Understanding these mechanisms is crucial for analyzing how changes in exchange rates influence an economy's overall trade performance and price stability. Import Prices: When a country's currency devalues, the immediate effect is an increase in the cost of imported goods and services. This is because more local currency is required to purchase the same quantity of foreign goods. The increased cost of imports has several downstream effects: Higher Input Costs for Exporters: Industries that rely heavily on imported raw materials, intermediate goods, or capital equipment will face higher production costs. This is particularly relevant for sectors like ready-made garments and pharmaceuticals in Bangladesh, which import significant portions of their inputs. Higher production costs can erode profit margins unless these costs are passed on to consumers or offset by increased efficiency. Consumer Prices: The rise in import prices can lead to higher consumer prices, especially for goods and services that are directly imported or rely on imported components. This can contribute to overall inflation in the economy, reducing consumers' purchasing power. Export Prices: The devaluation of a country's currency makes its goods and services cheaper for foreign buyers, potentially boosting export demand. However, the extent to which this increased demand translates into higher export volumes depends on several factors: Price Competitiveness: The primary mechanism by which devaluation boosts exports is through enhanced price competitiveness. As the local currency depreciates, the prices of exported goods in foreign currency terms decline, making them more attractive to international buyers. For instance, a devaluation of the Bangladeshi Taka (BDT) can make Bangladeshi garments cheaper in the US or European markets, potentially increasing sales. Market Dynamics and Elasticity of Demand: The actual impact on export volumes also depends on the price elasticity of demand for the exported goods. If the demand for a country's exports is highly elastic, a decrease in price due to currency devaluation will lead to a proportionately larger increase in quantity demanded. Conversely, if demand is inelastic, the increase in quantity demanded will be smaller. 54 Page 297 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Competitive Response: The response of competitors also plays a crucial role. If competing countries do not devalue their currencies, the country that devalues may gain a competitive advantage. However, if competitors also devalue their currencies, the net gain in export competitiveness may be reduced. Consumer Prices: ERPT also affects consumer prices through several pathways, which can influence overall economic stability and purchasing power: Inflationary Pressures: As import prices rise due to devaluation, the cost of goods and services that rely on imported inputs also increases. This can lead to cost-push inflation, where higher production costs are passed on to consumers in the form of higher prices. For instance, if the cost of imported oil increases, it can raise transportation and production costs across various sectors, leading to higher prices for a wide range of goods. Domestic Demand: Higher consumer prices can reduce domestic demand for goods and services. If consumers face higher prices for essentials, they may cut back on discretionary spending, which can slow economic growth. In Bangladesh, where a significant portion of household expenditure is on imported goods, devaluation-induced inflation can have substantial impacts on consumer spending patterns. Wage-Price Spiral: In response to rising consumer prices, workers may demand higher wages to maintain their standard of living. If businesses grant these wage increases, they may further raise prices to cover the higher labor costs, potentially leading to a wage-price spiral that exacerbates inflation. Impact on Different Sectors: The impact of ERPT varies across different sectors of the economy based on their reliance on imported inputs, pricing power, and competitive landscape: Ready-Made Garments (RMG): This sector may benefit from devaluation due to increased price competitiveness in international markets. However, the high reliance on imported fabrics and accessories means that production costs may also rise, potentially offsetting some of the gains from increased export demand. Pharmaceuticals: The pharmaceutical sector, which imports a significant amount of raw materials and active ingredients, may experience higher production costs. While devaluation can make Bangladeshi pharmaceuticals more competitive internationally, the increased cost of imported inputs may affect profit margins. 55 Page 298 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Frozen Fish and Jute Products: These sectors might benefit more straightforwardly from devaluation if they rely less on imported inputs and can quickly capitalize on increased international demand. For instance, jute products, which use locally sourced raw materials, may see a more direct benefit from devaluation. ERPT is a multifaceted process that influences various economic variables through import prices, export prices, and consumer prices. Understanding these mechanisms is essential for policymakers and businesses to navigate the challenges and opportunities presented by currency devaluation. This study aims to provide a detailed analysis of ERPT in Bangladesh's key export sectors, offering valuable insights for both academic research and practical policy formulation. By examining the sector-specific impacts of ERPT, this research will contribute to a more nuanced understanding of how exchange rate fluctuations affect export performance and economic stability in developing countries like Bangladesh. The extent and effectiveness of exchange rate pass-through (ERPT) are influenced by various factors that determine how changes in exchange rates translate into domestic prices. Understanding these factors is crucial for analyzing the impact of currency devaluation on export performance and overall economic stability. Economic Structure: The economic structure of a country plays a significant role in determining the degree of ERPT. Countries with diverse and robust economic frameworks tend to experience different levels of pass-through compared to those with less diversified economies. Diversification: In economies with a diversified export base, the impact of exchange rate changes may be distributed across various sectors, leading to different ERPT levels. For instance, Bangladesh's economy, with significant contributions from ready-made garments, pharmaceuticals, and jute products, might exhibit varied ERPT across these sectors. Market Flexibility: Economies with flexible markets, where prices and wages can adjust quickly, tend to have higher ERPT. In such environments, businesses and consumers can respond more rapidly to changes in exchange rates, making the economy more sensitive to currency fluctuations. Market Competition: The degree of competition within a market significantly influences ERPT. Competitive markets tend to have higher pass-through rates due to the pressure on firms to adjust prices in response to exchange rate changes. Price Sensitivity: In highly competitive markets, firms are more likely to pass on cost changes resulting from exchange rate fluctuations to maintain their market position. For example, in Bangladesh's ready-made garments sector, which faces intense global competition, firms may be compelled to adjust prices quickly to remain competitive. 56 Page 299 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Monopolistic vs. Competitive Markets: In monopolistic or less competitive markets, firms might absorb exchange rate changes rather than passing them on to consumers. This can lead to lower ERPT, as seen in sectors with few dominant players. Pricing Strategies: The pricing strategies adopted by firms are crucial in determining the extent of ERPT. Flexible pricing strategies enable firms to adjust their prices in response to exchange rate changes more effectively. Cost-Plus Pricing: Firms that use cost-plus pricing, where prices are set based on production costs plus a markup, are likely to exhibit higher ERPT. This is because any increase in costs due to exchange rate changes is directly reflected in final prices. Strategic Pricing: Some firms may adopt strategic pricing, where they temporarily absorb cost changes to maintain market share. This can lead to lower ERPT, especially in industries where price stability is crucial for retaining customers. Nature of Traded Goods: The nature of the goods being traded also influences ERPT. Different types of goods exhibit varying degrees of price sensitivity to exchange rate changes. Essential vs. Luxury Goods: Essential goods, such as basic food items and pharmaceuticals, often have lower ERPT because demand for these goods is relatively inelastic. Consumers need these goods regardless of price changes. Conversely, luxury goods, which have more elastic demand, tend to exhibit higher ERPT as consumers can delay or forego purchases in response to price increases. Export Composition: The composition of a country's exports also affects ERPT. For example, Bangladesh’s exports, which include essential goods like pharmaceuticals and more elastic goods like garments, will experience varied pass-through rates. Import Content of Exports: The extent to which exported goods rely on imported inputs can significantly influence ERPT. Higher reliance on imported inputs leads to higher sensitivity to exchange rate changes. Cost Structure: In sectors where a large portion of inputs is imported, any depreciation in the local currency increases production costs, which can be passed on to export prices, leading to higher ERPT. 57 Page 300 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) For instance, the Bangladeshi garments sector imports fabrics and accessories, which makes it more susceptible to exchange rate changes. Inflation and Monetary Policy: Inflation levels and the stance of monetary policy in a country also play a role in determining ERPT. Inflationary Environment: In high inflation environments, the pass-through of exchange rate changes to domestic prices can be higher, as firms and consumers expect prices to rise and adjust their behaviors accordingly. Monetary Policy: Tight monetary policies, aimed at controlling inflation, can dampen ERPT by reducing the ability of firms to pass on cost increases to consumers. Conversely, loose monetary policies might enhance ERPT by allowing prices to adjust more freely. Understanding the factors influencing ERPT is essential for analyzing how currency devaluation impacts export performance and economic stability. The economic structure, market competition, pricing strategies, nature of traded goods, import content of exports, and inflationary environment all interact to determine the degree of pass-through. By considering these factors, policymakers and businesses can better navigate the challenges and opportunities presented by exchange rate fluctuations. This study aims to provide a detailed analysis of these factors in the context of Bangladesh's key export sectors, offering valuable insights for both academic research and practical policy formulation. "High inflation rates can erode the purchasing power of a currency, leading to its devaluation." (IMF, 2022) "Global economic conditions, such as economic growth rates, financial crises, and geopolitical events, can significantly impact exchange rates." (World Bank, 2022) 58 Page 301 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 5 Determinants of Currency Devaluation INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 302 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 2 Determinants of Currency Devaluation: Table of Contents Determinants of Currency Devaluation:.................................................................................................. 4 Economic Determinants:................................................................................................................... 4 Inflation Rate:............................................................................................................................. 4 Trade Balance:............................................................................................................................ 4 Foreign Exchange Reserves:.......................................................................................................4 Interest Rate Differentials:.......................................................................................................... 4 Economic Growth:...................................................................................................................... 4 Political Determinants:...................................................................................................................... 4 Political Stability:........................................................................................................................4 Government Policies:..................................................................................................................4 External Determinants:............................................................................................................... 5 Global Economic Conditions:.....................................................................................................5 Commodity Prices:......................................................................................................................5 Foreign Direct Investment (FDI):............................................................................................... 5 Market Forces:...................................................................................................................................5 Supply and Demand Dynamics:..................................................................................................5 Speculative Activities:................................................................................................................ 5 Policy Decisions:............................................................................................................................... 5 Central Bank Interventions:........................................................................................................ 5 Monetary Policy:.........................................................................................................................5 Exchange Rate Regime:..............................................................................................................5 More Details on Determinants:......................................................................................................... 6 Economic Factors:............................................................................................................................. 6 Inflation Rates:.................................................................................................................................. 6 Impact of Inflation on Currency Value:.............................................................................................6 Erosion of Purchasing Power:.....................................................................................................6 Investor Behavior:.......................................................................................................................6 Export Competitiveness:.............................................................................................................6 Interest Rates:.................................................................................................................................... 6 Attraction of Foreign Capital:.....................................................................................................6 Capital Outflows:........................................................................................................................ 6 Monetary Policy Influence:.........................................................................................................6 2 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. 1 Page 303 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Balance of Payments:........................................................................................................................ 6 Deficit and Surplus Implications:......................................................................................................6 Balance of Payments Deficit:......................................................................................................6 Foreign Exchange Reserves:.......................................................................................................7 Trade Balance:............................................................................................................................ 7 Market Factors:..................................................................................................................................7 Speculation:....................................................................................................................................... 7 Investor Expectations:.................................................................................................................7 Market Sentiment:.......................................................................................................................7 Foreign Exchange Reserves:............................................................................................................. 7 Role of Reserves:........................................................................................................................ 7 Reserve Levels:...........................................................................................................................7 Structural Factors:............................................................................................................................. 7 Economic Growth:.............................................................................................................................7 Growth Prospects:.......................................................................................................................7 Export Performance:................................................................................................................... 7 Political Stability:.............................................................................................................................. 8 Government Policies:..................................................................................................................8 Policy Reforms:.......................................................................................................................... 8 External Debt:....................................................................................................................................8 Debt Servicing:........................................................................................................................... 8 External Factors:................................................................................................................................8 Global Market Conditions:................................................................................................................ 8 Economic Growth Rates:...................................................................................................................8 Global Economic Downturns:.....................................................................................................8 Economic Recovery and Growth:...............................................................................................8 Financial Crises:................................................................................................................................ 8 Global Financial Turbulence:......................................................................................................8 Capital Flight:............................................................................................................................. 9 Geopolitical Events:.......................................................................................................................... 9 Political Instability:.....................................................................................................................9 Sanctions and Trade Restrictions:...............................................................................................9 Trade Policies.................................................................................................................................... 9 Tariffs:............................................................................................................................................... 9 Impact on Export Competitiveness:............................................................................................9 Retaliatory Tariffs:...................................................................................................................... 9 Trade Agreements:.............................................................................................................................9 Bilateral and Multilateral Agreements:.......................................................................................9 Regional Trade Blocs:.................................................................................................................9 Export Subsidies:...............................................................................................................................9 Government Support for Exporters:............................................................................................9 WTO Regulations:...................................................................................................................... 9 Protectionist Policies:...................................................................................................................... 10 Impact on Market Access:........................................................................................................ 10 2 Page 304 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Domestic Response:..................................................................................................................10 Internal Factors Influencing Exchange Rate Fluctuations:............................................................. 10 Domestic Economic Conditions:.....................................................................................................10 GDP Growth:...................................................................................................................................10 Economic Performance:............................................................................................................10 Recessionary Periods:............................................................................................................... 10 Unemployment Rates:..................................................................................................................... 10 Low Unemployment:................................................................................................................ 10 High Unemployment:................................................................................................................10 Increase in Production:............................................................................................................. 10 Decline in Production:...............................................................................................................11 Government Spending:..............................................................................................................11 Taxation:....................................................................................................................................11 Monetary Policies:...........................................................................................................................11 Interest Rates:............................................................................................................................11 Quantitative Easing:..................................................................................................................11 Foreign Exchange Reserves:.....................................................................................................11 Investor Confidence:........................................................................................................................11 Stable Political Environment:................................................................................................... 11 Political Uncertainty:................................................................................................................ 11 Policy Continuity:............................................................................................................................12 Consistent Policies:...................................................................................................................12 Policy Changes:........................................................................................................................ 12 External Factors Influencing Exchange Rate Fluctuations:............................................................ 12 Global Economic Developments:....................................................................................................12 Strength of the US Dollar:...............................................................................................................12 Dollar Dominance:....................................................................................................................12 Impact on Trade:....................................................................................................................... 12 International Interest Rate Trends:.................................................................................................. 12 Interest Rate Differentials:........................................................................................................ 12 Global Monetary Policy:...........................................................................................................12 Global Trade Dynamics:..................................................................................................................12 Trade Policies:...........................................................................................................................13 Economic Growth Rates:.......................................................................................................... 13 Commodity Prices:.......................................................................................................................... 13 Impact of Oil Prices:........................................................................................................................13 Import Costs:.............................................................................................................................13 Production Costs:...................................................................................................................... 13 Other Commodities:........................................................................................................................ 13 Export Commodities:................................................................................................................ 13 Global Supply Chains:.............................................................................................................. 13 Capital Flows:..................................................................................................................................13 Investment Inflows:.................................................................................................................. 13 Investment Climate:.................................................................................................................. 13 3 Page 305 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Portfolio Investment:....................................................................................................................... 14 Short-term Capital Movements:................................................................................................14 Market Sentiment:.....................................................................................................................14 Impact of Exchange Rate Fluctuations on Export Performance:.................................................... 14 Immediate Effects:...........................................................................................................................14 Increased Export Competitiveness:................................................................................................. 14 Price Advantage:.......................................................................................................................14 Market Expansion:.................................................................................................................... 14 Boost in Export Volumes.................................................................................................................14 Demand Surge:..........................................................................................................................14 Utilization of Capacity:.............................................................................................................14 Revenue Growth..............................................................................................................................15 Increased Sales:.........................................................................................................................15 Foreign Exchange Earnings:..................................................................................................... 15 Case Study Example........................................................................................................................15 Garment Industry:..................................................................................................................... 15 Challenges and Risks.......................................................................................................................15 Increased Production Costs:......................................................................................................15 Inflationary Pressures:.............................................................................................................. 15 Short-term Gains vs. Long-term Stability:................................................................................15 Sustained Export Growth:............................................................................................................... 15 Competitive Edge:.................................................................................................................... 15 Investment in Export Sectors:...................................................................................................16 Inflation and Cost Management...................................................................................................... 16 Managing Inflation:.................................................................................................................. 16 Cost Control Strategies:............................................................................................................ 16 Holistic Economic Policies:......................................................................................................16 Trade Agreements and Market Access:.................................................................................... 16 Long-Term Implications of Sustained Currency Devaluation:........................................................16 Enhanced Export Competitiveness:.................................................................................................16 Sustained Competitive Advantage:................................................................................................. 16 Price Stability:...........................................................................................................................16 Market Penetration:...................................................................................................................16 Export Growth and Diversification:................................................................................................ 17 Product Diversification:............................................................................................................ 17 Market Diversification:.............................................................................................................17 Cost-Push Inflation:.........................................................................................................................17 Imported Inflation:.................................................................................................................... 17 Production Costs:...................................................................................................................... 17 Wage-Price Spiral:...........................................................................................................................17 Wage Demands:........................................................................................................................ 17 Consumer Prices:...................................................................................................................... 17 Higher Production Costs..................................................................................................................17 Input Costs:......................................................................................................................................17 4 Page 306 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Raw Materials:.......................................................................................................................... 17 Energy and Fuel:....................................................................................................................... 18 Impact on SMEs:............................................................................................................................. 18 Small and Medium Enterprises (SMEs):.................................................................................. 18 Erosion of Initial Gains................................................................................................................... 18 Competitive Landscape:.................................................................................................................. 18 Global Competition:..................................................................................................................18 Technological Advancements:.................................................................................................. 18 Balance of Payments:...................................................................................................................... 18 Current Account Deficit:...........................................................................................................18 Foreign Debt:............................................................................................................................ 18 Strategic Responses:........................................................................................................................18 Policy Interventions:........................................................................................................................18 Monetary Policy:.......................................................................................................................18 Fiscal Policy:.............................................................................................................................18 Structural Reforms:......................................................................................................................... 19 Supply Chain Management:......................................................................................................19 Innovation and Productivity:.....................................................................................................19 Diversification Strategies:............................................................................................................... 19 Product and Market Diversification:.........................................................................................19 Value Addition:......................................................................................................................... 19 Understanding Currency Devaluation:............................................................................................ 19 Currency devaluation can be achieved through various mechanisms, including:...........................19 Monetary Policy Adjustments:........................................................................................................ 19 Foreign Exchange Market Interventions:........................................................................................ 19 Quantitative Easing:........................................................................................................................ 20 Exchange Rate Policies:.................................................................................................................. 20 Objectives Behind Currency Devaluation:......................................................................................20 Currency devaluation is typically pursued with the following objectives in mind:........................ 20 Enhancing Export Competitiveness:............................................................................................... 20 Correcting Trade Imbalances:..........................................................................................................20 Managing External Debt:................................................................................................................ 20 Enhanced Revenue:......................................................................................................................... 20 Improved Trade Balance:................................................................................................................ 20 Diminished Domestic Demand:...................................................................................................... 20 Historical Context of Devaluation in Bangladesh:..........................................................................21 Key Instances of Currency Devaluation:.........................................................................................21 1970s: Post-Independence Economic Challenges:..........................................................................21 1980s: Structural Adjustments and Trade Liberalization:...............................................................21 1990s: Further Liberalization and Market Reforms:....................................................................... 21 2000s: Global Economic Dynamics and Inflation Control:............................................................ 21 2010s: Sustaining Export Growth:.................................................................................................. 21 Economic Pressures and Policy Decisions:.....................................................................................22 Trade Imbalances:............................................................................................................................22 5 Page 307 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Inflation Control:............................................................................................................................. 22 Export Competitiveness:................................................................................................................. 22 Structural Reforms:......................................................................................................................... 22 Impact on Economic Stability and Trade Balance:......................................................................... 22 Increased Exports:.....................................................................................................................22 Improved Trade Balance:..........................................................................................................22 Economic Growth:.................................................................................................................... 22 Inflation:....................................................................................................................................22 Higher Production Costs:..........................................................................................................22 Macroeconomic Stability:.........................................................................................................23 Factors Influencing the Determinants:............................................................................................ 23 Economic Factors:........................................................................................................................... 23 Inflation Rates:..........................................................................................................................23 Interest Rates:............................................................................................................................23 Balance of Payments:................................................................................................................23 External Factors:..............................................................................................................................23 Global Market Conditions:....................................................................................................... 23 Trade Policies:...........................................................................................................................23 Reasons for Exchange Rate Fluctuations:....................................................................................... 23 Internal Factors:...............................................................................................................................23 Domestic Economic Conditions:.............................................................................................. 23 Government Policies:................................................................................................................24 Global Economic Developments:............................................................................................. 24 Commodity Prices:....................................................................................................................24 Capital Flows:........................................................................................................................... 24 Impact on Export Performance:.......................................................................................................24 Immediate Effects:.................................................................................................................... 24 Long-Term Implications:.......................................................................................................... 24 Export Volume and Value:........................................................................................................ 24 Market Share:............................................................................................................................24 Policy Implications and Strategic Responses:.................................................................................24 Managing Exchange Rate Fluctuations:................................................................................... 24 Enhancing Export Competitiveness:.........................................................................................24 Effective Policy Responses:......................................................................................................25 Case Studies:................................................................................................................................... 25 South Korea:............................................................................................................................. 25 Brazil:........................................................................................................................................25 India:......................................................................................................................................... 25 Policy Recommendations for Bangladesh:......................................................................................25 Diversify Export Markets:...............................................................................................................25 Invest in Innovation and Quality Improvement:............................................................................. 25 Provide Financial Support and Incentives:......................................................................................25 Control Inflation and Maintain Macroeconomic Stability:............................................................. 25 Develop Infrastructure:....................................................................................................................25 6 Page 308 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Enhance Trade Policies:.................................................................................................................. 26 Long-Term Impacts of Devaluation:............................................................................................... 26 Complementary Economic Policies:............................................................................................... 26 Global Economic Trends:................................................................................................................26 Sustained Competitiveness:.............................................................................................................26 Durability of Gains:.................................................................................................................. 26 Elasticity of Demand:............................................................................................................... 26 Structural Changes in the Economy:............................................................................................... 26 Sectoral Shifts:.......................................................................................................................... 26 Investment Patterns:..................................................................................................................27 Cost-Push Inflation:.................................................................................................................. 27 Policy Responses:..................................................................................................................... 27 The Role of Complementary Economic Policies............................................................................ 27 Interest Rate Management:....................................................................................................... 27 Inflation Targeting:................................................................................................................... 27 Fiscal Policy:................................................................................................................................... 27 Government Spending:............................................................................................................. 27 Tax Policies:..............................................................................................................................27 Trade Policy:....................................................................................................................................27 Trade Agreements:....................................................................................................................27 Tariffs and Non-Tariff Barriers:................................................................................................ 27 Technological Advancements:.........................................................................................................28 Digital Trade:............................................................................................................................ 28 Automation and Innovation:..................................................................................................... 28 Global Supply Chains:.....................................................................................................................28 Reshoring and Nearshoring:..................................................................................................... 28 Supply Chain Disruptions:........................................................................................................28 Shifts in Global Demand:................................................................................................................ 28 Consumer Preferences:............................................................................................................. 28 Economic Growth Patterns:...................................................................................................... 28 Insights for Policymakers and Businesses:......................................................................................28 Enhancing Export Performance:......................................................................................................29 Strategic Devaluation:..................................................................................................................... 29 Competitive Pricing:................................................................................................................. 29 Targeted Devaluation:............................................................................................................... 29 Diversification:................................................................................................................................ 29 Export Market Diversification:................................................................................................. 29 Product Diversification:............................................................................................................ 29 Quality Enhancement:..................................................................................................................... 29 Investing in Quality:................................................................................................................. 29 Brand Building:.........................................................................................................................29 Maintaining Economic Stability:.....................................................................................................29 Macroeconomic Stability:............................................................................................................... 29 Inflation Control:...................................................................................................................... 29 7 Page 309 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Fiscal Discipline:...................................................................................................................... 29 Stable Governance:................................................................................................................... 30 Crisis Management:.................................................................................................................. 30 Targeted Interventions:.................................................................................................................... 30 Support for Export Industries:.................................................................................................. 30 Investment in Technology:........................................................................................................30 Comprehensive Policy Framework:................................................................................................ 30 Integrated Approach:....................................................................................................................... 30 Holistic Policy Framework:...................................................................................................... 30 Coordinated Efforts:..................................................................................................................30 Future-Proofing:.............................................................................................................................. 30 Adaptability:............................................................................................................................. 30 Resilience Building:..................................................................................................................30 Some Determinants under this Study:............................................................................................. 31 Time:................................................................................................................................................31 Countries:........................................................................................................................................ 31 Variables:......................................................................................................................................... 31 Sample of Organization of Determinants:.......................................................................................32 8 Page 310 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Determinants of Currency Devaluation: Currency devaluation is influenced by a variety of factors that can be broadly categorized into economic, political, and external determinants. Economic Determinants: Inflation Rate: Higher inflation rates in Bangladesh relative to its trading partners can erode the value of the Bangladeshi Taka (BDT), leading to devaluation. Persistent inflation reduces the purchasing power of the currency and can prompt the central bank to devalue the currency to maintain export competitiveness. Trade Balance: A persistent trade deficit, where imports consistently exceed exports, can put downward pressure on the BDT. To correct the trade imbalance and boost exports, the central bank might devalue the currency. Foreign Exchange Reserves: Low levels of foreign exchange reserves can signal economic vulnerability and lead to currency devaluation. Sufficient reserves are necessary to stabilize the currency value and manage exchange rate fluctuations. Interest Rate Differentials: Differences in interest rates between Bangladesh and other countries can influence capital flows. Higher interest rates in other countries can attract capital away from Bangladesh, leading to devaluation of the BDT. Economic Growth: Slow economic growth can lead to currency devaluation as the central bank might devalue the currency to stimulate economic activity through increased export competitiveness. Political Determinants: Political Stability: Political instability and uncertainty can undermine investor confidence, leading to capital flight and currency devaluation. Stable political environments, on the other hand, can help maintain a stable exchange rate. Government Policies: Fiscal and monetary policies significantly impact currency values. Expansionary fiscal policies and loose monetary policies can lead to devaluation, while prudent policies can help maintain currency stability. 4 Page 311 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) External Determinants: Global Economic Conditions: Global economic trends and conditions, such as recessions or booms in major economies, can affect demand for Bangladeshi exports and influence the exchange rate. Commodity Prices: Fluctuations in global commodity prices, especially for key exports and imports, can impact the trade balance and lead to currency devaluation. For instance, rising oil prices can increase import costs and affect the exchange rate. Foreign Direct Investment (FDI): Levels of FDI inflows and outflows can impact the exchange rate. High levels of FDI can strengthen the currency, while divestment can lead to devaluation. Reasons Behind Exchange Rate Fluctuations Exchange rate fluctuations in Bangladesh are influenced by a combination of market forces and policy decisions. Key reasons behind these fluctuations include: Market Forces: Supply and Demand Dynamics: The value of the BDT is influenced by the supply and demand for foreign currencies. High demand for foreign currencies, driven by imports or capital flight, can lead to depreciation of the BDT. Speculative Activities: Speculation in the foreign exchange market can cause short-term fluctuations in the exchange rate. Traders' expectations about future economic conditions or policy changes can lead to volatility. Policy Decisions: Central Bank Interventions: The Bangladesh Bank may intervene in the foreign exchange market to stabilize the currency. Interventions can include buying or selling foreign reserves to influence the exchange rate. Monetary Policy: Changes in monetary policy, such as interest rate adjustments, can affect exchange rate movements. For example, raising interest rates can attract foreign investment and strengthen the BDT. Exchange Rate Regime: The type of exchange rate regime adopted by Bangladesh, whether it is a floating, fixed, or managed float regime, plays a crucial role in determining exchange rate fluctuations. 5 Page 312 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Understanding the determinants of currency devaluation and the reasons behind exchange rate fluctuations is essential for developing effective economic policies. By identifying the key factors influencing the value of the Bangladeshi Taka, this study provides valuable insights that can help policymakers design strategies to enhance export competitiveness and achieve sustainable economic growth. The analysis of these determinants also highlights the complex interplay between domestic and external factors, emphasizing the need for a holistic approach to exchange rate management. More Details on Determinants: Economic Factors: Inflation Rates: Impact of Inflation on Currency Value: Erosion of Purchasing Power: High inflation rates reduce the purchasing power of a currency, making goods and services more expensive domestically. As the value of the currency diminishes, it becomes less attractive to investors and traders. Investor Behavior: Persistent inflation can lead investors to seek more stable currencies, decreasing demand for the domestic currency and increasing the exchange rate (currency devaluation). Export Competitiveness: While inflation can make domestic goods more expensive, devaluation resulting from high inflation can make exports cheaper in foreign markets, potentially boosting export volumes. Interest Rates: Attraction of Foreign Capital: Higher interest rates in Bangladesh relative to other countries can attract foreign capital inflows as investors seek higher returns on investments. This can lead to currency appreciation as demand for the Bangladeshi Taka (BDT) increases. Capital Outflows: Conversely, lower interest rates can result in capital outflows as investors seek better returns elsewhere, leading to currency depreciation. Monetary Policy Influence: Central bank policies on interest rates directly impact the currency value. Tight monetary policy with higher interest rates can strengthen the currency, while a loose policy with lower rates can weaken it. Balance of Payments: Deficit and Surplus Implications: Balance of Payments Deficit: 6 Page 313 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) A deficit occurs when a country imports more goods, services, and capital than it exports. This excess demand for foreign currencies leads to a higher exchange rate, resulting in currency devaluation. Foreign Exchange Reserves: Adequate reserves can help manage a balance of payments deficit. However, prolonged deficits can deplete reserves, making it difficult to support the currency value. Trade Balance: The trade balance, a major component of the balance of payments, directly affects currency value. Persistent trade deficits can weaken the currency as more domestic currency is exchanged for foreign currencies to pay for imports. Market Factors: Speculation: Investor Expectations: Speculators in the foreign exchange market can significantly influence currency values. If speculators expect the BDT to devalue due to economic indicators or political instability, their actions (selling off the currency) can accelerate the devaluation process. Market Sentiment: Market sentiment, driven by news, economic data, and geopolitical events, plays a crucial role in currency valuation. Negative sentiment towards Bangladesh's economy can lead to currency depreciation. Foreign Exchange Reserves: Role of Reserves: Foreign exchange reserves are critical in maintaining currency stability. They can be used to intervene in the currency markets to support the BDT by buying it with foreign currencies. Reserve Levels: Low levels of reserves can limit the central bank's ability to manage the currency, making it more susceptible to devaluation pressures during economic shocks or prolonged deficits. Structural Factors: Economic Growth: Growth Prospects: Strong economic growth can attract foreign investment, leading to currency appreciation. Conversely, slow or negative growth can deter investment and lead to currency depreciation. Export Performance: 7 Page 314 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Robust export growth strengthens the currency as foreign buyers need to purchase the domestic currency to pay for exports. Weak export performance can have the opposite effect. Political Stability: Government Policies: Political stability and consistent economic policies enhance investor confidence, supporting currency value. Political instability can lead to economic uncertainty and currency depreciation. Policy Reforms: Structural reforms aimed at improving economic efficiency and growth prospects can bolster currency value. Conversely, lack of reforms or policy reversals can weaken the currency. External Debt: Debt Servicing: High levels of external debt increase the demand for foreign currency to service the debt, leading to devaluation pressures. Managing external debt effectively is crucial to maintaining currency stability. Understanding the determinants of currency devaluation is essential for formulating effective economic policies. In Bangladesh, factors such as inflation rates, interest rates, balance of payments, and market speculation play pivotal roles in influencing the value of the BDT. By addressing these factors through sound economic management, Bangladesh can enhance its export performance and maintain a stable currency. External Factors: Global Market Conditions: Economic Growth Rates: Global Economic Downturns: During global economic recessions, demand for goods and services from emerging markets like Bangladesh typically decreases. This reduction in demand for Bangladeshi exports can lead to decreased foreign currency inflows, causing the Bangladeshi Taka (BDT) to depreciate. Economic Recovery and Growth: Conversely, during periods of global economic growth, demand for exports may increase, leading to higher foreign currency inflows and potentially appreciating the BDT. Financial Crises: Global Financial Turbulence: Financial crises, such as the 2008 global financial crisis, can lead to widespread economic instability. Investors often pull out of riskier emerging markets during such times, causing currency depreciation in those markets. 8 Page 315 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Capital Flight: During crises, capital flight from emerging markets can intensify, leading to a sharp depreciation of the local currency. This makes imports more expensive and can strain the balance of payments. Geopolitical Events: Political Instability: Geopolitical tensions and conflicts can lead to uncertainty and instability in global markets. Such events can reduce investor confidence in emerging markets like Bangladesh, leading to currency depreciation. Sanctions and Trade Restrictions: Geopolitical events resulting in sanctions or trade restrictions can directly affect a country's trade and economic performance, causing a devaluation of its currency. Trade Policies Tariffs: Impact on Export Competitiveness: Imposition of tariffs by major trading partners on Bangladeshi goods can reduce their competitiveness in international markets, leading to a decline in export volumes and foreign currency earnings. This can result in a depreciation of the BDT. Retaliatory Tariffs: Tariffs imposed by Bangladesh in response to foreign tariffs can further complicate trade dynamics and potentially lead to reduced export performance and currency depreciation. Trade Agreements: Bilateral and Multilateral Agreements: Favorable trade agreements can enhance market access for Bangladeshi exports, boosting foreign currency inflows and supporting the BDT. Conversely, unfavorable agreements or the absence of trade agreements can limit market access and lead to currency depreciation. Regional Trade Blocs: Membership in regional trade blocs (e.g., SAARC, ASEAN) can facilitate trade and enhance export performance. Effective integration within such blocs can support currency stability, while exclusion or marginalization can have the opposite effect. Export Subsidies: Government Support for Exporters: Export subsidies can help reduce the cost of production for export-oriented industries, making their products more competitive in international markets. This can boost export volumes and support the BDT. WTO Regulations: 9 Page 316 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Compliance with World Trade Organization (WTO) regulations on subsidies is crucial. Non-compliance can lead to disputes and retaliatory measures from trading partners, negatively impacting export performance and currency stability. Protectionist Policies: Impact on Market Access: Protectionist policies in major trading partners, such as import quotas and restrictive regulations, can limit market access for Bangladeshi goods, reducing export volumes and foreign currency earnings, thereby leading to currency depreciation. Domestic Response: Bangladesh's response to protectionist measures, including seeking new markets and diversifying exports, can influence the extent of currency depreciation. External factors such as global market conditions and trade policies significantly impact currency devaluation in Bangladesh. Understanding these external determinants is crucial for policymakers to develop strategies that mitigate adverse effects and enhance the resilience of the Bangladeshi economy. By navigating global economic fluctuations and crafting effective trade policies, Bangladesh can better manage its currency value and support sustainable economic growth. Internal Factors Influencing Exchange Rate Fluctuations: Domestic Economic Conditions: GDP Growth: Economic Performance: A high GDP growth rate indicates a strong and expanding economy, which generally attracts foreign investment. Increased capital inflows can lead to currency appreciation as demand for the local currency rises. Recessionary Periods: Conversely, during economic downturns or recessions, GDP growth may stagnate or decline, leading to reduced investor confidence and potential currency depreciation. Unemployment Rates: Low Unemployment: Low unemployment rates are often indicative of a healthy economy. High employment levels can boost consumer spending and economic activity, thereby attracting foreign investment and leading to currency appreciation. High Unemployment: High unemployment rates can signal economic distress, reducing investor confidence. This can lead to capital outflows and currency depreciation. Industrial Production: Increase in Production: 10 Page 317 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Growth in industrial production can enhance export performance and improve trade balances, which can attract foreign investment and support currency appreciation. Decline in Production: A decline in industrial production can weaken the economy and reduce export competitiveness, potentially leading to currency depreciation. Government Policies Government Spending: Expansionary fiscal policies, such as increased government spending, can stimulate economic growth but may also lead to higher budget deficits and inflationary pressures. This can result in currency depreciation. Taxation: Changes in taxation policies can influence economic activity. Lower taxes can boost disposable income and consumption, supporting economic growth and potentially leading to currency appreciation. Conversely, higher taxes can dampen economic activity and lead to currency depreciation. Monetary Policies: Interest Rates: Central banks use interest rates to control inflation and manage economic growth. Higher interest rates can attract foreign investment, leading to currency appreciation. Lower interest rates can stimulate economic growth but may result in currency depreciation. Quantitative Easing: Central bank policies such as quantitative easing, which involves purchasing government securities to increase money supply, can lead to currency depreciation as it typically results in lower interest rates and increased liquidity. Foreign Exchange Reserves: Central banks can intervene in the foreign exchange market by buying or selling foreign currencies to stabilize or influence the exchange rate. Selling foreign reserves can lead to currency appreciation, while buying foreign reserves can lead to depreciation. Investor Confidence: Stable Political Environment: Political stability enhances investor confidence, attracting foreign direct investment and portfolio investment. This can lead to currency appreciation as demand for the local currency increases. Political Uncertainty: Political instability, such as frequent changes in government, social unrest, or conflicts, can lead to capital flight as investors seek safer environments. This can result in currency depreciation. 11 Page 318 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Policy Continuity: Consistent Policies: A stable political environment often results in consistent and predictable economic policies, which can enhance investor confidence and support currency appreciation. Policy Changes: Frequent or unpredictable changes in government policies can create uncertainty, leading to reduced investor confidence and potential currency depreciation. Internal factors such as domestic economic conditions, government policies, and political stability play crucial roles in influencing exchange rate fluctuations in Bangladesh. Understanding these factors helps policymakers and investors make informed decisions to manage and stabilize the exchange rate, thereby supporting economic growth and stability. Effective management of these internal determinants is essential for maintaining investor confidence and ensuring a stable economic environment. External Factors Influencing Exchange Rate Fluctuations: Global Economic Developments: Strength of the US Dollar: Dollar Dominance: The US dollar is the world's primary reserve currency, and changes in its value can significantly impact other currencies. A strong US dollar often leads to the depreciation of other currencies, including the Bangladeshi Taka (BDT). This can occur because global investors tend to flock to the dollar as a safe-haven asset during periods of economic uncertainty, increasing its demand and value. . Impact on Trade: A stronger dollar makes Bangladeshi exports cheaper in dollar terms, potentially boosting export volumes. However, it also makes imports more expensive, leading to higher costs for imported goods and raw materials. International Interest Rate Trends: Interest Rate Differentials: Interest rates in major economies like the US and the Eurozone influence global capital flows. Higher interest rates in these regions can attract capital away from emerging markets like Bangladesh, leading to currency depreciation as investors seek higher returns in those regions. Global Monetary Policy: Changes in the monetary policies of major economies, such as the Federal Reserve's decisions on interest rates, can cause capital to move in or out of Bangladesh, impacting the BDT's value. Global Trade Dynamics: 12 Page 319 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Trade Policies: Changes in global trade policies, such as the imposition of tariffs, trade agreements, or sanctions, can influence the demand for Bangladeshi goods. Favorable trade agreements can enhance export performance and support currency appreciation, while trade barriers can have the opposite effect. Economic Growth Rates: Global economic growth rates affect demand for Bangladeshi exports. Strong global growth can increase demand for exports, leading to currency appreciation, whereas a global economic slowdown can reduce export demand and result in depreciation. Commodity Prices: Impact of Oil Prices: Import Costs: Bangladesh is a net importer of oil. Increases in global oil prices raise the cost of imports, worsening the trade balance and exerting downward pressure on the BDT. Higher import costs can lead to inflation and reduced purchasing power domestically. Production Costs: Elevated oil prices can increase the cost of production for industries reliant on energy, such as manufacturing and transportation, potentially reducing their competitiveness and impacting export performance. Other Commodities: Export Commodities: Prices of commodities that Bangladesh exports, such as jute, fish, and garments, also impact the exchange rate. Higher prices for these exports can improve trade balances and support currency appreciation. Global Supply Chains: Fluctuations in the prices of raw materials and intermediate goods that Bangladesh imports for its export-oriented industries can affect production costs and export competitiveness, influencing the exchange rate. Capital Flows: Investment Inflows: FDI brings in foreign capital, which can lead to currency appreciation as demand for the BDT increases. FDI often supports economic growth by creating jobs, boosting productivity, and enhancing export capacity. Investment Climate: 13 Page 320 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The attractiveness of Bangladesh as an investment destination depends on factors such as political stability, economic policies, and the business environment. Positive developments in these areas can attract more FDI, supporting the currency. Portfolio Investment: Short-term Capital Movements: Portfolio investments include investments in stocks, bonds, and other financial assets. These investments can be more volatile than FDI, as they are influenced by short-term market conditions and investor sentiment. Market Sentiment: Positive market sentiment and economic outlooks can lead to inflows of portfolio investment, causing currency appreciation. Conversely, negative sentiment or economic instability can result in capital outflows and currency depreciation. External factors such as global economic developments, commodity prices, and capital flows play a crucial role in influencing exchange rate fluctuations in Bangladesh. Understanding these factors helps policymakers and investors anticipate potential impacts on the currency and implement strategies to manage exchange rate risks effectively. By considering both internal and external determinants, Bangladesh can better navigate the complex landscape of global finance and maintain a stable economic environment. Impact of Exchange Rate Fluctuations on Export Performance: Immediate Effects: Increased Export Competitiveness: Price Advantage: When the Bangladeshi Taka (BDT) devalues, the price of Bangladeshi goods and services in foreign currencies decreases. This price advantage can make Bangladeshi exports more attractive to international buyers, potentially leading to an immediate increase in export orders and volumes. Market Expansion: The lower prices can help Bangladeshi exporters penetrate new markets or expand their presence in existing markets. Buyers who were previously deterred by higher prices may now find Bangladeshi products more affordable and desirable. Boost in Export Volumes Demand Surge: The immediate effect of a more competitive price point is an increase in demand for Bangladeshi exports. This surge in demand can result in higher export volumes, as foreign buyers take advantage of the lower prices to stock up on goods. Utilization of Capacity: 14 Page 321 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Exporters may increase their production to meet the rising demand, leading to better utilization of production capacity and potentially higher employment rates in export-oriented industries. Revenue Growth Increased Sales: Higher export volumes can translate into increased sales revenue for Bangladeshi exporters. This revenue growth can provide a short-term boost to the financial health of export-oriented businesses, enabling them to invest in capacity expansion, technology upgrades, and workforce development. Foreign Exchange Earnings: As export volumes rise, the inflow of foreign currency increases, improving the country’s foreign exchange reserves. This can help stabilize the exchange rate and provide the central bank with more resources to manage future exchange rate fluctuations. Case Study Example Garment Industry: The ready-made garment (RMG) sector in Bangladesh is a prime example of how immediate devaluation impacts export performance. When the BDT devalues, the cost of Bangladeshi garments in USD terms drops, making them more competitive in major markets like the US and EU. This often leads to a rapid increase in export orders, helping the sector maintain its global market share. Challenges and Risks Increased Production Costs: While devaluation can boost export competitiveness, it can also lead to higher production costs for exporters who rely on imported raw materials and components. The increased cost of imports can offset some of the gains from higher export volumes. Inflationary Pressures: Devaluation can contribute to inflation, as the cost of imported goods and services rises. Inflation can erode the purchasing power of consumers and increase the cost of living, potentially reducing domestic demand and creating economic instability. Short-term Gains vs. Long-term Stability: The immediate benefits of devaluation need to be balanced against potential long-term risks, such as inflation and increased production costs. Policymakers must carefully manage the devaluation process to maximize the positive impacts on export performance while minimizing negative consequences. Sustained Export Growth: Competitive Edge: If managed effectively, devaluation can provide Bangladeshi exporters with a sustained competitive edge in international markets. Continuous improvement in product quality, innovation, and market diversification can help maintain this advantage over the long term. 15 Page 322 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Investment in Export Sectors: The increased revenue from higher export volumes can be reinvested in export-oriented sectors to enhance productivity, efficiency, and capacity. This can lead to sustained growth in exports and overall economic development. Inflation and Cost Management Managing Inflation: Long-term success requires addressing inflationary pressures resulting from devaluation. Effective monetary and fiscal policies, such as controlling the money supply and managing government spending, can help mitigate inflation. Cost Control Strategies: Exporters need to implement strategies to manage rising production costs. This can include sourcing cheaper raw materials, improving operational efficiency, and leveraging technology to reduce costs. Holistic Economic Policies: Policymakers should adopt a holistic approach to managing exchange rate fluctuations and their impact on exports. This includes maintaining macroeconomic stability, controlling inflation, and supporting export-oriented industries through targeted policies and incentives. Trade Agreements and Market Access: Enhancing market access through trade agreements and diplomatic efforts can help Bangladeshi exporters maintain and expand their presence in global markets, offsetting some of the challenges posed by exchange rate fluctuations. Exchange rate fluctuations, particularly currency devaluation, can have immediate and significant effects on export performance. While devaluation can enhance export competitiveness and boost export volumes in the short term, it also presents challenges such as higher production costs and inflationary pressures. A balanced and strategic approach to managing exchange rate movements can help maximize the benefits and minimize the risks, supporting sustainable export growth and economic development in Bangladesh. Long-Term Implications of Sustained Currency Devaluation: Enhanced Export Competitiveness: Sustained Competitive Advantage: Price Stability: Over time, a weaker currency can make a country’s exports consistently cheaper compared to those from countries with stronger currencies. This sustained price advantage can help maintain and even expand market share in global markets. Market Penetration: 16 Page 323 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Continued devaluation can facilitate deeper penetration into existing markets and entry into new ones. As buyers become accustomed to lower prices, demand for Bangladeshi goods may stabilize at higher levels. Export Growth and Diversification: Product Diversification: Devaluation can provide the financial impetus for exporters to diversify their product lines. Increased revenue from higher export volumes can be reinvested in research and development, leading to innovation and a broader range of exportable goods. Market Diversification: Exporters may also seek to diversify their markets to reduce dependency on a few major trading partners. This can help mitigate risks associated with demand fluctuations in specific markets. Cost-Push Inflation: Imported Inflation: Devaluation increases the cost of imported goods and raw materials. As these higher costs are passed on to consumers, the overall price level in the economy can rise, leading to inflation. Production Costs: Export-oriented industries relying on imported inputs will face higher production costs. This can erode profit margins and potentially reduce the competitive advantage gained from devaluation. Wage-Price Spiral: Wage Demands: As the cost of living rises due to inflation, workers may demand higher wages to maintain their purchasing power. This can lead to a wage-price spiral, where increasing wages drive up production costs further, leading to additional price increases. Consumer Prices: Persistent inflation can reduce consumer purchasing power, affecting domestic demand for goods and services. This can create economic instability and reduce the overall standard of living. Higher Production Costs Input Costs: Raw Materials: Higher costs for imported raw materials can significantly impact the profitability of export-oriented industries. Companies may need to find alternative, cheaper sources or invest in local production to mitigate these costs. 17 Page 324 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Energy and Fuel: Increased prices for imported energy and fuel can raise transportation and production costs, further squeezing profit margins for exporters. Impact on SMEs: Small and Medium Enterprises (SMEs): Smaller firms may find it particularly challenging to absorb higher production costs. Unlike larger firms, SMEs often lack the financial resources to invest in cost-saving technologies or alternative supply chains. Erosion of Initial Gains Competitive Landscape: Global Competition: Other countries may also devalue their currencies to maintain export competitiveness, leading to a ‘race to the bottom’ where the benefits of devaluation are eroded by similar actions from trade competitors. Technological Advancements: Competitor countries investing in technology and innovation may outpace Bangladesh in productivity gains, offsetting the price advantage gained from devaluation. Balance of Payments: Current Account Deficit: While devaluation can initially improve the trade balance, persistent deficits due to higher import costs and inflationary pressures can negate these gains. The country may struggle to manage its current account balance, leading to potential financial instability. Foreign Debt: A weaker currency can increase the cost of servicing foreign-denominated debt, placing additional strain on the country's financial resources and potentially leading to higher borrowing costs. Strategic Responses: Policy Interventions: Monetary Policy: The central bank can implement monetary policies to control inflation, such as tightening the money supply or increasing interest rates. However, these measures must be balanced to avoid stifling economic growth. Fiscal Policy: Government spending and taxation policies can be adjusted to support export industries and mitigate inflationary pressures. Targeted subsidies or tax incentives for export-oriented sectors can help manage production costs. 18 Page 325 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Structural Reforms: Supply Chain Management: Encouraging the development of local supply chains can reduce dependence on imported inputs, helping to stabilize production costs. Investment in infrastructure and logistics can enhance supply chain efficiency. Innovation and Productivity: Promoting innovation and improving productivity through technology adoption and workforce development can help offset higher production costs and sustain export competitiveness. Diversification Strategies: Product and Market Diversification: Exporters should continually seek to diversify their product offerings and explore new markets to spread risk and capture new growth opportunities. This reduces reliance on a limited range of products or markets. Value Addition: Moving up the value chain by producing higher value-added goods can enhance export revenues and reduce vulnerability to price fluctuations. This requires investment in skills development, technology, and quality improvements. The long-term implications of sustained currency devaluation are multifaceted and require careful management to balance the benefits of enhanced export competitiveness against the risks of inflation and higher production costs. Policymakers and businesses must adopt strategic responses to navigate these complexities and ensure sustainable economic growth and export performance. Understanding Currency Devaluation: Currency devaluation refers to a deliberate downward adjustment of a country's currency value relative to another currency or a basket of currencies. This economic policy tool is often employed by governments or central banks to address specific economic challenges, such as improving export competitiveness, correcting trade imbalances, and managing external debt. Currency devaluation can be achieved through various mechanisms, including: Monetary Policy Adjustments: Central banks can lower interest rates to make domestic currency less attractive to foreign investors, leading to a depreciation of the currency. Foreign Exchange Market Interventions: Central banks may intervene in the foreign exchange market by selling their own currency and buying foreign currencies. This increases the supply of the domestic currency, causing its value to decrease. 19 Page 326 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Quantitative Easing: By increasing the money supply through measures such as purchasing government bonds, central banks can reduce the value of the domestic currency. Exchange Rate Policies: Shifting from a fixed or pegged exchange rate to a more flexible or floating exchange rate system can result in currency devaluation as market forces determine the currency's value. Objectives Behind Currency Devaluation: Currency devaluation is typically pursued with the following objectives in mind: Enhancing Export Competitiveness: Devaluation makes a country's goods and services cheaper for foreign buyers. This can lead to an increase in export volumes, as international buyers find the lower prices attractive. Correcting Trade Imbalances: By boosting exports and reducing imports (as imported goods become more expensive), devaluation can help reduce a trade deficit and improve the balance of payments. Increased exports can lead to higher production levels, greater utilization of capacity, and job creation, which in turn stimulate overall economic growth. Managing External Debt: For countries with significant external debt denominated in foreign currencies, devaluation can make debt servicing more manageable by boosting foreign exchange earnings through increased exports. As exports become cheaper for foreign buyers, demand for domestically produced goods increases, leading to higher export volumes. Enhanced Revenue: Increased export volumes can lead to higher revenues for exporters, contributing to economic growth and improved trade balances. Improved Trade Balance: By boosting exports and curbing imports, devaluation can help correct trade deficits and improve the overall balance of payments. The cost of imported inputs and raw materials rises due to devaluation, leading to higher production costs for exporters. Devaluation can lead to inflation as the prices of imported goods and services increase, reducing consumers' purchasing power. Diminished Domestic Demand: 20 Page 327 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Higher inflation and increased production costs can reduce domestic demand for goods and services, potentially slowing economic growth. Understanding the concept and implications of currency devaluation is crucial for policymakers and businesses. While devaluation can provide significant benefits by enhancing export competitiveness and correcting trade imbalances, it also poses challenges such as inflation and higher production costs. Effective management of devaluation requires a balanced approach that considers both its positive and negative impacts, ensuring that the overall economic objectives are met while mitigating potential adverse effects. This nuanced understanding forms the foundation for developing strategic policy interventions that support sustainable economic growth and stability. Historical Context of Devaluation in Bangladesh: Bangladesh has a history of currency devaluation events, driven by various economic pressures and policy decisions aimed at improving trade balances, economic stability, and overall growth. These devaluations have played a crucial role in shaping the economic landscape of the country, influencing export performance, inflation rates, and the broader macroeconomic environment. Key Instances of Currency Devaluation: 1970s: Post-Independence Economic Challenges: After gaining independence in 1971, Bangladesh faced significant economic challenges, including a war-ravaged infrastructure and a fragile economic base. To address these issues and stabilize the economy, the government devalued the Bangladeshi Taka (BDT) to encourage exports and attract foreign aid and investment. 1980s: Structural Adjustments and Trade Liberalization: During the 1980s, Bangladesh implemented structural adjustment programs in collaboration with the International Monetary Fund (IMF) and the World Bank. As part of these programs, the BDT was devalued several times to boost export competitiveness, reduce trade deficits, and promote economic liberalization. 1990s: Further Liberalization and Market Reforms: The 1990s saw further economic reforms aimed at liberalizing the trade regime and integrating Bangladesh into the global economy. The government devalued the BDT to support these reforms, enhance export performance, and attract foreign direct investment (FDI). 2000s: Global Economic Dynamics and Inflation Control: In the 2000s, global economic dynamics and domestic inflationary pressures led to periodic devaluations of the BDT. The government used devaluation as a tool to maintain export competitiveness, manage inflation, and stabilize the economy amid fluctuating global commodity prices. 2010s: Sustaining Export Growth: 21 Page 328 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The 2010s were marked by sustained efforts to boost export-led growth, particularly in the ready-made garments (RMG) sector, which became a cornerstone of the economy. Devaluation of the BDT during this period was aimed at maintaining the competitive edge of Bangladeshi exports in global markets. Economic Pressures and Policy Decisions: Trade Imbalances: Persistent trade deficits have been a major driver of currency devaluation in Bangladesh. By devaluing the BDT, the government aimed to reduce imports, boost exports, and improve the trade balance. Inflation Control: Inflationary pressures, often exacerbated by rising global commodity prices, necessitated devaluation to control inflation and stabilize the domestic economy. Export Competitiveness: Enhancing the competitiveness of Bangladeshi exports, particularly in labor-intensive sectors like RMG, pharmaceuticals, and jute products, has been a key objective behind devaluation policies. Structural Reforms: Structural adjustment programs and economic liberalization efforts have frequently included currency devaluation as a component to align the exchange rate with market realities and promote economic stability. Impact on Economic Stability and Trade Balance: Increased Exports: Devaluation made Bangladeshi goods cheaper in international markets, boosting export volumes and revenues. Improved Trade Balance: By curbing imports and promoting exports, devaluation helped to reduce trade deficits and improve the balance of payments. Economic Growth: Enhanced export performance contributed to overall economic growth and development. Inflation: Higher import prices due to devaluation led to inflationary pressures, reducing consumers' purchasing power. Higher Production Costs: 22 Page 329 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Exporters faced increased costs for imported inputs and raw materials, potentially offsetting the gains from increased export volumes. Macroeconomic Stability: Frequent devaluations could lead to volatility and uncertainty in the exchange rate, affecting investor confidence and economic stability. The historical context of currency devaluation in Bangladesh highlights the complex interplay between economic pressures, policy decisions, and macroeconomic outcomes. While devaluation has been an important tool for enhancing export competitiveness and addressing trade imbalances, it has also posed challenges such as inflation and higher production costs. Understanding these historical instances and their impacts provides valuable insights for current and future policy-making, helping to strike a balance between promoting export growth and maintaining economic stability. Factors Influencing the Determinants: Economic Factors: Inflation Rates: Persistent inflation can erode the currency's value, leading to devaluation as the purchasing power diminishes. Interest Rates: Interest rate differentials impact currency values, with lower rates leading to devaluation due to reduced foreign investment. Balance of Payments: Deficits in the balance of payments exert pressure on the currency, often resulting in devaluation to correct trade imbalances. External Factors: Global Market Conditions: Global economic dynamics, such as financial crises or economic downturns, significantly impact exchange rates and can lead to devaluation. Trade Policies: Protectionist measures and trade barriers from major trading partners can reduce export demand, prompting devaluation to regain competitiveness. Reasons for Exchange Rate Fluctuations: Internal Factors: Domestic Economic Conditions: 23 Page 330 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Changes in GDP growth, unemployment rates, and industrial output can influence exchange rates. Government Policies: Fiscal and monetary policies, along with political stability, play crucial roles in maintaining exchange rate stability. Global Economic Developments: Fluctuations in major global currencies and international interest rate trends affect the value of the Bangladeshi Taka. Commodity Prices: Changes in prices of key commodities, such as oil, impact import costs and exchange rates. Capital Flows: Movements of capital, both inwards and outwards, due to foreign investment trends, influence the currency value. Impact on Export Performance: Immediate Effects: In the short term, devaluation makes exports cheaper, potentially increasing export volumes and improving market share. Long-Term Implications: Sustained devaluation can lead to inflationary pressures and higher production costs, potentially offsetting initial gains in competitiveness. Export Volume and Value: While devaluation may boost export volumes, its impact on export value depends on various factors, including terms of trade and pricing strategies. Market Share: Devaluation can help gain larger market shares by making exports more attractive to international buyers. Policy Implications and Strategic Responses: Managing Exchange Rate Fluctuations: Policymakers should focus on macroeconomic stability, inflation control, and maintaining a stable political environment to manage exchange rate volatility. 24 Page 331 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Enhancing Export Competitiveness: Strategies to enhance competitiveness include market diversification, improving product quality, and reducing reliance on imported inputs. Effective Policy Responses: Drawing lessons from successful policy responses in countries like South Korea, Brazil, and India can provide actionable insights for Bangladesh to navigate exchange rate challenges. Case Studies: South Korea: Highlighted the benefits of market diversification, innovation, and financial support for exporters. Brazil: Demonstrated the importance of controlling inflation and providing export promotion programs. India: Emphasized the role of economic reforms, infrastructure development, and export incentives in enhancing competitiveness. Policy Recommendations for Bangladesh: Based on the findings, several policy recommendations are proposed to enhance export competitiveness and manage the challenges associated with currency devaluation: Diversify Export Markets: Reduce dependency on traditional markets by exploring new markets through trade agreements and diplomatic efforts. Invest in Innovation and Quality Improvement: Support research and development to improve product quality and competitiveness, especially in key export sectors like ready-made garments, pharmaceuticals, and jute products. Provide Financial Support and Incentives: Offer low-interest loans, tax incentives, and subsidies to export-oriented industries to mitigate the impact of exchange rate fluctuations. Control Inflation and Maintain Macroeconomic Stability: Implement stringent monetary policies to control inflation and maintain investor confidence. Develop Infrastructure: 25 Page 332 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Invest in transportation, logistics, and port facilities to reduce export costs and improve supply chain efficiency. Enhance Trade Policies: Engage in bilateral and multilateral trade agreements to secure favorable terms for exports and reduce trade barriers. Future research should focus on the following areas to deepen the understanding of the relationship between currency devaluation and export performance: Long-Term Impacts of Devaluation: Investigate the long-term effects of sustained currency devaluation on export competitiveness, inflation, and overall economic growth. Complementary Economic Policies: Study the role of complementary policies, such as fiscal measures and structural reforms, in mitigating the adverse effects of devaluation. Global Economic Trends: Analyze the impact of global economic trends, such as technological advancements and shifts in global trade dynamics, on the export performance of developing countries like Bangladesh. Understanding the exchange rate pass-through mechanism and the determinants of currency devaluation is crucial for developing effective policies and strategies to enhance export performance. By examining the direct impact of exchange rate movements on export prices and incorporating lessons from successful policy responses in other countries, this study provides valuable insights for policymakers and export-oriented businesses in Bangladesh. These insights can help in formulating strategies that ensure sustainable economic growth and improve overall export performance in the face of currency devaluation and exchange rate fluctuations. Future research should delve deeper into the long-term impacts of exchange rate devaluation on export performance. While short-term effects, such as increased export volumes and market share, are well-documented, the long-term consequences are more complex and multifaceted. Key areas for exploration include: Sustained Competitiveness: Durability of Gains: Investigate whether the competitive advantages gained through devaluation are sustainable over time or if they diminish as inflation and production costs rise. Elasticity of Demand: Examine the long-term elasticity of demand for Bangladeshi exports. How sensitive are international buyers to changes in export prices over extended periods? Structural Changes in the Economy: 26 Page 333 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sectoral Shifts: Analyze whether devaluation leads to significant structural changes within the economy, such as shifts from import-dependent industries to export-oriented sectors. Investment Patterns: Study how sustained devaluation influences domestic and foreign investment in export-oriented industries. Cost-Push Inflation: Assess the extent to which devaluation leads to cost-push inflation, increasing the prices of imported inputs and domestic goods. Policy Responses: Evaluate the effectiveness of monetary and fiscal policies in controlling inflation resulting from prolonged devaluation. The Role of Complementary Economic Policies To fully understand the impact of exchange rate devaluation on export performance, future research should consider the role of complementary economic policies. These policies can either amplify or mitigate the effects of devaluation. Key areas for investigation include: Interest Rate Management: Study the interaction between devaluation and interest rate policies. How do changes in interest rates influence the effectiveness of devaluation in boosting exports? Inflation Targeting: Explore the role of inflation targeting in stabilizing the economy post-devaluation. Fiscal Policy: Government Spending: Analyze the impact of government spending on infrastructure, education, and technology on the export sector's ability to capitalize on devaluation. Tax Policies: Investigate the role of tax incentives and subsidies in supporting export-oriented industries during periods of currency devaluation. Trade Policy: Trade Agreements: Examine how bilateral and multilateral trade agreements affect the outcomes of currency devaluation on export performance. 27 Page 334 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Tariffs and Non-Tariff Barriers: Study the impact of tariffs and non-tariff barriers on the competitiveness of Bangladeshi exports in the global market. . The global economic environment plays a crucial role in shaping the outcomes of exchange rate devaluation. Future research should focus on how global economic trends interact with national devaluation policies. Key areas for exploration include: Technological Advancements: Digital Trade: Investigate the impact of digital trade and e-commerce on the export performance of countries undergoing devaluation. Automation and Innovation: Study how technological advancements in production and logistics influence the ability of exporters to remain competitive. Global Supply Chains: Reshoring and Nearshoring: Examine the effects of reshoring and nearshoring trends on the demand for Bangladeshi exports. Supply Chain Disruptions: Analyze the impact of global supply chain disruptions, such as those caused by pandemics or geopolitical tensions, on the efficacy of devaluation strategies. Shifts in Global Demand: Consumer Preferences: Explore how changes in global consumer preferences, such as a shift towards sustainable and ethical products, affect the export performance of countries experiencing devaluation. Economic Growth Patterns: Study how varying economic growth rates in major trading partners influence the demand for Bangladeshi exports. Future research on the long-term impacts of exchange rate devaluation, the role of complementary economic policies, and the effects of global economic trends will provide a deeper understanding of the complex relationship between currency values and export performance. These insights will be invaluable for policymakers, economists, and businesses seeking to navigate the challenges and opportunities presented by currency devaluation. By building on the findings of this study, future research can help formulate more effective strategies to enhance export competitiveness and achieve sustainable economic growth. 28 Page 335 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Insights for Policymakers and Businesses: The thorough examination of currency devaluation determinants and exchange rate fluctuations in this study offers critical insights that can guide both policymakers and businesses in Bangladesh. These insights are instrumental in formulating strategies that enhance export performance and maintain economic stability. Enhancing Export Performance: Strategic Devaluation: Competitive Pricing: Understanding the factors leading to currency devaluation enables policymakers to strategically manage the currency value to make exports more competitive in global markets. Targeted Devaluation: Businesses can leverage periods of devaluation to expand market share by offering competitive pricing, thus boosting export volumes and revenues. Diversification: Export Market Diversification: Diversifying export markets can reduce dependence on a few trading partners and spread the risks associated with currency fluctuations. This approach helps stabilize export performance in the face of global economic shifts. Product Diversification: Encouraging businesses to diversify their product offerings can mitigate the risks associated with devaluation. Products less reliant on imported inputs are less vulnerable to cost-push inflation. Quality Enhancement: Investing in Quality: By focusing on improving the quality of export products, businesses can command better prices in international markets, offsetting the lower prices caused by devaluation. Higher quality also helps in retaining market share even when currency values fluctuate. Brand Building: Developing strong brands can reduce the sensitivity of export prices to exchange rate changes, as consumers may be willing to pay a premium for recognized brands. Maintaining Economic Stability: Macroeconomic Stability: Inflation Control: Policymakers must implement effective inflation control measures to counteract the inflationary pressures that often accompany devaluation. This includes prudent monetary policy and managing public expectations about price stability. 29 Page 336 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Fiscal Discipline: Ensuring fiscal discipline through balanced budgets and sustainable public debt levels helps maintain investor confidence and mitigate the adverse effects of devaluation. Stable Governance: A stable political environment is crucial for maintaining investor confidence and economic stability. Policies that promote transparency, rule of law, and effective governance can enhance the overall economic environment. Crisis Management: Developing robust mechanisms for political crisis management can prevent political instability from exacerbating economic vulnerabilities. Targeted Interventions: Support for Export Industries: Providing targeted support to export-oriented industries, such as subsidies, tax incentives, and infrastructure development, can help these sectors navigate the challenges posed by currency devaluation. Investment in Technology: Investing in technological advancements and innovation can enhance productivity and reduce the costs associated with export production, thereby improving competitiveness. Comprehensive Policy Framework: Integrated Approach: Holistic Policy Framework: An integrated approach that combines monetary, fiscal, trade, and industrial policies can create a conducive environment for sustainable economic growth. This approach ensures that all aspects of the economy are aligned towards enhancing export performance and maintaining stability. Coordinated Efforts: Coordinated efforts between government agencies, industry stakeholders, and financial institutions are essential for implementing effective policies. This collaboration ensures that the benefits of devaluation are maximized while minimizing potential drawbacks. Future-Proofing: Adaptability: Policies should be adaptable to changing global economic conditions. Regular reviews and adjustments of economic policies can help Bangladesh stay competitive in an ever-evolving international market. 30 Page 337 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Resilience Building: Building economic resilience through diversification, quality enhancement, and stable governance can help Bangladesh withstand external shocks and maintain steady growth. By examining the determinants of currency devaluation and the reasons behind exchange rate fluctuations, this study provides valuable insights that are essential for both policymakers and businesses in Bangladesh. These insights can inform the development of strategies that not only enhance export performance but also ensure economic stability and resilience. Understanding and addressing the complexities of currency devaluation and exchange rate movements will be crucial for achieving sustainable economic growth and improving the overall economic well-being of the country. Some Determinants under this Study: Time: 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Countries: Argentina, Bangladesh, Bhutan, Bolivia, Brazil, Cambodia, Colombia, Egypt, Arab Rep., El Salvador, Ethiopia, Ghana, India, Indonesia, Kenya, Mexico, Morocco, Myanmar, Nepal, Nigeria, Pakistan, Peru, Philippines, South Africa, Sri Lanka, Tanzania, Thailand, Tunisia, Turkiye, Uganda, Viet Nam Variables: Balance of Payment - Net Financial Account, Barter Terms of Trade Index (2015 = 100), Broad Money (% of GDP), Devaluation (%), Ease of Doing Business Rank, Export Value (% of GDP), Export Value Index (2015 = 100), Export Volume Index (2015 = 100), Final Government Consumption Expenditure (% of GDP), Foreign Direct Investment (Net Inflow % of GDP), GDP Growth (% Annual), GDP Per Capita Growth (% Annual), Government Expenditure (% of GDP), Import Value Index (2015 = 100), Import Volume = ndex (2015 = 100), Inflation (CPI), Interest Rate Spread (%), Lending Interest Rate (%), Nominal Exchange Rate, Personal Remittance (% of GDP), Price Level of Capital Formation, Price Level of USA GDPo in 2017=29, Price Level of Exports - Price Level of USA GDPo in 2017=29, Price Level of Imports - Price Level of USA GDPo in 2017=29, Price Level Ratio of PPP Conversion Factor (GDP) to Market Exchange Rate, Real Effective Exchange Rate, Share of Labour Compensation in GDP at Current National Prices, Share of Merchandise Exports at Current PPPs, Share of Merchandise Imports at Current PPPs, Subsidies and Other Transfers (% of GDP), Tech Value Added (% Manufacturing Value Added) 31 Page 338 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sample of Organization of Determinants: 32 Page 339 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 6Devaluation Instances and Export Performance INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 340 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 3 Devaluation Instances and Export Performance Table of Contents Devaluation Instances and Export Performance:..................................................................................... 3 Historical Instances of Currency Devaluation (1990-2020):.............................................................3 1990s: Early Devaluation Period:......................................................................................................3 1991 Devaluation:............................................................................................................................. 3 Context:.......................................................................................................................................3 Impact on Exports:......................................................................................................................3 Mid-1990s Adjustments:................................................................................................................... 3 Context:.......................................................................................................................................3 Impact on Exports:......................................................................................................................3 2000s: Period of Significant Devaluation..........................................................................................3 2000-2001 Devaluation:.................................................................................................................... 3 Context:.......................................................................................................................................3 Impact on Exports:......................................................................................................................3 2008 Financial Crisis:........................................................................................................................4 Context:.......................................................................................................................................4 Impact on Exports:......................................................................................................................4 2010s: Modern Devaluation Trends.................................................................................................. 4 2011-2012 Devaluation:.................................................................................................................... 4 Context:.......................................................................................................................................4 Impact on Exports:......................................................................................................................4 2018-2019 Adjustments:................................................................................................................... 4 Context:.......................................................................................................................................4 Impact on Exports:......................................................................................................................4 Effects on Major Export Products..................................................................................................... 4 Short-Term:................................................................................................................................. 4 Long-Term:................................................................................................................................. 4 Jute and Jute Goods:..........................................................................................................................5 Short-Term:................................................................................................................................. 5 Long-Term:................................................................................................................................. 5 Leather Products................................................................................................................................5 Short-Term:................................................................................................................................. 5 Long-Term:................................................................................................................................. 5 3 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. 1 Page 341 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Frozen Food (Shrimp):...................................................................................................................... 5 Short-Term:................................................................................................................................. 5 Long-Term:................................................................................................................................. 5 1990 to 2000...................................................................................................................................... 5 Context:.......................................................................................................................................5 Rationale:.................................................................................................................................... 6 Impact:........................................................................................................................................ 6 1996 Devaluation:............................................................................................................................. 6 Context:.......................................................................................................................................6 Rationale:.................................................................................................................................... 6 Impact:........................................................................................................................................ 6 2000 to 2010...................................................................................................................................... 6 2001 Devaluation:............................................................................................................................. 6 Context:.......................................................................................................................................6 Rationale:.................................................................................................................................... 6 Impact:........................................................................................................................................ 6 2003 Devaluation:............................................................................................................................. 6 Context:.......................................................................................................................................6 Rationale:.................................................................................................................................... 6 Impact:........................................................................................................................................ 7 2009 Devaluation:............................................................................................................................. 7 Context:.......................................................................................................................................7 Rationale:.................................................................................................................................... 7 Impact:........................................................................................................................................ 7 2010 to 2020...................................................................................................................................... 7 2011 Devaluation:..............................................................................................................................7 Context:.......................................................................................................................................7 Rationale:.................................................................................................................................... 7 Impact:........................................................................................................................................ 7 2013 Devaluation:............................................................................................................................. 7 Context:.......................................................................................................................................7 Rationale:.................................................................................................................................... 7 Impact:........................................................................................................................................ 7 2015 Devaluation:............................................................................................................................. 8 Context:.......................................................................................................................................8 Rationale:.................................................................................................................................... 8 Impact:........................................................................................................................................ 8 2019 Devaluation:............................................................................................................................. 8 Context:.......................................................................................................................................8 Rationale:.................................................................................................................................... 8 Impact:........................................................................................................................................ 8 Impact on Major Export Products:.................................................................................................... 8 Impact:........................................................................................................................................ 8 Offsetting Factors:.......................................................................................................................9 2 Page 342 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact:........................................................................................................................................ 9 Offsetting Factors:.......................................................................................................................9 Impact:........................................................................................................................................ 9 Offsetting Factors:.......................................................................................................................9 Impact:........................................................................................................................................ 9 Offsetting Factors:.......................................................................................................................9 Impact:........................................................................................................................................ 9 Offsetting Factors:.......................................................................................................................9 Impact:........................................................................................................................................ 9 Offsetting Factors:.......................................................................................................................9 Impact:...................................................................................................................................... 10 Offsetting Factors:.....................................................................................................................10 Impact:...................................................................................................................................... 10 Offsetting Factors:.....................................................................................................................10 Impact:...................................................................................................................................... 10 Offsetting Factors:.....................................................................................................................10 Impact:...................................................................................................................................... 10 Offsetting Factors:.....................................................................................................................10 Impact:.......................................................................................................................................11 Offsetting Factors:.....................................................................................................................11 Impact:.......................................................................................................................................11 Offsetting Factors:.....................................................................................................................11 Impact:.......................................................................................................................................11 Offsetting Factors:.....................................................................................................................11 Impact:.......................................................................................................................................11 Offsetting Factors:.....................................................................................................................11 Impact:.......................................................................................................................................11 Offsetting Factors:.....................................................................................................................11 Impact:...................................................................................................................................... 12 Offsetting Factors:.....................................................................................................................12 Impact:...................................................................................................................................... 12 Offsetting Factors:.....................................................................................................................12 Impact:...................................................................................................................................... 12 Offsetting Factors:.....................................................................................................................12 Leather and Leather Products:.........................................................................................................12 Impact:...................................................................................................................................... 12 Offsetting Factors:.....................................................................................................................13 Impact:...................................................................................................................................... 13 Offsetting Factors:.....................................................................................................................13 Impact:...................................................................................................................................... 13 Offsetting Factors:.....................................................................................................................13 Impact:...................................................................................................................................... 13 Offsetting Factors:.....................................................................................................................13 Impact:...................................................................................................................................... 13 3 Page 343 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Offsetting Factors:.....................................................................................................................13 Impact:...................................................................................................................................... 13 Offsetting Factors:.....................................................................................................................14 Impact:...................................................................................................................................... 14 Offsetting Factors:.....................................................................................................................14 Impact:...................................................................................................................................... 14 Offsetting Factors:.....................................................................................................................14 Impact:...................................................................................................................................... 14 Offsetting Factors:.....................................................................................................................14 Impact:...................................................................................................................................... 14 Offsetting Factors:.....................................................................................................................15 Impact:...................................................................................................................................... 15 Offsetting Factors:.....................................................................................................................15 Impact:...................................................................................................................................... 15 Offsetting Factors:.....................................................................................................................15 Impact:...................................................................................................................................... 15 Offsetting Factors:.....................................................................................................................15 Impact:...................................................................................................................................... 15 Offsetting Factors:.....................................................................................................................15 Impact:...................................................................................................................................... 16 Offsetting Factors:.....................................................................................................................16 Impact:...................................................................................................................................... 16 Offsetting Factors:.....................................................................................................................16 Impact:...................................................................................................................................... 16 Offsetting Factors:.....................................................................................................................16 Impact:...................................................................................................................................... 16 Offsetting Factors:.....................................................................................................................16 Reasons for Exchange Rate Fluctuations:....................................................................................... 17 Historical Instances of Currency Devaluation:................................................................................17 Background:.................................................................................................................................... 17 Early Years: Post-Independence (1971-1980s)............................................................................... 17 Initial Challenges:..................................................................................................................... 17 First Major Devaluation (1975):............................................................................................... 17 Results and Impact:......................................................................................................................... 17 Export Growth:......................................................................................................................... 17 Inflation:....................................................................................................................................17 Structural Adjustments and Economic Reforms (1980s-1990s)..................................................... 17 Structural Adjustment Programs (SAPs):................................................................................. 17 Devaluations of the 1980s:........................................................................................................17 Impact on RMG Sector:...................................................................................................................18 Rapid Growth:...........................................................................................................................18 Investment:................................................................................................................................18 The Asian Financial Crisis and Its Aftermath (Late 1990s-2000s).................................................18 Asian Financial Crisis (1997-1998):.........................................................................................18 4 Page 344 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Post-Crisis Adjustments:................................................................................................................. 18 Stabilization Efforts:................................................................................................................. 18 Inflation Control:...................................................................................................................... 18 Global Economic Slowdowns:..................................................................................................18 Focus on Diversification:..........................................................................................................18 Current Trends and Challenges:...................................................................................................... 18 Sustained Export Growth:.........................................................................................................18 Economic Resilience:................................................................................................................19 Long-Term Effects of Devaluation..................................................................................................19 Export Competitiveness:...........................................................................................................19 Balance of Payments:................................................................................................................19 Economic Stability:...................................................................................................................19 Policy Implications:.................................................................................................................. 19 Impact on Export Performance:.......................................................................................................19 Multidimensional Effects of Currency Devaluation:.......................................................................19 Potential Benefits of Currency Devaluation:...................................................................................19 Increased Export Volumes:..............................................................................................................19 Competitive Pricing:................................................................................................................. 19 Market Expansion:.................................................................................................................... 20 Higher Export Revenue:.................................................................................................................. 20 Revenue Growth:...................................................................................................................... 20 Foreign Exchange Earnings:..................................................................................................... 20 Challenges and Negative Consequences......................................................................................... 20 Higher Production Costs:................................................................................................................ 20 Increased Import Costs:............................................................................................................ 20 Cost Management:.................................................................................................................... 20 Domestic Inflation:................................................................................................................... 20 Wage Pressures:........................................................................................................................ 20 Sector-Specific Analysis:................................................................................................................ 20 Ready-Made Garments (RMG) Sector:...........................................................................................20 Pre-Devaluation Performance:..................................................................................................20 Post-Devaluation Impact:..........................................................................................................21 Frozen Fish Industry:.......................................................................................................................21 Pre-Devaluation Performance:..................................................................................................21 Post-Devaluation Impact:..........................................................................................................21 Pharmaceutical Sector:.................................................................................................................... 21 Pre-Devaluation Performance:..................................................................................................21 Post-Devaluation Impact:..........................................................................................................21 Jute Products Industry:.................................................................................................................... 21 Pre-Devaluation Performance:..................................................................................................21 Post-Devaluation Impact:..........................................................................................................21 Comparative Analysis of Pre- and Post-Devaluation Periods:........................................................21 Economic Indicators:.......................................................................................................................21 Export Volume and Revenue:................................................................................................... 21 5 Page 345 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Trade Balance:.......................................................................................................................... 22 Sectoral Performance:..................................................................................................................... 22 Growth Rates:........................................................................................................................... 22 Market Share:............................................................................................................................22 Inflation and Cost Analysis:............................................................................................................ 22 Inflation Rates:..........................................................................................................................22 Cost Structures:.........................................................................................................................22 Comparative Analysis of Export Performance:...............................................................................22 Changes in Export Volume and Value:............................................................................................22 Ready-Made Garments (RMG):...................................................................................................... 22 Volume:............................................................................................................................................22 1991 Devaluation:.....................................................................................................................22 2001 Devaluation:.....................................................................................................................23 2013 Devaluation:.....................................................................................................................23 Value:...............................................................................................................................................23 1991 Devaluation:.....................................................................................................................23 2001 Devaluation:.....................................................................................................................23 2013 Devaluation:.....................................................................................................................23 Jute and Jute Goods:........................................................................................................................23 1991 Devaluation:.....................................................................................................................23 2009 Devaluation:.....................................................................................................................23 2015 Devaluation:.....................................................................................................................23 1991 Devaluation:.....................................................................................................................23 2009 Devaluation:.....................................................................................................................23 2015 Devaluation:.....................................................................................................................24 Leather and Leather Products:.........................................................................................................24 1996 Devaluation:.....................................................................................................................24 2003 Devaluation:.....................................................................................................................24 2019 Devaluation:.....................................................................................................................24 1996 Devaluation:.....................................................................................................................24 2003 Devaluation:.....................................................................................................................24 2019 Devaluation:.....................................................................................................................24 Frozen Food (Shrimp):.................................................................................................................... 24 2001 Devaluation:.....................................................................................................................24 2013 Devaluation:.....................................................................................................................24 2019 Devaluation:.....................................................................................................................24 2001 Devaluation:.....................................................................................................................25 2013 Devaluation:.....................................................................................................................25 2019 Devaluation:.....................................................................................................................25 Comparative Analysis Across Sectors.............................................................................................25 RMG Sector:............................................................................................................................. 25 Jute and Jute Goods:................................................................................................................. 25 Leather and Leather Products:.................................................................................................. 25 Frozen Food (Shrimp):..............................................................................................................25 6 Page 346 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Share Analysis:................................................................................................................... 25 Pre-Devaluation Market Share:.................................................................................................25 Post-Devaluation Market Share:......................................................................................................26 1991 Devaluation:.....................................................................................................................26 2001 Devaluation:.....................................................................................................................26 2013 Devaluation:.....................................................................................................................26 Competitive Landscape:.................................................................................................................. 26 Pre-Devaluation Market Share:.................................................................................................26 1991 Devaluation:.....................................................................................................................26 2009 Devaluation:.....................................................................................................................26 2015 Devaluation:.....................................................................................................................26 Factors:......................................................................................................................................26 Pre-Devaluation Market Share:.................................................................................................26 1996 Devaluation:.....................................................................................................................27 2003 Devaluation:.....................................................................................................................27 2019 Devaluation:.....................................................................................................................27 Pre-Devaluation Market Share:.................................................................................................27 2001 Devaluation:.....................................................................................................................27 2013 Devaluation:.....................................................................................................................27 2019 Devaluation:.....................................................................................................................27 Summary:........................................................................................................................................ 27 Market Share Gains:................................................................................................................. 27 Sector Variations:...................................................................................................................... 28 Other Influences:.......................................................................................................................28 Policy Focus:.............................................................................................................................28 Strategic Interventions:............................................................................................................. 28 Price Advantage:.......................................................................................................................28 Volume Increase:.......................................................................................................................28 Competitive Pricing:................................................................................................................. 28 Sustainability Appeal:...............................................................................................................28 Cost Efficiency:.........................................................................................................................28 Market Penetration:...................................................................................................................29 Price Competitiveness:..............................................................................................................29 Market Dynamics:.....................................................................................................................29 Erosion of Competitive Advantage:................................................................................................ 29 Rising Costs of Imported Inputs:.....................................................................................................29 Production Costs:...................................................................................................................... 29 Pass-Through Effects:...............................................................................................................29 Domestic Inflation:................................................................................................................... 29 Export Prices:............................................................................................................................29 Supply Chain Disruptions:.............................................................................................................. 29 Input Availability:..................................................................................................................... 29 Quality Concerns:..................................................................................................................... 30 Demand Fluctuations:............................................................................................................... 30 7 Page 347 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Currency Fluctuations:..............................................................................................................30 Strategies to Sustain Price Competitiveness:.................................................................................. 30 Bangladesh can adopt several strategies:........................................................................................ 30 Diversifying Export Markets:..........................................................................................................30 Improving Product Quality:.............................................................................................................30 Reducing Dependence on Imported Inputs:.................................................................................... 30 Maintaining Macroeconomic Stability:...........................................................................................30 Enhancing Export Infrastructure:.................................................................................................... 30 Case Studies of Key Products:........................................................................................................ 31 1991 Devaluation:........................................................................................................................... 31 Context:.....................................................................................................................................31 Impact on RMG Exports:................................................................................................................ 31 Export Volume:......................................................................................................................... 31 Market Expansion:.................................................................................................................... 31 Revenue Growth:...................................................................................................................... 31 1996 Devaluation:........................................................................................................................... 31 Sustained Growth:.....................................................................................................................31 Investment in Capacity:............................................................................................................ 31 2009 Devaluation:........................................................................................................................... 31 Context:.....................................................................................................................................32 Resilience Amid Global Recession:..........................................................................................32 Market Stability:....................................................................................................................... 32 2013 Devaluation.............................................................................................................................32 Context:.....................................................................................................................................32 Regional Competition:.............................................................................................................. 32 Export Diversification:..............................................................................................................32 Overall Trends and Strategic Insights..............................................................................................32 Volume and Value Trends:...............................................................................................................32 Export Volumes:........................................................................................................................32 Export Values:...........................................................................................................................32 Strategic Insights:............................................................................................................................ 32 Price Sensitivity:....................................................................................................................... 32 Capacity Building:.................................................................................................................... 33 Market Diversification:.............................................................................................................33 Policy Support:..........................................................................................................................33 Context:.....................................................................................................................................33 Impact on Jute and Jute Goods:.......................................................................................................33 Export Volume:......................................................................................................................... 33 Market Demand:....................................................................................................................... 33 Revenue Growth:...................................................................................................................... 33 Employment:.............................................................................................................................33 Context:.....................................................................................................................................34 Sustained Competitiveness:...................................................................................................... 34 Export Diversification:..............................................................................................................34 8 Page 348 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Penetration:...................................................................................................................34 Investment in Quality:...............................................................................................................34 Other Devaluations and Long-Term Trends:...................................................................................34 2001 and 2003 Devaluations:.......................................................................................................... 34 Challenges and Strategic Insights:...................................................................................................34 Challenges:...................................................................................................................................... 34 Global Demand Fluctuations:................................................................................................... 34 Environmental and Labor Standards:........................................................................................35 Market Diversification:.............................................................................................................35 Product Innovation:...................................................................................................................35 Sustainable Practices:................................................................................................................35 Policy Support:..........................................................................................................................35 Impact of Devaluation on Shrimp Exports:.....................................................................................35 Context:.....................................................................................................................................35 Impact on Shrimp Exports:..............................................................................................................35 Increased Export Volumes:....................................................................................................... 35 Revenue Growth:...................................................................................................................... 35 Market Expansion:.................................................................................................................... 36 Context:.....................................................................................................................................36 Export Resilience:.....................................................................................................................36 Revenue Stability:.....................................................................................................................36 Quality and Compliance:.......................................................................................................... 36 Global Market Conditions:.............................................................................................................. 36 Price Fluctuations:........................................................................................................................... 36 Volatility:...................................................................................................................................36 Impact on Revenue:.................................................................................................................. 36 Non-Tariff Barriers:.................................................................................................................. 36 Tariff Preferences:.....................................................................................................................37 Market Diversification:.............................................................................................................37 Product Diversification:............................................................................................................ 37 Sustainability and Quality:.............................................................................................................. 37 Sustainable Practices:................................................................................................................37 Quality Assurance:....................................................................................................................37 Policy Interventions:................................................................................................................. 37 Training and Capacity Building:...............................................................................................37 Summary of Findings:..................................................................................................................... 37 Overall Positive Impact:.................................................................................................................. 37 Sectoral Variations:..........................................................................................................................38 Ready-Made Garments (RMG):............................................................................................... 38 Jute and Jute Goods:................................................................................................................. 38 Leather and Leather Products:.................................................................................................. 38 Frozen Food (Shrimp):..............................................................................................................38 Time Period Variations:.............................................................................................................38 Influence of Internal and External Factors:..................................................................................... 38 9 Page 349 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Strategic and Policy Implications:...................................................................................................39 Broader Economic Context:............................................................................................................ 39 Supporting Export Competitiveness:...............................................................................................39 Managing Inflation:......................................................................................................................... 39 Monetary Policy:.......................................................................................................................39 Fiscal Discipline:...................................................................................................................... 39 Mitigating Rising Import Costs:......................................................................................................39 Diversifying Import Sources:....................................................................................................39 Promoting Local Production:....................................................................................................39 Enhancing Export-Oriented Infrastructure:.....................................................................................40 Logistics and Transportation:....................................................................................................40 Industrial Zones and Export Processing Zones:........................................................................40 Strengthening Trade Policies:..........................................................................................................40 Trade Agreements:....................................................................................................................40 Export Incentives:..................................................................................................................... 40 Encouraging Innovation and Quality Improvement:.......................................................................40 Research and Development (R&D):......................................................................................... 40 Quality Standards and Certifications:....................................................................................... 40 Providing Training and Capacity Building:.....................................................................................40 Skills Development:..................................................................................................................40 Entrepreneurship Support:........................................................................................................ 41 Recommendations for Future Research:......................................................................................... 41 Long-Term Impacts of Devaluation:............................................................................................... 41 Sustained Growth:.....................................................................................................................41 Product Diversification:............................................................................................................ 41 Market Penetration:...................................................................................................................41 Economic Stability:......................................................................................................................... 41 Inflationary Pressures:.............................................................................................................. 41 Production Costs:...................................................................................................................... 41 Foreign Direct Investment (FDI):............................................................................................. 41 Domestic Investment:............................................................................................................... 41 Interest Rates:............................................................................................................................42 Money Supply Management:....................................................................................................42 Government Spending:............................................................................................................. 42 Taxation Policies:......................................................................................................................42 Trade Agreements:....................................................................................................................42 Export Incentives:..................................................................................................................... 42 Shifts in Trade Patterns:............................................................................................................42 Trade Barriers:.......................................................................................................................... 42 Price Fluctuations:.................................................................................................................... 42 Supply Chain Disruptions:........................................................................................................42 Economic Crises:.............................................................................................................................43 Financial Crises:........................................................................................................................43 Pandemics and Natural Disasters:.............................................................................................43 10 Page 350 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sector-Specific Impacts of Devaluation:.........................................................................................43 Global Market Trends:.............................................................................................................. 43 Compliance Costs:.................................................................................................................... 43 Demand Fluctuations:............................................................................................................... 43 Technological Advancements:.................................................................................................. 43 Environmental Regulations:......................................................................................................43 Market Access:..........................................................................................................................43 Health and Safety Standards:.................................................................................................... 43 Global Price Trends:................................................................................................................. 44 11 Page 351 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation Instances and Export Performance: The research study titled "Devaluation of Currency and Export Performance in Bangladesh" aims to understand the impact of currency devaluation on the country's export performance, focusing on major export products. This section delves into historical instances of currency devaluation in Bangladesh from 1990 to 2020 and examines their effects on the export of ready-made garments (RMG), jute and jute goods, leather products, and frozen food (shrimp). Historical Instances of Currency Devaluation (1990-2020): 1990s: Early Devaluation Period: 1991 Devaluation: Context: In 1991, Bangladesh devalued its currency by approximately 15% as part of a broader economic reform program supported by the International Monetary Fund (IMF). Impact on Exports: This devaluation aimed to correct the trade imbalance and boost export competitiveness. The immediate effect was a noticeable increase in the volume of RMG exports, which benefited from lower export prices in foreign markets. Mid-1990s Adjustments: Context: Throughout the mid-1990s, the Bangladeshi Taka (BDT) underwent several smaller devaluations to adjust to market conditions and maintain export competitiveness. Impact on Exports: These adjustments helped sustain the growth of the RMG sector, which continued to see robust demand in international markets. Additionally, jute and jute goods experienced a resurgence, leveraging the price advantage created by the devaluation. 2000s: Period of Significant Devaluation 2000-2001 Devaluation: Context: A series of devaluations occurred between 2000 and 2001, cumulatively amounting to around 20%. These measures were taken to address the rising trade deficit and declining foreign exchange reserves. Impact on Exports: The devaluations had a positive impact on export performance. The RMG sector, in particular, saw substantial growth, as did leather products and frozen shrimp exports. The devaluation made these products more competitively priced in global markets, driving up demand. 3 Page 352 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) 2008 Financial Crisis: Context: During the global financial crisis of 2008, the BDT was devalued by about 10% to counteract the adverse effects on export demand and maintain economic stability. Impact on Exports: The devaluation helped mitigate the impact of the global downturn on Bangladesh's export sectors. RMG exports remained resilient, and the leather and jute sectors also managed to sustain their export levels due to the competitive pricing advantage. 2010s: Modern Devaluation Trends 2011-2012 Devaluation: Context: Between 2011 and 2012, the BDT experienced a devaluation of around 15% due to rising import costs and a growing trade deficit. Impact on Exports: The immediate effect was a boost in RMG exports, as well as increased demand for jute goods and shrimp. The devaluation also encouraged diversification within the leather products sector, leading to higher export volumes. 2018-2019 Adjustments: Context: In response to economic pressures, including rising import costs and a widening current account deficit, the BDT was devalued by approximately 10% over 2018-2019. Impact on Exports: The devaluation supported export growth across all major sectors. RMG continued to dominate, but jute products, leather goods, and frozen shrimp also saw notable increases in export volumes, benefiting from the more competitive exchange rates. Effects on Major Export Products Short-Term: Each instance of devaluation resulted in a significant boost in RMG exports. The lower exchange rate made Bangladeshi garments more affordable in international markets, leading to increased demand and higher export volumes. Long-Term: Sustained devaluation periods helped establish Bangladesh as a key player in the global RMG market. The sector's growth was driven by both competitive pricing and improvements in production quality. 4 Page 353 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Jute and Jute Goods: Short-Term: Devaluations provided immediate relief to the jute industry by making jute goods more competitive internationally. This led to a resurgence in demand, especially from traditional markets in Europe and Asia. Long-Term: Over time, devaluation-induced competitiveness helped stabilize the jute sector, encouraging investment in production and diversification of jute products. Leather Products Short-Term: The leather industry benefited from devaluations through increased export volumes. Competitive pricing attracted buyers from Europe and North America, leading to higher revenue. Long-Term: The devaluations incentivized modernization and quality improvements in the leather industry, ensuring sustained growth and market expansion. Frozen Food (Shrimp): Short-Term: Devaluations made Bangladeshi shrimp more competitive, resulting in higher export volumes. The immediate price advantage attracted buyers from major markets such as the US, Japan, and the EU. Long-Term: The frozen food sector, particularly shrimp, experienced sustained growth due to continuous demand driven by competitive pricing and quality improvements. Investments in aquaculture also contributed to the sector's resilience. The historical analysis of currency devaluation in Bangladesh from 1990 to 2020 highlights its significant impact on the country's export performance. Each devaluation episode provided a competitive edge to major export sectors, leading to increased export volumes and revenue. While devaluation brought short-term gains, its long-term success depended on the ability of these sectors to maintain competitive pricing and improve product quality. The insights gained from this analysis can inform future policy decisions aimed at enhancing Bangladesh's export performance and economic stability. 1990 to 2000 Context: In May 1991, Bangladesh devalued the Taka by approximately 16% as part of its economic reforms aimed at addressing a balance of payments crisis. 5 Page 354 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Rationale: The devaluation was intended to make Bangladeshi exports more competitive in the global market by reducing their prices in foreign currency terms. Impact: This significant devaluation led to an immediate increase in export volumes, particularly in the ready-made garments (RMG) sector, which benefited from the enhanced price competitiveness. 1996 Devaluation: Context: In June 1996, the Taka was devalued by around 7% to reduce the trade deficit and promote export competitiveness. Rationale: This move was part of ongoing efforts to stabilize the economy and enhance the country's export sector. Impact: The devaluation supported export growth, with positive effects on the RMG and jute sectors, which saw increased demand due to lower prices in international markets. 2000 to 2010 2001 Devaluation: Context: In November 2001, the Taka was devalued by approximately 7% to address the trade imbalance and boost exports. Rationale: The devaluation aimed to improve the competitiveness of Bangladeshi goods in international markets. Impact: The devaluation resulted in increased export volumes, particularly in the RMG and leather goods sectors, which capitalized on the more favorable exchange rates. 2003 Devaluation: Context: In May 2003, the Taka was devalued by around 3% to stabilize the exchange rate and support export-oriented industries. Rationale: 6 Page 355 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) This relatively modest devaluation was part of broader economic measures to maintain export growth. Impact: Export sectors, including RMG and jute products, benefited from the devaluation, experiencing sustained growth in export volumes. 2009 Devaluation: Context: In January 2009, the Taka experienced another devaluation of about 4% to counterbalance the impact of the global economic recession and bolster exports. Rationale: This devaluation was crucial for maintaining export competitiveness during a period of global economic uncertainty. Impact: The devaluation helped mitigate the adverse effects of the global recession on Bangladeshi exports, particularly in the RMG and shrimp sectors. 2010 to 2020 2011 Devaluation: Context: In November 2011, the Taka was devalued by approximately 1% to help boost exports and improve the competitiveness of Bangladesh's products in international markets. Rationale: This minor devaluation was part of a strategy to sustain export growth. Impact: The devaluation supported ongoing export growth, particularly in the RMG sector, which continued to benefit from competitive pricing. 2013 Devaluation: Context: In May 2013, the Taka was devalued by around 4.7% to counteract the impact of a depreciating Indian rupee and maintain export competitiveness. Rationale: This devaluation was significant in the context of regional currency fluctuations. Impact: 7 Page 356 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The devaluation helped Bangladeshi exports remain competitive in regional markets, particularly benefiting the RMG and leather goods sectors. 2015 Devaluation: Context: In September 2015, the Taka experienced another devaluation of about 1.3% to stabilize the exchange rate following significant fluctuations in regional currencies. Rationale: This devaluation aimed to ensure the continued competitiveness of Bangladeshi exports. Impact: The devaluation supported export growth, with positive effects on the RMG, jute, and shrimp sectors, which saw increased demand due to competitive pricing. 2019 Devaluation: Context: In May 2019, the Taka was devalued by approximately 2.3% as a measure to support export-oriented industries and enhance competitiveness. Rationale: This devaluation was part of broader economic measures to sustain export growth. Impact: The devaluation helped maintain export momentum in key sectors, including RMG, leather goods, and frozen shrimp, by making them more competitively priced in international markets. Throughout the period from 1990 to 2020, Bangladesh utilized currency devaluation as a strategic tool to enhance export competitiveness and address economic challenges. Each instance of devaluation had a positive impact on export performance, particularly benefiting major sectors such as ready-made garments, jute and jute goods, leather products, and frozen food (shrimp). These devaluations helped sustain export growth and contributed to the overall economic stability of Bangladesh. Impact on Major Export Products: The RMG sector is a cornerstone of Bangladesh's export economy. Each instance of devaluation has generally improved the competitiveness of Bangladeshi garments in the global market, leading to increased export volumes. However, the benefits have sometimes been offset by rising import costs for raw materials. Impact: The significant 16% devaluation in 1991 led to a sharp increase in export volumes of RMG. The lower prices made Bangladeshi garments more attractive to international buyers, resulting in higher market penetration. 8 Page 357 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Offsetting Factors: The devaluation also increased the cost of imported raw materials such as fabrics and accessories, squeezing profit margins for garment manufacturers. Impact: The 7% devaluation in 1996 further boosted the competitiveness of the RMG sector. Export volumes increased as international buyers took advantage of lower prices. Offsetting Factors: Similar to the 1991 devaluation, the cost of imported inputs rose, which slightly mitigated the overall benefits of the devaluation. Impact: The 7% devaluation in 2001 continued to support the growth of the RMG sector by enhancing price competitiveness. This period saw sustained export growth in garments. Offsetting Factors: Rising costs of imported raw materials continued to be a challenge, though the overall positive impact on export volumes was significant. Impact: The 3% devaluation in 2003 had a modest yet positive effect on the RMG sector, maintaining its competitive edge in global markets. Offsetting Factors: The increased cost of imports was less severe due to the smaller devaluation, allowing manufacturers to better manage costs. Impact: The 4% devaluation in 2009 helped the RMG sector weather the global economic recession by keeping export prices competitive. This was crucial for maintaining export volumes during a period of global economic uncertainty. Offsetting Factors: The increased cost of imported raw materials was a concern, but the overall benefits in terms of export volume outweighed the negative impacts. Impact: The 1% devaluation in 2011 had a minor positive impact on the RMG sector, helping to sustain export growth. Offsetting Factors: 9 Page 358 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The rise in import costs was minimal due to the small devaluation, allowing manufacturers to largely benefit from the improved competitiveness. Impact: The 4.7% devaluation in 2013 significantly boosted the competitiveness of Bangladeshi garments, especially in light of regional currency fluctuations. Offsetting Factors: Higher costs for imported inputs continued to be a challenge, but the overall positive impact on export volumes was substantial. Impact: The 1.3% devaluation in 2015 helped stabilize the exchange rate and maintain the competitiveness of the RMG sector. Offsetting Factors: The slight increase in import costs was manageable, allowing the sector to benefit from the devaluation. Impact: The 2.3% devaluation in 2019 supported the RMG sector by enhancing price competitiveness and sustaining export growth. Offsetting Factors: While import costs for raw materials increased, the sector managed to leverage the devaluation to maintain export momentum. Overall, currency devaluation has generally benefited the RMG sector by enhancing its competitiveness in global markets and leading to increased export volumes. However, the positive impacts have often been tempered by the rising costs of imported raw materials. Despite this, the net effect of devaluations has been favorable for the RMG sector, contributing significantly to Bangladesh's export performance and economic stability. Devaluation has had a positive impact on the export of jute and jute goods, as the lower currency value makes these products more price-competitive internationally. However, fluctuations in global demand for jute products have also played a significant role in export performance. Impact: The significant 16% devaluation in 1991 made Bangladeshi jute and jute goods more affordable in international markets. This price advantage led to increased demand and higher export volumes. Offsetting Factors: Global demand for jute products was volatile during this period, which affected the consistency of export growth. Additionally, the increased cost of imported inputs for jute processing partially offset the benefits. 10 Page 359 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact: The 7% devaluation in 1996 further enhanced the price competitiveness of jute and jute goods. Export volumes saw an uptick as foreign buyers found Bangladeshi jute products more attractive. Offsetting Factors: Fluctuations in global demand continued to impact export performance. While the devaluation helped, inconsistent demand from key markets like Europe and North America posed challenges. Impact: The 7% devaluation in 2001 supported the export of jute and jute goods by lowering prices and boosting competitiveness. Exporters were able to capture more market share due to the favorable exchange rate. Offsetting Factors: As with previous devaluations, global demand fluctuations played a significant role. The increased cost of imported machinery and chemicals for jute processing also affected profitability. Impact: The 3% devaluation in 2003 had a modest positive impact on jute exports. While the price competitiveness improved, the smaller devaluation meant that the cost-benefit was less pronounced compared to previous instances. Offsetting Factors: Global demand variations continued to be a factor, and the relatively minor devaluation did not significantly alter the export landscape. Impact: The 4% devaluation in 2009 helped maintain the competitiveness of jute products during the global economic recession. This was crucial for sustaining export volumes when global demand was generally weak. Offsetting Factors: The recession led to reduced demand for non-essential goods, including jute products, which moderated the positive effects of the devaluation. Higher costs of imported inputs also remained an issue. Impact: The 1% devaluation in 2011 had a minor but positive impact on the export of jute and jute goods. It helped maintain price competitiveness in a stable global market. 11 Page 360 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Offsetting Factors: The small scale of the devaluation meant that its impact was limited. Global demand conditions played a more significant role in determining export volumes. Impact: The 4.7% devaluation in 2013 significantly boosted the competitiveness of Bangladeshi jute products. Export volumes increased as foreign buyers took advantage of lower prices. Offsetting Factors: Despite the devaluation, global demand for jute products was not uniform, affecting overall export performance. Additionally, increased costs of imported inputs for processing jute continued to be a concern. Impact: The 1.3% devaluation in 2015 helped stabilize the export prices of jute products, ensuring that Bangladeshi jute remained competitive in international markets. Offsetting Factors: The minor devaluation had a limited impact on overall export performance, with global demand fluctuations playing a more critical role. Impact: The 2.3% devaluation in 2019 supported the export of jute and jute goods by enhancing their price competitiveness. This helped to sustain export growth in a competitive global market. Offsetting Factors: As with previous devaluations, global demand for jute products varied, influencing export performance. Rising costs of imported inputs for jute processing also moderated the benefits. Overall, currency devaluation has generally benefited the export of jute and jute goods by enhancing their price competitiveness in international markets. However, the positive impacts of devaluation have been influenced by fluctuations in global demand and the rising costs of imported inputs required for processing jute. Despite these challenges, the net effect of devaluations has been favorable for the jute sector, contributing to its role as a significant export product for Bangladesh. Leather and Leather Products: The leather industry in Bangladesh has been significantly influenced by currency devaluation. Devaluation has generally increased the competitiveness of Bangladeshi leather products in the global market, leading to higher export volumes. However, the industry faces challenges related to compliance with international environmental and labor standards, which have moderated export growth. Impact: The 16% devaluation in 1991 made Bangladeshi leather products more price-competitive internationally. Export volumes increased as buyers took advantage of the lower prices. 12 Page 361 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Offsetting Factors: The industry struggled with outdated technology and low compliance with environmental standards, which affected the quality and marketability of leather products. Impact: The 7% devaluation in 1996 further boosted the competitiveness of leather exports. Exporters could expand their market share in key markets like Europe and North America. Offsetting Factors: Environmental and labor compliance issues persisted, limiting the industry's ability to fully capitalize on the devaluation. Many importers were hesitant to source from suppliers with poor compliance records. Impact: The 7% devaluation in 2001 supported the leather industry's export growth by making products more affordable in international markets. Export volumes saw a notable increase. Offsetting Factors: Compliance with international standards remained a significant challenge. Buyers increasingly demanded environmentally sustainable and ethically produced leather goods, which many Bangladeshi producers struggled to meet. Impact: The 3% devaluation in 2003 had a moderate positive impact on the leather sector. The competitive pricing helped maintain and slightly increase export volumes. Offsetting Factors: Limited improvements in compliance with environmental and labor standards continued to hinder the full potential of export growth. The industry needed substantial investment in modernizing production facilities to meet international standards. Impact: The 4% devaluation in 2009 was beneficial for the leather industry during the global economic recession. It helped maintain competitiveness and sustain export volumes when global demand was weak. Offsetting Factors: The recession led to reduced demand for luxury goods, including leather products. Additionally, compliance issues and rising costs of imported chemicals and tanning materials impacted the industry's growth. Impact: 13 Page 362 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The 1% devaluation in 2011 had a minor but positive impact on the leather industry's export performance. It helped maintain competitive pricing in stable market conditions. Offsetting Factors: The minor devaluation's impact was limited. The industry's ongoing challenges with environmental and labor compliance continued to affect its reputation and market access. Impact: The 4.7% devaluation in 2013 significantly enhanced the price competitiveness of Bangladeshi leather products. Export volumes increased as global buyers found Bangladeshi leather goods more affordable. Offsetting Factors: Despite the devaluation, compliance with international standards remained a barrier to growth. Many buyers required certifications and assurances that Bangladeshi leather products were produced sustainably and ethically. Impact: The 1.3% devaluation in 2015 helped stabilize the export prices of leather products, ensuring continued competitiveness in the global market. Offsetting Factors: The impact of the minor devaluation was limited by persistent compliance challenges. The industry needed to address these issues to fully leverage the benefits of currency devaluation. Impact: The 2.3% devaluation in 2019 supported the leather industry's export growth by enhancing price competitiveness. Export volumes saw a boost as international buyers responded to the favorable pricing. Offsetting Factors: As with previous devaluations, the industry's compliance with environmental and labor standards continued to be a significant issue. Investments in modernizing production and improving compliance were necessary to sustain long-term growth. Overall, the leather industry in Bangladesh has benefited from currency devaluation through increased price competitiveness and higher export volumes. However, the positive impacts of devaluation have been tempered by ongoing challenges related to compliance with international environmental and labor standards. To fully capitalize on the benefits of devaluation, the industry needs to invest in modernizing production processes, improving compliance, and meeting the growing demand for sustainably and ethically produced leather goods. Addressing these issues is crucial for maintaining and enhancing the industry's export performance in the long term. The shrimp export sector in Bangladesh has experienced varied impacts from currency devaluation. While devaluation has generally made Bangladeshi shrimp more price-competitive in international markets, the sector has also faced challenges from global price fluctuations, non-tariff barriers, and environmental issues. 14 Page 363 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact: The 16% devaluation in 1991 significantly improved the price competitiveness of Bangladeshi shrimp, leading to a boost in export volumes. Exporters were able to offer more attractive prices to buyers in key markets like the United States, Japan, and the European Union. Offsetting Factors: The benefits were partly offset by rising costs of imported inputs such as feed and technology. Additionally, the sector faced challenges from stringent quality and safety standards imposed by importing countries. Impact: The 7% devaluation in 1996 continued to enhance the competitiveness of Bangladeshi shrimp exports. Export volumes increased as international buyers found Bangladeshi shrimp more affordable. Offsetting Factors: Non-tariff barriers, such as strict sanitary and phytosanitary measures in the EU and the US, created additional hurdles for exporters. Compliance with these standards required significant investment and capacity building. Impact: The 7% devaluation in 2001 supported the shrimp sector by making exports more price-competitive. Exporters capitalized on the favorable exchange rate to expand their market share. Offsetting Factors: Global price fluctuations in shrimp, driven by changes in supply and demand dynamics, impacted the sector. Additionally, non-tariff barriers and competition from other shrimp-producing countries remained significant challenges. Impact: The 3% devaluation in 2003 provided a moderate boost to the shrimp sector. Exporters benefited from improved price competitiveness, which helped maintain export volumes. Offsetting Factors: The modest devaluation's impact was limited by ongoing challenges related to compliance with international standards and the fluctuating global prices of shrimp. Impact: The 4% devaluation in 2009 was beneficial for the shrimp sector during the global economic recession. The competitive pricing helped sustain export volumes during a period of reduced global demand. 15 Page 364 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Offsetting Factors: The recession led to lower global demand for luxury food items, including shrimp. Additionally, compliance with stringent international standards continued to pose challenges for the sector. Impact: The 1% devaluation in 2011 had a minor but positive impact on the shrimp sector. It helped maintain competitive pricing in relatively stable market conditions. Offsetting Factors: The sector continued to face challenges from non-tariff barriers, such as quality and safety standards, which required ongoing investment in compliance. Impact: The 4.7% devaluation in 2013 significantly enhanced the price competitiveness of Bangladeshi shrimp. Export volumes increased as global buyers found Bangladeshi shrimp more affordable. Offsetting Factors: Global price fluctuations in shrimp, driven by changes in supply and demand, impacted the sector. Additionally, compliance with international standards and competition from other shrimp-producing countries remained significant challenges. Impact: The 1.3% devaluation in 2015 helped stabilize export prices of shrimp, ensuring continued competitiveness in the global market. Offsetting Factors: The impact of the minor devaluation was limited by persistent non-tariff barriers and global price fluctuations. The sector needed to address these challenges to fully leverage the benefits of devaluation. Impact: The 2.3% devaluation in 2019 supported the shrimp sector's export growth by enhancing price competitiveness. Export volumes saw a boost as international buyers responded to the favorable pricing. Offsetting Factors: As with previous devaluations, the sector's challenges with compliance and global price fluctuations continued to affect its growth. Investments in improving quality and meeting international standards were necessary for sustained growth. The shrimp export sector in Bangladesh has benefited from currency devaluation through increased price competitiveness and higher export volumes. However, the positive impacts of devaluation have been moderated by challenges such as global price fluctuations, non-tariff barriers, and compliance 16 Page 365 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) with international standards. To fully capitalize on the benefits of devaluation, the sector needs to invest in improving quality, meeting international standards, and diversifying export markets. Addressing these issues is crucial for maintaining and enhancing the shrimp sector's export performance in the long term. Reasons for Exchange Rate Fluctuations: Historical Instances of Currency Devaluation: Background: Bangladesh has faced multiple episodes of currency devaluation since its independence in 1971. These devaluations were often implemented to address trade imbalances, improve the balance of payments, and enhance export competitiveness. By analyzing these historical instances, we can gain valuable insights into the long-term effects of currency devaluation on Bangladesh's export sector and overall economic health. Early Years: Post-Independence (1971-1980s) Initial Challenges: After gaining independence, Bangladesh struggled with economic instability, high inflation, and a trade deficit. The new government adopted a managed float exchange rate system, adjusting the value of the Bangladeshi Taka (BDT) periodically to stabilize the economy. First Major Devaluation (1975): In 1975, the BDT was significantly devalued to address severe trade imbalances and foreign exchange shortages. This devaluation aimed to make Bangladeshi exports more competitive, stimulate economic growth, and attract foreign aid and investment. Results and Impact: Export Growth: The devaluation initially boosted export volumes, particularly in the jute and tea industries. However, the positive effects were short-lived due to political instability and inadequate infrastructure. , Inflation: The devaluation led to higher import costs, contributing to inflation and reducing the purchasing power of the population. Structural Adjustments and Economic Reforms (1980s-1990s) Structural Adjustment Programs (SAPs): During the 1980s and 1990s, Bangladesh implemented Structural Adjustment Programs (SAPs) prescribed by the International Monetary Fund (IMF) and the World Bank. These programs included periodic devaluations of the BDT to correct trade imbalances and promote export-led growth. Devaluations of the 1980s: 17 Page 366 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Several devaluations occurred in this period, with the BDT being adjusted to reflect market realities and global economic conditions. These devaluations aimed to enhance export competitiveness and support the growing ready-made garments (RMG) sector. , Impact on RMG Sector: Rapid Growth: The RMG sector benefited significantly from these devaluations, as lower currency values made Bangladeshi garments cheaper in international markets. This period marked the beginning of Bangladesh's emergence as a global leader in the RMG industry. Investment: Devaluation attracted foreign investment in the RMG sector, leading to increased production capacity and job creation. The Asian Financial Crisis and Its Aftermath (Late 1990s-2000s) Asian Financial Crisis (1997-1998): The Asian financial crisis prompted another round of devaluations. The BDT was devalued to mitigate the adverse effects of the regional economic turmoil and maintain export competitiveness. Post-Crisis Adjustments: Stabilization Efforts: The government and central bank took measures to stabilize the economy, including further devaluations to support the export sector. The focus was on maintaining the growth momentum of the RMG sector while diversifying exports to include pharmaceuticals and frozen fish. Inflation Control: Efforts were made to control inflation through monetary policy adjustments and fiscal measures, balancing the benefits of devaluation with its inflationary pressures. Recent Devaluations (2010s-Present) Global Economic Slowdowns: The global economic slowdowns in the 2010s, including the impact of the global financial crisis and the COVID-19 pandemic, led to additional devaluations of the BDT. These were aimed at cushioning the export sector from global demand shocks and maintaining competitive pricing. Focus on Diversification: Recent devaluations have also supported the diversification of Bangladesh's export base, encouraging growth in sectors such as pharmaceuticals, IT services, and jute products alongside the dominant RMG sector. Current Trends and Challenges: Sustained Export Growth: 18 Page 367 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The export sector has continued to grow, with RMG exports reaching new heights. However, challenges such as rising production costs and global competition remain. Economic Resilience: The resilience of the Bangladeshi economy in the face of global economic challenges highlights the effectiveness of strategic devaluations in maintaining export competitiveness. Long-Term Effects of Devaluation Export Competitiveness: Historical devaluations have generally succeeded in enhancing the competitiveness of Bangladeshi exports. The RMG sector, in particular, has thrived due to favorable currency values, contributing significantly to GDP growth and employment. Balance of Payments: Devaluations have helped improve the balance of payments by increasing export earnings and reducing trade deficits. However, the benefits have been offset by higher import costs and inflationary pressures. Economic Stability: While devaluations have supported export growth, managing the accompanying inflation and ensuring economic stability remain critical challenges for policymakers. Sustained efforts are needed to balance the positive effects of devaluation with its potential drawbacks. Policy Implications: The long-term success of devaluation policies depends on complementary measures such as infrastructure development, investment in human capital, and diversification of the export base. Effective policymaking requires a nuanced understanding of the specific needs and dynamics of the Bangladeshi economy. Examining the historical instances of currency devaluation in Bangladesh provides valuable insights into the complex relationship between devaluation and export performance. These insights are crucial for designing policies that enhance export competitiveness, support economic growth, and ensure long-term economic stability. Understanding the lessons from the past can help policymakers navigate future economic challenges and opportunities in an increasingly interconnected global economy. Impact on Export Performance: Multidimensional Effects of Currency Devaluation: The impact of currency devaluation on Bangladesh's export performance is multifaceted, encompassing both potential benefits and challenges. Understanding these effects requires a detailed analysis of how devaluation influences various export sectors and the broader economic environment. This study aims to provide a comprehensive examination of these impacts by comparing pre- and post-devaluation periods across different industries. 19 Page 368 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Potential Benefits of Currency Devaluation: Increased Export Volumes: Competitive Pricing: Currency devaluation lowers the price of Bangladeshi goods in foreign markets, making them more attractive to international buyers. This can lead to an increase in export volumes as demand for cheaper goods rises. Market Expansion: Devaluation can help Bangladesh penetrate new markets by offering competitively priced products, thus expanding its export base and reducing dependence on a limited number of trading partners. Higher Export Revenue: Revenue Growth: With increased export volumes, the overall export revenue is likely to grow, providing a boost to the national economy. This growth in revenue can contribute to higher GDP and improve the country's trade balance. Foreign Exchange Earnings: Enhanced export performance results in greater foreign exchange earnings, which are crucial for financing imports, repaying foreign debt, and building foreign reserves. Challenges and Negative Consequences Higher Production Costs: Increased Import Costs: Devaluation makes imported goods and raw materials more expensive. Since many export industries in Bangladesh rely on imported inputs (e.g., machinery, fabric, chemicals), this can lead to higher production costs, potentially offsetting the benefits of increased export volumes. Cost Management: Exporters may need to adopt cost-saving measures and improve efficiency to manage rising production costs without compromising on quality or competitiveness. Domestic Inflation: Devaluation can lead to inflation by raising the cost of imported goods and services. This inflation erodes purchasing power and can increase the cost of living for the general population, creating economic hardships. Wage Pressures: As living costs rise, workers may demand higher wages, adding to the production costs for export industries. Balancing wage increases with maintaining competitiveness becomes a critical challenge for exporters. 20 Page 369 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sector-Specific Analysis: Ready-Made Garments (RMG) Sector: Pre-Devaluation Performance: The RMG sector has been the backbone of Bangladesh's export economy, characterized by steady growth and significant contribution to employment and GDP. Post-Devaluation Impact: Devaluation has typically resulted in increased competitiveness for Bangladeshi garments in global markets. However, the sector faces challenges from rising input costs, particularly for imported fabrics and accessories. Frozen Fish Industry: Pre-Devaluation Performance: The frozen fish industry, including shrimp and seafood, has shown strong export performance due to favorable geographical conditions and established markets. Post-Devaluation Impact: Devaluation can enhance competitiveness by making Bangladeshi seafood cheaper in international markets. However, higher costs for imported feed and technology may pose challenges. Pharmaceutical Sector: Pre-Devaluation Performance: Bangladesh's pharmaceutical industry has grown steadily, driven by domestic demand and increasing exports to developing countries. Post-Devaluation Impact: The sector benefits from devaluation through increased export revenue. However, the higher cost of imported raw materials and active pharmaceutical ingredients (APIs) can affect profitability and competitiveness. Jute Products Industry: Pre-Devaluation Performance: The jute industry has a long history in Bangladesh, with jute products being a major export item. The industry has faced challenges from declining global demand and competition from synthetic alternatives. Post-Devaluation Impact: Devaluation can revive competitiveness by making jute products more affordable globally. However, the industry must address issues like modernization, quality improvement, and cost control. 21 Page 370 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Comparative Analysis of Pre- and Post-Devaluation Periods: Economic Indicators: Export Volume and Revenue: Analyzing changes in export volume and revenue before and after devaluation provides insights into the effectiveness of devaluation in boosting export performance. Trade Balance: The impact on the trade balance is a key indicator of whether devaluation has helped reduce trade deficits and improve economic stability. Sectoral Performance: Growth Rates: Comparing growth rates of different export sectors pre- and post-devaluation helps identify which industries benefit most from devaluation. Market Share: Changes in market share in global exports can indicate how devaluation affects Bangladesh's competitiveness relative to other exporting countries. Inflation and Cost Analysis: Inflation Rates: Monitoring inflation rates post-devaluation helps assess the broader economic impact and its implications for domestic stability. Cost Structures: Evaluating changes in production and input costs provides a comprehensive understanding of how devaluation affects the cost dynamics within export industries. The impact of currency devaluation on Bangladesh's export performance is a complex interplay of benefits and challenges. While devaluation can enhance export competitiveness and revenue, it also introduces higher production costs and inflationary pressures. This study aims to provide a detailed, sector-specific analysis to inform policymakers and stakeholders about the nuanced effects of devaluation, guiding effective economic strategies to sustain and improve Bangladesh's export performance. By understanding these dynamics, Bangladesh can better navigate the global economic landscape and achieve long-term economic growth and stability. Comparative Analysis of Export Performance: Changes in Export Volume and Value: The devaluation of the Bangladeshi Taka (BDT) has had varying impacts on the export volumes and values of major products such as ready-made garments (RMG), jute and jute goods, leather products, and frozen food (shrimp). This section provides a detailed comparative analysis of these changes across different sectors and time periods. 22 Page 371 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Ready-Made Garments (RMG): Volume: 1991 Devaluation: The significant devaluation of approximately 16% in 1991 resulted in a substantial increase in RMG export volumes. The sector experienced a boost as Bangladeshi garments became more price-competitive in the global market. 2001 Devaluation: The 7% devaluation in 2001 continued to support the growth of RMG exports, with volumes increasing due to the favorable exchange rate. 2013 Devaluation: The 4.7% devaluation in 2013 further enhanced export volumes as international buyers sought cheaper Bangladeshi garments. Value: 1991 Devaluation: Export values also increased significantly post-1991 devaluation, as higher volumes offset the lower prices per unit. 2001 Devaluation: The increase in export values was maintained as the sector continued to grow and capture a larger share of the global market. 2013 Devaluation: The increase in export values was more pronounced due to the significant rise in export volumes and the sector's continued expansion. Jute and Jute Goods: 1991 Devaluation: The devaluation had a positive impact on the export volumes of jute and jute goods, making them more competitive in international markets. 2009 Devaluation: The 4% devaluation in 2009 helped sustain export volumes during the global economic recession by making jute products more affordable. 2015 Devaluation: The minor devaluation of 1.3% in 2015 had a limited impact on export volumes, as global demand fluctuations also played a significant role. 1991 Devaluation: 23 Page 372 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Export values increased as the sector benefited from improved price competitiveness, although global demand fluctuations influenced overall performance. 2009 Devaluation: Export values saw a modest increase due to higher volumes, although global economic conditions moderated the overall impact. 2015 Devaluation: Export values experienced limited growth, reflecting the modest devaluation and persistent global demand fluctuations. Leather and Leather Products: 1996 Devaluation: The 7% devaluation in 1996 positively impacted the leather sector, leading to increased export volumes due to enhanced price competitiveness. 2003 Devaluation: The 3% devaluation in 2003 provided a modest boost to export volumes, maintaining the sector's growth trajectory. 2019 Devaluation: The 2.3% devaluation in 2019 supported higher export volumes, as the sector continued to benefit from competitive pricing. 1996 Devaluation: Export values increased as the sector capitalized on improved competitiveness, despite challenges related to compliance with international standards. 2003 Devaluation: Export values saw moderate growth, reflecting the sector's continued expansion and improved pricing. 2019 Devaluation: Export values increased due to higher volumes, although the sector's challenges with compliance and global market conditions moderated overall growth. Frozen Food (Shrimp): 2001 Devaluation: The 7% devaluation in 2001 boosted shrimp export volumes as prices became more competitive in international markets. 2013 Devaluation: 24 Page 373 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The 4.7% devaluation in 2013 significantly increased export volumes, as global buyers took advantage of the favorable pricing. 2019 Devaluation: The 2.3% devaluation in 2019 supported export volumes, despite ongoing challenges with non-tariff barriers and global price fluctuations. 2001 Devaluation: Export values increased as higher volumes offset the lower prices per unit, although compliance with international standards remained a challenge. 2013 Devaluation: Export values saw significant growth due to the substantial increase in volumes, reflecting the sector's ability to capture market share. 2019 Devaluation: Export values increased moderately, as the sector continued to navigate challenges related to global price fluctuations and non-tariff barriers. Comparative Analysis Across Sectors RMG Sector: The RMG sector consistently benefited from devaluation, with significant increases in both export volumes and values. This sector's growth was driven by its ability to capitalize on improved price competitiveness and capture a larger share of the global market. Jute and Jute Goods: The jute sector experienced positive impacts from devaluation, although global demand fluctuations played a significant role in determining overall performance. Leather and Leather Products: The leather sector benefited from devaluation through increased export volumes and values, although compliance with international standards remained a challenge. Frozen Food (Shrimp): The shrimp sector saw mixed results from devaluation, with increased export volumes but moderated growth in export values due to global price fluctuations and non-tariff barriers. The comparative analysis of export performance across different sectors and time periods reveals that the devaluation of the Taka generally led to increased export volumes and values for major products. However, the extent of this impact varied across sectors, influenced by factors such as global demand fluctuations, compliance with international standards, and non-tariff barriers. Understanding these sector-specific impacts is crucial for formulating effective policies and strategies to enhance export performance in Bangladesh. 25 Page 374 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Share Analysis: Pre-Devaluation Market Share: Before significant devaluations, Bangladesh's market share in the global RMG sector was already substantial due to its competitive labor costs and established production infrastructure. Post-Devaluation Market Share: 1991 Devaluation: Following the 16% devaluation, Bangladesh's market share in global RMG exports saw a notable increase. This devaluation made Bangladeshi garments significantly cheaper, leading to higher demand from international buyers. The competitive pricing allowed Bangladesh to capture a larger share of the market, particularly in the low- to mid-priced segments. 2001 Devaluation: The 7% devaluation helped maintain and slightly increase market share despite growing competition from other countries like Vietnam and India. 2013 Devaluation: The 4.7% devaluation further solidified Bangladesh’s position as one of the top RMG exporters. The country's market share increased as buyers continued to favor cost-effective sourcing options. Competitive Landscape: Challenges: Competition from countries like China, India, and Vietnam. Factors: Quality improvements, adherence to labor standards, and innovation in designs contributed to maintaining and increasing market share. Pre-Devaluation Market Share: Bangladesh has historically been a leading exporter of jute and jute products, given its natural advantage in jute cultivation. 1991 Devaluation: The devaluation made Bangladeshi jute products more competitive, leading to an increase in market share. However, global demand for jute fluctuated, affecting overall performance. 2009 Devaluation: During the global recession, the devaluation helped maintain market share by making Bangladeshi jute products more affordable. 2015 Devaluation: The minor devaluation helped sustain market share in a competitive environment, though demand fluctuations continued to play a significant role. Challenges: Synthetic substitutes and competition from India. 26 Page 375 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Factors: Environmental concerns have led to a renewed interest in jute, potentially benefiting Bangladesh. Pre-Devaluation Market Share: Bangladesh’s market share in the global leather market has been moderate, with potential for growth. 1996 Devaluation: The 7% devaluation improved competitiveness, leading to a gradual increase in market share. 2003 Devaluation: The 3% devaluation further supported growth in market share as the sector capitalized on competitive pricing. 2019 Devaluation: The 2.3% devaluation helped sustain market share, although compliance with international standards remained a key challenge. Challenges: Environmental compliance, competition from China and India. Factors: Improvements in processing standards and marketing efforts have been crucial for maintaining and growing market share. Pre-Devaluation Market Share: Bangladesh has been a significant player in the global shrimp market, particularly in exporting to the EU and the US. 2001 Devaluation: The 7% devaluation made Bangladeshi shrimp more competitive, leading to increased market share. 2013 Devaluation: The 4.7% devaluation helped Bangladesh maintain its market share despite global price fluctuations and non-tariff barriers. 2019 Devaluation: The 2.3% devaluation supported competitiveness, but non-tariff barriers in key markets continued to pose challenges. Challenges: Quality standards, disease outbreaks, and competition from countries like India and Thailand. Factors: Meeting international quality standards and improving supply chain efficiency have been critical for sustaining market share. 27 Page 376 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Summary: Market Share Gains: Bangladesh’s market share in global exports for key products generally improved following devaluations. The competitive pricing resulting from devaluations made Bangladeshi exports more attractive to international buyers. Sector Variations: The extent of market share gains varied across sectors, influenced by global demand, competition, and compliance with international standards. Other Influences: Despite the positive impact of devaluations, other economic and policy factors such as global economic conditions, trade policies, and domestic economic stability played significant roles in determining market share. Implications for Policy: Policy Focus: To sustain and enhance market share, Bangladesh needs to focus on improving product quality, adhering to international standards, and diversifying export markets. Strategic Interventions: Policies that support technological upgrades, infrastructure improvements, and market access negotiations can help mitigate the adverse effects of global competition and enhance export performance. Enhanced Competitiveness Through Devaluation: Devaluation of the Bangladeshi Taka has historically led to increased price competitiveness for Bangladeshi exports. By making the currency cheaper relative to other currencies, devaluation effectively lowers the prices of Bangladeshi goods in foreign markets, thus increasing their attractiveness to international buyers. Price Advantage: Devaluation has made Bangladeshi garments cheaper compared to those from competing countries like China, India, and Vietnam. This has been crucial in securing and expanding market share in cost-sensitive markets such as the United States and the European Union. Volume Increase: The lower prices have led to higher export volumes, as international buyers are more inclined to purchase larger quantities due to the reduced cost. Competitive Pricing: Devaluation has made jute and jute goods more affordable for international buyers, helping to maintain Bangladesh’s position as a leading exporter of these products. 28 Page 377 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sustainability Appeal: The lower prices combined with the growing global emphasis on sustainable and eco-friendly products have boosted demand for Bangladeshi jute products. Cost Efficiency: Devaluation has allowed Bangladeshi leather products to be priced more competitively in the global market, helping to increase export volumes despite competition from countries with more advanced leather industries. Market Penetration: Competitive pricing has facilitated entry into new markets and expansion within existing markets. Price Competitiveness: Devaluation has made Bangladeshi shrimp more competitive in key markets such as the EU and the US, leading to increased export volumes. Market Dynamics: While price competitiveness has improved, factors such as global price fluctuations and non-tariff barriers have also played significant roles in shaping export performance. Erosion of Competitive Advantage: Despite the initial benefits of devaluation, several factors can erode the price competitiveness of Bangladeshi exports: Rising Costs of Imported Inputs: Production Costs: Many export-oriented industries in Bangladesh rely on imported raw materials and intermediate goods. Devaluation increases the cost of these imports, which can raise overall production costs. Pass-Through Effects: If the increased costs of imported inputs are passed on to the final product prices, the competitive advantage gained through devaluation can be diminished. Domestic Inflation: Devaluation can lead to higher inflation rates as the cost of imported goods and services rises. This inflation can reduce the purchasing power of consumers and increase operational costs for businesses. Export Prices: Sustained inflation can lead to higher prices for exported goods, reducing their competitiveness over time. 29 Page 378 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Supply Chain Disruptions: Input Availability: Disruptions in the supply chain for imported inputs, exacerbated by devaluation, can lead to production delays and increased costs, affecting the timely delivery and pricing of exports. Quality Concerns: Compromises in input quality due to cost-cutting measures can affect the overall quality of exports, potentially reducing demand. Demand Fluctuations: Global economic downturns or slowdowns can reduce demand for Bangladeshi exports, even if they are competitively priced. Currency Fluctuations: Movements in the exchange rates of major trading partners can influence the relative competitiveness of Bangladeshi exports. Strategies to Sustain Price Competitiveness: To sustain and enhance the price competitiveness achieved through devaluation, Bangladesh can adopt several strategies: Diversifying Export Markets: Reducing reliance on a few key markets by exploring new regions and countries can help mitigate the risks associated with market-specific economic downturns. Improving Product Quality: Investing in quality improvements and compliance with international standards can help differentiate Bangladeshi products and justify premium pricing, even in the face of rising production costs. Reducing Dependence on Imported Inputs: Developing domestic supply chains and encouraging local production of raw materials and intermediate goods can help mitigate the impact of rising import costs. Investing in technology and innovation to improve efficiency and reduce reliance on imported inputs. Maintaining Macroeconomic Stability: Ensuring stable macroeconomic conditions, including controlling inflation and maintaining a stable political environment, can help sustain the benefits of devaluation. Implementing sound fiscal and monetary policies to manage inflationary pressures and support economic growth. 30 Page 379 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Enhancing Export Infrastructure: Improving logistical infrastructure, including ports, roads, and storage facilities, can reduce costs and enhance the efficiency of export operations. By addressing these factors and adopting strategic interventions, Bangladesh can better sustain the price competitiveness of its exports and continue to benefit from the positive impacts of currency devaluation. Case Studies of Key Products: The Ready-Made Garments (RMG) sector is a cornerstone of Bangladesh's export economy. Historical instances of currency devaluation have had significant impacts on this sector, demonstrating its responsiveness to improved price competitiveness. This case study examines specific instances of devaluation and their effects on RMG exports. 1991 Devaluation: Context: In May 1991, Bangladesh devalued the Taka by approximately 16% as part of broader economic reforms aimed at addressing a balance of payments crisis. This significant devaluation was intended to make Bangladeshi exports more competitive on the global market. Impact on RMG Exports: Export Volume: Following the 1991 devaluation, RMG exports saw substantial growth. The lower currency value made Bangladeshi garments significantly cheaper for international buyers, leading to a surge in demand. Market Expansion: The price competitiveness gained through devaluation enabled Bangladeshi RMG exporters to penetrate new markets, particularly in the United States and the European Union. The increased affordability of Bangladeshi garments appealed to cost-conscious retailers and consumers in these regions. Revenue Growth: The rise in export volumes translated into higher revenues for the RMG sector, even as the unit prices of garments fell in foreign currency terms. The volume increase more than compensated for the lower prices, resulting in overall revenue growth. 1996 Devaluation: Sustained Growth: The 1996 devaluation continued to support the growth trajectory of RMG exports. The devaluation maintained the sector's competitive edge in the global market. Investment in Capacity: 31 Page 380 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The increased demand and revenue from exports encouraged investments in expanding production capacity and upgrading manufacturing technology within the RMG sector. This investment helped sustain export growth over the long term. 2009 Devaluation: Context: In January 2009, the Taka was devalued by about 4% to counterbalance the impact of the global economic recession and bolster exports. Resilience Amid Global Recession: The devaluation helped the RMG sector maintain its competitiveness during a period of global economic uncertainty. While global demand for many goods declined, the affordability of Bangladeshi garments ensured continued demand. Market Stability: The devaluation helped stabilize RMG exports by offsetting some of the adverse effects of the global recession. This stability was crucial for sustaining employment and economic activity in Bangladesh during challenging times. 2013 Devaluation Context: In May 2013, the Taka was devalued by around 4.7% to counteract the impact of a depreciating Indian Rupee and maintain export competitiveness. Regional Competition: The devaluation ensured that Bangladeshi RMG exports remained competitive against regional competitors like India. By mitigating the effects of currency movements in neighboring countries, Bangladesh could maintain its market share. Export Diversification: The continued competitiveness of Bangladeshi garments enabled exporters to diversify their product offerings and enter niche markets, further strengthening the sector's export performance. Overall Trends and Strategic Insights Volume and Value Trends: Export Volumes: Across multiple instances of devaluation, the RMG sector has consistently responded with increased export volumes. The price competitiveness gained through devaluation has been a key driver of this growth. Export Values: While the unit prices of garments in foreign currency terms have often declined following devaluation, the overall export values have generally increased due to the higher volumes. This indicates a net positive effect on the sector’s revenue. 32 Page 381 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Strategic Insights: Price Sensitivity: The RMG sector’s strong response to devaluation highlights its high price sensitivity. Maintaining competitive pricing is crucial for sustaining export growth. Capacity Building: Investment in production capacity and technology upgrades is essential to capitalize on the increased demand following devaluation. Market Diversification: Diversifying export markets and product offerings can help mitigate risks associated with reliance on a few key markets and enhance overall export performance. Policy Support: Continued government support in terms of favorable trade policies, infrastructure development, and regulatory facilitation is vital for sustaining the growth of the RMG sector. By understanding the impact of historical devaluations and implementing strategic responses, Bangladesh can continue to enhance the competitiveness and export performance of its RMG sector. This case study underscores the importance of devaluation as a policy tool and the need for comprehensive strategies to maximize its benefits. The jute sector has been a significant contributor to Bangladesh's export economy. Currency devaluation has played a crucial role in enhancing the competitiveness of jute and jute goods on the global market. This section examines the impact of historical devaluations on the jute sector, particularly during the early 1990s when global demand for jute products was robust. Context: In May 1991, Bangladesh devalued the Taka by approximately 16% to address a balance of payments crisis and boost export competitiveness. This substantial devaluation was part of broader economic reforms aimed at stabilizing the economy. Impact on Jute and Jute Goods: Export Volume: The 1991 devaluation significantly improved the price competitiveness of Bangladeshi jute products. This led to a notable increase in export volumes as global buyers found Bangladeshi jute goods more affordable. Market Demand: During the early 1990s, global demand for jute products was strong, driven by the increasing awareness of environmental sustainability and the need for biodegradable packaging materials. The devaluation allowed Bangladesh to capitalize on this demand by offering competitively priced jute goods. Revenue Growth: 33 Page 382 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The surge in export volumes translated into higher revenue for the jute sector. Despite lower unit prices in foreign currency terms, the overall revenue increased due to the higher sales volumes. Employment: The boost in export activity supported employment in the jute sector, providing livelihoods for many workers involved in jute cultivation, processing, and manufacturing. Context: In June 1996, the Taka was devalued by around 7% to reduce the trade deficit and enhance export competitiveness. This devaluation was part of ongoing efforts to support the country's export-oriented industries. Sustained Competitiveness: The 1996 devaluation further strengthened the price competitiveness of Bangladeshi jute products. This helped sustain the export growth momentum that had been established following the 1991 devaluation. Export Diversification: The enhanced competitiveness enabled jute exporters to diversify their product offerings, including various types of jute bags, carpets, and industrial textiles. This diversification helped expand market reach and reduce dependence on a few key products. Market Penetration: The devaluation allowed Bangladeshi jute products to penetrate new markets, particularly in Europe and North America, where demand for eco-friendly and sustainable materials was growing. Investment in Quality: With increased revenue and market opportunities, there was greater investment in improving the quality of jute products. This included advancements in processing technology and quality control measures to meet international standards. Other Devaluations and Long-Term Trends: 2001 and 2003 Devaluations: These devaluations continued to support the competitiveness of the jute sector. While the devaluation rates were smaller (around 7% in 2001 and 3% in 2003), they helped maintain the export growth trajectory by offsetting rising costs and enhancing price competitiveness. The 4% devaluation in 2009 helped the jute sector navigate the global economic recession. By making Bangladeshi jute products more affordable, the devaluation supported export stability during a period of reduced global demand for many goods. 34 Page 383 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Challenges and Strategic Insights: Challenges: Global Demand Fluctuations: The jute sector's performance is highly dependent on global demand, which can be volatile. Factors such as changes in consumer preferences, competition from synthetic alternatives, and trade policies in importing countries can impact demand. Environmental and Labor Standards: Compliance with international environmental and labor standards is essential for maintaining market access. Non-compliance can lead to trade barriers and reduced export opportunities. Market Diversification: Expanding into new markets and reducing dependence on a few key buyers is crucial for mitigating risks associated with demand fluctuations. Product Innovation: Investing in product innovation and quality improvements can help differentiate Bangladeshi jute products and meet the evolving needs of global buyers. Sustainable Practices: Adopting sustainable and eco-friendly practices in jute cultivation and processing can enhance the appeal of Bangladeshi jute goods, particularly in markets with stringent environmental regulations. Policy Support: Continued government support in terms of favorable trade policies, infrastructure development, and regulatory facilitation is vital for sustaining the growth of the jute sector. By analyzing historical instances of devaluation and their impacts on the jute sector, this study highlights the importance of strategic responses to maximize the benefits of currency devaluation. The jute sector's experience demonstrates how devaluation can enhance export competitiveness and drive economic growth, provided that other supportive measures are in place. The shrimp sector is a vital part of Bangladesh's export economy, contributing significantly to foreign exchange earnings. This section examines the impact of currency devaluation on the shrimp sector, focusing on the periods following the 2001 and 2009 devaluations. While devaluation has generally boosted export volumes, the sector's performance is also influenced by global market conditions and trade policies in key importing countries. Impact of Devaluation on Shrimp Exports: Context: In November 2001, Bangladesh devalued the Taka by approximately 7% to address the trade imbalance and enhance the competitiveness of its exports. This devaluation was part of broader economic measures to support export-oriented industries. 35 Page 384 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact on Shrimp Exports: Increased Export Volumes: The devaluation made Bangladeshi shrimp more price-competitive in the global market. As a result, export volumes increased as foreign buyers found Bangladeshi shrimp more affordable compared to other sources. Revenue Growth: The increase in export volumes led to higher overall revenue for the shrimp sector, despite the lower prices in foreign currency terms. This was particularly beneficial for shrimp farmers and exporters who gained from the surge in demand. Market Expansion: The competitive pricing allowed Bangladeshi shrimp to penetrate new markets and expand its presence in existing ones, particularly in Europe and North America, where demand for shrimp is substantial. Context: In January 2009, Bangladesh devalued the Taka by about 4% to counteract the impact of the global economic recession and bolster exports. This devaluation was crucial for maintaining export competitiveness during a period of global economic uncertainty. Export Resilience: The devaluation helped the shrimp sector remain competitive during the global economic downturn. By making Bangladeshi shrimp more affordable, the sector could sustain export volumes even as global demand contracted. Revenue Stability: The devaluation supported revenue stability by offsetting some of the adverse effects of the global recession on export prices. This was important for maintaining the livelihoods of those involved in shrimp farming and processing. Quality and Compliance: The increased revenue enabled further investment in quality improvements and compliance with international standards. This was essential for maintaining market access and meeting the stringent requirements of importing countries. Global Market Conditions: Price Fluctuations: Volatility: Global shrimp prices are subject to significant volatility due to factors such as changes in supply and demand, competition from other shrimp-producing countries, and environmental conditions affecting shrimp farming. 36 Page 385 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact on Revenue: Fluctuating prices can impact the profitability of shrimp exports. While devaluation helps in making shrimp more competitive, sustained low prices can reduce overall revenue. Non-Tariff Barriers: Importing countries often impose non-tariff barriers, such as stringent sanitary and phytosanitary (SPS) standards, which can affect market access for Bangladeshi shrimp. Tariff Preferences: Changes in trade agreements and tariff preferences can also influence the competitiveness of Bangladeshi shrimp in key markets. Market Diversification: Expanding into new markets and reducing reliance on a few key buyers can mitigate risks associated with demand fluctuations and trade policy changes. Product Diversification: Developing a range of shrimp products, including value-added items, can help meet diverse market needs and enhance revenue stability. Sustainability and Quality: Sustainable Practices: Adopting sustainable shrimp farming practices can enhance the appeal of Bangladeshi shrimp, particularly in markets with stringent environmental regulations. Quality Assurance: Continued investment in quality control and compliance with international standards is crucial for maintaining market access and ensuring long-term competitiveness. Government Support: Policy Interventions: Government support in terms of favorable trade policies, infrastructure development, and regulatory facilitation is essential for sustaining the growth of the shrimp sector. Training and Capacity Building: Providing training and capacity-building programs for shrimp farmers and processors can improve productivity and quality, enhancing the sector's overall competitiveness. By analyzing the impact of historical devaluations on the shrimp sector, this study underscores the importance of strategic responses to maximize the benefits of currency devaluation. The shrimp sector's experience demonstrates how devaluation can enhance export competitiveness and drive economic growth, provided that other supportive measures are in place. Summary of Findings: 37 Page 386 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The research study on "Devaluation of Currency and Export Performance in Bangladesh" provides a comprehensive analysis of the impact of currency devaluation on Bangladesh's export performance from 1990 to 2020. The key findings highlight the multifaceted nature of this impact, demonstrating that while currency devaluation has generally enhanced export performance, the benefits and challenges have varied across different sectors and time periods. Overall Positive Impact: Currency devaluation has generally had a positive impact on the export performance of Bangladesh by making its exports more price-competitive in the global market. Increased export volumes and revenues were observed following devaluations, particularly in the ready-made garments (RMG) sector, which is a cornerstone of Bangladesh's export economy. Sectoral Variations: Ready-Made Garments (RMG): The RMG sector consistently benefited from currency devaluations, with substantial increases in export volumes and revenue. However, the sector also faced challenges related to rising import costs for raw materials. Jute and Jute Goods: Devaluation improved the competitiveness of jute products, leading to increased export volumes. However, global demand fluctuations for jute products also significantly influenced export performance. Leather and Leather Products: The leather sector saw higher export volumes following devaluations. However, compliance with international environmental and labor standards remained a challenge, affecting the overall export growth. Frozen Food (Shrimp): The shrimp sector experienced mixed results from devaluations. While devaluations made Bangladeshi shrimp more competitive, global price fluctuations and non-tariff barriers in key markets also played a significant role. Time Period Variations: The impact of devaluation varied over different time periods. For example, the 1991 and 2001 devaluations had substantial positive effects on export performance due to the broader economic reforms and global economic conditions. The devaluation in 2009 was particularly significant in maintaining export competitiveness during the global economic recession, demonstrating the importance of timely policy responses to global economic challenges. Influence of Internal and External Factors: Internal Factors: 38 Page 387 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Domestic economic conditions, government policies, and political stability were crucial determinants of the effectiveness of devaluations. For instance, high inflation rates could erode the benefits of devaluation by increasing production costs. External Factors: Global market conditions, trade policies, and commodity price fluctuations significantly influenced the outcomes of devaluation. For example, a strong US dollar or protectionist trade policies in major markets could mitigate the benefits of devaluation for Bangladeshi exports. Strategic and Policy Implications: Effective management of exchange rate fluctuations requires a balanced approach that considers both the benefits and challenges of devaluation. Policymakers need to adopt strategies to enhance export performance, such as diversifying export markets, improving product quality, and reducing reliance on imported inputs. Government support in terms of favorable trade policies, infrastructure development, and regulatory facilitation is essential for sustaining the growth of export-oriented sectors. While currency devaluation has generally had a positive impact on the export performance of Bangladesh, the benefits have been influenced by a range of internal and external factors. The study underscores the importance of understanding these determinants and developing strategic responses to maximize the benefits of currency devaluation for Bangladesh's export economy. Broader Economic Context: Policymakers in Bangladesh must recognize that currency devaluation is not a standalone solution but part of a broader economic strategy. Effective devaluation policies require a comprehensive approach that takes into account the overall economic environment, including inflation, import costs, and global market conditions. Supporting Export Competitiveness: To ensure that devaluation policies effectively enhance export competitiveness, policymakers should consider the following measures: Managing Inflation: Monetary Policy: The central bank should implement prudent monetary policies to control inflation. This may involve adjusting interest rates, managing money supply, and using other monetary tools to prevent excessive inflationary pressures following devaluation. Fiscal Discipline: Maintaining fiscal discipline through controlled government spending and efficient tax policies can help stabilize the economy and keep inflation in check. Reducing budget deficits and avoiding excessive borrowing are essential for sustaining the benefits of devaluation. 39 Page 388 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Mitigating Rising Import Costs: Diversifying Import Sources: Reducing dependence on a single source for critical imports can help mitigate the impact of rising import costs. Encouraging trade agreements and exploring alternative suppliers can provide more stable pricing for imported inputs. Promoting Local Production: Developing domestic industries that produce raw materials and intermediate goods can reduce reliance on imports. Government incentives, such as subsidies, tax breaks, and support for technological advancements, can encourage local production and decrease import costs. Enhancing Export-Oriented Infrastructure: Logistics and Transportation: Improving infrastructure related to logistics, transportation, and port facilities can enhance the efficiency and competitiveness of export activities. Investments in modernizing transport networks and reducing bottlenecks can facilitate smoother and more cost-effective export operations. Industrial Zones and Export Processing Zones: Establishing and upgrading industrial zones and export processing zones can provide exporters with the necessary infrastructure and facilities to increase production and reduce costs. These zones can offer benefits such as tax incentives, streamlined regulations, and access to utilities. Strengthening Trade Policies: Trade Agreements: Engaging in bilateral and multilateral trade agreements can open up new markets for Bangladeshi exports and reduce trade barriers. Negotiating favorable terms and reducing tariffs can enhance export opportunities and improve competitiveness. Export Incentives: Providing targeted incentives to export-oriented industries can stimulate growth. These incentives may include tax rebates, export subsidies, and financial support for marketing and promotional activities in international markets. Encouraging Innovation and Quality Improvement: Research and Development (R&D): Investing in R&D to develop innovative products and processes can enhance the competitiveness of Bangladeshi exports. Government grants, subsidies, and collaboration with academic and research institutions can foster innovation. Quality Standards and Certifications: 40 Page 389 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Ensuring that export products meet international quality standards and certifications is crucial for competing in global markets. Government support for compliance with standards and facilitating access to certification processes can enhance product credibility and acceptance. Providing Training and Capacity Building: Skills Development: Investing in the training and capacity building of the workforce can improve productivity and quality in export-oriented industries. Government programs and partnerships with industry associations can provide training in advanced manufacturing techniques, quality control, and international market requirements. Entrepreneurship Support: Encouraging entrepreneurship and supporting small and medium-sized enterprises (SMEs) can diversify the export base and promote innovation. Providing access to financing, mentoring, and business development services can help SMEs succeed in international markets. Currency devaluation can be an effective tool for enhancing export competitiveness in Bangladesh. However, its success depends on a comprehensive policy approach that addresses inflation, rising import costs, infrastructure, trade policies, innovation, and capacity building. By adopting a holistic strategy, policymakers can maximize the benefits of devaluation and ensure sustainable growth in Bangladesh's export performance. Recommendations for Future Research: Long-Term Impacts of Devaluation: Future research should delve deeper into understanding the long-term impacts of currency devaluation on the economy. This involves examining how sustained devaluation affects: Sustained Growth: Investigate whether the initial boost in export volumes and competitiveness is maintained over the long term. Product Diversification: Assess how devaluation impacts the diversification of export products over time. Market Penetration: Study how long-term devaluation affects the penetration of new markets and the retention of existing ones. Economic Stability: Inflationary Pressures: Examine the prolonged inflationary effects of devaluation and how they influence overall economic stability. 41 Page 390 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Production Costs: Analyze changes in production costs over time, particularly how the rising costs of imported raw materials and inputs impact export-oriented industries. Investment Climate: Foreign Direct Investment (FDI): Investigate how sustained currency devaluation influences FDI inflows and outflows. Domestic Investment: Assess the impact on domestic investment in export-oriented sectors and overall economic growth. Research should also focus on the role of complementary economic policies in maximizing the benefits of devaluation: Interest Rates: Examine the interaction between devaluation and interest rate adjustments, and their combined impact on export performance and inflation. Money Supply Management: Study the effects of controlling the money supply in conjunction with devaluation on economic stability and growth. Government Spending: Investigate how targeted government spending can support export-oriented industries following devaluation. Taxation Policies: Assess the impact of tax incentives and rebates on enhancing export competitiveness. Trade Agreements: Examine the effectiveness of bilateral and multilateral trade agreements in supporting the gains from devaluation. Export Incentives: Analyze the impact of various export incentives on sustaining long-term export growth. Future studies should explore how global economic trends influence the effectiveness of devaluation: Shifts in Trade Patterns: Study how changes in global trade patterns affect the competitiveness of Bangladeshi exports following devaluation. 42 Page 391 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Trade Barriers: Examine the impact of non-tariff barriers and protectionist policies in key markets on the benefits of devaluation. Price Fluctuations: Investigate the impact of global commodity price fluctuations on the costs and competitiveness of Bangladeshi exports. Supply Chain Disruptions: Assess how global supply chain disruptions influence the effectiveness of devaluation policies. Economic Crises: Financial Crises: Study the impact of global financial crises on the devaluation-export performance relationship. Pandemics and Natural Disasters: Examine the effects of global pandemics and natural disasters on export performance and the role of devaluation in mitigating these impacts. Sector-Specific Impacts of Devaluation: Further research should focus on sector-specific impacts of devaluation to provide more targeted policy recommendations: Global Market Trends: Study how global fashion trends and consumer preferences impact the RMG sector following devaluation. Compliance Costs: Investigate the impact of compliance with international labor and environmental standards on the RMG sector's competitiveness. Demand Fluctuations: Analyze how global demand for eco-friendly products influences the jute sector following devaluation. Technological Advancements: Examine the role of technological advancements in improving the quality and competitiveness of jute products. 43 Page 392 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Environmental Regulations: Study the impact of compliance with international environmental regulations on the leather industry's competitiveness post-devaluation. Market Access: Assess how access to key markets influences the leather sector's export performance following devaluation. Health and Safety Standards: Investigate the impact of compliance with international health and safety standards on the shrimp export sector. Global Price Trends: Examine how global price trends for shrimp influence the sector's competitiveness following devaluation. Future research should adopt a comprehensive and multidisciplinary approach to understanding the long-term impacts of currency devaluation, the role of complementary economic policies, and the effects of global economic trends. By focusing on sector-specific impacts and providing targeted policy recommendations, future studies can offer valuable insights to enhance export performance and maintain economic stability in Bangladesh. 44 Page 393 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 7 Minimizing Variables INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 394 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 4 Minimizing Variables: Table of Contents Minimizing Variables:..............................................................................................................................6 Minimizing the Number of Variables According to Priority of Significance:.................................. 6 Major Macroeconomic Variables:..................................................................................................... 6 Impact of Interest Rates on Export Performance:............................................................................. 6 Influence on Investment and Production Costs:................................................................................6 Currency Value and Export Prices:....................................................................................................6 Role of Foreign Direct Investment (FDI)..........................................................................................6 Enhancing Export Capacity:..............................................................................................................6 Market Access and Trade Networks:.................................................................................................6 Impact on Balance of Payments:....................................................................................................... 6 Balance of Payments (BoP) and Export Performance.......................................................................7 Current Account Dynamics:.............................................................................................................. 7 Trade Deficits and Currency Devaluation:........................................................................................7 Interconnected Impacts and Policy Implications...............................................................................7 Integrated Policy Approach:..............................................................................................................7 Monetary Policy:.........................................................................................................................7 FDI Promotion:........................................................................................................................... 7 BoP Management:.......................................................................................................................7 Strategic Responses to Economic Variables:.....................................................................................7 Interest Rate Adjustments:..........................................................................................................7 FDI Attraction:............................................................................................................................7 BoP Improvements:.................................................................................................................... 8 Theoretical Impact on Export Performance:..................................................................................... 8 Reduction of Borrowing Costs:......................................................................................................... 8 Investment in Production Capacity:............................................................................................8 Technological Upgrades:.............................................................................................................8 Operational Efficiency:............................................................................................................... 8 Stimulation of Domestic Consumption:............................................................................................ 8 Increased Economic Activity:.....................................................................................................8 Consumer Spending:...................................................................................................................9 Business Expansion:................................................................................................................... 9 Empirical Evidence from Bangladesh:..............................................................................................9 4 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. 1 Page 395 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) 1990s Economic Reforms:..........................................................................................................9 2000s Growth Phase:.................................................................................................................. 9 Monetary Policy Management:...................................................................................................9 Export Financing Programs:....................................................................................................... 9 Support for SMEs:.................................................................................................................... 10 Infrastructure Investment:.........................................................................................................10 Case Study: Garments Sector:......................................................................................................... 10 Access to Affordable Credit:........................................................................................................... 10 Financing Working Capital:.............................................................................................................10 Operational Needs:....................................................................................................................10 Inventory Management:............................................................................................................ 10 Expansion and Modernization:........................................................................................................10 Capacity Expansion:................................................................................................................. 10 Technological Upgrades:...........................................................................................................11 Empirical Evidence:.........................................................................................................................11 Early 2000s Growth.........................................................................................................................11 Interest Rate Environment:....................................................................................................... 11 Export Performance:................................................................................................................. 11 Case Example: 2001-2005...............................................................................................................11 Investment in Production:......................................................................................................... 11 Market Penetration:...................................................................................................................11 Challenges and Mitigation:..............................................................................................................11 Rising Costs of Imported Inputs......................................................................................................11 Vulnerability to Input Costs:..................................................................................................... 11 Mitigation Strategies:................................................................................................................11 Impact on Costs:....................................................................................................................... 12 Policy Response:.......................................................................................................................12 Foreign Direct Investment (FDI):....................................................................................................12 Technology Transfer........................................................................................................................12 Improving Production Efficiency:...................................................................................................12 Advanced Manufacturing Techniques:..................................................................................... 12 Training and Skills Development:............................................................................................ 12 Innovation and R&D:...................................................................................................................... 12 Capital Infusion:.............................................................................................................................. 13 Expanding Production Capacities:.................................................................................................. 13 Infrastructure Development:..................................................................................................... 13 Modern Equipment:.................................................................................................................. 13 Financial Stability:...........................................................................................................................13 Long-Term Investment:.............................................................................................................13 Market Access:................................................................................................................................ 13 Global Market Linkages:.................................................................................................................13 Established Networks:.............................................................................................................. 13 Brand Recognition:................................................................................................................... 13 Export Market Diversification:........................................................................................................13 2 Page 396 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Access to New Markets:........................................................................................................... 13 Case Studies of FDI Impact:............................................................................................................13 Technology and Efficiency:.............................................................................................................13 Example:................................................................................................................................... 13 Expansion and Capital:....................................................................................................................14 Example:................................................................................................................................... 14 Example:................................................................................................................................... 14 Innovation and Quality:...................................................................................................................14 Example:................................................................................................................................... 14 Capital for Expansion:.....................................................................................................................14 Example:................................................................................................................................... 14 Global Market Entry:.......................................................................................................................14 Example:................................................................................................................................... 14 Creating a Favorable Investment Climate:...................................................................................... 14 Regulatory Framework:............................................................................................................ 14 Incentives:................................................................................................................................. 14 Supporting Infrastructure Development:.........................................................................................14 Industrial Zones:....................................................................................................................... 14 Logistics and Connectivity:...................................................................................................... 14 Enhancing Skills and Workforce:.................................................................................................... 15 Education and Training Programs:............................................................................................15 Public-Private Partnerships:......................................................................................................15 Pharmaceutical Sector:.................................................................................................................... 15 Case Study: Pharmaceutical Sector:................................................................................................15 Access to International Markets:..................................................................................................... 15 Regulatory Navigation:.............................................................................................................15 Global Networks:...................................................................................................................... 15 Brand Recognition and Trust:..........................................................................................................16 Quality Assurance:....................................................................................................................16 Expanded Production Capacity:...................................................................................................... 16 State-of-the-Art Facilities:........................................................................................................ 16 Increased Output:...................................................................................................................... 16 Research and Development (R&D):................................................................................................16 Innovation:................................................................................................................................ 16 Clinical Trials:...........................................................................................................................16 Improved Compliance with International Quality Standards:.........................................................16 Meeting Standards:................................................................................................................... 16 Certification and Accreditation:................................................................................................16 Training and Development:............................................................................................................. 17 Skill Enhancement:................................................................................................................... 17 Knowledge Transfer:.................................................................................................................17 Examples of Successful FDI Impact:.............................................................................................. 17 Incepta Pharmaceuticals:.......................................................................................................... 17 Global Expansion:.....................................................................................................................17 3 Page 397 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) R&D Collaborations:................................................................................................................ 17 Square Pharmaceuticals:..................................................................................................................17 Technological Advancements:.................................................................................................. 17 Regulatory Approvals:.............................................................................................................. 17 Balance of Payments (BoP):............................................................................................................18 Importance for Export-Oriented Industries:.................................................................................... 18 Current Account Balance:............................................................................................................... 18 Trade Balance:.................................................................................................................................18 Exports vs. Imports:.................................................................................................................. 18 Raw Material Imports:.............................................................................................................. 18 Service Exports:...............................................................................................................................18 Service Sector Contributions:................................................................................................... 18 Transport and Logistics:............................................................................................................18 Remittances:.................................................................................................................................... 18 Worker Remittances:.................................................................................................................18 Economic Stability:...................................................................................................................18 Capital and Financial Account:....................................................................................................... 19 Investment Inflows:.................................................................................................................. 19 Technology and Skills Transfer:............................................................................................... 19 Portfolio Investment:....................................................................................................................... 19 Capital Markets:........................................................................................................................19 Exchange Rate Stability:...........................................................................................................19 External Borrowing:........................................................................................................................ 19 Development Loans and Aid:................................................................................................... 19 Debt Management:....................................................................................................................19 Implications for Export-Oriented Industries:.................................................................................. 19 Financing Imports:...........................................................................................................................19 Raw Materials and Intermediate Goods:...................................................................................19 Capital Goods and Technology:................................................................................................20 Maintaining Exchange Rate Stability:.............................................................................................20 Competitiveness:.......................................................................................................................20 Investor Confidence:.................................................................................................................20 Economic Resilience:...................................................................................................................... 20 Shock Absorption:.................................................................................................................... 20 Policy Flexibility:......................................................................................................................20 Case Study: Jute Industry................................................................................................................ 20 Importance of a Favorable Balance of Payments (BoP) for Export Performance:......................... 20 The Role of Imported Inputs:.......................................................................................................... 20 Jute Fiber:........................................................................................................................................ 20 Sourcing Raw Materials:...........................................................................................................20 Quality Enhancement:...............................................................................................................21 Machinery and Technology:............................................................................................................ 21 Modernization of Production:................................................................................................... 21 Maintenance and Upgrades:......................................................................................................21 4 Page 398 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact of BoP Crises on the Jute Industry:..................................................................................... 21 Depletion of Foreign Exchange Reserves:...................................................................................... 21 Input Shortages:........................................................................................................................ 21 Production Declines:.................................................................................................................21 Rising Costs and Inflation:.............................................................................................................. 21 Import Costs:.............................................................................................................................21 Inflationary Pressures:.............................................................................................................. 21 Historical Analysis of BoP and Jute Export Performance:............................................................. 22 Periods of BoP Surpluses:............................................................................................................... 22 Growth in Export Volumes:...................................................................................................... 22 Enhanced Product Quality:....................................................................................................... 22 Periods of BoP Deficits:.................................................................................................................. 22 Export Declines:........................................................................................................................22 Competitive Disadvantages:..................................................................................................... 22 Lower Interest Rates:.......................................................................................................................22 Affordable Financing for Exporters:............................................................................................... 22 Investment in Production:......................................................................................................... 22 Cost Reduction:.........................................................................................................................23 Stimulating Domestic Consumption:.............................................................................................. 23 Indirect Support for Exports:.................................................................................................... 23 Technology Transfer and Innovation:..............................................................................................23 Production Efficiency:.............................................................................................................. 23 Quality Improvement:...............................................................................................................23 Capacity Expansion:................................................................................................................. 23 Financial Stability:.................................................................................................................... 23 Global Linkages:.......................................................................................................................23 Raw Materials and Machinery:.................................................................................................23 Continuous Production:............................................................................................................ 24 Investor Confidence:.................................................................................................................24 Inflation Control:...................................................................................................................... 24 Combined Impact on Export Performance:.....................................................................................24 Integrated Economic Policies.......................................................................................................... 24 Coordinated Approach:.............................................................................................................24 Support for Export-Oriented Industries:..........................................................................................24 Targeted Interventions:..............................................................................................................24 Long-Term Sustainability:...............................................................................................................24 Sustainable Growth:..................................................................................................................24 Boosting Export Capacity:........................................................................................................25 Stimulating Domestic Consumption:........................................................................................25 Provision of Essential Resources:.............................................................................................25 Market Access:..........................................................................................................................25 Sustainability of Export-Oriented Industries:........................................................................... 25 Economic Stability:...................................................................................................................25 Integrating Findings for Strategic Insights:.....................................................................................25 5 Page 399 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Coordinated Economic Policies:..................................................................................................... 25 Holistic Approach:.................................................................................................................... 25 Targeted Support for Key Sectors:.................................................................................................. 26 Sector-Specific Interventions:...................................................................................................26 Ensuring Long-Term Sustainability:............................................................................................... 26 Sustainable Growth Strategies:................................................................................................. 26 Examine Long-Term Impacts:.................................................................................................. 26 Explore Complementary Policies:............................................................................................ 26 Analyze Sector-Specific Impacts:.............................................................................................26 Maintaining Low and Stable Interest Rates:................................................................................... 26 Consistent Monetary Policy:.....................................................................................................26 Inflation Control:...................................................................................................................... 27 Attracting Foreign Direct Investment (FDI):.................................................................................. 27 Favorable Investment Climate:................................................................................................. 27 Sector-Specific Incentives:....................................................................................................... 27 Infrastructure Development:..................................................................................................... 27 Ensuring a Positive Balance of Payments (BoP):............................................................................27 Export Promotion:.....................................................................................................................27 Import Substitution:.................................................................................................................. 27 Exchange Rate Management:................................................................................................... 27 Sector-Specific Strategies:...............................................................................................................27 Ready-Made Garments (RMG):............................................................................................... 27 Pharmaceuticals:....................................................................................................................... 28 Jute and Jute Goods:................................................................................................................. 28 Leather and Leather Products:.................................................................................................. 28 Frozen Food (Shrimp):..............................................................................................................28 Integrated Economic Policies:.........................................................................................................28 Holistic Approach:.................................................................................................................... 28 Public-Private Partnerships:......................................................................................................28 6 Page 400 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Minimizing Variables: Minimizing the Number of Variables According to Priority of Significance: Major Macroeconomic Variables: This section delves into the impact of three critical economic variables—interest rates, foreign direct investment (FDI), and the balance of payments (BoP)—on export performance in Bangladesh. By understanding these variables and their interrelationships, we can gain valuable insights into how they influence the country's export dynamics and overall economic stability. This analysis is essential for formulating effective policies and strategies to enhance export performance and maintain economic equilibrium. Impact of Interest Rates on Export Performance: Influence on Investment and Production Costs: Interest rates play a pivotal role in determining the cost of borrowing for businesses. Lower interest rates reduce the cost of financing for export-oriented industries, encouraging investment in production capacity and technological upgrades. Conversely, higher interest rates increase borrowing costs, potentially constraining business expansion and leading to higher production costs. These changes directly impact the price competitiveness of Bangladeshi exports in international markets. Currency Value and Export Prices: Interest rates also affect the value of the national currency. Higher interest rates tend to attract foreign capital, leading to currency appreciation, which can make exports more expensive and less competitive. Conversely, lower interest rates can lead to currency depreciation, enhancing export competitiveness by making goods cheaper for foreign buyers. However, persistent low interest rates can lead to inflationary pressures, which might offset the benefits of a weaker currency. Role of Foreign Direct Investment (FDI) Enhancing Export Capacity: Foreign direct investment (FDI) brings in capital, technology, and managerial expertise, which are crucial for enhancing the production capacity and efficiency of export-oriented industries. FDI can lead to the establishment of new manufacturing facilities, the introduction of advanced technologies, and improvements in supply chain management, all of which contribute to increased export volumes and value. Market Access and Trade Networks: FDI often comes from multinational corporations with established trade networks and access to international markets. These networks can facilitate market entry for Bangladeshi products, enhancing their global reach and competitiveness. Additionally, the presence of foreign investors can lead to better compliance with international standards, improving the quality and appeal of Bangladeshi exports. Impact on Balance of Payments: 6 Page 401 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) FDI inflows are recorded in the capital account of the BoP and can help offset deficits in the current account. By improving the country's financial position, FDI can stabilize the exchange rate, reducing volatility and providing a more predictable environment for exporters. Balance of Payments (BoP) and Export Performance Current Account Dynamics: The balance of payments (BoP) reflects all economic transactions between residents of a country and the rest of the world. The current account, a component of the BoP, includes trade in goods and services. A surplus in the current account, driven by strong export performance, contributes to a positive BoP, strengthening the currency and enhancing economic stability. Trade Deficits and Currency Devaluation: Conversely, a persistent trade deficit can lead to currency devaluation as the demand for foreign currency exceeds supply. While devaluation can initially boost export competitiveness, it can also increase the cost of imported inputs, leading to higher production costs and potential inflationary pressures. Effective management of the BoP is crucial to maintaining a stable exchange rate and creating a conducive environment for export growth. Interconnected Impacts and Policy Implications Integrated Policy Approach: To maximize export performance, policymakers need to adopt an integrated approach that considers the interrelationships between interest rates, FDI, and the BoP. This involves: Monetary Policy: Adjusting interest rates to balance the cost of borrowing, currency value, and inflationary pressures. FDI Promotion: Creating a favorable investment climate through regulatory reforms, incentives, and infrastructure development to attract and retain foreign investors. BoP Management: Implementing measures to improve the current account balance, such as promoting high-value exports, reducing import dependence, and diversifying export markets. Strategic Responses to Economic Variables: Interest Rate Adjustments: Policymakers should carefully calibrate interest rates to support export-oriented industries while controlling inflation. This might involve temporary interest rate reductions during periods of economic downturn to stimulate investment and production. FDI Attraction: 7 Page 402 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Enhancing the legal and regulatory framework to protect investors, offering tax incentives, and improving infrastructure can attract more FDI. Policymakers should also focus on sectors with high export potential to maximize the benefits of FDI. BoP Improvements: Measures to improve the BoP include promoting export diversification, enhancing the quality and competitiveness of exports, and reducing import dependency through domestic production incentives. Understanding the impact of interest rates, FDI, and the balance of payments on export performance is crucial for formulating effective economic policies. By considering these interconnected variables, policymakers can develop strategies to enhance export competitiveness, attract investment, and maintain economic stability. This integrated approach is essential for sustaining long-term export growth and achieving broader economic development goals in Bangladesh. Theoretical Impact on Export Performance: Lower interest rates can positively affect export performance in Bangladesh through two primary channels: Reduction of Borrowing Costs: Lower interest rates directly reduce the cost of borrowing for businesses. This has several implications for export performance: Investment in Production Capacity: With reduced borrowing costs, export-oriented businesses can invest more in expanding their production capacity. This means they can produce more goods to meet the increased demand in international markets. Technological Upgrades: Lower interest rates make it more affordable for businesses to invest in new technologies and modernize their production processes. This can lead to higher productivity and better quality products, enhancing the competitiveness of Bangladeshi exports. Operational Efficiency: Companies can use cheaper loans to streamline operations, reduce waste, and improve efficiency. Enhanced operational efficiency can lower production costs, allowing exporters to offer more competitive prices in the global market. Stimulation of Domestic Consumption: Lower interest rates can also stimulate domestic consumption and aggregate demand, indirectly supporting export growth: Increased Economic Activity: Lower interest rates typically lead to increased borrowing and spending by consumers and businesses. This stimulates economic activity and can lead to higher overall economic growth. 8 Page 403 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) A growing economy can create a more supportive environment for exporters by providing a stable and expanding market base. Consumer Spending: When interest rates are low, consumers are more likely to take loans for major purchases, such as homes and cars. Increased consumer spending boosts demand for various goods and services, contributing to overall economic growth. As the economy grows, businesses can benefit from improved economic conditions, making it easier to invest in export-related activities. Business Expansion: Lower interest rates can encourage businesses to expand not only their domestic operations but also their export activities. With more financial resources available at lower costs, companies can explore new international markets, diversify their product offerings, and enhance their competitive position globally. Empirical Evidence from Bangladesh: Empirical evidence from Bangladesh supports the theoretical impact of lower interest rates on export performance. Historical data and case studies show that periods of lower interest rates have often coincided with increased investment in export-oriented industries and improved export performance. 1990s Economic Reforms: During the early 1990s, Bangladesh implemented economic reforms, including reductions in interest rates. This period saw significant growth in the ready-made garments (RMG) sector, which became a cornerstone of the country's export economy. Lower borrowing costs allowed garment manufacturers to expand production and improve product quality, leading to a surge in exports. 2000s Growth Phase: In the 2000s, Bangladesh continued to benefit from relatively low interest rates, which supported the expansion of various export sectors. For example, the jute and leather industries experienced increased investment, leading to higher export volumes. The availability of affordable credit played a crucial role in enabling businesses to scale up operations and enhance competitiveness. To maximize the positive impact of lower interest rates on export performance, policymakers in Bangladesh should consider the following strategies: Monetary Policy Management: The central bank should carefully manage interest rates to balance the needs of exporters with the overall economic environment. While lower interest rates can boost export-related investment, it is essential to monitor inflationary pressures and ensure financial stability. Export Financing Programs: 9 Page 404 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The government can introduce targeted export financing programs that provide low-interest loans to export-oriented businesses. These programs can help companies access the necessary capital to expand production, invest in technology, and explore new markets. Support for SMEs: Small and medium-sized enterprises (SMEs) often face higher borrowing costs due to perceived risks. Policymakers should implement measures to reduce these costs for SMEs involved in export activities, such as offering loan guarantees or subsidies. Infrastructure Investment: Lower interest rates can also facilitate government borrowing for infrastructure projects that support export activities. Improved transportation, logistics, and communication infrastructure can enhance the efficiency and competitiveness of exporters. Lower interest rates have a multifaceted impact on export performance in Bangladesh. By reducing borrowing costs and stimulating domestic consumption, they create a favorable environment for export growth. Policymakers should leverage this relationship by implementing supportive measures that enable businesses to invest in production capacity, improve efficiency, and explore new markets. Understanding the theoretical and empirical linkages between interest rates and export performance is crucial for formulating effective economic policies that drive sustainable export-led growth in Bangladesh. Case Study: Garments Sector: The garments sector, a cornerstone of Bangladesh's export economy, provides a compelling example of how interest rates impact export performance. This sector heavily relies on bank loans to finance working capital and expansion activities. Understanding the dynamics of this reliance and the effects of interest rate changes offers valuable insights into the broader relationship between monetary policy and export performance. Access to Affordable Credit: Financing Working Capital: Operational Needs: The garments industry requires substantial working capital to purchase raw materials, pay labor costs, and cover other operational expenses. Low interest rates reduce the cost of financing these needs, allowing manufacturers to operate more efficiently. Inventory Management: Affordable credit enables garment producers to maintain optimal inventory levels, reducing the risk of production delays and ensuring timely fulfillment of export orders. Expansion and Modernization: Capacity Expansion: When interest rates are low, garment manufacturers can borrow at lower costs to expand production capacity. This expansion is crucial to meeting increasing global demand and securing larger export orders. 10 Page 405 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Technological Upgrades: Access to affordable loans allows businesses to invest in modern machinery and technology, enhancing productivity and product quality. Improved efficiency and higher-quality outputs make Bangladeshi garments more competitive in the international market. Empirical Evidence: Early 2000s Growth Interest Rate Environment: During the early 2000s, Bangladesh experienced relatively low interest rates, which played a significant role in the expansion of the garments sector. Lower borrowing costs encouraged manufacturers to invest in capacity expansion and efficiency improvements. Export Performance: The garments industry saw substantial growth in export volumes during this period. Manufacturers expanded operations to meet rising global demand, resulting in a surge in export revenues. This growth was particularly evident in the ready-made garments (RMG) sub-sector, which became a major driver of Bangladesh's export economy. Case Example: 2001-2005 Investment in Production: Between 2001 and 2005, many garment manufacturers took advantage of low-interest loans to invest in additional production lines and facilities. This investment led to increased production capacity and the ability to fulfill larger international orders. Market Penetration: With enhanced production capabilities and improved product quality, Bangladeshi garment exporters were able to penetrate new markets and increase their market share in existing ones. This period saw significant growth in exports to major markets such as the United States and the European Union. Challenges and Mitigation: Rising Costs of Imported Inputs Vulnerability to Input Costs: The garments sector relies on imported raw materials, such as fabrics and accessories. While low interest rates support expansion, rising global prices for these inputs can erode the cost advantages gained from devaluation and low borrowing costs. Mitigation Strategies: To mitigate this challenge, manufacturers can explore strategies such as backward integration (producing more raw materials domestically), bulk purchasing agreements, and seeking alternative suppliers to reduce dependence on expensive imports. 11 Page 406 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact on Costs: Sustained low interest rates can contribute to inflationary pressures, increasing the costs of labor and other domestic inputs. Higher production costs can offset the benefits of devaluation and low-interest financing. Policy Response: Policymakers need to balance the benefits of low interest rates with measures to control inflation. This may include targeted interventions to stabilize prices and support for productivity-enhancing investments that offset rising costs. The garments sector in Bangladesh exemplifies the critical role of interest rates in export performance. Access to affordable credit during periods of low interest rates has enabled manufacturers to expand production, improve efficiency, and enhance competitiveness in the global market. However, challenges such as rising costs of imported inputs and inflationary pressures need to be managed effectively to sustain the benefits. Policymakers and industry stakeholders must work together to create a supportive environment that leverages low-interest rates while addressing potential drawbacks, ensuring the continued growth and success of Bangladesh's garments sector in international trade. Foreign Direct Investment (FDI): Foreign Direct Investment (FDI) plays a pivotal role in enhancing export performance, particularly in developing countries like Bangladesh. By bringing in technology, capital, and market access, FDI can significantly boost the export capabilities of the host country. Below is an elaboration on how FDI impacts export performance through various mechanisms: Technology Transfer Improving Production Efficiency: Advanced Manufacturing Techniques: Foreign investors often bring state-of-the-art manufacturing techniques and technologies. These advanced methods can significantly enhance production efficiency and product quality in host countries. Training and Skills Development: Along with technology, FDI typically involves the transfer of knowledge and expertise. Foreign companies often provide training to local employees, improving their skills and productivity, which in turn boosts the overall efficiency of the production processes. Innovation and R&D: Research and Development: Foreign firms may establish R&D centers in the host country, fostering innovation and development of new products tailored to global market demands. This innovation is crucial for staying competitive in international markets. 12 Page 407 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Capital Infusion: Expanding Production Capacities: Infrastructure Development: FDI brings in much-needed capital that can be invested in building and upgrading production facilities, thereby increasing the host country's manufacturing capabilities. Modern Equipment: The infusion of capital allows for the purchase of modern machinery and equipment, which can enhance production speed and efficiency, reducing costs and increasing output. Financial Stability: Long-Term Investment: Unlike portfolio investments, which can be withdrawn quickly, FDI is generally long-term and stable. This financial stability supports sustained growth and development of export-oriented industries. Market Access: Global Market Linkages: Established Networks: Foreign investors often have established networks and distribution channels in global markets. Leveraging these networks, host countries can gain easier and broader access to international markets. Brand Recognition: Associating with well-known foreign brands can enhance the credibility and attractiveness of local products in international markets, thereby boosting exports. Export Market Diversification: Access to New Markets: FDI can open doors to new markets that local companies might find difficult to enter on their own. This diversification reduces dependence on a limited number of export markets, spreading risk and increasing stability. Case Studies of FDI Impact: Technology and Efficiency: Example: Foreign investments in the RMG sector have introduced advanced textile technologies and efficient production processes. For instance, investments from South Korean and Chinese firms have led to the adoption of automated sewing machines and lean manufacturing techniques, significantly increasing productivity and quality. 13 Page 408 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Expansion and Capital: Example: Major global apparel brands, such as H&M and Zara, have set up sourcing offices and provided direct investments in Bangladesh. This has led to the expansion of local garment factories, increased production capacities, and the ability to meet large international orders. Example: With FDI from major global brands, Bangladeshi garment manufacturers have gained access to high-demand markets in Europe and North America, boosting export volumes and revenues. Innovation and Quality: Example: Indian and European pharmaceutical companies have invested in Bangladesh, bringing in advanced drug manufacturing technologies and strict quality control standards. This has enabled Bangladeshi pharmaceutical firms to produce high-quality generic medicines that meet international regulatory standards. Capital for Expansion: Example: FDI has facilitated the expansion of production facilities, enabling Bangladeshi pharmaceutical companies to increase their output and export capabilities. Global Market Entry: Example: Collaboration with foreign investors has helped local pharmaceutical firms to navigate complex regulatory environments in international markets, enhancing their export potential. Creating a Favorable Investment Climate: Regulatory Framework: Simplifying regulations and ensuring transparent and efficient procedures for foreign investors can attract more FDI. Incentives: Offering tax incentives, subsidies, and other benefits can make the country more attractive to foreign investors. Supporting Infrastructure Development: Industrial Zones: Developing special economic zones and industrial parks with modern infrastructure can facilitate the smooth operation of foreign-invested enterprises. Logistics and Connectivity: 14 Page 409 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Improving transportation, logistics, and connectivity to major ports can enhance the efficiency of export operations. Enhancing Skills and Workforce: Education and Training Programs: Investing in education and vocational training programs can ensure a skilled workforce that meets the needs of foreign investors. Public-Private Partnerships: Collaborating with foreign firms to develop training programs and technical education can bridge the skills gap. Foreign Direct Investment (FDI) is a critical driver of export performance in Bangladesh. Through technology transfer, capital infusion, and enhanced market access, FDI can significantly boost the competitiveness and capabilities of export-oriented industries. However, to fully leverage the benefits of FDI, it is essential to create a favorable investment climate, support infrastructure development, and enhance the skills of the workforce. By adopting these measures, Bangladesh can maximize the positive impact of FDI on its export performance and overall economic growth. Pharmaceutical Sector: The pharmaceutical sector in Bangladesh has benefited significantly from FDI. Multinational corporations have facilitated access to international markets, expanded production capacity, and improved compliance with international quality standards. For instance, investment from global pharmaceutical giants has enabled local companies to upgrade their manufacturing processes and meet stringent regulatory requirements in export markets. Case Study: Pharmaceutical Sector: The pharmaceutical sector in Bangladesh has experienced substantial growth and development, largely due to Foreign Direct Investment (FDI). Investments from multinational corporations have provided several key benefits, facilitating access to international markets, expanding production capacity, and improving compliance with international quality standards. This case study highlights the significant impact of FDI on the pharmaceutical sector in Bangladesh. Access to International Markets: Market Entry and Expansion: Regulatory Navigation: Multinational corporations have assisted local pharmaceutical companies in navigating complex regulatory environments in international markets. By sharing expertise and resources, these foreign investors have enabled Bangladeshi firms to meet the stringent requirements of agencies such as the US FDA and the European Medicines Agency (EMA). Global Networks: Partnerships with global pharmaceutical giants have provided Bangladeshi companies with access to established distribution networks. This has facilitated the entry of Bangladeshi pharmaceuticals into new markets, enhancing their global reach and competitiveness. 15 Page 410 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Brand Recognition and Trust: Quality Assurance: Association with reputable multinational corporations has enhanced the credibility of Bangladeshi pharmaceutical products. International customers are more likely to trust products that are backed by well-known global brands, leading to increased demand and higher export volumes. Expanded Production Capacity: Infrastructure Development: State-of-the-Art Facilities: FDI has enabled local pharmaceutical companies to build and upgrade manufacturing facilities equipped with advanced technologies. For example, investments from companies like Sanofi and Novartis have led to the establishment of modern production lines that meet global standards. Increased Output: The infusion of foreign capital has facilitated the expansion of production capacities, allowing Bangladeshi firms to scale up operations and meet the growing demand for generic medicines in international markets. Research and Development (R&D): Innovation: Multinational corporations often bring with them cutting-edge research and development capabilities. Collaborations with foreign investors have spurred innovation in the Bangladeshi pharmaceutical sector, leading to the development of new and improved formulations. Clinical Trials: Investment from global firms has also supported the conduct of clinical trials in Bangladesh, further enhancing the sector’s ability to produce high-quality, effective medications. Improved Compliance with International Quality Standards: Regulatory Compliance: Meeting Standards: FDI has been instrumental in helping Bangladeshi pharmaceutical companies comply with international quality standards. Foreign investors have provided the necessary technical assistance and financial resources to upgrade manufacturing processes and quality control systems. 16 Page 411 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Certification and Accreditation: With the support of multinational corporations, many Bangladeshi firms have achieved certifications such as WHO Good Manufacturing Practice (GMP), making them eligible to export to regulated markets. Training and Development: Skill Enhancement: Foreign partnerships have facilitated the training and development of the local workforce. Employees have received training in advanced manufacturing techniques, quality control, and regulatory compliance, enhancing their capabilities and productivity. Knowledge Transfer: The presence of multinational corporations has led to significant knowledge transfer, with local employees gaining expertise in various aspects of pharmaceutical manufacturing and quality assurance. Examples of Successful FDI Impact: Incepta Pharmaceuticals: Global Expansion: Incepta Pharmaceuticals has successfully leveraged FDI to expand its operations and export its products to over 50 countries. The company has benefited from investments in advanced manufacturing facilities and quality assurance processes, enabling it to meet the stringent requirements of international markets. R&D Collaborations: Partnerships with foreign investors have also enhanced Incepta’s R&D capabilities, leading to the development of innovative products and the successful conduct of clinical trials. Square Pharmaceuticals: Technological Advancements: FDI has enabled Square Pharmaceuticals to adopt advanced technologies and manufacturing practices. The company’s collaboration with international partners has facilitated the production of high-quality pharmaceuticals that comply with global standards. Regulatory Approvals: With the support of foreign investors, Square Pharmaceuticals has achieved various international certifications, including approvals from the US FDA and the EMA, significantly boosting its export potential. The case study of the pharmaceutical sector in Bangladesh underscores the transformative impact of Foreign Direct Investment (FDI). Through technology transfer, capital infusion, and enhanced market access, FDI has enabled local pharmaceutical companies to expand their production capacities, improve compliance with international quality standards, and access global markets. These advancements have not only boosted the export performance of the sector but have also contributed to the overall economic development of Bangladesh. As the country continues to attract foreign 17 Page 412 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) investments, the pharmaceutical sector is poised for sustained growth and increased competitiveness in the global market. Balance of Payments (BoP): Importance for Export-Oriented Industries: The Balance of Payments (BoP) is a comprehensive record of all economic transactions between a country and the rest of the world. It consists of two main accounts: the current account and the capital and financial account. A favorable BoP position is crucial for the sustained performance of export-oriented industries, particularly in economies like Bangladesh, which rely heavily on importing raw materials and capital goods. This section elaborates on the importance of a positive BoP for export-oriented industries. Current Account Balance: Trade Balance: Exports vs. Imports: The trade balance, which is the difference between a country's exports and imports of goods and services, is a critical component of the current account. A surplus in the trade balance indicates that a country exports more than it imports, contributing positively to the BoP. For Bangladesh, maintaining a trade surplus is essential to support its export-oriented industries. Raw Material Imports: Many of Bangladesh's key export sectors, such as ready-made garments (RMG) and pharmaceuticals, rely heavily on imported raw materials. A positive trade balance ensures that the country can finance these imports through its export earnings, thereby sustaining production and export activities. Service Exports: Service Sector Contributions: The service sector, including IT and tourism, also plays a significant role in the current account. Earnings from service exports can offset deficits in goods trade and contribute to a favorable BoP. For instance, Bangladesh's burgeoning IT outsourcing industry generates valuable foreign exchange, supporting the overall BoP position. Transport and Logistics: Efficient transport and logistics services are essential for export-oriented industries. Earnings from these services not only enhance the current account balance but also improve the competitiveness of export sectors by reducing shipping and handling costs. Remittances: Worker Remittances: Remittances from Bangladeshis working abroad constitute a significant portion of the current account. These remittances provide a steady flow of foreign exchange, bolstering the BoP and supporting the country's import needs. They also contribute to household income, driving domestic consumption and economic growth. Economic Stability: 18 Page 413 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) High levels of remittances contribute to economic stability by providing a reliable source of foreign exchange, which can be used to support critical imports for export-oriented industries, such as machinery and technology. Capital and Financial Account: Investment Inflows: FDI is a vital component of the capital and financial account. It brings in necessary capital for expanding and modernizing export-oriented industries. For example, investments in the textile sector have enabled Bangladesh to enhance its production capacity and quality, making its exports more competitive internationally. Technology and Skills Transfer: FDI not only provides capital but also facilitates technology transfer and skills development. This enhances the productivity and efficiency of export-oriented industries, contributing to higher export volumes and better-quality products. Portfolio Investment: Capital Markets: Portfolio investments in the form of equity and debt securities can also support the BoP. By attracting foreign capital into its stock and bond markets, Bangladesh can finance its development needs, including infrastructure improvements that benefit export-oriented industries. Exchange Rate Stability: Inflows of portfolio investment can help stabilize the exchange rate, reducing volatility that can adversely affect export competitiveness. A stable exchange rate environment is conducive to long-term planning and investment in export sectors. External Borrowing: Development Loans and Aid: External borrowing, including development loans and aid, plays a role in the capital and financial account. These funds can be used for infrastructure projects, such as building ports, roads, and power plants, which are critical for the efficient functioning of export-oriented industries. Debt Management: Effective management of external debt is essential to maintain a favorable BoP position. Excessive debt can lead to a BoP crisis, negatively impacting the ability to import necessary inputs for export sectors. Implications for Export-Oriented Industries: Financing Imports: Raw Materials and Intermediate Goods: Export-oriented industries in Bangladesh, such as RMG and leather, depend heavily on imported raw materials and intermediate goods. A favorable BoP ensures that the country has 19 Page 414 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) sufficient foreign exchange reserves to finance these imports, enabling continuous production and export activities. Capital Goods and Technology: Imports of capital goods and advanced technology are crucial for upgrading production facilities and improving efficiency. A positive BoP position allows for such investments, enhancing the competitiveness of Bangladeshi exports. Maintaining Exchange Rate Stability: Competitiveness: A favorable BoP helps maintain exchange rate stability, which is critical for export competitiveness. A stable exchange rate reduces the risk of currency depreciation, which can lead to higher import costs and inflation, eroding the benefits of devaluation. Investor Confidence: A positive BoP reflects economic stability, attracting foreign investors and fostering a favorable business environment. This, in turn, supports the growth and sustainability of export-oriented industries. Economic Resilience: Shock Absorption: A robust BoP position enhances the economy's ability to absorb external shocks, such as global economic downturns or commodity price fluctuations. This resilience is vital for maintaining the stability and growth of export sectors. Policy Flexibility: A favorable BoP provides the government with greater policy flexibility to implement measures that support export industries, such as subsidies, tax incentives, and infrastructure development projects. The Balance of Payments (BoP) is a critical indicator of a country's economic health and its ability to support export-oriented industries. For Bangladesh, a favorable BoP position is essential for financing imports of raw materials and capital goods, maintaining exchange rate stability, and enhancing overall economic resilience. By ensuring a positive BoP, Bangladesh can sustain the growth and competitiveness of its export sectors, contributing to long-term economic development and stability. Case Study: Jute Industry Importance of a Favorable Balance of Payments (BoP) for Export Performance: The jute industry in Bangladesh serves as a prime example of how a favorable Balance of Payments (BoP) can significantly influence export performance. The industry's reliance on imported inputs and machinery underscores the need for a steady inflow of foreign currency to sustain production and maintain competitiveness in the global market. This case study explores the interplay between BoP conditions and the export performance of the jute industry, highlighting the critical role of economic stability in supporting this vital sector. 20 Page 415 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The Role of Imported Inputs: Jute Fiber: Sourcing Raw Materials: While Bangladesh is a major producer of raw jute, certain high-quality jute fibers may need to be imported to meet specific export requirements. A positive BoP ensures that the necessary foreign exchange is available to finance these imports without disrupting production. Quality Enhancement: Importing superior quality jute fibers can enhance the quality of jute products, making them more competitive in international markets. A favorable BoP allows for such strategic imports, thereby supporting the growth of export volumes. Machinery and Technology: Modernization of Production: The jute industry requires advanced machinery and technology to improve efficiency and product quality. Importing such machinery is crucial for modernization efforts. A surplus in the BoP provides the financial means to invest in state-of-the-art equipment, boosting the industry's export capabilities. Maintenance and Upgrades: Regular maintenance and upgrades of machinery are essential for sustained production. Access to foreign exchange for importing spare parts and technology ensures that the jute industry operates smoothly, maintaining its competitive edge. Impact of BoP Crises on the Jute Industry: Depletion of Foreign Exchange Reserves: Input Shortages: During periods of BoP crises, when foreign exchange reserves are depleted, the jute industry may struggle to secure the necessary foreign currency to import critical inputs. This can lead to shortages of raw materials and machinery, disrupting production processes. Production Declines: Input shortages inevitably lead to production declines, reducing the volume of jute products available for export. This diminishes the industry's ability to meet international demand, negatively impacting export performance and revenue generation. Rising Costs and Inflation: Import Costs: A BoP crisis often results in a weaker domestic currency, increasing the cost of imports. For the jute industry, this means higher expenses for imported fibers and machinery, squeezing profit margins and making it challenging to remain competitive. Inflationary Pressures: 21 Page 416 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) A weaker currency can lead to broader inflationary pressures in the economy. Increased production costs due to higher import prices can be passed on to consumers, affecting overall economic stability and potentially reducing the demand for jute products both domestically and internationally. Historical Analysis of BoP and Jute Export Performance: Periods of BoP Surpluses: Growth in Export Volumes: Historical data indicates that during periods of BoP surpluses, the jute industry experienced steady growth in export volumes. For example, in the early 1990s, Bangladesh enjoyed a favorable BoP position, which facilitated the import of high-quality jute fibers and modern machinery. As a result, the jute industry saw an increase in production capacity and export competitiveness. Enhanced Product Quality: With access to superior inputs and advanced technology, the quality of jute products improved, leading to higher demand in international markets. The ability to invest in quality enhancements during BoP surpluses translated into better market positioning and increased export revenues. Periods of BoP Deficits: Export Declines: Conversely, during periods of BoP deficits, the jute industry faced significant challenges. The late 1990s saw a BoP crisis that constrained the availability of foreign exchange. This resulted in difficulties importing essential inputs, leading to production bottlenecks and a subsequent decline in export volumes. Competitive Disadvantages: The inability to maintain production levels and invest in quality improvements during BoP deficits left the jute industry at a competitive disadvantage. International buyers turned to alternative suppliers, reducing Bangladesh's share in the global jute market and impacting the overall economic contribution of the sector. The case of the jute industry in Bangladesh highlights the critical importance of a favorable BoP for sustaining export performance. Access to foreign exchange is essential for importing necessary inputs, maintaining production levels, and enhancing product quality. Periods of BoP surpluses have historically corresponded with growth in export volumes and improved competitiveness for the jute industry. Conversely, BoP deficits have led to input shortages, production declines, and competitive disadvantages. This case study underscores the need for sound economic policies that ensure a stable and favorable BoP, thereby supporting the long-term growth and resilience of Bangladesh's export-oriented industries. Interconnected Impacts The interplay between interest rates, Foreign Direct Investment (FDI), and the Balance of Payments (BoP) significantly influences Bangladesh's export performance. These factors do not operate in isolation; their combined effects create a complex economic environment that can either enhance or hinder export growth. Understanding these interconnected impacts is crucial for policymakers aiming to develop comprehensive strategies to boost the country's export competitiveness. 22 Page 417 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Lower Interest Rates: Affordable Financing for Exporters: Investment in Production: Lower interest rates reduce the cost of borrowing, enabling exporters to invest in expanding production capacities, upgrading technologies, and improving efficiency. This investment is crucial for sectors like Ready-Made Garments (RMG), which require significant capital for operations and growth. Cost Reduction: Reduced borrowing costs lower overall production costs, allowing exporters to offer more competitive prices in the global market. This is particularly beneficial for price-sensitive products, where even small cost reductions can lead to significant competitive advantages. Stimulating Domestic Consumption: Indirect Support for Exports: Lower interest rates can stimulate domestic consumption and aggregate demand, creating a more robust economic environment. Increased economic activity can indirectly support export growth by enhancing the overall economic stability and infrastructure. Technology Transfer and Innovation: Production Efficiency: FDI brings in advanced technologies and innovative practices that can significantly improve production efficiency. For instance, in the pharmaceutical sector, FDI has enabled local companies to adopt cutting-edge manufacturing processes, enhancing their competitiveness in international markets. Quality Improvement: Technological advancements introduced through FDI can lead to higher-quality products, meeting the stringent requirements of global markets and increasing export potential. Capacity Expansion: FDI provides much-needed capital for expanding production capacities. This capital infusion is essential for sectors aiming to scale up operations to meet rising global demand. The leather and leather products industry, for example, has benefited from FDI, which has enabled the expansion of production facilities. Financial Stability: The influx of foreign capital strengthens the financial stability of exporting firms, making them more resilient to economic fluctuations and enabling them to maintain a steady supply of exports. Global Linkages: 23 Page 418 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Foreign investors often bring established international market linkages, facilitating easier access to global markets. This is particularly advantageous for sectors like pharmaceuticals, where compliance with international standards is critical for market entry. Import of Necessary Inputs Raw Materials and Machinery: A favorable BoP ensures the availability of foreign exchange necessary for importing raw materials and machinery vital for export production. For the jute industry, for example, importing high-quality jute fibers and advanced machinery is essential for maintaining export competitiveness. Continuous Production: A positive BoP allows for uninterrupted production by ensuring a steady flow of imported inputs, crucial for sustaining export volumes and meeting international demand. Investor Confidence: A healthy BoP reflects economic stability, fostering investor confidence. This stability attracts both domestic and foreign investments, further bolstering the export sector. Inflation Control: A favorable BoP helps control inflation by stabilizing the currency and reducing the cost of imports. This stabilization is critical for keeping production costs low and maintaining the price competitiveness of exports. Combined Impact on Export Performance: The interconnected impacts of interest rates, FDI, and BoP create a synergistic effect that can significantly enhance export performance. Policymakers need to consider the following strategies: Integrated Economic Policies Coordinated Approach: Formulating policies that simultaneously address interest rates, FDI incentives, and BoP management can create a conducive environment for export growth. For instance, lowering interest rates while attracting FDI and maintaining a positive BoP can collectively boost production capacity and export competitiveness. Support for Export-Oriented Industries: Targeted Interventions: Providing targeted support to export-oriented industries can amplify the positive effects of these economic variables. For example, offering low-interest loans, tax incentives for foreign investors, and measures to stabilize the BoP can specifically enhance the performance of key export sectors like RMG, pharmaceuticals, and leather products. Long-Term Sustainability: Sustainable Growth: 24 Page 419 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Ensuring that economic policies promote long-term sustainability is crucial. This involves not only boosting export performance in the short term but also maintaining economic stability and competitiveness in the global market over the long term. By understanding and leveraging the interconnected impacts of interest rates, FDI, and BoP, Bangladesh can develop comprehensive strategies to enhance export performance and achieve sustained economic growth. The research study highlights the pivotal roles that interest rates, Foreign Direct Investment (FDI), and the Balance of Payments (BoP) play in shaping Bangladesh's export performance. Understanding these variables provides a comprehensive view of how they influence the country’s export dynamics and overall economic stability. Boosting Export Capacity: Lower interest rates reduce the cost of borrowing for businesses, enabling them to invest in expanding production capacities, upgrading technologies, and improving operational efficiency. This is particularly crucial for sectors like Ready-Made Garments (RMG), where capital-intensive operations require affordable financing to maintain competitiveness. Stimulating Domestic Consumption: Lower interest rates can stimulate domestic consumption and aggregate demand, indirectly supporting export growth by enhancing overall economic activity. A vibrant domestic economy can create a more favorable environment for exporters. Provision of Essential Resources: FDI brings in much-needed capital, technology, and expertise, enabling local industries to enhance production capacities and improve product quality. For instance, the pharmaceutical sector has benefited from FDI through access to advanced manufacturing technologies and international market linkages. Market Access: FDI often comes with established global market connections, facilitating easier access to international markets. This is particularly advantageous for sectors that need to comply with stringent international standards to gain market entry. Sustainability of Export-Oriented Industries: A favorable BoP position, marked by a surplus in the current account, ensures the availability of foreign exchange necessary for importing critical inputs like raw materials and machinery. This is vital for maintaining continuous production and sustaining export growth. Economic Stability: A positive BoP reflects economic stability, boosting investor confidence and attracting both domestic and foreign investments. This stability is crucial for creating a conducive environment for export activities. Integrating Findings for Strategic Insights: 25 Page 420 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The interplay between interest rates, FDI, and BoP creates a complex yet synergistic environment that can either enhance or hinder export performance. Policymakers must recognize the interconnected impacts of these variables to formulate effective economic strategies. Coordinated Economic Policies: Holistic Approach: Implementing policies that address interest rates, FDI incentives, and BoP management simultaneously can create a robust framework for export growth. For instance, combining low-interest loans, favorable FDI regulations, and measures to stabilize the BoP can collectively boost production capacities and export competitiveness. Targeted Support for Key Sectors: Sector-Specific Interventions: Providing tailored support to key export sectors can maximize the positive effects of these economic variables. For example, the RMG sector could benefit from low-interest financing, while the pharmaceutical industry could gain from FDI incentives and technology transfer initiatives. Ensuring Long-Term Sustainability: Sustainable Growth Strategies: Policies should not only aim at boosting short-term export performance but also focus on maintaining long-term economic stability and competitiveness. This involves fostering a stable macroeconomic environment, managing inflation, and ensuring continuous access to necessary inputs. To further enhance the understanding of how these variables influence export performance, future research should: Examine Long-Term Impacts: Investigate the long-term effects of devaluation and other economic policies on export performance and overall economic stability. Explore Complementary Policies: Study the role of complementary economic policies, such as trade agreements and industrial policy, in amplifying the benefits of interest rate adjustments, FDI, and BoP management. Analyze Sector-Specific Impacts: Conduct detailed sector-specific analyses to understand how different industries respond to changes in these economic variables. By recognizing the critical roles of interest rates, FDI, and BoP, this study provides valuable insights for policymakers and businesses. These insights can inform the development of strategies aimed at enhancing export performance and maintaining economic stability in Bangladesh. 26 Page 421 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Policymakers in Bangladesh play a crucial role in shaping the economic environment to enhance export performance. Based on the findings of the study, several recommendations can be made to guide effective policy formulation: Maintaining Low and Stable Interest Rates: Consistent Monetary Policy: Implementing a consistent and transparent monetary policy that aims to keep interest rates low and stable is essential. This will reduce borrowing costs for businesses, encouraging investment in export-related activities such as expanding production capacities and adopting new technologies. Inflation Control: Policymakers must ensure that efforts to maintain low interest rates do not lead to runaway inflation. This can be achieved through prudent fiscal policies and effective monetary controls. Attracting Foreign Direct Investment (FDI): Favorable Investment Climate: Creating a favorable investment climate through policies that provide tax incentives, streamlined regulatory procedures, and protection for foreign investors will attract more FDI. These measures should be regularly reviewed and updated to remain competitive in the global market. Sector-Specific Incentives: Tailoring FDI incentives to the specific needs of key sectors, such as the RMG, pharmaceutical, and jute industries, can maximize the benefits. For instance, offering subsidies for technology upgrades in the pharmaceutical sector or providing tax breaks for environmentally sustainable practices in the leather industry. Infrastructure Development: Investing in infrastructure, such as transport and logistics, to support export-oriented industries will make Bangladesh a more attractive destination for foreign investors. Ensuring a Positive Balance of Payments (BoP): Export Promotion: Enhancing export promotion activities, such as participating in international trade fairs, supporting branding initiatives, and facilitating market access through trade agreements, will help maintain a positive BoP. Import Substitution: Encouraging the development of domestic industries that can produce inputs currently imported will reduce the trade deficit. For example, promoting local production of raw materials for the RMG sector can help balance the BoP. Exchange Rate Management: 27 Page 422 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Implementing policies to manage exchange rate fluctuations effectively can prevent excessive volatility that might harm export competitiveness. This could involve using foreign exchange reserves strategically and adopting a managed float exchange rate system. Sector-Specific Strategies: Ready-Made Garments (RMG): Focus on improving compliance with international labor and environmental standards to enhance market access. Additionally, investing in skill development programs will ensure a steady supply of qualified labor. Pharmaceuticals: Support research and development initiatives and facilitate partnerships with global pharmaceutical companies to enhance technological capabilities. Regulatory reforms to align with international standards will also boost export potential. Jute and Jute Goods: Promote the diversification of jute products and explore new markets. Supporting innovation in the jute sector, such as developing new uses for jute fibers, can create additional export opportunities. Leather and Leather Products: Address environmental concerns through stringent regulations and support for sustainable practices. Developing leather clusters with modern facilities can attract more FDI and boost exports. Frozen Food (Shrimp): Invest in quality control and certification processes to meet the standards of importing countries. Enhancing cold chain infrastructure will also improve the competitiveness of the shrimp sector. Integrated Economic Policies: Holistic Approach: Adopt an integrated approach to economic policy that considers the interconnected impacts of interest rates, FDI, and BoP on export performance. This approach ensures that policies in one area do not negatively impact another. Public-Private Partnerships: Foster public-private partnerships to leverage the strengths of both sectors. This can include joint ventures in infrastructure development, research and innovation, and market expansion initiatives. By focusing on these recommendations, policymakers can create a robust economic environment that supports sustained export growth and economic stability in Bangladesh. This strategic approach will help leverage the unique advantages of low interest rates, FDI, and a positive BoP, ultimately enhancing the country's export performance and global competitiveness. 28 Page 423 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 8Circular Reasoning INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 424 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 5 Circular Reasoning: Table of Contents Circular Reasoning...................................................................................................................................4 The Challenge of Circular Reasoning:.............................................................................................. 4 Devaluation and Exchange Rate Movements:...................................................................................4 Definition Overlap:..................................................................................................................... 4 Economic Complexity:............................................................................................................... 4 Alternative Independent Variables:................................................................................................... 4 Real Effective Exchange Rate (REER):............................................................................................ 4 Definition:................................................................................................................................... 4 Benefits:...................................................................................................................................... 4 Trade-Weighted Exchange Rate (TWER):........................................................................................ 4 Definition:................................................................................................................................... 4 Benefits:...................................................................................................................................... 4 Export Price Competitiveness Index:................................................................................................ 5 Definition:................................................................................................................................... 5 Benefits:...................................................................................................................................... 5 Rationale for Revising the Independent Variable:.............................................................................5 Clarity and Precision:........................................................................................................................ 5 Isolating Effects:......................................................................................................................... 5 Comprehensive Analysis:........................................................................................................... 5 Informed Decision-Making:........................................................................................................5 Targeted Strategies:.....................................................................................................................5 Application in Bangladesh:............................................................................................................... 5 Historical Analysis:.....................................................................................................................5 Comparative Studies:.................................................................................................................. 5 Case Study: Ready-Made Garments (RMG) Sector..........................................................................5 Impact of REER:.........................................................................................................................6 Trade-Weighted Analysis:...........................................................................................................6 Summary of Key Points:................................................................................................................... 6 The Issue with Devaluation as an Independent Variable:..................................................................6 Circular Reasoning and Ambiguity:..................................................................................................6 Circular Reasoning:........................................................................................................................... 6 5 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. 1 Page 425 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Definition and Consequence:............................................................................................................ 6 Devaluation Defined:.................................................................................................................. 6 Circular Reasoning:.................................................................................................................... 6 Example:............................................................................................................................................7 Economic Instability:.................................................................................................................. 7 Balance of Payments:..................................................................................................................7 Ambiguity in Analysis:......................................................................................................................7 Multiple Influencing Factors:............................................................................................................ 7 Interconnected Variables:............................................................................................................7 Confounding Variables:.............................................................................................................. 7 Impact on Research Clarity:.............................................................................................................. 7 Blurring Cause and Effect:..........................................................................................................7 Complicating Policy Analysis:................................................................................................... 7 Case Studies Illustrating the Issue:....................................................................................................7 Example 1: Bangladesh’s RMG Sector:............................................................................................ 7 Post-1991 Devaluation:...............................................................................................................7 Ambiguity:.................................................................................................................................. 7 Example 2: Jute Exports:...................................................................................................................8 1996 Devaluation:.......................................................................................................................8 Confounding Influences:.............................................................................................................8 Importance of Revising the Independent Variable:........................................................................... 8 Enhanced Clarity:........................................................................................................................8 Avoiding Circular Reasoning:.....................................................................................................8 Comprehensive Insights:.............................................................................................................8 Implications for Policy and Research:...............................................................................................8 Policy Formulation:.................................................................................................................... 8 Future Research:......................................................................................................................... 8 Theoretical and Practical Challenges:............................................................................................... 8 Theoretical Frameworks and the Dual Role of Devaluation:............................................................8 Complexity in Economic Theory:..................................................................................................... 8 Dual Role of Devaluation:.......................................................................................................... 9 Interconnected Variables:............................................................................................................9 Models and Assumptions:................................................................................................................. 9 Simplifying Assumptions:.......................................................................................................... 9 Causality vs. Correlation:............................................................................................................9 Practical Challenges in Isolating Specific Impacts:.......................................................................... 9 Empirical Data Issues:.......................................................................................................................9 Data Limitations:........................................................................................................................ 9 Time Lags:.................................................................................................................................. 9 Simultaneity Problem:....................................................................................................................... 9 Concurrent Economic Events:.................................................................................................... 9 Feedback Mechanisms:...............................................................................................................9 Case Study: Economic Instability................................................................................................... 10 Context:.....................................................................................................................................10 2 Page 426 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact Assessment:......................................................................................................................... 10 Practical Example: Bangladesh’s Economic Landscape................................................................. 10 Background:..............................................................................................................................10 Concurrent Factors:...................................................................................................................10 Background:..............................................................................................................................10 Compounding Influences:.........................................................................................................10 Addressing Theoretical and Practical Challenges:.......................................................................... 10 Improved Analytical Methods:........................................................................................................10 Advanced Econometric Techniques:.........................................................................................10 Counterfactual Analysis:...........................................................................................................10 Sector-Specific Studies:...................................................................................................................10 Focused Analysis:..................................................................................................................... 11 Comparative Analysis:..............................................................................................................11 Policy Considerations:.....................................................................................................................11 Holistic Policy Approach:.........................................................................................................11 Dynamic Policy Adjustments:...................................................................................................11 Economic Indicators:.......................................................................................................................11 Impact on Currency and Exports:....................................................................................................11 Currency Devaluation:.............................................................................................................. 11 Export Competitiveness:........................................................................................................... 11 Historical Trends:......................................................................................................................11 Bangladesh Context:................................................................................................................. 12 Currency Value:........................................................................................................................ 12 Export Performance:................................................................................................................. 12 Interest Rate Movements:......................................................................................................... 12 Bangladesh Context:................................................................................................................. 12 Trade Deficits:...........................................................................................................................12 Export Competitiveness:...........................................................................................................12 Trade Deficit Patterns:.............................................................................................................. 12 Bangladesh Context:................................................................................................................. 12 Case Study Examples:..................................................................................................................... 12 Inflation Impact:.............................................................................................................................. 12 Rising Costs:............................................................................................................................. 12 Empirical Evidence:..................................................................................................................13 Interest Rates Impact:............................................................................................................... 13 Financing Expansion:................................................................................................................13 Empirical Evidence:..................................................................................................................13 Trade Balance Impact:.....................................................................................................................13 Competitiveness Boost:............................................................................................................ 13 Empirical Evidence:..................................................................................................................13 Production Costs:...................................................................................................................... 13 Empirical Evidence:..................................................................................................................13 Investment in Technology:........................................................................................................13 Empirical Evidence:..................................................................................................................13 3 Page 427 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Global Demand:........................................................................................................................ 13 Empirical Evidence:..................................................................................................................14 Cost of Inputs:...........................................................................................................................14 Empirical Evidence:..................................................................................................................14 Expansion of Farms:................................................................................................................. 14 Empirical Evidence:..................................................................................................................14 Market Competitiveness:.......................................................................................................... 14 Empirical Evidence:..................................................................................................................14 Other Macroeconomic Variables:.................................................................................................... 14 Government Debt Levels:................................................................................................................15 Currency Devaluation:.............................................................................................................. 15 Export Competitiveness:...........................................................................................................15 Debt and Currency Stability:.................................................................................................... 15 Bangladesh Context:................................................................................................................. 15 Currency Stability:.................................................................................................................... 15 Export Financing:......................................................................................................................15 Reserve Levels and Currency Health:.......................................................................................15 Bangladesh Context:................................................................................................................. 15 Investor Confidence:.................................................................................................................15 Economic Policy:...................................................................................................................... 15 Political Risk and Currency Volatility:..................................................................................... 16 Bangladesh Context:................................................................................................................. 16 Case Studies Highlighting Other Macroeconomic Variables:......................................................... 16 Government Debt Levels: Impact on Export Sectors......................................................................16 Garments Sector:............................................................................................................................. 16 Debt-Induced Devaluation:.......................................................................................................16 Empirical Evidence:..................................................................................................................16 Debt and Investment:................................................................................................................ 16 Empirical Evidence:..................................................................................................................16 Foreign Exchange Reserves: Buffer Against Volatility...................................................................16 Reserves and Stability:..............................................................................................................16 Empirical Evidence:..................................................................................................................16 Reserve Support:.......................................................................................................................16 Empirical Evidence:..................................................................................................................17 Political Stability: Foundation for Growth...................................................................................... 17 Stability and Policy:..................................................................................................................17 Empirical Evidence:..................................................................................................................17 Investor Confidence:.................................................................................................................17 Empirical Evidence:..................................................................................................................17 Policymakers should adopt a holistic approach by:........................................................................ 17 Maintaining Low Government Debt:........................................................................................17 Building Foreign Exchange Reserves:......................................................................................17 Ensuring Political Stability:...................................................................................................... 17 Future research should:....................................................................................................................17 4 Page 428 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Explore Interconnected Impacts:.............................................................................................. 17 Focus on Sector-Specific Analysis:.......................................................................................... 18 Analyze Long-Term Trends:..................................................................................................... 18 Methodological Approach:..............................................................................................................18 Framework for Revising the Independent Variable:........................................................................18 Key Components of the Framework:.............................................................................................. 18 Selection of Alternative Independent Variables:............................................................................. 18 Inflation Rates:..........................................................................................................................18 Interest Rates:............................................................................................................................18 Trade Balance:.......................................................................................................................... 18 Government Debt Levels:......................................................................................................... 18 Foreign Exchange Reserves:.....................................................................................................18 Political Stability:......................................................................................................................18 Data Collection and Sources:.......................................................................................................... 19 Statistical and Econometric Techniques:.........................................................................................19 Multiple Regression Analysis:..................................................................................................19 Vector Autoregression (VAR):..................................................................................................19 Structural Equation Modeling (SEM):......................................................................................19 Synthetic Control Method (SCM):............................................................................................19 Control Variables:..................................................................................................................... 19 Analytical Steps:..............................................................................................................................19 Descriptive Analysis:.......................................................................................................................19 Regression Analysis:....................................................................................................................... 19 Dynamic Analysis:.......................................................................................................................... 19 Indirect Effects Analysis:................................................................................................................ 20 Counterfactual Analysis:................................................................................................................. 20 Expected Outcomes:........................................................................................................................20 Clarified Impacts:............................................................................................................................ 20 Enhanced Analytical Framework:................................................................................................... 20 Analytical Techniques Used:...........................................................................................................20 Multiple Regression Analysis:........................................................................................................ 21 Purpose:.....................................................................................................................................21 Methodology:.................................................................................................................................. 21 Model Specification:.................................................................................................................21 Estimation:................................................................................................................................ 21 Interpretation:............................................................................................................................21 Advantages:..................................................................................................................................... 21 Vector Autoregression (VAR):.........................................................................................................21 Purpose:.....................................................................................................................................21 Model Specification:.................................................................................................................21 Estimation:................................................................................................................................ 21 Impulse Response Functions (IRFs):........................................................................................ 21 Variance Decomposition:.......................................................................................................... 21 Structural Equation Modeling (SEM):............................................................................................ 22 5 Page 429 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Purpose:.....................................................................................................................................22 Model Specification:.................................................................................................................22 Estimation:................................................................................................................................ 22 Path Analysis:........................................................................................................................... 22 Synthetic Control Method (SCM):.................................................................................................. 22 Purpose:.....................................................................................................................................22 Synthetic Control Creation:...................................................................................................... 22 Comparison:..............................................................................................................................22 Validation:................................................................................................................................. 22 Time-Series Analysis:......................................................................................................................22 Purpose:.....................................................................................................................................22 Unit Root Tests:........................................................................................................................ 23 Cointegration Tests:.................................................................................................................. 23 Error Correction Model (ECM):............................................................................................... 23 Examples from Bangladesh:............................................................................................................23 Context:........................................................................................................................................... 23 Inflation:.......................................................................................................................................... 23 Pre-Devaluation:....................................................................................................................... 23 Impact on Devaluation:.............................................................................................................23 Interest Rates:.................................................................................................................................. 23 Pre-Devaluation:....................................................................................................................... 23 Impact on Devaluation:.............................................................................................................24 Pre-Devaluation:....................................................................................................................... 24 Impact on Devaluation:.............................................................................................................24 Export Performance:................................................................................................................. 24 Economic Stability:...................................................................................................................24 Context:........................................................................................................................................... 24 Pre-Devaluation:....................................................................................................................... 24 Impact on Devaluation:.............................................................................................................24 Pre-Devaluation:....................................................................................................................... 24 Impact on Devaluation:.............................................................................................................24 Pre-Devaluation:....................................................................................................................... 25 Impact on Devaluation:.............................................................................................................25 Export Performance:................................................................................................................. 25 Economic Stability:...................................................................................................................25 Summary of Case Study Findings:.................................................................................................. 25 The case studies underscore the importance of:.............................................................................. 25 Inflation Management:..............................................................................................................25 Interest Rate Policies:............................................................................................................... 25 Trade Balance Improvements:.................................................................................................. 25 Future research should further explore:...........................................................................................25 Sector-Specific Impacts:........................................................................................................... 25 Long-Term Effects:................................................................................................................... 26 Global Economic Integration:...................................................................................................26 6 Page 430 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Comparative Analysis with Other Countries:..................................................................................26 India:................................................................................................................................................26 Devaluation Episodes:..................................................................................................................... 26 1991 Devaluation:.....................................................................................................................26 1998 Devaluation:.....................................................................................................................26 2013 Depreciation:....................................................................................................................26 Short-Term Impact:...................................................................................................................26 Long-Term Impact:................................................................................................................... 26 Unique Factors:............................................................................................................................... 27 Economic Reforms:.................................................................................................................. 27 Diverse Export Base:................................................................................................................ 27 1997-1998 Crisis:......................................................................................................................27 2008 Global Financial Crisis:................................................................................................... 27 Short-Term Impact:...................................................................................................................27 Long-Term Impact:................................................................................................................... 27 Commodity Dependence:..........................................................................................................27 Crisis Management:.................................................................................................................. 27 Common Patterns:........................................................................................................................... 27 Devaluation:..............................................................................................................................27 Impact of Devaluation:............................................................................................................. 27 Policy Complementation:..........................................................................................................28 Unique Factors:............................................................................................................................... 28 Export Base Diversity:.................................................................................................................... 28 India:......................................................................................................................................... 28 Indonesia:..................................................................................................................................28 Crisis Management:.........................................................................................................................28 Indonesia:..................................................................................................................................28 Economic Policy Context:...............................................................................................................28 India:......................................................................................................................................... 28 Indonesia:..................................................................................................................................28 Lessons for Bangladesh:..................................................................................................................28 Integrated Policy Approach:............................................................................................................28 Structural Reforms:...................................................................................................................28 Crisis Management:.................................................................................................................. 29 Diversifying Export Base:............................................................................................................... 29 Economic Resilience:................................................................................................................29 Managing Inflationary Pressures:....................................................................................................29 Monetary and Fiscal Policies:...................................................................................................29 Implications for Policy and Business:............................................................................................. 29 Insights for Policymakers:...............................................................................................................29 Understanding Underlying Causes of Devaluation:........................................................................ 29 Economic Stability:...................................................................................................................29 Inflation Control:...................................................................................................................... 29 Trade Balance:.......................................................................................................................... 29 7 Page 431 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Fiscal Discipline:...................................................................................................................... 29 Strategic Economic Planning:......................................................................................................... 30 Diversification:......................................................................................................................... 30 Investment in Infrastructure:.....................................................................................................30 FDI Attraction:..........................................................................................................................30 Collaborative Approach:................................................................................................................. 30 Stakeholder Engagement:......................................................................................................... 30 International Cooperation:........................................................................................................ 30 Insights for Businesses:................................................................................................................... 30 Adaptation to Economic Conditions:.............................................................................................. 30 Cost Management:.................................................................................................................... 30 Quality Improvement:...............................................................................................................30 Expanding Export Markets:...................................................................................................... 30 Product Diversification:............................................................................................................ 31 Innovation and Technology:............................................................................................................ 31 Adopting Technology:...............................................................................................................31 Research and Development (R&D):......................................................................................... 31 Strategic Financial Management:.................................................................................................... 31 Hedging Against Currency Risk:.............................................................................................. 31 Access to Finance:.................................................................................................................... 31 Strategies for Export-Oriented Businesses:.....................................................................................31 Improving Productivity:.................................................................................................................. 31 Investing in Technology and Automation:...................................................................................... 31 Modernization:..........................................................................................................................31 Training and Development:.......................................................................................................31 Waste Reduction:...................................................................................................................... 32 Continuous Improvement:........................................................................................................ 32 Reducing Reliance on Imported Inputs:.......................................................................................... 32 Local Sourcing:............................................................................................................................... 32 Developing Local Supply Chains:............................................................................................ 32 Supplier Development Programs:............................................................................................. 32 Material Substitution:................................................................................................................32 R&D for Alternatives:...............................................................................................................32 Financial Hedging Techniques:....................................................................................................... 32 Currency Hedging:.......................................................................................................................... 32 Forward Contracts:....................................................................................................................32 Options and Futures:................................................................................................................. 32 Diversifying Financial Instruments:................................................................................................ 33 Export Credit Insurance:........................................................................................................... 33 Access to Trade Finance:.......................................................................................................... 33 Expanding into New Markets:.................................................................................................. 33 Tailoring Products for Different Markets:.................................................................................33 Value Addition:................................................................................................................................33 Moving Up the Value Chain:.................................................................................................... 33 8 Page 432 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Brand Development:................................................................................................................. 33 Collaboration and Networking:....................................................................................................... 33 Industry Alliances:.................................................................................................................... 33 Government and NGO Partnerships:........................................................................................ 33 Key Findings:.................................................................................................................................. 34 Complexity of Devaluation as an Independent Variable:......................................................... 34 Alternative Independent Variables:................................................................................................. 34 Inflation Rates:..........................................................................................................................34 Interest Rates:............................................................................................................................34 Trade Balance:.......................................................................................................................... 34 Other Macroeconomic Variables:............................................................................................. 34 Methodological Approach:..............................................................................................................34 Comprehensive Framework:.....................................................................................................34 Advanced Econometric Models:...............................................................................................34 Bangladesh:...............................................................................................................................34 Comparative Analysis:..............................................................................................................34 Implications for Policy and Business:............................................................................................. 35 Policymakers:............................................................................................................................35 Export-Oriented Businesses:.....................................................................................................35 Recommendations for Future Research:......................................................................................... 35 Exploring the Interplay Between Economic Factors and Currency Values:................................... 35 Longitudinal Studies:.......................................................................................................................35 In-depth Temporal Analysis:.....................................................................................................35 Impact Assessment Over Different Economic Cycles:.............................................................35 Cross-Country Comparisons:.......................................................................................................... 35 Comparative Analysis:..............................................................................................................35 Regional and Global Context:...................................................................................................36 Focused Analysis on Key Sectors:............................................................................................36 Comparative Sector Performance:............................................................................................ 36 Integrated Policy Analysis:....................................................................................................... 36 Policy Synergy:.........................................................................................................................36 Technological and Innovation Factors:............................................................................................36 Role of Technology:..................................................................................................................36 Adoption of New Technologies:............................................................................................... 36 Influence of Global Trends:...................................................................................................... 36 Future Global Scenarios:...........................................................................................................36 Microeconomic Perspectives:..........................................................................................................37 Firm-Level Analysis:................................................................................................................ 37 Behavioral Insights:.................................................................................................................. 37 9 Page 433 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Circular Reasoning The relationship between currency devaluation and export performance is intricate and multifaceted. When currency devaluation is used as an independent variable in economic studies, it can lead to ambiguities due to its inherent connection to exchange rate movements. This circular reasoning can obscure the true dynamics affecting export performance. To gain a clearer understanding of how devaluation impacts exports in Bangladesh, it is necessary to revise the independent variable to more accurately capture the underlying economic factors at play. The Challenge of Circular Reasoning: Devaluation and Exchange Rate Movements: Definition Overlap: Devaluation is typically defined as a deliberate downward adjustment of a currency's value, which is inherently tied to exchange rate fluctuations. Using devaluation as an independent variable can therefore be problematic, as it is both a cause and effect of changes in the exchange rate. Economic Complexity: Devaluation impacts multiple economic variables such as inflation, interest rates, and foreign exchange reserves, which in turn influence export performance. This interconnectedness can make it difficult to isolate the specific effects of devaluation. Alternative Independent Variables: Real Effective Exchange Rate (REER): Definition: The Real Effective Exchange Rate (REER) is an index that adjusts the nominal exchange rate by the relative prices or costs of goods and services between countries. It provides a more comprehensive measure of a country's competitiveness. Benefits: Using REER as an independent variable can help capture the broader economic impact of exchange rate movements on export performance, accounting for inflation and relative cost changes across trading partners. Trade-Weighted Exchange Rate (TWER): Definition: The Trade-Weighted Exchange Rate (TWER) is a measure that compares the value of a country's currency against the currencies of its major trading partners, weighted by the trade share. Benefits: TWER reflects the actual exchange rates experienced in trade transactions, providing a direct measure of how exchange rate movements affect export competitiveness. 4 Page 434 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Export Price Competitiveness Index: Definition: This index measures the relative price of a country's exports compared to those of its competitors. Benefits: Focusing on export price competitiveness can provide insights into how changes in currency value influence the relative pricing of goods in international markets. Rationale for Revising the Independent Variable: Clarity and Precision: Isolating Effects: By revising the independent variable to REER, TWER, or an Export Price Competitiveness Index, researchers can more precisely isolate the impact of exchange rate movements on export performance. This avoids the circular reasoning inherent in using devaluation directly. Comprehensive Analysis: These alternative variables incorporate multiple factors influencing exchange rates and their effects on exports, leading to a more comprehensive analysis. Informed Decision-Making: Policymakers require clear and actionable insights to design effective interventions. Using a more precise independent variable provides a better understanding of the specific economic mechanisms through which exchange rate movements impact export performance. Targeted Strategies: With clearer insights, policymakers can develop more targeted strategies to enhance export competitiveness, such as focusing on cost control, improving product quality, or negotiating better trade agreements. Application in Bangladesh: Historical Analysis: Applying alternative independent variables such as REER or TWER to historical data on Bangladesh can reveal more accurate trends and patterns in the relationship between exchange rate movements and export performance. Comparative Studies: Comparative studies with other countries using these revised variables can provide valuable benchmarks and insights into best practices for managing exchange rate impacts on exports. Case Study: Ready-Made Garments (RMG) Sector 5 Page 435 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact of REER: Analyzing the RMG sector using REER as an independent variable can highlight how relative cost changes affect export volumes and values, providing a clearer picture of the sector's responsiveness to exchange rate movements. Trade-Weighted Analysis: Using TWER to study the RMG sector can reveal how changes in the Taka's value against the currencies of major trading partners influence export performance, offering actionable insights for policymakers and industry stakeholders. Summary of Key Points: Revising the independent variable from devaluation to a more precise measure such as REER, TWER, or an Export Price Competitiveness Index is crucial for understanding the true impact of exchange rate movements on export performance in Bangladesh. These variables provide a clearer, more comprehensive analysis, avoiding the pitfalls of circular reasoning and offering valuable insights for policymakers and industry leaders. Future research should continue to refine the choice of independent variables, exploring the use of composite indices and sector-specific measures to capture the nuanced effects of exchange rate movements on different export sectors. Additionally, empirical studies applying these revised variables can enhance the robustness of findings and support evidence-based policy formulation. The Issue with Devaluation as an Independent Variable: Circular Reasoning and Ambiguity: Using devaluation as an independent variable in economic studies introduces significant challenges due to circular reasoning and ambiguity. Devaluation itself is a result of complex exchange rate movements influenced by various economic conditions, which means treating it as an independent variable can create a scenario where the cause and effect become indistinguishable. This section elaborates on these issues and their implications for analyzing the relationship between devaluation and export performance. Circular Reasoning: Definition and Consequence: Devaluation Defined: Devaluation refers to a deliberate downward adjustment in the value of a country's currency, typically enacted by monetary authorities to boost export competitiveness and address trade imbalances. Circular Reasoning: When devaluation is used as an independent variable, the analysis can fall into a loop where devaluation is both the cause and effect of exchange rate movements. This circular reasoning arises because the reasons for devaluation (like balance of payments deficits or economic instability) are also the factors that exchange rates respond to. 6 Page 436 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: Economic Instability: An unstable economic environment can lead to devaluation as a corrective measure. However, devaluation itself affects economic stability, leading to further changes in the exchange rate. Balance of Payments: A deficit in the balance of payments can prompt devaluation to correct the imbalance. Yet, the devaluation impacts the balance of payments by making exports cheaper and imports more expensive, influencing the initial condition. Ambiguity in Analysis: Multiple Influencing Factors: Interconnected Variables: Devaluation is influenced by a multitude of factors such as inflation, interest rates, foreign exchange reserves, and political stability. This interconnectedness creates ambiguity in isolating the specific impact of devaluation on export performance. Confounding Variables: When analyzing the effect of devaluation, other concurrent economic policies and external factors (like global economic conditions) can confound the results, making it difficult to attribute changes in export performance solely to devaluation. Impact on Research Clarity: Blurring Cause and Effect: By treating devaluation as an independent variable, the clear distinction between cause and effect is blurred. This makes it challenging to determine whether improvements in export performance are a direct result of devaluation or other underlying factors. Complicating Policy Analysis: For policymakers, the ambiguity in analysis complicates the development of effective strategies. If the effects of devaluation are not clearly understood, crafting targeted interventions becomes more difficult. Case Studies Illustrating the Issue: Example 1: Bangladesh’s RMG Sector: Post-1991 Devaluation: After the 1991 devaluation of the Taka, Bangladesh's ready-made garments (RMG) sector experienced significant export growth. However, this growth was also influenced by global trade agreements, improvements in production technology, and labor cost advantages. Ambiguity: 7 Page 437 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Isolating the impact of devaluation from these other factors is challenging. The RMG sector’s growth may not solely be attributable to the currency adjustment but also to concurrent economic and trade policies. Example 2: Jute Exports: 1996 Devaluation: The 1996 devaluation was aimed at reducing the trade deficit and enhancing export competitiveness of jute products. While exports did increase, the rise was also driven by favorable global market conditions for jute and increased demand. Confounding Influences: The beneficial impact of devaluation on jute exports was confounded by these external market factors, making it difficult to assess the true effectiveness of the devaluation. Importance of Revising the Independent Variable: Enhanced Clarity: By revising the independent variable to more precise measures like the Real Effective Exchange Rate (REER) or Trade-Weighted Exchange Rate (TWER), researchers can achieve a clearer understanding of the relationship between exchange rate movements and export performance. Avoiding Circular Reasoning: Alternative variables help avoid the pitfalls of circular reasoning, providing a more straightforward analysis of how exchange rate changes impact exports. Comprehensive Insights: These measures incorporate the broader economic context, capturing the multiple factors influencing exchange rates and their subsequent effect on export performance. Implications for Policy and Research: Policy Formulation: Policymakers can develop more effective strategies with a clearer understanding of how exchange rate movements affect exports, avoiding the ambiguities introduced by using devaluation as an independent variable. Future Research: Future studies should continue to refine the choice of independent variables, exploring composite indices and sector-specific measures to provide deeper insights into the economic dynamics at play. By addressing the issues of circular reasoning and ambiguity, researchers and policymakers can better navigate the complexities of exchange rate dynamics and their impact on export performance, leading to more robust economic strategies and research findings. 8 Page 438 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Theoretical and Practical Challenges: Theoretical Frameworks and the Dual Role of Devaluation: Complexity in Economic Theory: Dual Role of Devaluation: In economic theory, devaluation functions both as a cause and an effect within the broader framework of macroeconomic dynamics. It is implemented as a policy response to correct imbalances but also acts as a result of underlying economic conditions. Interconnected Variables: The theoretical challenge lies in understanding how devaluation interacts with various economic variables like inflation, interest rates, foreign exchange reserves, and trade balances. These interactions create a feedback loop that complicates the analysis. Models and Assumptions: Simplifying Assumptions: Economic models often make simplifying assumptions to isolate the effect of devaluation. These assumptions may overlook the multifaceted nature of economic systems, leading to incomplete or skewed interpretations. Causality vs. Correlation: Distinguishing between causality and correlation becomes difficult when devaluation is both a reactive measure and a proactive tool. The theoretical models must account for the simultaneous occurrence of devaluation and its supposed effects. Practical Challenges in Isolating Specific Impacts: Empirical Data Issues: Data Limitations: Practical analysis requires accurate and comprehensive data. However, economic data is often influenced by numerous factors, making it hard to isolate the impact of devaluation on export performance. Time Lags: The effects of devaluation on exports may not be immediate. Time lags between devaluation and observable changes in export performance complicate the identification of direct causal relationships. Simultaneity Problem: Concurrent Economic Events: During periods of economic instability, multiple events occur simultaneously. For example, a country might experience devaluation, inflation, shifts in global demand, and policy changes all at once. This simultaneity makes it challenging to attribute changes in export performance directly to devaluation. 9 Page 439 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Feedback Mechanisms: Economic variables often interact through feedback mechanisms. For instance, devaluation may lead to increased export competitiveness, but the resulting economic growth could influence further exchange rate adjustments. Case Study: Economic Instability Context: In periods of economic instability, devaluation is commonly used to stabilize the economy. However, during such times, other policies (fiscal stimuli, monetary easing, trade agreements) are also implemented. Impact Assessment: Assessing the impact of devaluation on exports in this context requires disentangling its effects from those of concurrent measures. This separation is challenging because all measures aim to stabilize and stimulate the economy simultaneously. Practical Example: Bangladesh’s Economic Landscape Background: In 1991, Bangladesh devalued the Taka as part of broader economic reforms to address a balance of payments crisis. Concurrent Factors: Alongside devaluation, the government implemented structural reforms, trade liberalization, and fiscal adjustments. The RMG sector, a major export driver, benefitted from these combined measures, making it hard to isolate the specific impact of devaluation. Background: In 2013, Bangladesh devalued the Taka to maintain export competitiveness amidst a depreciating Indian Rupee. Compounding Influences: Global demand for Bangladeshi garments was rising, and the country was experiencing significant inflows of FDI. The impact of devaluation on exports was intertwined with these factors, complicating the direct attribution of export growth to devaluation alone. Addressing Theoretical and Practical Challenges: Improved Analytical Methods: Advanced Econometric Techniques: Utilizing econometric models that can handle multiple variables and account for simultaneity can improve the accuracy of impact assessments. Techniques like Vector Autoregression (VAR) and Structural Equation Modeling (SEM) can provide more nuanced insights. Counterfactual Analysis: 10 Page 440 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Employing counterfactual scenarios helps in understanding what export performance would have been in the absence of devaluation. This method aids in isolating the specific effects of devaluation. Sector-Specific Studies: Focused Analysis: Conducting sector-specific studies allows for a more detailed examination of how devaluation affects different parts of the economy. By focusing on individual sectors, researchers can control for sector-specific variables and better isolate the impact of devaluation. Comparative Analysis: Comparing sectors with different levels of exposure to devaluation provides insights into its differential impact. For instance, the RMG sector, heavily dependent on import costs, might react differently compared to the less import-reliant jute sector. Policy Considerations: Holistic Policy Approach: Policymakers need to consider the broader economic environment when implementing devaluation policies. Complementary measures such as inflation control, fiscal stability, and trade facilitation are essential to maximize the positive effects of devaluation on exports. Dynamic Policy Adjustments: Policies should be adaptive, responding to real-time economic changes. Monitoring the effects of devaluation and making necessary adjustments can help mitigate any negative repercussions. The theoretical and practical challenges of using devaluation as an independent variable in economic studies highlight the need for more refined analytical approaches. By addressing these challenges through advanced methods, sector-specific analyses, and comprehensive policy strategies, researchers and policymakers can better understand and harness the impacts of devaluation on export performance. Economic Indicators: To mitigate the challenges associated with using devaluation as an independent variable, the study proposes using key economic indicators that more accurately reflect the underlying factors influencing currency movements. These indicators provide a clearer and more direct understanding of the dynamics at play and their impact on export performance. Impact on Currency and Exports: Currency Devaluation: Higher inflation erodes the purchasing power of a currency, leading to devaluation as the currency loses value relative to others. Export Competitiveness: 11 Page 441 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Inflation can impact the cost of production, affecting the price competitiveness of exports. High inflation may increase the cost of local inputs, making exports less competitive despite currency devaluation. Historical Trends: Empirical studies show that countries with higher inflation rates tend to experience more frequent and significant currency devaluations. Bangladesh Context: In Bangladesh, periods of high inflation have coincided with currency devaluation. For instance, during the late 1990s and early 2000s, high inflation rates led to several instances of Taka devaluation. Currency Value: Lower interest rates reduce the return on investments in a country's currency, leading to decreased demand and potential devaluation. Export Performance: Lower interest rates can stimulate domestic investment and production, potentially boosting exports by reducing borrowing costs for businesses. Interest Rate Movements: Studies have shown that lower interest rates are associated with currency depreciation, as investors seek higher returns elsewhere. Bangladesh Context: In Bangladesh, adjustments in interest rates have influenced currency value. For example, reductions in interest rates during economic downturns have often been followed by devaluation to maintain export competitiveness. Trade Deficits: Persistent trade deficits increase demand for foreign currency to pay for imports, leading to pressure on the domestic currency to devalue. Export Competitiveness: Devaluation in response to trade deficits can make exports cheaper and more competitive internationally, potentially improving the trade balance over time. Trade Deficit Patterns: Countries with sustained trade deficits often face downward pressure on their currencies, leading to devaluation. Bangladesh Context: 12 Page 442 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Bangladesh's trade balance has been a critical factor in its currency movements. Episodes of significant trade deficits have often preceded currency devaluation, as seen in the early 1990s and late 2000s. Case Study Examples: Inflation Impact: Rising Costs: Higher inflation can increase the cost of raw materials and labor, affecting the RMG sector's competitiveness despite a weaker currency. Empirical Evidence: During periods of high inflation in the late 1990s, the RMG sector faced rising costs, which partially offset the benefits of currency devaluation. Interest Rates Impact: Financing Expansion: Lower interest rates in the early 2000s allowed RMG manufacturers to finance expansion and upgrade production facilities, enhancing export performance. Empirical Evidence: The sector's growth during this period demonstrates the positive impact of affordable credit on export capacity. Trade Balance Impact: Competitiveness Boost: Trade deficits and subsequent devaluations in the 2010s improved the price competitiveness of Bangladeshi garments, leading to increased global market share. Empirical Evidence: The trade deficit-induced devaluation in 2013 helped sustain export growth in the RMG sector. Production Costs: Inflationary pressures can increase production costs for jute goods, reducing the competitive edge gained from currency devaluation. Empirical Evidence: In the mid-1990s, inflation led to higher input costs, which impacted the profitability of jute exports. Investment in Technology: Lower interest rates can facilitate investment in better production technology, improving efficiency and export quality. 13 Page 443 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Empirical Evidence: The early 2000s saw technological upgrades in the jute industry, supported by lower borrowing costs. Global Demand: Devaluation in response to trade deficits can enhance the global competitiveness of jute products, boosting export volumes. Empirical Evidence: The trade deficit-related devaluation in the early 1990s supported sustained growth in jute exports. Cost of Inputs: Inflation can raise the cost of feed and other inputs for shrimp farming, impacting export margins even with a weaker currency. Empirical Evidence: Periods of high inflation in the 2000s affected the profitability of shrimp exports. Expansion of Farms: Lower interest rates help shrimp farmers invest in expanding and modernizing farms, improving export output and quality. Empirical Evidence: The early 2000s saw significant investment in shrimp farming, supported by low interest rates. Market Competitiveness: Devaluation due to trade deficits can make Bangladeshi shrimp more competitive in global markets, increasing export volumes. Empirical Evidence: The devaluation in the early 2000s coincided with a surge in shrimp exports. Using alternative economic indicators such as inflation rates, interest rates, and trade balance as independent variables offers a clearer and more precise analysis of the factors driving currency devaluation and their impact on export performance. These indicators allow for a better understanding of the complex dynamics at play, providing valuable insights for policymakers and researchers in formulating strategies to enhance Bangladesh's export competitiveness. By focusing on these variables, the study can more effectively isolate the specific impacts of economic conditions on export performance, avoiding the ambiguities and circular reasoning associated with using devaluation as an independent variable. 14 Page 444 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Other Macroeconomic Variables: To comprehensively understand the factors influencing currency values and their impact on export performance, it is essential to consider a broader range of macroeconomic variables. Beyond inflation rates, interest rates, and trade balance, other significant factors include government debt levels, foreign exchange reserves, and political stability. These variables offer a nuanced understanding of the economic environment and its influence on currency movements. Government Debt Levels: Currency Devaluation: High levels of government debt can lead to concerns about a country's fiscal health, potentially triggering currency devaluation as investors lose confidence and demand for the currency decreases. Export Competitiveness: While devaluation can boost export competitiveness, high debt levels may also constrain the government's ability to invest in export-supportive infrastructure and policies. Debt and Currency Stability: Empirical studies show a correlation between high government debt and increased currency volatility, as seen in several emerging economies facing fiscal crises. Bangladesh Context: In Bangladesh, periods of high government debt have coincided with currency devaluation. For example, the early 2000s saw rising debt levels, which contributed to the devaluation of the Taka. Currency Stability: Adequate foreign exchange reserves provide a buffer against external shocks and help maintain currency stability, reducing the likelihood of sudden devaluation. Export Financing: High reserves can also support export financing and facilitate smoother trade transactions by ensuring the availability of foreign currency for import payments. Reserve Levels and Currency Health: Countries with higher foreign exchange reserves tend to experience lower currency volatility and greater investor confidence. Bangladesh Context: Bangladesh's foreign exchange reserves have played a crucial role in stabilizing the Taka. For instance, during the global financial crisis of 2008-2009, robust reserves helped mitigate the impact on the currency. 15 Page 445 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Investor Confidence: Political stability fosters investor confidence, reducing the risk of currency devaluation and encouraging foreign investment in export-oriented industries. Economic Policy: Stable political environments enable consistent and effective economic policies, supporting long-term export growth and competitiveness. Political Risk and Currency Volatility: Political instability often leads to currency depreciation as investors seek safer assets, as observed in various emerging markets. Bangladesh Context: Periods of political stability in Bangladesh have been associated with more stable currency values and better export performance. For example, the mid-2010s saw relative political calm, contributing to steady export growth. Case Studies Highlighting Other Macroeconomic Variables: Government Debt Levels: Impact on Export Sectors Garments Sector: Debt-Induced Devaluation: High government debt levels in the early 2000s led to devaluation of the Taka, which improved the price competitiveness of Bangladeshi garments. However, the accompanying fiscal constraints limited government support for industry infrastructure. Empirical Evidence: Despite increased export volumes, the sector faced challenges related to inadequate infrastructure investment due to high government debt. Debt and Investment: High debt levels can deter foreign investment in the pharmaceutical sector, impacting export potential. For instance, during periods of high debt, foreign investors have been cautious about committing to long-term projects in Bangladesh. Empirical Evidence: The sector's growth has been slower during high debt periods due to reduced foreign investment and limited government support. Foreign Exchange Reserves: Buffer Against Volatility Reserves and Stability: Strong foreign exchange reserves in the late 2000s helped stabilize the Taka, enabling consistent export growth in the leather sector. 16 Page 446 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Empirical Evidence: The sector benefited from reduced currency volatility, which facilitated long-term export contracts and planning. Reserve Support: Adequate reserves ensured the availability of foreign currency for importing necessary inputs like feed and technology, supporting the shrimp sector's export performance. Empirical Evidence: High reserve levels in the mid-2010s helped the sector withstand global market fluctuations and maintain export volumes. Political Stability: Foundation for Growth Stability and Policy: Political stability in the early 1990s allowed for consistent economic policies that supported the jute sector's growth and export performance. Empirical Evidence: The sector thrived during stable periods, with government policies focused on promoting jute exports and improving production efficiency. Investor Confidence: Political stability in the 2010s enhanced investor confidence, leading to increased foreign investment in the RMG sector and sustained export growth. Empirical Evidence: The sector saw significant investments in infrastructure and technology during stable political periods, boosting export competitiveness. Incorporating additional macroeconomic variables such as government debt levels, foreign exchange reserves, and political stability provides a more comprehensive analysis of the factors influencing currency devaluation and export performance. These variables offer valuable insights into the broader economic context and help isolate the specific impacts of various economic conditions on export dynamics. Policymakers should adopt a holistic approach by: Maintaining Low Government Debt: Implementing fiscal policies that keep debt levels manageable to avoid currency devaluation and ensure resources for infrastructure investments. Building Foreign Exchange Reserves: Strengthening reserves to buffer against external shocks and support export financing. 17 Page 447 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Ensuring Political Stability: Promoting a stable political environment to foster investor confidence and enable consistent economic policies. Future research should: Explore Interconnected Impacts: Investigate the interplay between government debt, foreign exchange reserves, political stability, and other economic variables. Focus on Sector-Specific Analysis: Examine how different sectors respond to changes in these macroeconomic variables to identify targeted policy interventions. Analyze Long-Term Trends: Study the long-term impacts of these variables on export performance to inform sustainable economic strategies. By addressing these factors, policymakers and researchers can better understand and enhance Bangladesh's export performance in a complex global economic environment. Methodological Approach: Framework for Revising the Independent Variable: To provide a clearer and more accurate analysis of the relationship between currency devaluation and export performance, the study adopts a comprehensive framework that incorporates alternative independent variables. This methodological approach focuses on integrating key economic indicators and macroeconomic variables to disentangle the specific impacts of devaluation from its underlying causes. Key Components of the Framework: Selection of Alternative Independent Variables: Inflation Rates: Measured through Consumer Price Index (CPI) and Producer Price Index (PPI). Interest Rates: Focus on central bank policy rates and commercial lending rates. Trade Balance: Assessing the difference between exports and imports. Government Debt Levels: Evaluating the ratio of government debt to GDP. 18 Page 448 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Foreign Exchange Reserves: Analyzing the total reserves in foreign currency holdings. Political Stability: Using indices such as the Political Stability and Absence of Violence/Terrorism index by the World Bank. Data Collection and Sources: Collect historical data from 1990 to 2020 from reliable sources like the World Bank, International Monetary Fund (IMF), and national statistical agencies. Use time-series data to capture the dynamics over different periods. Statistical and Econometric Techniques: Multiple Regression Analysis: To identify the direct impacts of each variable on export performance. Vector Autoregression (VAR): To analyze the dynamic relationships and feedback loops between the variables. Structural Equation Modeling (SEM): To understand the indirect effects and the interdependencies among the variables. Synthetic Control Method (SCM): To create counterfactual scenarios and assess the impact of devaluation and other economic variables on export performance. Control Variables: Include control variables such as global economic conditions, exchange rate volatility, and trade policies to isolate the effects of the independent variables on export performance. Analytical Steps: Descriptive Analysis: Perform a descriptive analysis to understand the trends and patterns of the selected variables over the study period. Use graphical representations such as line charts, bar graphs, and scatter plots to visualize the data. Regression Analysis: Conduct multiple regression analysis to estimate the impact of each independent variable on export performance. 19 Page 449 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Evaluate the statistical significance and coefficients to determine the strength and direction of the relationships. Dynamic Analysis: Apply Vector Autoregression (VAR) to explore the dynamic interactions between the variables. Use impulse response functions and variance decomposition to analyze how shocks to one variable affect others over time. Indirect Effects Analysis: Utilize Structural Equation Modeling (SEM) to identify indirect effects and the pathways through which the variables influence export performance. Assess the model fit and the significance of the indirect paths. Counterfactual Analysis: Implement the Synthetic Control Method to create a synthetic Bangladesh that did not experience devaluation. Compare the export performance of the actual Bangladesh with the synthetic control to quantify the impact of devaluation and other variables. Expected Outcomes: Clarified Impacts: Provide a clearer understanding of how each alternative variable directly and indirectly affects export performance. Identify which factors are most significant in driving changes in export volumes and values. Policy Insights: Offer insights into which macroeconomic variables policymakers should focus on to enhance export performance. Recommend specific policy interventions based on the identified impacts. Enhanced Analytical Framework: Develop an improved methodological framework that can be applied to other countries and contexts to study the impact of devaluation and macroeconomic variables on export performance. By adopting a comprehensive framework that integrates key economic indicators and macroeconomic variables, this study aims to provide a more accurate and nuanced analysis of the relationship between devaluation and export performance in Bangladesh. This approach helps disentangle the specific impacts of devaluation from its underlying causes, offering 20 Page 450 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) valuable insights for policymakers and researchers to enhance export performance and economic stability. Analytical Techniques Used: To provide a comprehensive and accurate assessment of the factors driving devaluation and their subsequent effects on export performance, the study employs a range of advanced econometric models and regression analyses. These methodologies are chosen to ensure robustness in quantifying the relationships between the selected variables and export performance. Multiple Regression Analysis: Purpose: To estimate the impact of each independent variable on export performance while controlling for other variables. Methodology: Model Specification: Formulate a multiple linear regression model where export performance (measured by export volumes or values) is the dependent variable, and the alternative independent variables (inflation rates, interest rates, trade balance, government debt levels, foreign exchange reserves, political stability) are the predictors. Estimation: Use Ordinary Least Squares (OLS) to estimate the coefficients of the regression model. Interpretation: Analyze the coefficients to determine the direction and magnitude of the impact of each independent variable on export performance. Assess statistical significance through t-tests and p-values. Advantages: Provides clear insights into the individual contribution of each variable. Controls for multiple factors simultaneously. Vector Autoregression (VAR): Purpose: To analyze the dynamic interactions and feedback loops between multiple time-series variables. Model Specification: Specify a VAR model where each variable is regressed on its own lagged values and the lagged values of all other variables in the system. Estimation: Estimate the VAR model using time-series data for the selected variables. 21 Page 451 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impulse Response Functions (IRFs): Use IRFs to trace the effect of a one-time shock to one of the variables on the current and future values of all variables in the system. Variance Decomposition: Decompose the variance of the forecast error of each variable into proportions attributable to shocks to each variable in the system. Captures the dynamic interrelationships between variables. Provides insights into the temporal effects of shocks. Structural Equation Modeling (SEM): Purpose: To understand the direct and indirect effects and the interdependencies among the variables. Model Specification: Develop a structural model that specifies the hypothesized relationships between the independent variables, devaluation, and export performance. Estimation: Estimate the parameters of the structural model using SEM techniques. Path Analysis: Analyze the direct and indirect paths to understand how changes in independent variables affect export performance both directly and through devaluation. Provides a comprehensive view of the complex relationships among variables. Identifies indirect effects and mediating variables. Synthetic Control Method (SCM): Purpose: To create counterfactual scenarios and assess the impact of devaluation and other economic variables on export performance. Synthetic Control Creation: Construct a synthetic Bangladesh that did not experience devaluation by selecting a weighted combination of other countries that did not devalue their currencies. Comparison: Compare the export performance of actual Bangladesh with the synthetic control to estimate the causal impact of devaluation. Validation: 22 Page 452 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Ensure robustness by checking the pre-intervention fit between actual and synthetic Bangladesh. Provides a causal estimate of the impact of devaluation. Addresses potential endogeneity issues by comparing against a constructed counterfactual. Time-Series Analysis: Purpose: To capture the temporal patterns and trends in the data. Unit Root Tests: Conduct tests such as the Augmented Dickey-Fuller (ADF) test to check for stationarity. Cointegration Tests: Use Johansen cointegration tests to determine long-term relationships between variables. Error Correction Model (ECM): Apply ECM to capture both short-term dynamics and long-term equilibrium relationships. Ensures the validity of time-series econometric models. Captures both short-term and long-term effects. By employing these advanced econometric techniques and regression analyses, the study ensures a robust and accurate assessment of the factors driving devaluation and their subsequent effects on export performance. These methodologies provide a comprehensive understanding of the complex interactions between economic variables and export dynamics, offering valuable insights for policymakers and researchers aiming to enhance export performance and maintain economic stability in Bangladesh. Examples from Bangladesh: The study examines specific instances of currency devaluation in Bangladesh, particularly focusing on the episodes in 1991 and 2009. By analyzing these cases, the study aims to understand how alternative independent variables such as inflation, interest rates, and trade balance influenced these devaluation events. Context: In May 1991, Bangladesh devalued its currency, the Taka, by approximately 16%. This move was part of broader economic reforms intended to address a balance of payments crisis and enhance export competitiveness. Inflation: Pre-Devaluation: Inflation rates in the years leading up to 1991 were relatively high, driven by factors such as rising import costs and fiscal deficits. 23 Page 453 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact on Devaluation: High inflation eroded the purchasing power of the Taka, making it necessary to devalue the currency to restore competitiveness and stabilize the economy. Interest Rates: Pre-Devaluation: Interest rates were relatively high, reflecting efforts to control inflation and manage economic stability. Impact on Devaluation: High-interest rates increased the cost of borrowing, which strained businesses and contributed to economic sluggishness, necessitating currency devaluation to spur export growth and economic activity. Pre-Devaluation: Bangladesh faced a significant trade deficit, with imports consistently exceeding exports. This imbalance put pressure on foreign exchange reserves. Impact on Devaluation: The persistent trade deficit created a need to make Bangladeshi exports more competitive, leading to the devaluation decision as a measure to correct the trade imbalance and improve the balance of payments. Export Performance: Post-devaluation, the competitiveness of Bangladeshi goods improved, particularly in the ready-made garments (RMG) sector, leading to a notable increase in export volumes. Economic Stability: While the devaluation helped boost exports, it also contributed to inflationary pressures, necessitating complementary economic policies to manage the inflation and stabilize the economy. Context: In January 2009, amid the global economic recession, Bangladesh devalued the Taka by approximately 4%. This devaluation aimed to counteract the adverse effects of the global downturn and support the country's export sector. Pre-Devaluation: Inflation rates were relatively moderate, but there were concerns about rising prices for essential goods. Impact on Devaluation: 24 Page 454 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Moderate inflation provided some room for devaluation without triggering runaway inflation, helping to improve export competitiveness without severe economic disruptions. Pre-Devaluation: Interest rates had been lowered in response to the global economic crisis to stimulate domestic economic activity. Impact on Devaluation: Lower interest rates reduced borrowing costs, encouraging investment in export-oriented industries and supporting the overall objective of enhancing export performance through devaluation. Pre-Devaluation: The trade balance showed a deficit, exacerbated by declining global demand and falling export revenues. Impact on Devaluation: The devaluation was aimed at boosting export competitiveness to mitigate the impact of the global economic downturn and address the trade deficit by making Bangladeshi goods more attractive in international markets. Export Performance: The devaluation helped stabilize and eventually increase export volumes, particularly in key sectors such as garments and frozen food (shrimp), despite the challenging global economic environment. Economic Stability: The devaluation, combined with supportive monetary and fiscal policies, helped Bangladesh navigate the global recession with relatively resilient export performance. Summary of Case Study Findings: By examining these specific instances of devaluation, the study highlights the significant roles of inflation, interest rates, and trade balance in influencing devaluation decisions. These case studies provide valuable insights into how these variables interact and contribute to the overall economic context leading to devaluation. The case studies underscore the importance of: Inflation Management: Maintaining moderate inflation levels to provide flexibility for currency adjustments without destabilizing the economy. Interest Rate Policies: 25 Page 455 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Adjusting interest rates to balance the dual objectives of controlling inflation and stimulating economic activity. Trade Balance Improvements: Implementing policies to enhance export competitiveness and reduce trade deficits, thereby reducing the pressure for devaluation. Future research should further explore: Sector-Specific Impacts: Detailed analysis of how devaluation impacts different sectors differently and the role of sector-specific policies. Long-Term Effects: Investigating the long-term economic impacts of devaluation beyond immediate export performance. Global Economic Integration: Understanding the interaction between domestic devaluation policies and global economic trends, including trade policies and economic cycles. By focusing on these areas, future research can build a more comprehensive understanding of the complex dynamics between devaluation and export performance, providing deeper insights for policymakers and economic strategists. Comparative Analysis with Other Countries: A comparative analysis of Bangladesh with countries like India and Indonesia provides a broader perspective on the relationship between devaluation and export performance. This section examines the devaluation episodes and export performance of these countries to identify common patterns and unique factors influencing their economic outcomes. Such comparisons can offer valuable insights and lessons for Bangladesh's economic strategy. India: Devaluation Episodes: 1991 Devaluation: India devalued the rupee in July 1991 by about 18-19% as part of a broader economic reform package to address a severe balance of payments crisis. This was followed by another devaluation in July 1991. 1998 Devaluation: During the Asian financial crisis, the rupee faced downward pressure, leading to a managed depreciation rather than a sharp devaluation. 2013 Depreciation: 26 Page 456 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The rupee depreciated significantly due to a capital flight caused by the US Federal Reserve's tapering announcement, resulting in a nearly 20% decline. Short-Term Impact: The 1991 devaluation led to a sharp increase in export competitiveness, especially in textiles, garments, and software services. Export volumes increased significantly as Indian products became cheaper in global markets. Long-Term Impact: Sustained export growth was achieved through policy reforms that complemented the devaluation, including trade liberalization, deregulation, and investment in export infrastructure. Unique Factors: Economic Reforms: The success of devaluation was closely tied to comprehensive economic reforms that opened up the economy and attracted foreign investment. Diverse Export Base: India's diverse export base, including IT services, pharmaceuticals, and engineering goods, helped sustain export growth despite global economic fluctuations. Indonesia 1997-1998 Crisis: The Indonesian rupiah experienced a dramatic devaluation during the Asian financial crisis, losing about 80% of its value against the US dollar. 2008 Global Financial Crisis: The rupiah depreciated by around 30% due to global economic turmoil and capital outflows. Short-Term Impact: The 1997-1998 devaluation initially boosted export competitiveness, particularly in commodities like palm oil, rubber, and textiles. However, the economic crisis led to severe contractions in overall economic activity. Long-Term Impact: Post-crisis recovery saw a gradual improvement in export performance, supported by structural reforms and efforts to diversify the export base. Commodity Dependence: Indonesia's heavy reliance on commodity exports made its export performance highly sensitive to global commodity price fluctuations. Crisis Management: 27 Page 457 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The 1997-1998 crisis highlighted the importance of effective crisis management and institutional reforms to stabilize the economy and support export recovery. Common Patterns: Devaluation: Both India and Indonesia saw immediate improvements in export competitiveness following significant currency devaluations. This resulted in increased export volumes as their products became more affordable in international markets. Impact of Devaluation: In both countries, devaluation led to inflationary pressures due to increased import costs, particularly for essential inputs and consumer goods. Effective monetary and fiscal policies were crucial to managing these pressures. Policy Complementation: Successful export performance following devaluation was often supported by structural economic reforms. These included trade liberalization, deregulation, investment in infrastructure, and measures to attract foreign direct investment (FDI). Unique Factors: Export Base Diversity: India: Benefited from a diverse export base, including high-value sectors like IT services and pharmaceuticals, which provided resilience against global economic fluctuations. Indonesia: Faced challenges due to its reliance on commodity exports, making its economy more vulnerable to global price volatility. Crisis Management: Indonesia: The 1997-1998 Asian financial crisis underscored the need for robust crisis management strategies and institutional reforms to stabilize the economy and support long-term export growth. Economic Policy Context: India: The success of devaluation in improving export performance was closely tied to comprehensive economic reforms that liberalized the economy and attracted foreign investment. 28 Page 458 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Indonesia: The post-crisis recovery and export growth were facilitated by structural reforms aimed at diversifying the export base and improving economic resilience. Lessons for Bangladesh: Integrated Policy Approach: Structural Reforms: Bangladesh can learn from India and Indonesia by implementing comprehensive structural reforms that complement devaluation. This includes trade liberalization, investment in export infrastructure, and measures to attract FDI. Crisis Management: Effective crisis management strategies are essential to mitigate the negative impacts of devaluation and support economic stability. Diversifying Export Base: Economic Resilience: Developing a diverse export base can enhance economic resilience against global economic fluctuations. Bangladesh should focus on expanding into high-value sectors and reducing dependence on a few key products. Managing Inflationary Pressures: Monetary and Fiscal Policies: Effective monetary and fiscal policies are crucial to manage inflationary pressures resulting from devaluation. This includes controlling inflation and ensuring stable economic conditions to support export growth. The comparative analysis of India and Indonesia provides valuable insights for Bangladesh in managing devaluation and enhancing export performance. By adopting integrated policy approaches, diversifying the export base, and implementing effective crisis management strategies, Bangladesh can improve its export competitiveness and achieve sustained economic growth. Implications for Policy and Business: Insights for Policymakers: Understanding Underlying Causes of Devaluation: Economic Stability: Policymakers need to focus on the fundamental economic conditions that lead to devaluation, such as inflation, trade imbalances, and fiscal deficits. By addressing these root causes, the necessity for frequent devaluations can be reduced, ensuring a more stable economic environment. Inflation Control: 29 Page 459 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Controlling inflation is crucial. High inflation erodes the value of the currency, leading to devaluation. Effective monetary policies that control money supply and interest rates can help manage inflation. Trade Balance: Maintaining a stable trade balance is essential. Persistent trade deficits exert pressure on the currency to devalue. Policies that promote exports and control imports can help achieve a favorable trade balance. Fiscal Discipline: Ensuring fiscal discipline is vital. Large fiscal deficits financed by borrowing can lead to currency depreciation. Policymakers should aim for sustainable fiscal policies, reducing the need for external borrowing. Strategic Economic Planning: Diversification: Economic diversification is key. Relying on a few export products makes the economy vulnerable to global price fluctuations. Promoting a diverse range of exports can provide stability and growth. Investment in Infrastructure: Investing in export infrastructure, such as ports, logistics, and production facilities, can enhance export performance. Efficient infrastructure reduces costs and improves competitiveness. FDI Attraction: Policies that attract foreign direct investment (FDI) can bring in capital, technology, and expertise, boosting export sectors. Creating a favorable business environment with clear regulations, incentives, and stability is crucial for attracting FDI. Collaborative Approach: Stakeholder Engagement: Engaging with businesses, industry associations, and trade unions can provide valuable insights into the challenges and opportunities within export sectors. Collaborative policymaking ensures that policies are practical and effective. International Cooperation: Engaging in international cooperation and trade agreements can open up new markets and enhance export opportunities. Negotiating favorable trade terms and reducing trade barriers can significantly benefit export performance. Insights for Businesses: Adaptation to Economic Conditions: Cost Management: 30 Page 460 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Businesses should focus on effective cost management to maintain competitiveness, especially when devaluation leads to higher import costs. Streamlining operations, improving efficiency, and negotiating better terms with suppliers can help control costs. Quality Improvement: Investing in quality improvement is crucial. High-quality products are more competitive in international markets and can command better prices, offsetting some of the impacts of devaluation. Expanding Export Markets: Businesses should explore new markets to reduce dependency on a few key markets. Market research, participation in international trade fairs, and leveraging trade agreements can help identify and enter new markets. Product Diversification: Diversifying product offerings can help mitigate risks associated with market fluctuations. Developing new products and adapting existing ones to meet the demands of different markets can enhance export resilience. Innovation and Technology: Adopting Technology: Embracing new technologies can improve production efficiency and product quality. Investing in automation, advanced manufacturing techniques, and digital tools can give businesses a competitive edge. Research and Development (R&D): Investing in R&D is essential for innovation. Developing new products, improving existing ones, and finding cost-effective production methods can help businesses stay competitive in global markets. Strategic Financial Management: Hedging Against Currency Risk: Businesses engaged in international trade should consider financial strategies like hedging to protect against currency risks. Using forward contracts, options, and other financial instruments can mitigate the adverse effects of currency fluctuations. Access to Finance: Ensuring access to affordable finance is vital. Businesses should build strong relationships with financial institutions and explore various financing options, including bank loans, trade finance, and government schemes. Both policymakers and businesses need to adopt a comprehensive approach to manage the impacts of devaluation and enhance export performance. By understanding the underlying causes of devaluation, implementing strategic economic policies, and adopting effective business practices, Bangladesh can achieve sustainable growth and improve its competitiveness in the global market. 31 Page 461 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Strategies for Export-Oriented Businesses: Export-oriented businesses in Bangladesh can adopt several strategies to mitigate the adverse effects of devaluation and enhance their competitiveness. By focusing on improving productivity, reducing reliance on imported inputs, and implementing financial hedging techniques, businesses can build resilience to currency fluctuations. Improving Productivity: Investing in Technology and Automation: Modernization: Upgrading to the latest technology and automating production processes can significantly improve productivity and reduce costs. Automation can lead to more consistent quality, higher output, and lower labor costs. Training and Development: Investing in employee training programs ensures that the workforce is skilled in using new technologies and adopting efficient production techniques. A well-trained workforce can operate more effectively, contributing to overall productivity. Lean Manufacturing Practices: Waste Reduction: Implementing lean manufacturing practices can help identify and eliminate waste in production processes. This leads to more efficient use of resources and lowers production costs. Continuous Improvement: Encouraging a culture of continuous improvement (Kaizen) allows businesses to make incremental changes that enhance efficiency and productivity over time. Reducing Reliance on Imported Inputs: Local Sourcing: Developing Local Supply Chains: Establishing relationships with local suppliers can reduce dependence on imported raw materials and components. This not only lowers costs but also mitigates the risk associated with currency fluctuations. Supplier Development Programs: Supporting local suppliers in improving their quality and capacity can ensure a reliable supply of inputs that meet international standards. Substitution and Innovation: Material Substitution: Identifying alternative materials that can be sourced locally or regionally can help reduce reliance on imports. Innovations in product design and material science can make this feasible. 32 Page 462 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) R&D for Alternatives: Investing in research and development to find or create alternative materials and components that do not need to be imported can provide long-term benefits. Financial Hedging Techniques: Currency Hedging: Forward Contracts: Engaging in forward contracts allows businesses to lock in exchange rates for future transactions. This can protect against adverse currency movements. Options and Futures: Using currency options and futures provides flexibility and protection against unfavorable exchange rate changes while allowing businesses to benefit from favorable movements. Diversifying Financial Instruments: Export Credit Insurance: Export credit insurance can protect businesses against non-payment by foreign buyers and other risks. This reduces financial uncertainty and improves cash flow stability. Access to Trade Finance: Utilizing trade finance products like letters of credit and trade loans can provide liquidity and reduce the risks associated with international trade. Strategic Business Practices Expanding into New Markets: Diversifying export markets can reduce the impact of economic downturns or currency issues in a single market. Businesses should conduct market research to identify and enter new international markets. Tailoring Products for Different Markets: Customizing products to meet the specific needs and preferences of different markets can enhance competitiveness and open new opportunities. Value Addition: Moving Up the Value Chain: Focusing on value-added products rather than raw materials or low-value goods can increase profit margins and reduce vulnerability to price competition. Brand Development: Building strong brands and reputations for quality can help secure premium pricing and customer loyalty, providing a buffer against price volatility. 33 Page 463 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Collaboration and Networking: Industry Alliances: Forming alliances with other businesses and industry groups can enhance collective bargaining power, share resources, and improve market access. Government and NGO Partnerships: Collaborating with government agencies and non-governmental organizations can provide access to support programs, funding, and expertise. Export-oriented businesses in Bangladesh can develop and implement a variety of strategies to mitigate the adverse effects of currency devaluation. By focusing on improving productivity, reducing reliance on imported inputs, and using financial hedging techniques, businesses can enhance their resilience to currency fluctuations. Additionally, strategic business practices such as market diversification, value addition, and collaboration can further strengthen their competitive position in the global market. These measures, collectively, can ensure sustainable growth and stability for export-oriented businesses in the face of economic uncertainties. This research underscores the potential pitfalls of using devaluation as an independent variable to study its impact on export performance. Devaluation, being a result of exchange rate movements influenced by various economic conditions, often leads to circular reasoning, obscuring the true dynamics at play. By revising the independent variable to include more precise economic indicators, we achieve a clearer and more accurate understanding of the relationship between devaluation and export performance in Bangladesh. Key Findings: Complexity of Devaluation as an Independent Variable: Treating devaluation as an independent variable can lead to ambiguity and circular reasoning, complicating the analysis and interpretation of results. Alternative Independent Variables: Inflation Rates: Higher inflation typically leads to currency devaluation as the purchasing power of the currency declines. Interest Rates: Lower interest rates can reduce returns on investments, leading to currency devaluation. Trade Balance: Persistent trade deficits increase demand for foreign currency, pressuring the local currency to devalue. Other Macroeconomic Variables: Government debt levels, foreign exchange reserves, and political stability also play significant roles in influencing currency values. 34 Page 464 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Methodological Approach: Comprehensive Framework: Integrating alternative variables allows for a more nuanced analysis, disentangling the specific impacts of devaluation from its underlying causes. Advanced Econometric Models: Using sophisticated econometric models and regression analyses helps quantify the relationships between these variables and export performance, ensuring robust and accurate assessments. Bangladesh: Instances of currency devaluation in Bangladesh are examined with respect to alternative variables, providing insights into the roles of inflation, interest rates, and trade balance. Comparative Analysis: Comparing Bangladesh's experience with countries like India and Indonesia reveals common patterns and unique factors that affect the relationship between devaluation and export performance. Implications for Policy and Business: Policymakers: Understanding the underlying causes of devaluation enables policymakers to formulate more effective economic strategies, such as controlling inflation and maintaining a stable trade balance to mitigate the need for frequent devaluations. Export-Oriented Businesses: Businesses can develop strategies to hedge against the adverse effects of devaluation, such as improving productivity, reducing reliance on imported inputs, and implementing financial hedging techniques. The research highlights that devaluation, while enhancing export competitiveness, presents challenges that require careful management. The revised approach, focusing on more precise economic indicators, provides a clearer understanding of the factors driving devaluation and their impact on export performance. This refined analysis is crucial for formulating effective policy measures and strategic business responses to sustain and enhance Bangladesh's export growth. Recommendations for Future Research: Future research should delve deeper into the long-term impacts of devaluation and the interplay of complementary economic policies. Additionally, sector-specific studies can provide further insights into the nuanced effects of devaluation on different industries. By continuing to refine the analytical framework and exploring new variables, researchers can contribute to a more comprehensive understanding of the complex dynamics between currency devaluation and export performance. 35 Page 465 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Exploring the Interplay Between Economic Factors and Currency Values: Longitudinal Studies: In-depth Temporal Analysis: Future research should conduct longitudinal studies to track the long-term effects of devaluation and other economic factors on export performance. Such studies can reveal trends, patterns, and cycles that short-term analyses might miss. Impact Assessment Over Different Economic Cycles: By examining multiple economic cycles, researchers can better understand how devaluation impacts exports during periods of growth, recession, and recovery. Cross-Country Comparisons: Comparative Analysis: Comparing Bangladesh's experience with those of other countries can provide valuable insights into the effectiveness of different devaluation strategies and economic policies. This approach can help identify best practices and avoid pitfalls observed in other economies. Regional and Global Context: Assessing how global economic trends, such as changes in international trade policies or global financial crises, influence the relationship between devaluation and export performance across different countries. Focused Analysis on Key Sectors: Further research should delve into sector-specific impacts of devaluation, examining how industries like garments, pharmaceuticals, jute, leather, and shrimp are uniquely affected by currency fluctuations. Comparative Sector Performance: Comparing the performance of similar sectors in different countries can help identify industry-specific factors that influence export success in the context of devaluation. Integrated Policy Analysis: Future studies should explore how complementary economic policies, such as trade agreements, fiscal policies, and labor market regulations, interact with currency devaluation to affect export performance. Policy Synergy: Understanding the synergy between devaluation and other economic measures can help policymakers design more effective and holistic strategies for enhancing export competitiveness. Technological and Innovation Factors: Role of Technology: 36 Page 466 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Investigate how technological advancements and innovation in production processes influence the ability of export-oriented industries to capitalize on devaluation. Adoption of New Technologies: Examine how the adoption of new technologies by businesses affects their resilience to currency fluctuations and their overall export performance. Influence of Global Trends: Analyze the effects of global economic trends, such as shifts in trade dynamics, changes in commodity prices, and international monetary policies, on the relationship between devaluation and export performance. Future Global Scenarios: Explore potential future global economic scenarios and their likely impact on the currency values and export performance of developing economies like Bangladesh. Microeconomic Perspectives: Firm-Level Analysis: Conduct firm-level studies to understand how individual businesses respond to devaluation, including their strategies for managing costs, pricing, and market expansion. Behavioral Insights: Incorporate behavioral economics to understand how perceptions of currency stability and economic policy influence business decisions related to exports. By continuing to explore these areas, future research can provide a more comprehensive understanding of the complex interplay between economic factors and currency values. This enriched knowledge base will support the development of more effective economic policies and business strategies, ultimately enhancing the export performance and economic stability of Bangladesh and similar developing economies. "Devaluation results from exchange rate movements influenced by various economic conditions." (Bangladesh Bank, 2020) "Policymakers can benefit from understanding the underlying causes of devaluation to formulate more effective economic strategies." (World Bank, 2022) 37 Page 467 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 9Factors Influencing Both Devaluation and Export Performance INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 468 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 6 Factors Influencing Both Devaluation and Export Performance: Table of Contents Factors Influencing Both Devaluation and Export Performance............................................................. 5 Inflation Rates:.................................................................................................................................. 5 Impact on Export Performance:.................................................................................................. 5 Interest Rates:.................................................................................................................................... 5 Impact on Devaluation:...............................................................................................................5 Impact on Export Performance:.................................................................................................. 5 Trade Deficit:.....................................................................................................................................5 Impact on Devaluation:...............................................................................................................5 Impact on Export Performance:.................................................................................................. 5 Structural and Institutional Factors:.................................................................................................. 5 Foreign Direct Investment:................................................................................................................5 Impact on Devaluation:...............................................................................................................5 Impact on Export Performance:.................................................................................................. 5 Government Debt:............................................................................................................................. 6 Impact on Devaluation:...............................................................................................................6 Impact on Export Performance:.................................................................................................. 6 Foreign Exchange Reserves:............................................................................................................. 6 Impact on Devaluation:...............................................................................................................6 Impact on Export Performance:.................................................................................................. 6 Market and Policy Dynamics:........................................................................................................... 6 Global Economic Conditions:........................................................................................................... 6 Impact on Devaluation:...............................................................................................................6 Impact on Export Performance:.................................................................................................. 6 Central Bank Policies:....................................................................................................................... 6 Impact on Devaluation:...............................................................................................................6 Impact on Export Performance:.................................................................................................. 6 Political Stability and Governance:................................................................................................... 6 Impact on Devaluation:...............................................................................................................7 Impact on Export Performance:.................................................................................................. 7 Sector-Specific Factors:.....................................................................................................................7 Resource Availability and Cost:........................................................................................................ 7 6 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 469 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Cost of Resources:.............................................................................................................................7 Impact on Devaluation:...............................................................................................................7 Impact on Export Performance:.................................................................................................. 7 Technological Improvements:........................................................................................................... 7 Impact on Devaluation:...............................................................................................................7 Impact on Export Performance:.................................................................................................. 7 International Standards:.....................................................................................................................7 Impact on Devaluation:...............................................................................................................7 Impact on Export Performance:.................................................................................................. 7 Key Factors:.......................................................................................................................................8 Impact on Devaluation:...............................................................................................................8 Impact on Export Performance:.................................................................................................. 8 Interest Rates:.................................................................................................................................... 8 Impact on Devaluation:...............................................................................................................8 Impact on Export Performance:.................................................................................................. 8 Balance of Payments:........................................................................................................................ 8 Impact on Devaluation:...............................................................................................................8 Impact on Export Performance:.................................................................................................. 8 Interest Rate Management:......................................................................................................... 9 Inflation Control:........................................................................................................................ 9 BoP Monitoring:......................................................................................................................... 9 Integrated Economic Policies:.................................................................................................... 9 Impact of Inflation Rates:..................................................................................................................9 Direct Effects on Currency Purchasing Power:.................................................................................9 High Inflation and Currency Devaluation......................................................................................... 9 Mechanism of Devaluation:........................................................................................................9 Boost to Export Volumes:......................................................................................................... 10 Rising Production Costs and Export Competitiveness....................................................................10 Inflation-Driven Costs:............................................................................................................. 10 Impact on Competitiveness:......................................................................................................10 Case Study: Ready-Made Garments (RMG)...................................................................................10 Positive Effects:........................................................................................................................ 10 Negative Effects:.......................................................................................................................10 Inflation Control Measures:...................................................................................................... 10 Support for Exporters:...............................................................................................................10 Diversification Strategies:.........................................................................................................11 Recommendations for Export-Oriented Businesses:.......................................................................11 Productivity Improvements:......................................................................................................11 Cost Management:.................................................................................................................... 11 Hedging Strategies:................................................................................................................... 11 Role of Interest Rates:..................................................................................................................... 11 Influence on Investment Flows and Exchange Rates:..................................................................... 11 Lower Interest Rates and Economic Stimulation:........................................................................... 11 Reduction of Borrowing Costs:.................................................................................................11 Page 470 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example:................................................................................................................................... 11 Increased Consumer Spending:.................................................................................................12 Potential for Capital Outflows and Currency Depreciation............................................................ 12 Attraction of Foreign Investment:.............................................................................................12 Example:................................................................................................................................... 12 Currency Depreciation:.............................................................................................................12 Balancing Stimulus and Stability:................................................................................................... 12 Net Effect on Export Performance:...........................................................................................12 Positive Scenario:......................................................................................................................12 Negative Scenario:.................................................................................................................... 12 Access to Affordable Credit:.....................................................................................................12 Currency Depreciation Effects:.................................................................................................13 Monetary Policy Balance:.........................................................................................................13 Supporting Measures:............................................................................................................... 13 Diversified Financing:.............................................................................................................. 13 Risk Management:.................................................................................................................... 13 Efficiency Improvements:.........................................................................................................13 Significance of a Favorable Balance of Payments:......................................................................... 13 Currency Stability:...........................................................................................................................13 Support for Domestic Currency:...............................................................................................14 Example:................................................................................................................................... 14 Economic Confidence:.................................................................................................................... 14 Financing Imports:...........................................................................................................................14 Availability of Foreign Currency:.............................................................................................14 Example:................................................................................................................................... 14 Impact of Persistent Trade Deficits:................................................................................................ 14 Currency Devaluation:.....................................................................................................................14 Increased Demand for Foreign Currency:.................................................................................14 Example:................................................................................................................................... 14 Rising Import Costs:........................................................................................................................15 Inflationary Pressures:.............................................................................................................. 15 Example:................................................................................................................................... 15 Economic Instability:.......................................................................................................................15 Reduced Economic Confidence:...............................................................................................15 Example:................................................................................................................................... 15 Historical Context:.................................................................................................................... 15 BoP Crises:................................................................................................................................15 Promoting Export Diversification:.................................................................................................. 15 Reducing Reliance on Few Sectors:......................................................................................... 15 Example:................................................................................................................................... 16 Infrastructure and Regulatory Reforms:................................................................................... 16 Example:................................................................................................................................... 16 Managing Import Dependencies:.................................................................................................... 16 Domestic Production Initiatives:...............................................................................................16 Page 471 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example:................................................................................................................................... 16 Export-oriented businesses can take proactive measures to navigate the implications of the BoP:... 16 Strategic Sourcing:.......................................................................................................................... 16 Developing Local Supplier Networks:......................................................................................16 Example:................................................................................................................................... 16 Protecting Against Exchange Rate Volatility:...........................................................................16 Example:................................................................................................................................... 16 Efficiency Improvements:............................................................................................................... 16 Enhancing Productivity:............................................................................................................16 Example:................................................................................................................................... 17 Tariffs and Non-Tariff Barriers:.......................................................................................................17 Protective Tariffs:............................................................................................................................ 17 Impact on Imports and Exports:................................................................................................17 Example:................................................................................................................................... 17 Retaliatory Measures:............................................................................................................... 17 Non-Tariff Barriers (NTBs):............................................................................................................17 Regulatory and Administrative Measures:................................................................................17 Example:................................................................................................................................... 17 Export Incentives:............................................................................................................................18 Subsidies and Tax Breaks:...............................................................................................................18 Enhancing Competitiveness:.....................................................................................................18 Example:................................................................................................................................... 18 Rebate Programs:.............................................................................................................................18 Value-Added Tax (VAT) Rebate:.............................................................................................. 18 Example:................................................................................................................................... 18 Trade Agreements:...........................................................................................................................18 Bilateral and Multilateral Agreements:........................................................................................... 18 Reducing Trade Barriers:.......................................................................................................... 18 Example:................................................................................................................................... 18 Market Access:................................................................................................................................ 18 Expanding Export Markets:...................................................................................................... 18 Example:................................................................................................................................... 18 Impacts on Currency Stability:........................................................................................................19 Trade Balance and Currency Value:................................................................................................ 19 Positive Trade Balance:.............................................................................................................19 Example:................................................................................................................................... 19 Currency Depreciation and Trade Barriers:.....................................................................................19 Negative Trade Balance:...........................................................................................................19 Example:................................................................................................................................... 19 Balanced Trade Policies:................................................................................................................. 19 Promoting Exports While Protecting Domestic Industries:......................................................19 Recommendation:..................................................................................................................... 19 Supporting Export Growth:.......................................................................................................19 Page 472 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Recommendation:..................................................................................................................... 19 Negotiating Trade Agreements:.......................................................................................................19 Expanding Market Access:....................................................................................................... 19 Recommendation:..................................................................................................................... 20 Tariff and Non-Tariff Barriers:........................................................................................................ 20 Overview:..................................................................................................................................20 Tariffs:............................................................................................................................................. 20 Definition and Purpose:...................................................................................................................20 Impacts on Domestic Industries:..................................................................................................... 20 Protection of Local Industries:..................................................................................................20 Example:................................................................................................................................... 20 Negative Consequences:..................................................................................................................20 Retaliatory Measures:............................................................................................................... 20 Example:................................................................................................................................... 20 Increased Consumer Prices: .....................................................................................................21 Inefficiencies and Reduced Competitiveness:.......................................................................... 21 Non-Tariff Barriers (NTBs):............................................................................................................21 Impacts on Trade:............................................................................................................................ 21 Regulatory Measures:............................................................................................................... 21 Example:................................................................................................................................... 21 Quotas and Import Licenses:.................................................................................................... 21 Example:................................................................................................................................... 21 Trade Disputes and Retaliation:................................................................................................21 Market Distortion and Inefficiencies:....................................................................................... 21 Removing Barriers and Entering Trade Agreements:..................................................................... 22 Reduction of Tariffs and NTBs:................................................................................................22 Example:................................................................................................................................... 22 Stabilizing the Currency:.................................................................................................................22 Example:................................................................................................................................... 22 Entering Trade Agreements:............................................................................................................22 Bilateral and Multilateral Agreements:.....................................................................................22 Example:................................................................................................................................... 22 Enhancing Market Access and Stability:.................................................................................. 22 Example:................................................................................................................................... 22 Gradual Reduction of Barriers:.................................................................................................22 Recommendation:..................................................................................................................... 23 Negotiating Strategic Trade Agreements:....................................................................................... 23 Focus on Key Markets:............................................................................................................. 23 Recommendation:..................................................................................................................... 23 Supporting Domestic Industries:..................................................................................................... 23 Enhancing Competitiveness:.....................................................................................................23 Recommendation:..................................................................................................................... 23 Monitoring and Evaluation:.............................................................................................................23 Regular Assessment:.................................................................................................................23 Page 473 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Recommendation:..................................................................................................................... 23 Export Incentives and Subsidies:.....................................................................................................23 Overview:..................................................................................................................................24 Types of Export Incentives and Subsidies:......................................................................................24 Financial Incentives:........................................................................................................................24 Cash Subsidies:......................................................................................................................... 24 Example:................................................................................................................................... 24 Tax Incentives:.......................................................................................................................... 24 Example:................................................................................................................................... 24 Low-Interest Loans:.................................................................................................................. 24 Example:................................................................................................................................... 24 Non-Financial Incentives:............................................................................................................... 24 Export Credit Insurance:........................................................................................................... 24 Example:................................................................................................................................... 24 Marketing Support:................................................................................................................... 24 Example:................................................................................................................................... 25 Infrastructure Development:..................................................................................................... 25 Example:................................................................................................................................... 25 Benefits of Export Incentives and Subsidies:..................................................................................25 Reducing Costs:...............................................................................................................................25 Example:................................................................................................................................... 25 Enhancing Competitiveness:........................................................................................................... 25 Example:................................................................................................................................... 25 Encouraging Export Growth:.......................................................................................................... 25 Example:................................................................................................................................... 25 Compliance with International Trade Rules:...................................................................................25 Example:................................................................................................................................... 26 Risk of Trade Disputes:................................................................................................................... 26 Example:................................................................................................................................... 26 Budgetary Constraints:.................................................................................................................... 26 Example:................................................................................................................................... 26 Dependency and Complacency:...................................................................................................... 26 Example:................................................................................................................................... 26 Managing Export Incentives and Subsidies:................................................................................... 26 Strategic Implementation:............................................................................................................... 26 Example:................................................................................................................................... 26 Example:................................................................................................................................... 27 Compliance with International Regulations:................................................................................... 27 Example:................................................................................................................................... 27 Bilateral and Multilateral Trade Agreements:................................................................................. 27 Overview:..................................................................................................................................27 Types of Trade Agreements:............................................................................................................27 Bilateral Trade Agreements:............................................................................................................27 Example:................................................................................................................................... 27 Page 474 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Multilateral Trade Agreements:.......................................................................................................27 Example:................................................................................................................................... 27 Benefits of Trade Agreements:........................................................................................................28 Market Access and Expansion:....................................................................................................... 28 Example:................................................................................................................................... 28 Stability and Predictability:............................................................................................................. 28 Example:................................................................................................................................... 28 Improved Competitiveness:.............................................................................................................28 Example:................................................................................................................................... 28 Enhanced Foreign Direct Investment (FDI):...................................................................................28 Example:................................................................................................................................... 28 Impact on Currency Stability:......................................................................................................... 28 Example:................................................................................................................................... 29 Foreign Exchange Earnings:............................................................................................................29 Example:................................................................................................................................... 29 Impact:...................................................................................................................................... 29 Impact:...................................................................................................................................... 29 Compliance with Standards:............................................................................................................29 Example:................................................................................................................................... 29 Dependency on Trade Partners:.......................................................................................................29 Example:................................................................................................................................... 29 Example:................................................................................................................................... 30 Diversify Trade Agreements:.......................................................................................................... 30 Action:.......................................................................................................................................30 Enhance Compliance Mechanisms:.................................................................................................30 Action:.......................................................................................................................................30 Monitor and Adjust Policies:...........................................................................................................30 Action:.......................................................................................................................................30 Strengthen Negotiation Capacities:................................................................................................. 30 Action:.......................................................................................................................................30 Impact on Export Revenues:........................................................................................................... 31 Example:................................................................................................................................... 31 Pressure on Currency:......................................................................................................................31 Example:................................................................................................................................... 31 Exchange Rate Volatility:................................................................................................................ 31 Impact on Export Earnings:.............................................................................................................31 Example:................................................................................................................................... 31 Hedging Costs:................................................................................................................................ 31 Example:................................................................................................................................... 32 International Trade Dynamics:........................................................................................................ 32 Trade Policies and Agreements:...................................................................................................... 32 Example:................................................................................................................................... 32 Example:................................................................................................................................... 32 Jute Industry:.............................................................................................................................32 Page 475 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact:...................................................................................................................................... 32 Exchange Rate Volatility:................................................................................................................ 32 Garments Sector:.......................................................................................................................32 Impact:...................................................................................................................................... 32 International Trade Dynamics:........................................................................................................ 32 Shrimp Export Sector:...............................................................................................................33 Impact:...................................................................................................................................... 33 Policy and Business Implications:...................................................................................................33 For Policymakers:............................................................................................................................33 Commodity Price Management:............................................................................................... 33 Action:.......................................................................................................................................33 Exchange Rate Stability:...........................................................................................................33 Action:.......................................................................................................................................33 Trade Policy Adaptation:.......................................................................................................... 33 Action:.......................................................................................................................................33 For Export-Oriented Businesses:.....................................................................................................33 Hedging Strategies:...................................................................................................................33 Action:.......................................................................................................................................33 Quality and Compliance:.......................................................................................................... 34 Action:.......................................................................................................................................34 Market Diversification:.............................................................................................................34 Action:.......................................................................................................................................34 Impact on Export Revenues:........................................................................................................... 34 Jute Industry:................................................................................................................................... 34 Global Demand and Price Fluctuations:..........................................................................................34 Example:................................................................................................................................... 34 Shrimp Sector:................................................................................................................................. 35 Vulnerability to Global Price Changes:...........................................................................................35 Example:................................................................................................................................... 35 Garment Industry:............................................................................................................................35 Dependence on Raw Material Prices:..............................................................................................35 Example:................................................................................................................................... 35 Currency Stability:...........................................................................................................................35 Effects of Volatile Export Earnings:................................................................................................35 Example:................................................................................................................................... 35 Strategies to Mitigate Impact...........................................................................................................35 Diversification of Export Products:.................................................................................................35 Action:.......................................................................................................................................36 Action:.......................................................................................................................................36 Hedging Against Price Fluctuations:...............................................................................................36 Action:.......................................................................................................................................36 Impact on Export Performance:.......................................................................................................36 Effects on Export Contracts and Pricing:........................................................................................ 36 Uncertainty in Pricing:.................................................................................................................... 36 Page 476 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example:................................................................................................................................... 37 Impact on Long-term Contracts:..................................................................................................... 37 Example:................................................................................................................................... 37 Managing Exchange Rate Volatility:...............................................................................................37 Hedging Strategies:......................................................................................................................... 37 Action:.......................................................................................................................................37 Stable Macroeconomic Policies:..................................................................................................... 37 Action:.......................................................................................................................................37 Case Study: Bangladesh Garments Sector...................................................................................... 37 Hedging in Practice:........................................................................................................................ 37 Example:................................................................................................................................... 37 Action:.......................................................................................................................................38 Macro-Economic Stability:............................................................................................................. 38 Action:.......................................................................................................................................38 Support for Small and Medium Enterprises (SMEs):......................................................................38 Action:.......................................................................................................................................38 Influence on Export Performance and Currency Stability:............................................................. 38 Changes in Global Demand and Supply:.........................................................................................39 Demand Shifts:................................................................................................................................ 39 Example:................................................................................................................................... 39 Example:................................................................................................................................... 39 Trade Wars and Protectionism:........................................................................................................39 Impact of Trade Wars:..................................................................................................................... 39 Example:................................................................................................................................... 39 Example:................................................................................................................................... 39 Economic Cycles:............................................................................................................................39 Global Economic Cycles:................................................................................................................ 39 Example:................................................................................................................................... 40 Counter-Cyclical Policies:...............................................................................................................40 Action:.......................................................................................................................................40 Case Study: Garment Industry in Bangladesh.................................................................................40 Adaptation to Global Demand:........................................................................................................40 Example:................................................................................................................................... 40 Impact of Trade Agreements:.......................................................................................................... 40 Example:................................................................................................................................... 40 Responsive Trade Policies:..............................................................................................................40 Action:.......................................................................................................................................40 Action:.......................................................................................................................................41 Managing Supply Chain Risks:....................................................................................................... 41 Strengthening Supply Chains:......................................................................................................... 41 Action:.......................................................................................................................................41 Summary of Findings:..................................................................................................................... 41 Recommendations for Policymakers:..............................................................................................41 Influence on Economic Policies and Governance:..........................................................................41 Page 477 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Economic Uncertainty and Investor Confidence:............................................................................41 Impact on Investor Confidence:...................................................................................................... 41 Example:................................................................................................................................... 42 Effect on Capital Flows:..................................................................................................................42 Example:................................................................................................................................... 42 Governance and Institutional Strength:........................................................................................... 42 Stable Governance:..........................................................................................................................42 Example:................................................................................................................................... 42 Policy Consistency:......................................................................................................................... 42 Example:................................................................................................................................... 42 Trade Policies and International Relations:.....................................................................................42 Negotiation of Trade Agreements:.................................................................................................. 42 Example:................................................................................................................................... 43 Effect on Trade Policies:................................................................................................................. 43 Example:................................................................................................................................... 43 Impact of Political Stability on RMG Exports:............................................................................... 43 Example:................................................................................................................................... 43 Disruptions Due to Political Instability:.......................................................................................... 43 Example:................................................................................................................................... 43 Summary of Findings:..................................................................................................................... 43 Recommendations for Policymakers:..............................................................................................43 Governance and Economic Policies:............................................................................................... 44 Role of Effective Governance:........................................................................................................ 44 Creating a Stable Investment Environment:....................................................................................44 Legal and Regulatory Framework:..................................................................................................44 Example:................................................................................................................................... 44 Transparency and Accountability:...................................................................................................44 Example:................................................................................................................................... 44 Continuity of Economic Policies:....................................................................................................44 Long-Term Policy Planning:........................................................................................................... 44 Example:................................................................................................................................... 45 Consistency in Trade and Investment Policies:...............................................................................45 Example:................................................................................................................................... 45 Supporting Export Growth and Currency Stability:........................................................................45 Economic Policy Continuity:.......................................................................................................... 45 Example:................................................................................................................................... 45 Macroeconomic Management:........................................................................................................ 45 Example:................................................................................................................................... 45 Transport and Logistics:.................................................................................................................. 45 Example:................................................................................................................................... 46 Energy and Utilities:........................................................................................................................46 Example:................................................................................................................................... 46 Policy Support and Growth:............................................................................................................ 46 Example:................................................................................................................................... 46 Page 478 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact of Political Instability:......................................................................................................... 46 Example:................................................................................................................................... 46 Summary of Findings:..................................................................................................................... 46 Recommendations for Policymakers:..............................................................................................46 Corruption and Institutional Quality:.............................................................................................. 47 Impact on Investment and Economic Efficiency:............................................................................47 Deterrence of Investment:............................................................................................................... 47 Uncertainty and Risk:...................................................................................................................... 47 Example:................................................................................................................................... 47 Reduced Foreign Direct Investment (FDI):.....................................................................................47 Example:................................................................................................................................... 47 Economic Efficiency:...................................................................................................................... 47 Misallocation of Resources:............................................................................................................ 47 Example:................................................................................................................................... 48 Reduced Public Revenue:................................................................................................................48 Example:................................................................................................................................... 48 Currency Devaluation:.....................................................................................................................48 Impact on Exchange Rates:............................................................................................................. 48 Example:................................................................................................................................... 48 Example:................................................................................................................................... 48 Strategies to Improve Institutional Quality and Reduce Corruption:..............................................48 Strengthening Legal Frameworks:.................................................................................................. 48 Anti-Corruption Laws and Enforcement:........................................................................................48 Example:................................................................................................................................... 49 Enhancing Institutional Quality:......................................................................................................49 Transparent Governance:.................................................................................................................49 Example:................................................................................................................................... 49 Capacity Building:...........................................................................................................................49 Example:................................................................................................................................... 49 Case Study: Anti-Corruption Efforts in Bangladesh....................................................................... 49 Initiatives and Outcomes:................................................................................................................ 49 Bangladesh Anti-Corruption Commission (ACC):......................................................................... 49 Outcome:...................................................................................................................................49 E-Governance:.................................................................................................................................49 Outcome:...................................................................................................................................49 Summary of Findings:..................................................................................................................... 50 Recommendations for Policymakers:..............................................................................................50 Political Events and Their Economic Impact:................................................................................. 50 Elections and Economic Uncertainty:............................................................................................. 50 Pre-Election Period:.........................................................................................................................50 Example:................................................................................................................................... 50 Post-Election Period:....................................................................................................................... 50 Example:................................................................................................................................... 50 Policy Changes and Economic Impact:...........................................................................................51 Page 479 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Fiscal and Monetary Policies:......................................................................................................... 51 Example:................................................................................................................................... 51 Regulatory Changes:....................................................................................................................... 51 Example:................................................................................................................................... 51 Exchange Rates and Currency Values:............................................................................................ 51 Impact on Currency Stability:......................................................................................................... 51 Example:................................................................................................................................... 51 Example:................................................................................................................................... 51 Political Events and Economic Outcomes:......................................................................................51 Historical Context:...........................................................................................................................51 Example:................................................................................................................................... 52 Policy Changes and Export Performance:.......................................................................................52 Example:................................................................................................................................... 52 Regulatory Environment:................................................................................................................ 52 Example:................................................................................................................................... 52 Summary of Findings:..................................................................................................................... 52 Recommendations for Policymakers:..............................................................................................52 Recommendations for Future Research:......................................................................................... 52 Simultaneous Effects on Exchange Rates and Export Performance:.............................................. 53 Theoretical Framework:.................................................................................................................. 53 Economic Stability:......................................................................................................................... 53 Direct Impact on Exchange Rates:............................................................................................53 Direct Impact on Export Performance:..................................................................................... 53 Direct Impact on Exchange Rates:............................................................................................53 Direct Impact on Export Performance:..................................................................................... 53 Balance of Payments (BoP):............................................................................................................53 Direct Impact on Exchange Rates:............................................................................................53 Direct Impact on Export Performance:..................................................................................... 53 Trade Policies.................................................................................................................................. 53 Tariffs and Non-Tariff Barriers:.......................................................................................................53 Direct Impact on Exchange Rates:............................................................................................53 Direct Impact on Export Performance:..................................................................................... 54 Export Incentives and Subsidies:.....................................................................................................54 Direct Impact on Exchange Rates:............................................................................................54 Direct Impact on Export Performance:..................................................................................... 54 Bilateral and Multilateral Trade Agreements:................................................................................. 54 Direct Impact on Exchange Rates:............................................................................................54 Direct Impact on Export Performance:..................................................................................... 54 Global Market Conditions:.............................................................................................................. 54 Direct Impact on Exchange Rates:............................................................................................54 Direct Impact on Export Performance:..................................................................................... 54 Direct Impact on Exchange Rates:............................................................................................54 Direct Impact on Export Performance:..................................................................................... 54 Direct Impact on Exchange Rates:............................................................................................55 Page 480 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Direct Impact on Export Performance:..................................................................................... 55 Political Stability:............................................................................................................................ 55 Governance and Economic Policies:............................................................................................... 55 Direct Impact on Exchange Rates:............................................................................................55 Direct Impact on Export Performance:..................................................................................... 55 Corruption and Institutional Quality:.............................................................................................. 55 Direct Impact on Exchange Rates:............................................................................................55 Direct Impact on Export Performance:..................................................................................... 55 Political Events and Economic Impact:...........................................................................................55 Direct Impact on Exchange Rates:............................................................................................55 Direct Impact on Export Performance:..................................................................................... 55 Integrating the Factors:....................................................................................................................55 Multivariate Regression Analysis:............................................................................................55 Time-Series Analysis:............................................................................................................... 56 Comparative Case Studies:....................................................................................................... 56 Practical Implications:..................................................................................................................... 56 Historical Data Analysis:.................................................................................................................56 Inflation Rates and Devaluation:..................................................................................................... 56 Empirical Evidence:..................................................................................................................56 Impact on Exports:....................................................................................................................56 Interest Rates and Export Performance:.......................................................................................... 56 Empirical Evidence:..................................................................................................................56 Sector-Specific Impact:.............................................................................................................57 Empirical Evidence:..................................................................................................................57 Impact on Industries:.................................................................................................................57 Tariffs, Non-Tariff Barriers, and Export Incentives:....................................................................... 57 Empirical Evidence:..................................................................................................................57 Impact on Export Growth:........................................................................................................ 57 Empirical Evidence:..................................................................................................................57 Impact on Export Performance:................................................................................................ 57 Empirical Evidence:..................................................................................................................57 Impact on Export Volumes:.......................................................................................................57 Empirical Evidence:..................................................................................................................58 Mitigation Strategies:................................................................................................................58 Empirical Evidence:..................................................................................................................58 Impact on Investor Confidence:................................................................................................58 Empirical Evidence:..................................................................................................................58 Impact on Export Competitiveness:..........................................................................................58 Empirical Evidence:..................................................................................................................58 Policy Recommendations:........................................................................................................ 58 Policy Implications and Recommendations:................................................................................... 59 Policymakers should:.......................................................................................................................59 Export-oriented businesses should:................................................................................................. 59 Factors Influencing Export Performance:....................................................................................... 60 Page 481 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Trade Policies:...........................................................................................................................60 Sector-Specific Growth:............................................................................................................60 Economic Context:....................................................................................................................60 2015 Devaluation:.....................................................................................................................60 Impact on Exports:....................................................................................................................60 FDI and Trade Agreements:......................................................................................................60 Government Policies:................................................................................................................60 Indonesia:........................................................................................................................................ 60 Economic Context:....................................................................................................................60 1998 Devaluation:.....................................................................................................................60 Impact on Exports:....................................................................................................................61 Commodity Prices:....................................................................................................................61 Economic Policies:....................................................................................................................61 Common Patterns and Unique Factors:...........................................................................................61 Common Patterns:........................................................................................................................... 61 Devaluation as a Tool for Competitiveness:............................................................................. 61 Role of FDI and Trade Policies:................................................................................................61 Sector-Specific Impacts:........................................................................................................... 61 Economic Structure:..................................................................................................................61 Government Policies:................................................................................................................61 Global Market Conditions:....................................................................................................... 61 Implications for Bangladesh:...........................................................................................................62 Strategic Use of Devaluation:................................................................................................... 62 Focus on FDI and Trade Policies:.............................................................................................62 Sector-Specific Strategies:........................................................................................................ 62 Managing Global Market Risks:..................................................................................................... 62 Maintaining Economic Stability:.....................................................................................................62 Monetary Policy:.......................................................................................................................62 Fiscal Discipline:...................................................................................................................... 62 Managing Interest Rates:.................................................................................................................62 Balanced Interest Rate Policies:................................................................................................62 Supporting Export Financing:...................................................................................................63 Maintaining a Favorable Balance of Payments:..............................................................................63 Export Diversification:..............................................................................................................63 Enhancing Competitiveness:.....................................................................................................63 Improving Trade Policies................................................................................................................ 63 Entering into Beneficial Trade Agreements:................................................................................... 63 Bilateral and Multilateral Agreements:.....................................................................................63 Regional Cooperation:.............................................................................................................. 63 Providing Export Incentives and Subsidies:....................................................................................63 Tax Breaks and Subsidies:........................................................................................................ 63 Streamlining Export Processes:................................................................................................ 63 Implementing Protective Measures Judiciously:.............................................................................63 Selective Use of Tariffs:............................................................................................................63 Page 482 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Anti-Dumping Measures:..........................................................................................................64 Ensuring Political Stability:.............................................................................................................64 Promoting Good Governance:.........................................................................................................64 Transparent Policies:.................................................................................................................64 Strengthening Institutions:........................................................................................................ 64 Reducing Corruption:...................................................................................................................... 64 Anti-Corruption Measures:....................................................................................................... 64 Improving Institutional Quality:............................................................................................... 64 Ensuring Predictable Political Processes:........................................................................................64 Stable Political Environment:................................................................................................... 64 Conflict Resolution:.................................................................................................................. 64 Managing Currency Devaluation:................................................................................................... 64 Effective Management of Currency Devaluation:...........................................................................64 Maintaining a Favorable Balance of Payments:..............................................................................65 Enhancing Export Performance:......................................................................................................65 Diversification:......................................................................................................................... 65 Value Addition:......................................................................................................................... 65 Trade Promotion:...................................................................................................................... 65 Improving Trade Balance:............................................................................................................... 65 Import Substitution:.................................................................................................................. 65 Strategic Imports:......................................................................................................................65 Export Earnings:....................................................................................................................... 65 Remittances:..............................................................................................................................65 Managing External Debt:................................................................................................................ 65 Prudent Borrowing:......................................................................................................................... 65 Debt Sustainability:...................................................................................................................66 Diversified Financing:.............................................................................................................. 66 Debt Servicing:................................................................................................................................66 Efficient Use of Borrowed Funds:............................................................................................ 66 Debt Restructuring:...................................................................................................................66 Implementing Sound Macroeconomic Policies:..............................................................................66 Inflation Control:...................................................................................................................... 66 Exchange Rate Management:................................................................................................... 66 Fiscal Discipline:...................................................................................................................... 66 Public Investment:.................................................................................................................... 66 Improving Business Environment:........................................................................................... 66 Labor Market Reforms:.............................................................................................................67 Stabilizing the Currency:.................................................................................................................67 Foreign Exchange Interventions:.....................................................................................................67 Market Interventions:................................................................................................................67 Capital Controls:....................................................................................................................... 67 Building Investor Confidence:........................................................................................................ 67 Transparent Policies:.................................................................................................................67 Political Stability:......................................................................................................................67 Page 483 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Adopting a Holistic Approach:........................................................................................................67 Integrated Economic Policy Framework:........................................................................................67 Stable Inflation:.........................................................................................................................67 Interest Rate Management:....................................................................................................... 68 Fiscal Discipline:...................................................................................................................... 68 Public Investment:.................................................................................................................... 68 Exchange Rate Policy:.....................................................................................................................68 Flexible Exchange Rate:........................................................................................................... 68 Foreign Exchange Reserves:.....................................................................................................68 Trade Policy and Export Promotion:............................................................................................... 68 Bilateral and Multilateral Agreements:.....................................................................................68 Regional Integration:................................................................................................................ 68 Subsidies and Incentives:..........................................................................................................68 Trade Facilitation:..................................................................................................................... 68 Product and Market Diversification:.........................................................................................68 Value Addition:......................................................................................................................... 69 Attracting and Managing Foreign Direct Investment (FDI):.......................................................... 69 Favorable Policies:....................................................................................................................69 Ease of Doing Business:........................................................................................................... 69 Technology Transfer:.......................................................................................................................69 Facilitate Technology Transfer:................................................................................................ 69 Capacity Building:.................................................................................................................... 69 Ensuring Political Stability and Good Governance:........................................................................69 Political Stability:......................................................................................................................69 Transparent Policies:.................................................................................................................69 Anti-Corruption Measures:..............................................................................................................69 Institutional Quality:................................................................................................................. 69 Public Sector Reforms:............................................................................................................. 69 Addressing Global Market Conditions:...........................................................................................70 Market Intelligence:.........................................................................................................................70 Monitor Global Trends:.............................................................................................................70 Strategic Planning:.................................................................................................................... 70 Currency Hedging:....................................................................................................................70 Risk Management:.................................................................................................................... 70 Inflation Rates:..........................................................................................................................70 Interest Rates:............................................................................................................................70 Balance of Payments (BoP):..................................................................................................... 70 Tariffs and Non-Tariff Barriers:................................................................................................ 70 Export Incentives and Subsidies:.............................................................................................. 71 Bilateral and Multilateral Trade Agreements:...........................................................................71 Commodity Prices:....................................................................................................................71 Exchange Rate Volatility:..........................................................................................................71 International Trade Dynamics:..................................................................................................71 Governance and Economic Policies:........................................................................................ 71 Page 484 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Corruption and Institutional Quality:........................................................................................71 Political Events and Their Economic Impact:.......................................................................... 71 Simultaneous Effects on Exchange Rates and Export Performance:........................................71 Empirical Evidence from Bangladesh:..................................................................................... 72 Comparative Analysis with Other Countries:........................................................................... 72 Strategies for Policymakers:..................................................................................................... 72 Managing Currency Devaluation:.............................................................................................72 Strategies for Export-Oriented Businesses:.............................................................................. 72 Continued Exploration:.............................................................................................................72 Sector-Specific Impacts:........................................................................................................... 72 Dynamic Interactions Over Time:................................................................................................... 72 Longitudinal Studies:................................................................................................................ 72 Temporal Analysis:................................................................................................................... 73 Cross-Country Comparisons:.......................................................................................................... 73 Comparative Studies:................................................................................................................ 73 Regional Analysis:.................................................................................................................... 73 Sector-Specific Impacts:..................................................................................................................73 Industry-Specific Research:...................................................................................................... 73 Case Studies:.............................................................................................................................73 Macro and Microeconomic Perspectives:....................................................................................... 73 Macroeconomic Analysis:........................................................................................................ 73 Microeconomic Perspectives:................................................................................................... 73 Policy Evaluation and Effectiveness:.............................................................................................. 74 Policy Impact Analysis:............................................................................................................ 74 Adaptive Policies:..................................................................................................................... 74 Global Economic Trends:................................................................................................................74 Global Market Integration:....................................................................................................... 74 Climate Change and Sustainability:..........................................................................................74 Page 485 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Factors Influencing Both Devaluation and Export Performance The research delves into the intricate relationship between currency devaluation and export performance, with a particular focus on the factors that simultaneously influence both variables. Recognizing these factors is essential for policymakers and economists to develop strategies that not only promote export growth but also ensure economic stability. Inflation Rates: wImpact on Devaluation: High inflation rates erode the purchasing power of a currency, leading to its devaluation. When domestic prices rise faster than those of trading partners, the currency loses value. Impact on Export Performance: While devaluation can make exports cheaper and more competitive, high inflation can offset these gains by increasing the cost of production, thereby reducing profit margins and export competitiveness over time. Interest Rates: Impact on Devaluation: Lower interest rates can lead to currency devaluation as they reduce the returns on investments denominated in the currency, leading to capital outflows. Impact on Export Performance: Lower interest rates reduce borrowing costs for exporters, enabling them to invest more in production and expand their export capacities. However, if the resultant devaluation is not managed properly, it can lead to inflationary pressures. Trade Deficit: Impact on Devaluation: A persistent trade deficit increases demand for foreign currencies to pay for imports, putting downward pressure on the domestic currency. Impact on Export Performance: While devaluation can help reduce a trade deficit by making exports cheaper and imports more expensive, the improvement in export performance depends on the elasticity of demand for exports and imports. Structural and Institutional Factors: Foreign Direct Investment: Impact on Devaluation: Inflows of FDI can support the domestic currency by increasing demand for it. Conversely, outflows or lack of FDI can contribute to currency devaluation. Impact on Export Performance: 5 Page 486 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) FDI brings capital, technology, and expertise that can enhance export capacities. It also provides access to global markets and networks, fostering export growth. Government Debt: Impact on Devaluation: High levels of government debt, especially if financed by foreign borrowing, can lead to concerns about the country's ability to repay, resulting in currency devaluation. Impact on Export Performance: High debt levels can constrain government spending on infrastructure and other support for exporters. Conversely, well-managed debt can finance improvements that boost export performance. Foreign Exchange Reserves: Impact on Devaluation: Adequate foreign exchange reserves can help stabilize a currency by providing a buffer against external shocks. Low reserves increase the risk of devaluation. Impact on Export Performance: Sufficient reserves can reassure international buyers and investors of economic stability, indirectly supporting export performance. Market and Policy Dynamics: Global Economic Conditions: Impact on Devaluation: Global economic downturns or financial crises can lead to currency devaluation as investors seek safer assets, leading to capital outflows. Impact on Export Performance: Global economic conditions affect demand for exports. For instance, a global recession reduces demand for exports, while an economic boom increases it. Central Bank Policies: Impact on Devaluation: Central bank policies, including interventions in the foreign exchange market, can influence the value of the currency. Policies aimed at maintaining a competitive exchange rate can lead to deliberate devaluation. Impact on Export Performance: Policies that stabilize the exchange rate can create a favorable environment for exporters, reducing uncertainty and enabling long-term planning. Political Stability and Governance: 6 Page 487 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact on Devaluation: Political instability can lead to currency devaluation as it undermines investor confidence and leads to capital flight. Impact on Export Performance: Stable and transparent governance creates a conducive environment for export growth by attracting investments, both domestic and foreign. Sector-Specific Factors: Resource Availability and Cost: Cost of Resources: Impact on Devaluation: Scarcity of essential resources can lead to higher import costs, contributing to trade deficits and currency devaluation. Impact on Export Performance: Availability and cost of resources such as raw materials and labor directly affect production costs and export competitiveness. Technological Improvements: Impact on Devaluation: Adoption of advanced technologies can improve productivity and export competitiveness, potentially strengthening the currency by boosting trade balances. Impact on Export Performance: Technological improvements enhance product quality and reduce costs, making exports more competitive in global markets. Compliance with International Standards: International Standards: Impact on Devaluation: Non-compliance with international standards can lead to trade barriers, reducing export revenues and exerting downward pressure on the currency. Impact on Export Performance: Adherence to international standards and certifications can open new markets and increase demand for exports. The relationship between currency devaluation and export performance in Bangladesh is influenced by a multitude of interrelated factors. By understanding these variables, policymakers and businesses can better navigate the complexities of global trade and economic stability. Comprehensive strategies that consider these influences will be essential for promoting sustainable export growth and economic resilience. 7 Page 488 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Key Factors: Economic stability is a cornerstone for understanding the interplay between currency devaluation and export performance. Several interconnected factors contribute to economic stability, each playing a significant role in influencing these dynamics. Impact on Devaluation: High inflation rates diminish the purchasing power of a currency. As domestic prices increase relative to those of trading partners, the currency weakens, leading to devaluation. Persistent inflationary pressures indicate an unstable economy, which can cause investors to lose confidence, resulting in capital flight and further currency depreciation. Impact on Export Performance: While currency devaluation can make exports cheaper and more competitive globally, high inflation can offset these benefits. Increased production costs due to rising prices of raw materials and labor can reduce profit margins for exporters. Moreover, if inflation is not controlled, the initial competitive advantage gained from devaluation can quickly erode. Interest Rates: Impact on Devaluation: Interest rates significantly influence currency values. Lower interest rates tend to reduce returns on investments denominated in the local currency, leading to outflows of capital as investors seek higher returns elsewhere. This capital flight can devalue the currency. Conversely, higher interest rates can attract foreign investment, supporting the currency's value. Impact on Export Performance: Lower interest rates reduce borrowing costs for businesses, making it easier for exporters to finance expansion and operational improvements. This can lead to increased production capacity and enhanced competitiveness. However, if low interest rates result in excessive devaluation, the ensuing inflationary pressures can harm the economy, negating these benefits. Balance of Payments: Impact on Devaluation: The balance of payments is a critical indicator of a country's economic health. A favorable BoP, characterized by a current account surplus, suggests that a country is earning enough foreign exchange through exports to finance its imports. This strengthens the currency. In contrast, a persistent BoP deficit, indicating more imports than exports, puts downward pressure on the currency, leading to devaluation. Impact on Export Performance: A favorable BoP enhances economic stability, providing a steady inflow of foreign currency. This stability is crucial for import-dependent export industries, ensuring they can obtain necessary inputs without facing currency-induced cost increases. A positive BoP also reflects a strong export sector, which can reinvest earnings into further growth and innovation. 8 Page 489 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The garments sector in Bangladesh illustrates the impact of economic stability on export performance. This sector relies heavily on bank loans for working capital and expansion. During periods of low interest rates, such as in the early 2000s, the garments industry accessed affordable credit, expanded operations, and increased export volumes. However, the sector also faced challenges when high inflation rates increased production costs, partially offsetting the competitive advantage gained from currency devaluation. Policymakers must balance interest rates to support both stable currency values and affordable financing for businesses. They should also focus on controlling inflation through prudent fiscal and monetary policies. Maintaining a favorable BoP is essential, requiring strategies to boost exports and manage imports effectively. Ensuring economic stability through these measures can enhance the overall resilience and competitiveness of the export sector. Interest Rate Management: Maintain interest rates at levels that attract investment without causing excessive currency appreciation or depreciation. This balance supports economic stability and provides affordable credit for exporters. Inflation Control: Implement policies to control inflation, such as prudent monetary policies, fiscal discipline, and supply-side measures to improve production efficiency and reduce costs. BoP Monitoring: Regularly monitor and manage the balance of payments to ensure a favorable position. Encourage export diversification and value addition to reduce dependence on a few sectors and improve overall export performance. Integrated Economic Policies: Develop integrated economic policies that consider the interdependencies between interest rates, inflation, and BoP. This holistic approach ensures that policies in one area do not inadvertently destabilize another. By understanding and addressing the factors influencing both devaluation and export performance, policymakers can create a stable economic environment that supports sustainable export growth and overall economic development. Impact of Inflation Rates: Direct Effects on Currency Purchasing Power: Inflation rates are a critical determinant of a currency's purchasing power. High inflation erodes the value of money, meaning each unit of currency buys fewer goods and services over time. This devaluation of the currency can have both positive and negative implications for a country's export performance. High Inflation and Currency Devaluation Mechanism of Devaluation: 9 Page 490 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) When inflation rates rise significantly, the purchasing power of the currency declines. This depreciation can occur as domestic prices increase relative to those of trading partners, making the currency less valuable in international markets. Investors may also lose confidence in the currency, leading to capital flight and further depreciation. Boost to Export Volumes: A weaker currency makes a country's exports cheaper and more attractive to foreign buyers. For instance, if the Bangladeshi Taka devalues due to high inflation, Bangladeshi goods become more competitively priced in global markets. This can lead to an increase in export volumes as international demand rises for cheaper Bangladeshi products. Rising Production Costs and Export Competitiveness Inflation-Driven Costs: High inflation often leads to increased production costs, including higher prices for raw materials, labor, and energy. If these cost increases are not offset by corresponding productivity gains, the overall cost of producing goods rises. Impact on Competitiveness: The benefit of having cheaper exports due to currency devaluation can be undermined by rising production costs. For example, if the cost of producing ready-made garments (RMG) increases due to inflation-driven wage hikes or more expensive raw materials, the price advantage gained from a weaker currency may be reduced. As a result, the competitiveness of Bangladeshi exports may not improve significantly. Case Study: Ready-Made Garments (RMG) The RMG sector in Bangladesh provides a clear example of how inflation affects export performance: Positive Effects: After significant devaluations, such as in 1991, the RMG sector often experienced a boost in export volumes. This was because Bangladeshi garments became cheaper and more attractive to international buyers. Negative Effects: During periods of high inflation, the sector faced increased costs for inputs like fabrics, dyes, and labor. For instance, if inflation led to higher wages or more expensive imported raw materials, the cost of producing garments rose. This could offset the price competitiveness gained from devaluation, reducing the overall benefit to export performance. Understanding the dual impact of inflation on currency value and production costs is crucial for policymakers: Inflation Control Measures: Implementing effective inflation control measures can help maintain the purchasing power of the currency and prevent excessive cost increases. This includes prudent fiscal policies, effective monetary policy management, and measures to improve supply chain efficiencies. Support for Exporters: 10 Page 491 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Policymakers can provide targeted support to export-oriented industries to help them manage inflation-driven cost increases. This support can include subsidies, tax incentives, and investment in infrastructure to reduce production costs. Diversification Strategies: Encouraging diversification of export products and markets can help mitigate the risks associated with inflation and currency devaluation. By spreading risk across multiple sectors and international markets, the overall impact of inflation can be better managed. Recommendations for Export-Oriented Businesses: Export-oriented businesses can adopt several strategies to mitigate the adverse effects of inflation: Productivity Improvements: Investing in technology and processes that improve productivity can help offset inflation-driven cost increases. For example, automation and efficient supply chain management can reduce reliance on expensive labor and raw materials. Cost Management: Businesses should implement robust cost management practices to control expenses. This includes negotiating better terms with suppliers, reducing waste, and optimizing resource use. Hedging Strategies: To protect against currency volatility, businesses can use financial instruments like forward contracts and options to hedge against unfavorable exchange rate movements. This can help stabilize costs and prices, ensuring more predictable profit margins. By understanding the complex relationship between inflation, currency devaluation, and export performance, both policymakers and businesses can develop more effective strategies to enhance the competitiveness of Bangladesh's exports and support sustained economic growth. Role of Interest Rates: Influence on Investment Flows and Exchange Rates: Interest rates are a crucial lever of monetary policy and have significant effects on investment flows and exchange rates. The balance between stimulating economic activity and managing capital flows is essential for understanding the role of interest rates in export performance. Lower Interest Rates and Economic Stimulation: Reduction of Borrowing Costs: Lower interest rates reduce the cost of borrowing for businesses and consumers. For export-oriented businesses, this means cheaper access to capital for expanding production, upgrading technology, and investing in efficiency improvements. Example: 11 Page 492 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) A garment manufacturer in Bangladesh might take advantage of lower interest rates to secure a loan for purchasing new machinery, leading to increased production capacity and potentially higher export volumes. Increased Consumer Spending: Lower interest rates often lead to increased consumer spending and higher aggregate demand. While this effect is more pronounced in domestic markets, the overall economic growth it spurs can indirectly support export industries by creating a more robust economic environment. Potential for Capital Outflows and Currency Depreciation Attraction of Foreign Investment: While lower interest rates can stimulate domestic investment, they may also make the country less attractive to foreign investors seeking higher returns. This can lead to capital outflows as investors move their funds to markets offering better returns. Example: If Bangladesh lowers its interest rates significantly, foreign investors might withdraw their investments and seek higher returns in countries with more favorable interest rates. Currency Depreciation: Capital outflows can put downward pressure on the currency, leading to depreciation. While a weaker currency can boost export competitiveness by making goods cheaper for foreign buyers, it can also increase the cost of imported inputs, affecting overall production costs. Balancing Stimulus and Stability: Net Effect on Export Performance: The net effect of lower interest rates on export performance depends on the balance between stimulating economic activity and managing potential capital outflows. Positive Scenario: If the reduction in borrowing costs and economic stimulus outweigh the negative effects of capital outflows, the overall impact on export performance can be positive. Negative Scenario: Conversely, if capital outflows are substantial and lead to significant currency depreciation, the resulting increase in import costs can offset the benefits of lower interest rates, potentially harming export competitiveness. The garments sector in Bangladesh illustrates the dual effects of interest rates on export performance: Access to Affordable Credit: During periods of low interest rates, garment manufacturers have benefited from affordable credit, enabling them to invest in production expansion and efficiency improvements. This has led to increased export volumes, as seen in the early 2000s when interest rates were relatively low. 12 Page 493 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Currency Depreciation Effects: However, these benefits can be countered by currency depreciation. If lower interest rates lead to significant capital outflows and a weaker Taka, the cost of imported raw materials like fabrics and dyes may rise. This can erode the competitive advantage gained from lower borrowing costs. Policymakers need to carefully consider the broader economic implications when setting interest rates: Monetary Policy Balance: Striking a balance between stimulating domestic investment and maintaining investor confidence is crucial. Policymakers must monitor capital flows and adjust monetary policy to avoid excessive currency depreciation that could harm export competitiveness. Supporting Measures: Complementary policies can help mitigate the adverse effects of low interest rates. For example, providing subsidies for critical imported inputs or investing in domestic production capabilities can help stabilize costs for export-oriented industries. Export-oriented businesses should adopt strategies to manage the impacts of interest rate fluctuations: Diversified Financing: Businesses should seek diversified financing sources, including equity investments, to reduce reliance on debt and mitigate the impact of interest rate changes. Risk Management: Implementing risk management strategies, such as currency hedging, can help businesses protect against adverse exchange rate movements resulting from interest rate fluctuations. Efficiency Improvements: Continuous investment in productivity and efficiency improvements can help businesses remain competitive, even when borrowing costs fluctuate. By understanding the complex interplay between interest rates, investment flows, and currency values, policymakers and businesses can develop strategies that enhance export performance and support sustained economic growth in Bangladesh. Significance of a Favorable Balance of Payments: A favorable balance of payments (BoP) position is a key indicator of a country's economic health. It reflects a nation’s ability to finance its imports through its export revenues. When a country maintains a positive BoP, it suggests that it is earning sufficient foreign exchange from its exports to cover its import expenses. This balance is crucial for several reasons: Currency Stability: 13 Page 494 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Support for Domestic Currency: A favorable BoP indicates that a country is consistently earning more foreign currency than it is spending. This inflow of foreign currency helps support the domestic currency, reducing the risk of devaluation. Example: If Bangladesh exports significantly more than it imports, the steady inflow of foreign currency (such as US dollars) supports the value of the Bangladeshi Taka. This stability helps maintain the purchasing power of the Taka, which is beneficial for the economy. Economic Confidence: Investor and Consumer Confidence: A stable BoP fosters confidence among investors and consumers. Investors are more likely to invest in a country with a stable currency and strong export sector, while consumers feel more secure about the economy. Example: A consistent BoP surplus in Bangladesh can attract foreign investors to the garment and pharmaceutical sectors, bringing in capital, technology, and market linkages that further enhance export capabilities. Financing Imports: Availability of Foreign Currency: A positive BoP ensures that there is sufficient foreign currency available to finance imports of essential goods and services. This is particularly important for countries that rely on imported raw materials and capital goods for their export-oriented industries. Example: The garment industry in Bangladesh relies heavily on imported fabrics and accessories. A favorable BoP ensures that these imports can be financed without exerting undue pressure on the Taka, keeping production costs competitive. Impact of Persistent Trade Deficits: On the other hand, persistent trade deficits can have several adverse effects on a country's economy: Currency Devaluation: Increased Demand for Foreign Currency: When a country consistently imports more than it exports, it needs more foreign currency to pay for these imports. This increased demand for foreign currency can lead to the depreciation of the domestic currency. Example: 14 Page 495 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) If Bangladesh faces a prolonged trade deficit, the increased demand for foreign currencies like the US dollar can lead to a devaluation of the Taka. This depreciation makes imports more expensive, which can increase production costs for export-oriented industries. Rising Import Costs: Inflationary Pressures: A weaker domestic currency makes imports more expensive, which can lead to inflationary pressures in the economy. For industries that rely on imported inputs, this can erode the competitive advantage gained from devaluation. Example: If the Taka depreciates significantly, the cost of importing raw materials for the pharmaceutical sector will rise, potentially increasing the prices of Bangladeshi pharmaceutical products and reducing their competitiveness in international markets. Economic Instability: Reduced Economic Confidence: Persistent trade deficits and currency devaluation can erode investor and consumer confidence, leading to reduced investment and economic instability. Example: If investors perceive Bangladesh’s economy as unstable due to ongoing trade deficits and a weakening currency, they may be less likely to invest, impacting economic growth and development. The jute industry in Bangladesh offers a clear example of how the BoP influences export performance: Historical Context: During the early 1990s, Bangladesh experienced BoP surpluses. This period coincided with steady growth in the jute industry, as the country was able to import the necessary raw materials and machinery without facing significant currency depreciation. BoP Crises: Conversely, during periods of BoP deficits, such as in the late 1990s, the jute industry struggled. The inability to secure sufficient foreign currency for essential imports hindered production and export competitiveness. Policymakers need to focus on maintaining a favorable BoP to support currency stability and export performance: Promoting Export Diversification: Reducing Reliance on Few Sectors: By diversifying the export base, Bangladesh can achieve a more stable BoP. Reducing dependence on a few key export commodities can help stabilize export revenues and contribute to currency stability. 15 Page 496 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: Encouraging the growth of sectors like IT services, agro-based products, and pharmaceuticals can reduce reliance on the garment sector, stabilizing overall export earnings. Infrastructure and Regulatory Reforms: Improving infrastructure and streamlining regulations can boost the competitiveness of export industries, leading to increased export volumes and a favorable BoP. Example: Investing in port facilities and reducing bureaucratic hurdles can enhance the efficiency of export logistics, benefiting all export-oriented industries. Managing Import Dependencies: Domestic Production Initiatives: Promoting domestic production of raw materials and machinery can reduce import dependencies, easing pressure on the BoP. Example: Encouraging domestic production of high-quality textiles can reduce the garment industry's reliance on imported fabrics, supporting a stable BoP. Export-oriented businesses can take proactive measures to navigate the implications of the BoP: Strategic Sourcing: Developing Local Supplier Networks: Businesses should explore alternative sourcing strategies to reduce reliance on imports, such as developing local supplier networks or investing in vertical integration. Example: A leather goods manufacturer might invest in local tanneries to ensure a stable supply of leather, reducing dependency on imported materials. Protecting Against Exchange Rate Volatility: Implementing currency hedging strategies can protect against exchange rate volatility, ensuring more predictable costs for imported inputs. Example: A shrimp exporter might use forward contracts or options to lock in exchange rates, mitigating the risk of currency depreciation. Efficiency Improvements: Enhancing Productivity: 16 Page 497 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Continuous investment in productivity enhancements and cost-efficiency measures can help businesses remain competitive, even in the face of fluctuating input costs due to currency movements. Example: Automating certain production processes in the pharmaceutical industry can reduce operational costs, offsetting the impact of higher import prices for raw materials. A favorable BoP is essential for maintaining currency stability and supporting the growth of export-oriented industries in Bangladesh. By understanding the intricate relationships between the BoP, currency values, and export performance, policymakers and businesses can develop strategies that enhance export competitiveness and contribute to sustainable economic development. Trade policies are crucial instruments in influencing both currency values and export performance. They encompass a wide range of measures, including tariffs, non-tariff barriers, export incentives, and trade agreements. Each of these components has distinct impacts on the economic landscape, which in turn shape trade balances and currency stability. Tariffs and Non-Tariff Barriers: Protective Tariffs: Impact on Imports and Exports: Protective tariffs are imposed to shield domestic industries from foreign competition by making imported goods more expensive. While this can benefit local producers in the short term, it often leads to higher prices for consumers and can provoke retaliatory tariffs from trade partners. Example: If Bangladesh imposes high tariffs on imported textiles to protect its domestic garment industry, other countries might respond with tariffs on Bangladeshi garments. This could lead to reduced export volumes, negatively impacting the trade balance and exerting downward pressure on the Taka. Retaliatory Measures: Retaliatory tariffs can escalate into trade wars, disrupting international trade flows and affecting the stability of the domestic currency. These measures can also lead to trade imbalances, further complicating economic stability. Non-Tariff Barriers (NTBs): Regulatory and Administrative Measures: NTBs include quotas, import licenses, and stringent quality standards that can limit the quantity of imports. While these measures protect local industries, they can also lead to inefficiencies and higher costs. Example: 17 Page 498 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Stringent quality standards on imported pharmaceuticals can protect local manufacturers but might also limit access to essential medicines, leading to higher healthcare costs and potential trade disputes. Export Incentives: Subsidies and Tax Breaks: Enhancing Competitiveness: Export incentives such as subsidies, tax breaks, and grants can significantly enhance the competitiveness of domestic products in international markets. These incentives reduce production costs, enabling exporters to offer their goods at more competitive prices. Example: The Bangladeshi government provides subsidies to the jute industry, reducing production costs and enhancing the global competitiveness of jute products. This boosts export volumes and supports the trade balance. Rebate Programs: Value-Added Tax (VAT) Rebate: Offering VAT rebates on exported goods can lower the effective cost for exporters, making their products more competitive internationally. Example: VAT rebate programs for the garment industry can reduce the overall cost of production, allowing Bangladeshi garments to be sold at lower prices in international markets, thereby increasing export volumes. Trade Agreements: Bilateral and Multilateral Agreements: Reducing Trade Barriers: Trade agreements with other countries or regional blocs can reduce or eliminate tariffs and NTBs, fostering a more favorable environment for exports. Example: Bangladesh’s participation in the South Asian Free Trade Area (SAFTA) allows for reduced tariffs on exports to neighboring countries, increasing market access for Bangladeshi products. Market Access: Expanding Export Markets: Trade agreements often provide preferential access to larger markets, enhancing the potential for export growth. Example: The Generalized System of Preferences (GSP) program with the European Union provides duty-free access for many Bangladeshi products, significantly boosting exports to the EU. 18 Page 499 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impacts on Currency Stability: Trade Balance and Currency Value: Positive Trade Balance: Effective trade policies that enhance export performance contribute to a positive trade balance, which supports the value of the domestic currency. Example: Consistent export incentives and favorable trade agreements have helped Bangladesh achieve a positive trade balance in sectors like ready-made garments, supporting the Taka’s value. Currency Depreciation and Trade Barriers: Negative Trade Balance: Protective tariffs and NTBs that provoke trade retaliation can lead to a negative trade balance, increasing the risk of currency depreciation. Example: If retaliatory tariffs are imposed on Bangladeshi garments due to protective measures, the resulting decline in exports could lead to a trade deficit, putting downward pressure on the Taka. Balanced Trade Policies: Promoting Exports While Protecting Domestic Industries: Policymakers must strike a balance between protecting domestic industries and promoting exports. This involves designing tariffs and NTBs that protect local businesses without provoking significant retaliation or trade disputes. Recommendation: Implement moderate tariffs that provide some protection to local industries while negotiating trade agreements that enhance market access for exports. Export Incentives and Infrastructure: Supporting Export Growth: Investing in infrastructure and providing targeted export incentives can help local industries become more competitive internationally. Recommendation: Enhance port facilities, streamline customs procedures, and offer tax breaks for export-oriented businesses to reduce costs and improve competitiveness. Negotiating Trade Agreements: Expanding Market Access: 19 Page 500 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Actively pursuing bilateral and multilateral trade agreements can open new markets for Bangladeshi products and reduce reliance on a few key markets. Recommendation: Negotiate trade agreements with emerging markets and major economies to diversify export destinations and reduce vulnerability to market-specific shocks. Trade policies play a pivotal role in shaping both currency values and export performance. By understanding the complex interplay between tariffs, non-tariff barriers, export incentives, and trade agreements, policymakers can formulate strategies that enhance export competitiveness, maintain a favorable trade balance, and support the stability of the domestic currency. Effective trade policies, complemented by strategic investments in infrastructure and continuous engagement in trade negotiations, can drive sustainable economic growth and ensure long-term economic stability for Bangladesh. Tariff and Non-Tariff Barriers: Overview: Tariffs and non-tariff barriers (NTBs) are trade policy tools used by governments to control the amount of trade across their borders. While these tools can protect domestic industries from foreign competition, they also have significant implications for export performance and overall economic stability. Understanding the nuanced impacts of these barriers, and strategically managing them, is essential for enhancing export competitiveness and stabilizing the currency. Tariffs: Definition and Purpose: Tariffs are taxes imposed on imported goods, making them more expensive than their domestic counterparts. They are designed to protect local industries from foreign competition by increasing the cost of imported goods. Impacts on Domestic Industries: Protection of Local Industries: By making imported goods more expensive, tariffs can help local industries grow and stabilize by reducing competition. This can lead to increased production, job creation, and economic growth within protected sectors. Example: Bangladesh's tariffs on imported textiles protect its domestic garment industry, encouraging local production and employment. Negative Consequences: Retaliatory Measures: Other countries may respond to tariffs with their own tariffs on exports, leading to trade wars that can harm international trade relationships. 20 Page 501 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: If Bangladesh imposes high tariffs on imported electronics, countries exporting these goods might retaliate with tariffs on Bangladeshi garments, impacting the garment industry's export performance. Increased Consumer Prices: . Higher tariffs on imports can lead to increased prices for consumers, reducing their purchasing power and overall economic welfare. Inefficiencies and Reduced Competitiveness: Over-reliance on tariffs can create complacency among domestic industries, reducing their incentive to innovate and improve efficiency. This can ultimately make them less competitive globally. Non-Tariff Barriers (NTBs): Non-Tariff Barriers include a variety of regulatory and administrative measures such as quotas, import licenses, quality standards, and safety regulations that restrict imports and protect domestic industries. Impacts on Trade: Regulatory Measures: Stringent quality and safety standards can protect consumers and the environment but can also restrict imports by making compliance costly and difficult for foreign producers. Example: Bangladesh might impose strict quality standards on imported pharmaceuticals to protect consumers, but this can also limit access to affordable medications from abroad. Quotas and Import Licenses: Quotas limit the quantity of a specific good that can be imported, while import licenses require importers to obtain permission before bringing goods into the country. Example: Quotas on the import of sugar might protect local producers, but they can also lead to supply shortages and higher prices for consumers. Trade Disputes and Retaliation: Like tariffs, NTBs can lead to trade disputes and retaliatory measures from other countries, impacting export performance. Market Distortion and Inefficiencies: NTBs can distort market dynamics by creating artificial scarcity or surplus, leading to inefficiencies and reduced competitiveness of domestic industries. 21 Page 502 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Removing Barriers and Entering Trade Agreements: Reduction of Tariffs and NTBs: Removing or reducing tariffs and NTBs can lower costs for exporters and enhance the competitiveness of domestic products in international markets. This can lead to increased export volumes and improved trade balances. Example: Reducing tariffs on raw materials used in garment production can lower production costs, making Bangladeshi garments more competitive globally. Stabilizing the Currency: Positive Trade Balance: Increased exports contribute to a positive trade balance, supporting the value of the domestic currency. A stronger currency reduces the cost of imports, further stabilizing the economy. Example: As Bangladesh increases its garment exports by lowering tariffs on imported fabrics, the resulting trade surplus can help stabilize the Taka. Entering Trade Agreements: Bilateral and Multilateral Agreements: Trade agreements can reduce or eliminate tariffs and NTBs, providing preferential access to larger markets. These agreements can enhance export performance by opening new markets and reducing trade barriers. Example: Bangladesh’s participation in trade agreements like the South Asian Free Trade Area (SAFTA) and the Generalized System of Preferences (GSP) with the European Union provides duty-free access to major markets, boosting export volumes. Enhancing Market Access and Stability: Trade agreements can provide a stable and predictable trading environment, fostering long-term economic relationships and reducing the risk of trade disputes. Example: A free trade agreement with the United States could provide Bangladeshi exporters with stable and predictable access to one of the largest markets in the world. Gradual Reduction of Barriers: Policymakers should consider a gradual reduction of tariffs and NTBs to allow domestic industries time to adjust and become competitive. Supporting measures, such as subsidies and training programs, can help industries transition. 22 Page 503 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Recommendation: Implement phased tariff reductions on imported inputs for key industries, combined with support programs to enhance productivity and competitiveness. Negotiating Strategic Trade Agreements: Focus on Key Markets: Prioritize trade agreements with major trading partners and emerging markets to diversify export destinations and reduce dependency on a few markets. Recommendation: Pursue trade agreements with countries in the Asia-Pacific region and Africa to open new markets for Bangladeshi products. Supporting Domestic Industries: Enhancing Competitiveness: Invest in infrastructure, research and development, and skills training to improve the competitiveness of domestic industries. This will help them thrive in a liberalized trade environment. Recommendation: Develop industrial clusters with state-of-the-art facilities and provide grants for innovation and technology adoption. Monitoring and Evaluation: Regular Assessment: Continuously monitor the impact of trade policies and agreements on the economy and adjust strategies as needed. This will ensure that trade policies remain effective and aligned with national economic goals. Recommendation: Establish a dedicated trade policy monitoring unit within the Ministry of Commerce to evaluate the impacts of trade agreements and tariff reductions. Tariffs and non-tariff barriers are powerful tools for protecting domestic industries but can have unintended negative consequences on export performance and currency stability. By strategically reducing these barriers and entering into well-negotiated trade agreements, Bangladesh can enhance its export competitiveness and stabilize its currency. Policymakers must adopt a balanced approach, combining barrier reduction with supportive measures to ensure a smooth transition for domestic industries. Export Incentives and Subsidies: 23 Page 504 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Overview: Export incentives and subsidies are policy tools used by governments to encourage domestic producers to sell their goods and services abroad. These measures can significantly boost export performance by reducing production costs, enhancing competitiveness, and providing financial support to exporters. However, their implementation must be carefully managed to avoid trade disputes and ensure compliance with international trade regulations. Types of Export Incentives and Subsidies: Financial Incentives: Cash Subsidies: Direct financial payments to exporters to reduce their production costs and enhance competitiveness in international markets. Example: The government provides a cash subsidy of 10% of the export value to garment manufacturers to support their international sales. Tax Incentives: Reductions or exemptions in taxes for exporters, including income tax, value-added tax (VAT), and import duties on raw materials and machinery used in production for export. Example: Exporters receive a tax rebate on the income generated from their export sales. Low-Interest Loans: Providing exporters with access to credit at below-market interest rates to finance production, expansion, and export activities. Example: The government offers low-interest loans to jute exporters to help them expand their operations and increase exports. Non-Financial Incentives: Export Credit Insurance: Insurance schemes that protect exporters against the risk of non-payment by foreign buyers, providing them with greater confidence to enter new markets. Example: Exporters of pharmaceuticals can insure their receivables against the risk of default by international buyers. Marketing Support: 24 Page 505 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Government-funded programs that help exporters promote their products in international markets through trade shows, advertising campaigns, and market research. Example: The government funds participation in international trade fairs for leather goods manufacturers to showcase their products. Infrastructure Development: Investment in infrastructure such as ports, logistics, and transportation networks to facilitate efficient export processes. Example: Upgrading port facilities to reduce shipping times and costs for frozen food exporters. Benefits of Export Incentives and Subsidies: Reducing Costs: Export incentives and subsidies lower the overall costs of production for exporters, making their products more price-competitive in international markets. Example: Cash subsidies to garment exporters reduce their costs, allowing them to offer lower prices and compete effectively with manufacturers from other countries. Enhancing Competitiveness: Financial and non-financial incentives enhance the competitiveness of domestic products by providing exporters with the resources they need to improve quality, increase production, and expand into new markets. Example: Low-interest loans enable pharmaceutical companies to invest in advanced manufacturing technology, improving the quality and competitiveness of their products. Encouraging Export Growth: By reducing the financial risks associated with exporting and providing support for market expansion, incentives and subsidies encourage businesses to increase their export activities. Example: Export credit insurance mitigates the risk of non-payment, encouraging jute exporters to enter new markets. Compliance with International Trade Rules: 25 Page 506 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Export incentives and subsidies must comply with international trade agreements, such as those governed by the World Trade Organization (WTO). Non-compliance can lead to trade disputes and retaliatory measures from trading partners. Example: If Bangladesh's export subsidies for shrimp violate WTO rules, other countries might impose tariffs on Bangladeshi shrimp imports in retaliation. Risk of Trade Disputes: Excessive or improperly managed subsidies can distort trade and provoke disputes with other countries, potentially leading to sanctions or loss of market access. Example: Subsidies that significantly undercut the prices of competitors in other countries might lead to anti-dumping investigations and trade sanctions. Budgetary Constraints: Providing financial incentives and subsidies requires significant government expenditure, which may strain public finances, especially in developing economies. Example: Extensive cash subsidies for multiple export sectors might lead to budget deficits and necessitate borrowing or cuts in other areas of public spending. Dependency and Complacency: Over-reliance on subsidies can create dependency among exporters, reducing their motivation to innovate and improve efficiency. This can hinder long-term competitiveness and sustainability. Example: Garment manufacturers relying heavily on subsidies may not invest in new technologies or process improvements, making them less competitive over time. Managing Export Incentives and Subsidies: Strategic Implementation: To maximize benefits and minimize risks, export incentives and subsidies should be strategically targeted at sectors with high export potential and alignment with national economic goals. Example: Prioritizing subsidies for high-growth sectors like pharmaceuticals and technology, where Bangladesh has competitive advantages and significant export potential. 26 Page 507 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Regular assessment of the effectiveness and impact of incentives and subsidies is crucial. This ensures that the measures are achieving desired outcomes and allows for adjustments based on changing economic conditions. Example: Conducting periodic reviews of the export performance of sectors receiving subsidies to evaluate their effectiveness and make necessary policy adjustments. Compliance with International Regulations: Ensuring that export incentives and subsidies comply with WTO rules and other international trade agreements is essential to avoid disputes and maintain good trade relations. Example: Consulting trade experts and conducting legal reviews to ensure that new subsidy programs for the jute sector adhere to international trade laws. Export incentives and subsidies are powerful tools for boosting export performance by reducing costs and enhancing competitiveness. However, they must be carefully managed to avoid trade disputes, ensure compliance with international trade rules, and prevent dependency among exporters. Strategic implementation, monitoring, and alignment with national economic goals are key to maximizing the benefits of these measures while mitigating potential risks. By adopting a balanced approach, Bangladesh can effectively use export incentives and subsidies to drive sustainable export growth and economic development. Bilateral and Multilateral Trade Agreements: Overview: Trade agreements, both bilateral and multilateral, play a critical role in enhancing export performance and ensuring currency stability. These agreements help in opening new markets, reducing trade barriers, and providing a predictable trading environment, which can significantly benefit exporting countries like Bangladesh. Types of Trade Agreements: Bilateral Trade Agreements: Agreements between two countries aimed at fostering trade by reducing tariffs, import quotas, and trade barriers. Example: A bilateral trade agreement between Bangladesh and Japan to lower tariffs on textile and clothing products, making Bangladeshi garments more competitive in the Japanese market. Multilateral Trade Agreements: Agreements involving multiple countries, typically negotiated under the auspices of international organizations like the World Trade Organization (WTO). 27 Page 508 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: The General Agreement on Tariffs and Trade (GATT) or the South Asian Free Trade Area (SAFTA), which includes multiple South Asian countries aiming to reduce tariffs and facilitate trade within the region. Benefits of Trade Agreements: Market Access and Expansion: Trade agreements open up new markets for exporters by removing or reducing tariffs and non-tariff barriers, making it easier for products to reach international customers. Example: The SAFTA agreement has allowed Bangladeshi exporters to access larger markets in India, Pakistan, and other South Asian countries without prohibitive tariffs. Stability and Predictability: By establishing clear rules and reducing the likelihood of sudden changes in trade policies, agreements provide a stable and predictable environment for exporters. Example: The Trade and Investment Framework Agreement (TIFA) between Bangladesh and the United States offers a platform for discussing trade issues, providing stability and confidence for Bangladeshi exporters. Improved Competitiveness: Reduction or elimination of tariffs on raw materials and intermediate goods used in production can lower costs and improve the competitiveness of exports. Example: A trade agreement that reduces tariffs on imported machinery for the leather industry can lower production costs and make Bangladeshi leather goods more competitive globally. Enhanced Foreign Direct Investment (FDI): Trade agreements often attract FDI by providing a more favorable and stable business environment, leading to technological transfers and improved export capabilities. Example: Multilateral agreements like those under the WTO can attract multinational companies to invest in Bangladesh, bringing in advanced technologies and boosting export quality. Impact on Currency Stability: Reduced Trade Deficits: 28 Page 509 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) By increasing exports and reducing trade barriers, trade agreements help in reducing trade deficits, which can positively affect currency stability. Example: Increased textile exports to the European Union under the Everything But Arms (EBA) initiative help reduce Bangladesh's trade deficit, supporting the stability of the Taka. Foreign Exchange Earnings: Enhanced export performance leads to higher foreign exchange earnings, which can stabilize the national currency by increasing foreign currency reserves. Example: Bilateral trade agreements with Middle Eastern countries boost remittances and export revenues, increasing Bangladesh's foreign exchange reserves and stabilizing the Taka. The RMG sector has greatly benefited from trade agreements such as the EBA initiative with the European Union, which grants duty-free access to Bangladeshi garments. Impact: Significant increase in RMG exports to the EU, contributing to economic growth and currency stability. Bilateral agreements with countries like the US and Canada have facilitated easier market access for Bangladeshi pharmaceutical products by reducing regulatory barriers. Impact: Growth in pharmaceutical exports, technological advancements, and improved compliance with international standards. Compliance with Standards: Exporters must comply with the standards and regulations of the partner countries, which can be challenging and require significant investment. Example: Meeting stringent EU standards for garment quality and labor practices may require substantial upgrades in production processes. Dependency on Trade Partners: Over-reliance on a few trade partners can make the economy vulnerable to policy changes or economic downturns in those countries. Example: Heavy dependence on the EU market for RMG exports means that economic or political changes in the EU can significantly impact Bangladesh's export performance. 29 Page 510 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) While trade agreements aim to balance trade, they can sometimes lead to imbalances if one country's exports significantly outpace its imports, potentially causing political and economic tensions. Example: A significant trade surplus with a partner country might lead to calls for renegotiating terms or imposing tariffs. Trade agreements, both bilateral and multilateral, are essential tools for enhancing export performance and ensuring currency stability. By reducing trade barriers and providing a predictable trading environment, these agreements open up new markets and support the competitiveness of exports. However, they also require careful management to ensure compliance with international standards and to mitigate the risks of dependency and trade imbalances. By strategically leveraging trade agreements, Bangladesh can achieve sustained export growth and economic stability. Diversify Trade Agreements: Engage in multiple bilateral and multilateral trade agreements to reduce dependency on a few markets and spread risk. Action: Negotiate new trade agreements with emerging markets in Africa and Latin America. Enhance Compliance Mechanisms: Invest in improving compliance with international standards to fully capitalize on the benefits of trade agreements. Action: Establish a compliance support program to help exporters meet quality and regulatory standards in major markets. Monitor and Adjust Policies: Continuously monitor the impact of trade agreements and be ready to adjust policies to address any negative outcomes or to take advantage of new opportunities. Action: Create a task force to review the performance of trade agreements and recommend policy adjustments as needed. Strengthen Negotiation Capacities: Build capacity within trade negotiation teams to effectively advocate for favorable terms that benefit key export sectors. Action: 30 Page 511 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Provide specialized training for trade negotiators and involve industry stakeholders in the negotiation process. By implementing these recommendations, policymakers can better harness the benefits of trade agreements, ensuring that Bangladesh's export sectors remain competitive and resilient in the global market. Overview: Global market conditions play a pivotal role in shaping both currency devaluation and export performance. Factors such as commodity prices, exchange rate volatility, and international trade dynamics can have significant and often intertwined impacts on a country's economic stability and export competitiveness. Impact on Export Revenues: The prices of commodities, such as oil, agricultural products, and raw materials, directly affect the revenues of exporting countries. For Bangladesh, fluctuations in global jute, shrimp, and garment prices can substantially impact export earnings. Example: A decline in global jute prices reduces export revenues for Bangladesh, affecting overall economic performance and potentially leading to currency devaluation due to reduced foreign exchange inflows. Pressure on Currency: Lower commodity prices can lead to a decrease in foreign currency earnings, putting pressure on the national currency. This can lead to devaluation if the country struggles to maintain its foreign exchange reserves. Example: The drop in global shrimp prices in recent years has affected Bangladesh's export revenues, contributing to currency depreciation. Exchange Rate Volatility: Impact on Export Earnings: Volatility in exchange rates can create uncertainty for exporters, affecting the predictability of export earnings. Stable exchange rates are crucial for planning and pricing exports effectively. Example: Sudden fluctuations in the value of the US dollar can lead to unpredictable export earnings for Bangladeshi garment manufacturers, who often price their products in dollars. Hedging Costs: To mitigate the risks of exchange rate volatility, businesses may engage in hedging activities. However, hedging can be costly and may not always fully protect against adverse currency movements. 31 Page 512 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: Bangladeshi exporters might use forward contracts to hedge against currency risks, but these financial instruments come with additional costs that can erode profit margins. International Trade Dynamics: Trade Policies and Agreements: Changes in international trade policies, such as the imposition of tariffs, non-tariff barriers, or new trade agreements, can significantly affect export performance. These dynamics can either open up new markets or restrict access to existing ones. Example: The US-China trade war created opportunities for Bangladeshi garment exporters as US importers sought alternatives to Chinese suppliers. However, new EU regulations on environmental standards for textile imports could pose challenges. Broader economic trends, such as global recessions or booms, influence demand for exports. During economic downturns, demand for non-essential goods tends to decline, affecting export sectors. Example: The global financial crisis of 2008 led to a reduction in demand for Bangladeshi garments as consumers in key markets like the US and EU cut back on spending. Jute Industry: The global demand and price for jute have fluctuated over the years. In periods when prices were high, Bangladesh experienced increased export revenues and economic stability. Conversely, during price declines, the industry faced challenges, leading to reduced foreign exchange earnings and pressure on the Taka. Impact: The significant price drop in the early 2000s affected jute export revenues, contributing to economic challenges and currency pressure. Exchange Rate Volatility: Garments Sector: The garments sector, heavily reliant on stable exchange rates for pricing and contracts, has been impacted by fluctuations in the US dollar. Manufacturers have faced challenges in managing costs and pricing due to unpredictable exchange rate movements. Impact: The volatility of the US dollar against the Taka in recent years has led to varying profit margins for garment exporters, necessitating effective risk management strategies. International Trade Dynamics: 32 Page 513 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Shrimp Export Sector: Changes in trade policies, such as new tariffs or sanitary and phytosanitary standards, have affected shrimp exports. For instance, stringent quality standards imposed by the EU have required Bangladeshi exporters to invest in improved processing facilities. Impact: Compliance with new standards has increased costs, but adherence has also opened up premium markets, stabilizing export revenues in the long run. Policy and Business Implications: For Policymakers: Commodity Price Management: Implement policies to support key export sectors during periods of low commodity prices, such as subsidies or incentives for diversification into value-added products. Action: Develop a stabilization fund to support jute and shrimp exporters during global price downturns. , Exchange Rate Stability: Promote exchange rate stability through sound monetary policies and interventions in the foreign exchange market when necessary. Action: Strengthen the central bank's capacity to manage foreign exchange reserves and intervene effectively in currency markets. Trade Policy Adaptation: Proactively negotiate trade agreements and adapt policies to changing global trade dynamics to ensure market access and competitiveness. Action: Engage in bilateral and multilateral trade negotiations to secure favorable terms for key export sectors like garments and pharmaceuticals. For Export-Oriented Businesses: Hedging Strategies: Implement robust hedging strategies to manage exchange rate risks and protect profit margins. Action: Utilize financial instruments like forward contracts and options to mitigate currency volatility risks. 33 Page 514 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Quality and Compliance: Invest in meeting international standards and quality requirements to access premium markets and comply with evolving trade regulations. Action: Upgrade processing facilities and obtain relevant certifications to meet EU and US standards for shrimp and garment exports. Market Diversification: Diversify export markets to reduce dependency on a few key markets and mitigate risks associated with global economic fluctuations. Action: Explore emerging markets in Africa and Latin America to expand the customer base and reduce exposure to economic downturns in traditional markets. Global market conditions significantly influence both currency devaluation and export performance. Understanding the impacts of commodity prices, exchange rate volatility, and international trade dynamics is crucial for developing effective strategies to support economic stability and export growth. By implementing targeted policies and strategic business practices, Bangladesh can better navigate these global challenges and enhance its export performance. Future research should delve deeper into the interplay between global market conditions and domestic economic policies. Longitudinal studies could provide insights into how sustained changes in commodity prices, exchange rate policies, and international trade agreements influence long-term export performance and economic stability. Comparative analyses with other similar economies could also offer valuable lessons and best practices. Impact on Export Revenues: Commodity prices play a critical role in determining the export revenues of countries that rely heavily on exporting primary goods. For Bangladesh, key export commodities include jute, shrimp, and garments, each of which is subject to global price fluctuations. These fluctuations can lead to volatile export earnings and, consequently, impact the stability of the national currency. Jute Industry: Global Demand and Price Fluctuations: Jute, known as the "golden fiber," is one of Bangladesh's major export products. The global demand for jute products, such as sacks, bags, and other packaging materials, often depends on the prices of synthetic alternatives like polypropylene. When the price of synthetic materials rises, the demand for jute increases, boosting export revenues. Conversely, when synthetic materials become cheaper, the demand for jute declines, leading to lower export earnings. Example: 34 Page 515 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) In the early 2000s, the price of synthetic packaging materials dropped, leading to a decrease in the global demand for jute products. This adversely affected Bangladesh's jute export revenues, contributing to economic instability. Shrimp Sector: Vulnerability to Global Price Changes: The shrimp sector in Bangladesh is highly sensitive to changes in global prices. Factors such as international market demand, competition from other shrimp-exporting countries, and changes in consumer preferences can cause significant price fluctuations. Example: In recent years, increased shrimp production in countries like Vietnam and India has intensified competition in the global market, leading to a drop in shrimp prices. This competition, combined with stringent quality standards imposed by importing countries, has pressured Bangladesh's shrimp export revenues. Garment Industry: Dependence on Raw Material Prices: Although garments are not primary goods, the garment industry is indirectly affected by commodity prices, particularly the prices of raw materials like cotton and synthetic fibers. Fluctuations in these prices can impact production costs and, consequently, export prices and revenues. Example: The rise in global cotton prices in 2011 led to increased production costs for Bangladeshi garment manufacturers. This increase squeezed profit margins and made it challenging to maintain competitive export prices, affecting overall export revenues. Currency Stability: Effects of Volatile Export Earnings: Volatile export earnings resulting from fluctuating commodity prices can destabilize the national currency. When export revenues are high, there is a greater inflow of foreign currency, which can strengthen the national currency. Conversely, when export revenues decline, the reduced foreign currency inflow can lead to currency depreciation. Example: The decline in global shrimp prices in recent years has reduced Bangladesh's export revenues from this sector, contributing to a weaker Taka. Strategies to Mitigate Impact Diversification of Export Products: Diversifying export products can reduce dependence on a few commodities and mitigate the impact of global price fluctuations. Developing new export sectors, such as pharmaceuticals and IT services, can provide more stable revenue streams. 35 Page 516 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Action: Promote the growth of the pharmaceutical industry by attracting foreign direct investment (FDI) and improving regulatory standards to enhance export competitiveness. Adding value to primary commodities before export can help stabilize revenues. For instance, processing jute into finished goods like carpets, textiles, and handicrafts can fetch higher prices and reduce vulnerability to raw material price fluctuations. Action: Invest in processing facilities and technology to produce high-value jute products, thereby increasing export revenues and reducing price volatility risks. Hedging Against Price Fluctuations: Exporters can use financial instruments to hedge against price fluctuations. Futures contracts, options, and other derivatives can provide a buffer against adverse price movements in global markets. Action: Educate and encourage exporters to use hedging tools to manage risks associated with commodity price fluctuations. Commodity prices significantly impact the export revenues of Bangladesh, particularly for key sectors like jute, shrimp, and garments. Fluctuations in global prices can lead to volatile export earnings, affecting the stability of the national currency. By implementing strategies such as diversification of export products, value addition, and hedging, Bangladesh can mitigate the adverse effects of global price volatility and enhance its economic resilience. Future research should focus on developing a deeper understanding of the mechanisms through which global commodity prices impact domestic export sectors. Studies could analyze the effectiveness of various risk management strategies, such as hedging and diversification, in stabilizing export revenues. Comparative studies with other commodity-exporting countries could provide valuable insights into best practices for managing price volatility and sustaining export growth. Impact on Export Performance: Exchange rate volatility refers to the frequent and unpredictable fluctuations in the exchange rate of a country's currency against others. This volatility creates uncertainty for exporters, affecting export contracts, pricing, and revenues. Effects on Export Contracts and Pricing: Uncertainty in Pricing: Exporters typically price their goods in foreign currencies to remain competitive in international markets. However, exchange rate volatility makes it challenging to set stable prices. Sudden depreciation or appreciation of the domestic currency can lead to either reduced revenues or increased costs for foreign buyers. 36 Page 517 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: If a Bangladeshi garment exporter prices their goods in USD and the Taka suddenly depreciates, the exporter might receive more Taka per dollar. Conversely, if the Taka appreciates, the exporter might receive less Taka per dollar, potentially reducing profit margins. Impact on Long-term Contracts: Long-term export contracts are particularly vulnerable to exchange rate fluctuations. Volatility can lead to significant changes in the expected revenue, complicating financial planning and budgeting for exporters. Example: A shrimp exporter entering a year-long contract at a fixed price in USD might face difficulties if the Taka depreciates significantly during that period, increasing costs of imported inputs and reducing overall profitability. Managing Exchange Rate Volatility: Hedging Strategies: Exporters can manage exchange rate risks through hedging strategies such as forward contracts, options, and futures. These financial instruments allow exporters to lock in exchange rates for future transactions, providing stability and reducing uncertainty. Action: Educate exporters on the benefits and mechanisms of hedging. Facilitate access to hedging instruments through financial institutions. Stable Macroeconomic Policies: Maintaining stable macroeconomic policies is crucial for reducing exchange rate volatility. Policies that control inflation, manage interest rates, and maintain a healthy balance of payments can contribute to a more stable currency. Action: Implement prudent fiscal and monetary policies to ensure macroeconomic stability. This includes managing inflation through appropriate monetary measures and maintaining a balanced budget. Case Study: Bangladesh Garments Sector Hedging in Practice: The garments sector in Bangladesh has started to adopt hedging strategies to manage exchange rate risks. Large exporters, in particular, use forward contracts to lock in favorable exchange rates for their transactions. Example: 37 Page 518 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) A leading garments exporter in Bangladesh enters into forward contracts to sell USD at a fixed rate for a set period, ensuring stable revenue despite fluctuations in the Taka's value. Government initiatives to support exporters in managing exchange rate risks can also play a vital role. Providing training on financial risk management and facilitating access to hedging instruments can help smaller exporters cope with volatility. Action: Develop government programs to support exporters in understanding and utilizing hedging strategies. Offer workshops and training sessions in collaboration with financial institutions. Macro-Economic Stability: Ensuring macro-economic stability through sound fiscal and monetary policies is essential to mitigate exchange rate volatility. Stable economic conditions help create a predictable business environment for exporters. Action: Implement policies that control inflation, manage interest rates prudently, and ensure a positive balance of payments. These measures will contribute to a stable exchange rate environment. Support for Small and Medium Enterprises (SMEs): SMEs are often less equipped to manage exchange rate risks due to limited resources and financial expertise. Providing targeted support to these businesses can help them navigate volatility. Action: Establish financial support programs and advisory services for SMEs. Encourage banks to offer affordable hedging instruments tailored to the needs of small exporters. Exchange rate volatility poses significant challenges for export performance by creating uncertainty in pricing and revenue. Managing this volatility through effective hedging strategies and stable macroeconomic policies is crucial for maintaining export growth. Exporters, particularly SMEs, need support in understanding and utilizing financial instruments to hedge against currency risks. By ensuring macroeconomic stability and providing targeted assistance, policymakers can help exporters navigate the complexities of exchange rate fluctuations, thereby enhancing overall export performance. Future research should focus on developing comprehensive models to quantify the impact of exchange rate volatility on export performance across different sectors. Studies could explore the effectiveness of various hedging strategies and the role of government policies in mitigating exchange rate risks. Additionally, comparative analyses with other emerging economies can provide insights into best practices for managing currency volatility and supporting export growth. Influence on Export Performance and Currency Stability: Global trade dynamics encompass various factors, including changes in global demand and supply, trade wars, and economic cycles. These factors significantly impact export 38 Page 519 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) performance and currency stability. Understanding and responding to these dynamics is crucial for formulating effective trade and economic policies. Changes in Global Demand and Supply: Demand Shifts: Global demand for goods and services can fluctuate due to economic conditions, consumer preferences, and technological advancements. These shifts directly impact the export performance of countries like Bangladesh. Example: A rise in demand for eco-friendly products has boosted exports of jute and jute goods from Bangladesh, as these are biodegradable and environmentally friendly. Disruptions in global supply chains, caused by events like natural disasters, pandemics, or geopolitical tensions, can affect the availability of raw materials and intermediate goods. This, in turn, impacts the production and export capabilities of affected countries. Example: The COVID-19 pandemic disrupted global supply chains, affecting the availability of raw materials for Bangladesh's garment industry, leading to delays and increased costs. Trade Wars and Protectionism: Impact of Trade Wars: Trade wars and protectionist policies, such as tariffs and quotas, can alter the competitive landscape for exporters. These measures can lead to retaliatory actions, reducing market access and increasing costs for exporters. Example: The US-China trade war led to increased tariffs on certain goods, affecting global trade flows and creating opportunities for Bangladeshi exporters to fill gaps left by Chinese suppliers. Protectionist policies in key markets can hinder export growth by imposing higher barriers to entry. Conversely, the removal of such barriers through trade agreements can enhance market access and boost exports. Example: The European Union's Generalized Scheme of Preferences (GSP) provides tariff reductions for Bangladeshi exports, supporting the country's garment industry. Economic Cycles: Global Economic Cycles: Global economic cycles, characterized by periods of growth and recession, influence export performance. During economic booms, higher demand for goods boosts exports, while recessions lead to reduced demand and lower export volumes. 39 Page 520 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: During the global financial crisis of 2008-2009, demand for non-essential goods plummeted, affecting Bangladesh's garment exports. Counter-Cyclical Policies: Implementing counter-cyclical policies, such as fiscal stimulus during recessions and austerity during booms, can help stabilize the economy and mitigate the impact of global economic cycles on export performance. Action: Develop and implement counter-cyclical economic policies to stabilize export performance during global economic fluctuations. Case Study: Garment Industry in Bangladesh Adaptation to Global Demand: The garment industry in Bangladesh has successfully adapted to changes in global demand by diversifying its product range and targeting new markets. This adaptability has helped maintain export growth despite global economic fluctuations. Example: The shift in consumer preference towards casual and comfortable clothing during the COVID-19 pandemic led Bangladeshi garment manufacturers to pivot their production lines to meet this demand. Impact of Trade Agreements: Trade agreements have played a crucial role in the growth of Bangladesh's garment exports. The duty-free access to the European Union under the Everything But Arms (EBA) initiative has significantly boosted exports. Example: The EBA initiative has allowed Bangladeshi garment exporters to compete more effectively in the European market by eliminating tariffs on their products. Responsive Trade Policies: Policymakers should focus on negotiating favorable trade agreements to enhance market access for exporters. These agreements should aim to reduce tariffs, eliminate non-tariff barriers, and create a predictable trading environment. Action: Actively participate in multilateral trade negotiations and seek bilateral trade agreements with key trading partners. 40 Page 521 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Diversifying export markets can reduce dependence on a few key markets and spread risk. Exploring new markets in emerging economies can provide additional opportunities for export growth. Action: Conduct market research to identify potential new markets and develop strategies to penetrate these markets. Managing Supply Chain Risks: Strengthening Supply Chains: Developing resilient supply chains can mitigate the impact of global supply chain disruptions. This includes diversifying suppliers, investing in local production capabilities, and enhancing logistics infrastructure. Action: Encourage investment in local supply chain infrastructure and support initiatives to develop alternative supply sources. Summary of Findings: Global trade dynamics, including changes in demand and supply, trade wars, and economic cycles, significantly influence export performance and currency stability. Understanding these dynamics is crucial for formulating responsive trade and economic policies. Recommendations for Policymakers: Policymakers should focus on negotiating favorable trade agreements, diversifying export markets, and strengthening supply chains to enhance export performance and maintain currency stability. Implementing counter-cyclical economic policies can also help stabilize the economy during global economic fluctuations. Future research should explore the long-term impacts of trade agreements and protectionist policies on export performance. Studies should also investigate the effectiveness of counter-cyclical policies in mitigating the impact of global economic cycles. Comparative analyses with other export-oriented economies can provide further insights into best practices for managing global trade dynamics. Influence on Economic Policies and Governance: Political stability is crucial for creating a predictable and favorable economic environment. Stable governance ensures the consistent implementation of economic policies, which is essential for fostering investor confidence, maintaining capital flows, and supporting sustainable economic growth. Political instability, conversely, can lead to economic uncertainty, erratic policy changes, and disruptions in governance, adversely impacting both currency stability and export performance. Economic Uncertainty and Investor Confidence: Impact on Investor Confidence: 41 Page 522 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Political instability can significantly affect investor confidence, leading to reduced foreign direct investment (FDI) and capital outflows. Investors seek stable environments where the risk of abrupt policy changes or governance failures is minimal. Example: Political turmoil in Bangladesh in the early 2010s led to a decrease in FDI, as investors were wary of potential disruptions and policy uncertainties. Effect on Capital Flows: Uncertainty and risk associated with political instability can cause capital flight, where investors move their funds out of the country to safer markets. This can result in a devaluation of the currency as the demand for foreign currency increases. Example: Periods of political unrest in Bangladesh have historically been accompanied by depreciations in the Taka, as both domestic and foreign investors sought to protect their assets. Governance and Institutional Strength: Stable Governance: Stable governance and strong institutions play a critical role in maintaining economic stability and fostering an environment conducive to export growth. They ensure the consistent application of laws, protection of property rights, and enforcement of contracts. Example: The establishment of the Bangladesh Economic Zones Authority (BEZA) under stable governance has encouraged investment in special economic zones (SEZs), boosting export-oriented industries. Policy Consistency: Political stability allows for the formulation and implementation of long-term economic policies, which are essential for sustained export growth. Consistent policies provide businesses with the confidence to make long-term investments in export capacity. Example: The stable political environment and consistent economic policies in the late 1990s and early 2000s supported the rapid growth of the ready-made garment (RMG) sector in Bangladesh. Trade Policies and International Relations: Negotiation of Trade Agreements: Political stability is vital for negotiating and maintaining trade agreements, which are crucial for export performance. Stable governments can engage in long-term diplomatic relations and trade negotiations that open new markets and reduce trade barriers. 42 Page 523 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: Bangladesh's ability to secure preferential trade agreements, such as the Generalized System of Preferences (GSP) with the European Union, has been facilitated by stable political relations and effective diplomacy. Effect on Trade Policies: Political stability enables the development and implementation of coherent trade policies that support export growth. It also helps in maintaining favorable relationships with trading partners, avoiding trade disputes and retaliatory measures. Example: The stable political environment in recent years has allowed Bangladesh to pursue and implement export-friendly policies, such as subsidies for the garment sector and incentives for new export markets. Impact of Political Stability on RMG Exports: The growth of the RMG sector in Bangladesh can be partly attributed to periods of political stability, which provided a favorable environment for investment and expansion. Stable governance has ensured the consistent application of export incentives, infrastructure development, and regulatory support. Example: During the politically stable period from 2001 to 2006, the RMG sector experienced significant growth, with export volumes increasing due to enhanced investor confidence and supportive government policies. Disruptions Due to Political Instability: Conversely, political instability has negatively impacted the RMG sector. Strikes, hartals (general strikes), and political violence have disrupted production, increased costs, and affected the timely delivery of goods, undermining export performance. Example: The political unrest and violence during the 2013-2014 period led to significant disruptions in the RMG sector, causing delays and cancellations of export orders, which hurt Bangladesh's reputation as a reliable supplier. Summary of Findings: Political stability is a critical factor influencing both currency devaluation and export performance in Bangladesh. Stable governance promotes investor confidence, consistent economic policies, and strong institutional frameworks, all of which are essential for sustainable export growth. Conversely, political instability can lead to economic uncertainty, capital flight, and disruptions in export-oriented industries. Recommendations for Policymakers: 43 Page 524 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Policymakers should prioritize maintaining political stability to support economic growth and export performance. This includes fostering strong institutions, ensuring consistent economic policies, and engaging in proactive diplomacy to secure favorable trade agreements. Additionally, measures should be taken to mitigate the impact of political instability on key export sectors, such as the RMG industry, through contingency planning and support mechanisms. Future research should explore the specific mechanisms through which political stability influences economic variables and export performance. Longitudinal studies examining the impact of political events on economic outcomes can provide deeper insights. Comparative studies with other countries facing similar challenges can also help identify best practices for managing the relationship between political stability and economic performance. Governance and Economic Policies: Role of Effective Governance: Effective governance is pivotal in establishing a stable economic environment conducive to investment and trade. It encompasses the consistent application of laws, transparent decision-making processes, and the enforcement of contracts, all of which build investor confidence and foster economic growth. Political stability underpins effective governance, ensuring that economic policies remain consistent and predictable over time. Creating a Stable Investment Environment: Legal and Regulatory Framework: A robust legal and regulatory framework is essential for protecting property rights, resolving disputes, and enforcing contracts. Effective governance ensures that these frameworks are consistently applied, reducing the risk for investors and encouraging both domestic and foreign investment. Example: The development of the Bangladesh Investment Development Authority (BIDA) has been instrumental in streamlining investment procedures and enhancing investor confidence through clear regulations and support services. Transparency and Accountability: Transparency in government operations and accountability of public officials reduce corruption and increase the efficiency of public administration. This creates a favorable business environment by ensuring that resources are allocated efficiently and that businesses can operate without undue interference. Example: Efforts to improve transparency and reduce corruption in Bangladesh have included the implementation of e-governance initiatives, which streamline processes and reduce opportunities for corrupt practices. Continuity of Economic Policies: Long-Term Policy Planning: 44 Page 525 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Political stability enables long-term economic policy planning and implementation, which is crucial for sustainable growth. Stable governments can develop and pursue comprehensive economic strategies that align with the country’s development goals. Example: The implementation of the Vision 2021 and subsequent Vision 2041 plans in Bangladesh reflects the ability of stable governance to pursue long-term development strategies aimed at transforming the country into a middle-income and eventually high-income economy. Consistency in Trade and Investment Policies: Consistent trade and investment policies provide businesses with the confidence to invest in export-oriented activities. These policies include export incentives, tax breaks, and support for infrastructure development, which are critical for enhancing export competitiveness. Example: The consistent application of export incentives, such as cash incentives for RMG exporters and tax holidays for certain industries, has played a significant role in the expansion of Bangladesh's export sectors. Supporting Export Growth and Currency Stability: Economic Policy Continuity: Political stability ensures the continuity of economic policies that support export growth. This includes maintaining favorable trade agreements, providing export incentives, and developing infrastructure to support trade. Example: The continued support for the RMG sector through various incentives and infrastructure investments, such as the development of specialized economic zones, has been crucial in maintaining export growth. Macroeconomic Management: Effective governance contributes to sound macroeconomic management, including prudent fiscal and monetary policies. These policies help maintain currency stability by controlling inflation, managing public debt, and ensuring a favorable balance of payments. Example: Bangladesh’s management of its macroeconomic policies, including efforts to control inflation and maintain a stable exchange rate, has helped to stabilize the Taka and support export performance. Transport and Logistics: Infrastructure development, particularly in transport and logistics, is essential for efficient trade. Effective governance ensures that investments in infrastructure are made strategically and are well-maintained. 45 Page 526 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: The development of the Padma Bridge is expected to significantly improve connectivity within Bangladesh, reducing transport costs and transit times for exporters, thereby enhancing competitiveness. Energy and Utilities: Reliable energy and utilities are critical for industrial activities. Stable governance ensures that these services are provided efficiently and at a reasonable cost, supporting industrial growth and export performance. Example: Investments in power generation and distribution have improved the reliability of electricity supply in Bangladesh, benefiting energy-intensive industries such as textiles and garments. Policy Support and Growth: The RMG sector’s growth has been supported by consistent policies under stable governance, including export incentives, duty-free import of raw materials, and infrastructure development. Example: The Export Processing Zones (EPZs) in Bangladesh, established under stable governance, have provided a conducive environment for RMG manufacturers by offering tax incentives, streamlined customs procedures, and reliable infrastructure. Impact of Political Instability: Political instability, on the other hand, has at times disrupted production and trade in the RMG sector. Strikes and political violence have caused delays and increased costs, affecting the sector’s competitiveness. Example: The political unrest in 2013-2014 led to significant disruptions in the RMG supply chain, affecting export orders and tarnishing Bangladesh’s reputation as a reliable supplier. Summary of Findings: Effective governance and sound economic policies are essential for creating a stable environment for investment and trade. Political stability ensures the continuity of policies that support export growth and currency stability. Key aspects include a robust legal and regulatory framework, transparency and accountability, consistent economic policies, and strategic infrastructure development. Recommendations for Policymakers: Policymakers should prioritize maintaining political stability to ensure the continuity of economic policies and effective governance. This includes fostering strong institutions, ensuring transparent and accountable governance, and investing in infrastructure 46 Page 527 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) development. Additionally, efforts should be made to maintain a stable macroeconomic environment through prudent fiscal and monetary policies. Future research should focus on the specific mechanisms through which political stability and effective governance influence economic variables and export performance. Comparative studies across different countries and regions can provide further insights into best practices for achieving stable and effective governance. Longitudinal studies can also help understand the long-term impacts of governance and policy continuity on economic outcomes. Corruption and Institutional Quality: Impact on Investment and Economic Efficiency: Corruption and poor institutional quality significantly undermine economic development by creating an unpredictable business environment, increasing transaction costs, and reducing the overall efficiency of resource allocation. This section explores how these factors influence investment decisions, economic efficiency, and currency stability, ultimately affecting export performance. Deterrence of Investment: Uncertainty and Risk: High levels of corruption create an unpredictable and risky environment for investors. Bribery and corrupt practices can lead to unexpected costs and legal uncertainties, discouraging both domestic and foreign investment. Example: Businesses may be required to pay bribes to obtain permits or government contracts, increasing their operational costs and creating uncertainty about future expenses. This deters long-term investment, particularly in sectors that require substantial upfront capital. Reduced Foreign Direct Investment (FDI): Corruption acts as a significant barrier to FDI. Investors are less likely to invest in countries where they perceive a high risk of corrupt practices affecting their business operations and profitability. Example: Studies have shown that countries with high levels of corruption attract significantly lower levels of FDI. Multinational companies, which are subject to anti-corruption regulations in their home countries, may avoid investing in corrupt environments to minimize legal and reputational risks. Economic Efficiency: Misallocation of Resources: Corruption leads to the misallocation of resources as decisions are made based on personal gain rather than economic efficiency. This results in suboptimal investment in public goods and infrastructure, which are critical for supporting export activities. 47 Page 528 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: Government contracts may be awarded to less competent firms due to bribes rather than to the most efficient or qualified companies. This can lead to poorly constructed infrastructure projects that do not support economic growth effectively. Reduced Public Revenue: Corruption erodes the tax base and reduces public revenues as tax evasion and illicit financial flows become more prevalent. Lower public revenues limit the government’s ability to invest in essential services and infrastructure that support export industries. Example: Tax evasion facilitated by corrupt tax officials reduces the government’s ability to collect revenues needed for public investment in transport, energy, and education—key areas that underpin export competitiveness. Currency Devaluation: Impact on Exchange Rates: High levels of corruption and poor institutional quality can lead to economic instability, which in turn can pressure the currency to devalue. Investors and traders lose confidence in the economic management of the country, leading to capital flight and reduced foreign exchange reserves. Example: Persistent corruption can undermine investor confidence, leading to capital outflows and a depreciation of the national currency. This depreciation, if not managed properly, can spiral into a significant devaluation, impacting the country’s economic stability and export performance. Corruption can exacerbate inflationary pressures by increasing costs for businesses and consumers. These inflationary pressures can erode the value of the currency, contributing to devaluation. Example: Corruption in procurement processes can inflate the cost of goods and services, leading to higher overall prices in the economy. This inflation, coupled with reduced investor confidence, can lead to currency devaluation. Strategies to Improve Institutional Quality and Reduce Corruption: Strengthening Legal Frameworks: Anti-Corruption Laws and Enforcement: Implementing stringent anti-corruption laws and ensuring their rigorous enforcement can deter corrupt practices. Establishing independent anti-corruption agencies with the power to investigate and prosecute corruption cases is crucial. 48 Page 529 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Example: The establishment of anti-corruption commissions, like the Anti-Corruption Commission (ACC) in Bangladesh, can help address corruption through investigations, enforcement actions, and public awareness campaigns. Enhancing Institutional Quality: Transparent Governance: Promoting transparency in government operations, including public procurement and financial management, reduces opportunities for corruption. Open data initiatives and e-governance can enhance transparency and accountability. Example: E-procurement systems that allow for transparent bidding processes and reduce human intervention can minimize corruption in public contracts. Capacity Building: Investing in the capacity building of public institutions to improve their efficiency and effectiveness is essential. Training public officials, improving administrative processes, and leveraging technology can enhance institutional quality. Example: Training programs for public officials on ethical standards, combined with the use of digital tools for administrative processes, can reduce opportunities for corruption and improve service delivery. Case Study: Anti-Corruption Efforts in Bangladesh Initiatives and Outcomes: Bangladesh Anti-Corruption Commission (ACC): The ACC has been instrumental in combating corruption in Bangladesh. It focuses on investigating corruption cases, raising public awareness, and promoting ethical standards in public service. Outcome: The ACC’s efforts have led to increased awareness of corruption issues and some high-profile prosecutions, though challenges remain in ensuring comprehensive enforcement. E-Governance: The adoption of e-governance initiatives, such as digital land registration and online tax filing systems, has helped reduce corruption by minimizing direct interactions between citizens and public officials. Outcome: 49 Page 530 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) These initiatives have improved transparency and reduced opportunities for bribery, contributing to a more favorable business environment. Summary of Findings: Corruption and poor institutional quality have profound negative impacts on investment, economic efficiency, and currency stability, ultimately affecting export performance. Improving institutional quality and reducing corruption are essential for creating a stable and predictable business environment that supports export growth. Recommendations for Policymakers: Policymakers should prioritize anti-corruption measures, strengthen legal and regulatory frameworks, enhance transparency in government operations, and invest in capacity building for public institutions. By addressing these issues, Bangladesh can improve its economic stability, attract more investment, and enhance export performance. Future research should explore the specific mechanisms through which corruption affects different sectors of the economy and the effectiveness of various anti-corruption measures. Comparative studies across countries with similar economic contexts can provide insights into best practices for improving institutional quality and reducing corruption. Additionally, longitudinal studies can help understand the long-term impacts of anti-corruption efforts on economic and export performance. Political Events and Their Economic Impact: Political events, including elections, policy changes, and government stability, significantly influence economic outcomes. These events can create uncertainty, affecting investor confidence, exchange rates, and overall economic performance. Understanding the impact of political events on the economy is crucial for policymakers, investors, and businesses to navigate the complexities of economic decision-making. Elections and Economic Uncertainty: Pre-Election Period: Elections often lead to economic uncertainty as investors and businesses await the outcomes and potential policy shifts. This uncertainty can result in reduced investment and economic activity as stakeholders adopt a "wait and see" approach. Example: In the run-up to national elections, businesses may delay major investment decisions, and stock markets may experience increased volatility as investors react to polls and potential election outcomes. Post-Election Period: The period following an election can also be marked by uncertainty, especially if the results are contested or lead to a significant shift in government policies. Clarity and stability in political outcomes can help restore investor confidence and economic stability. Example: 50 Page 531 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Following a clear and decisive election outcome, markets often stabilize as investors gain confidence in the continuity of economic policies and governance. Policy Changes and Economic Impact: Fiscal and Monetary Policies: Changes in fiscal policies, such as tax reforms, public spending, and budget allocations, can have immediate and long-term effects on the economy. Similarly, shifts in monetary policy, including interest rates and inflation control measures, directly impact economic performance. Example: A newly elected government may implement expansionary fiscal policies to stimulate economic growth, resulting in increased public spending and potentially higher inflation. Conversely, a focus on austerity measures can lead to reduced spending and slower economic growth. Regulatory Changes: Regulatory changes, such as modifications in trade policies, environmental regulations, and labor laws, can affect business operations and economic outcomes. Predictable and transparent regulatory environments enhance investor confidence and economic stability. Example: Changes in trade policies, such as the imposition of tariffs or the negotiation of free trade agreements, can significantly impact export industries and trade balances. Exchange Rates and Currency Values: Impact on Currency Stability: Political stability is a key determinant of currency stability. Stable governments with predictable policies are more likely to maintain steady currency values, while political instability can lead to currency volatility and devaluation. Example: Countries with frequent political upheavals or changes in government may experience rapid fluctuations in exchange rates as investors seek safer, more stable currencies. Consistent and transparent economic policies contribute to currency stability. Sudden or unpredictable policy shifts can lead to investor uncertainty and affect currency values. Example: A government that maintains consistent fiscal and monetary policies is likely to see more stable currency values compared to one that frequently changes its economic strategies. Political Events and Economic Outcomes: Historical Context: 51 Page 532 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Bangladesh has experienced various political events that have impacted its economic performance. Periods of political stability have generally been associated with positive economic outcomes, while political instability has often led to economic challenges. Example: During times of political stability, Bangladesh has seen robust economic growth and increased foreign investment. Conversely, political turmoil, such as strikes and protests, has disrupted economic activities and affected investor confidence. Policy Changes and Export Performance: Changes in trade policies have directly impacted Bangladesh's export performance. Favorable trade agreements and policies promoting export-oriented industries have contributed to export growth. Example: The introduction of export incentives and favorable trade agreements with key markets has boosted Bangladesh’s garment sector, enhancing its export performance. Regulatory Environment: Improvements in the regulatory environment, such as streamlining business registration processes and reducing bureaucratic hurdles, have supported economic growth and export performance. Example: Efforts to improve the ease of doing business in Bangladesh have attracted foreign investment and supported the growth of export-oriented industries. Summary of Findings: Political events, including elections and policy changes, significantly influence economic stability and export performance. Economic uncertainty during political transitions can affect investor confidence and currency values, while predictable and transparent political processes contribute to economic stability and growth. Recommendations for Policymakers: Policymakers should focus on maintaining political stability, ensuring transparency in policy changes, and promoting a consistent regulatory environment to enhance investor confidence and economic performance. Additionally, strategies to mitigate the economic impact of political uncertainty, such as fostering strong institutions and sound economic policies, are essential for sustained growth. Recommendations for Future Research: Future research should explore the specific mechanisms through which political events impact different sectors of the economy. Longitudinal studies and cross-country comparisons can provide insights into best practices for managing the economic impacts of political events and 52 Page 533 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) promoting stability. Additionally, examining the role of political institutions in mitigating the adverse effects of political uncertainty can offer valuable policy recommendations. Simultaneous Effects on Exchange Rates and Export Performance: Theoretical Framework: To understand the simultaneous effects of key economic factors on both exchange rates and export performance, this research adopts a comprehensive theoretical framework. This framework integrates multiple economic variables to analyze their direct and indirect impacts, providing a clearer picture of the complex interactions at play. Economic Stability: Direct Impact on Exchange Rates: High inflation rates erode the purchasing power of a currency, leading to devaluation. When a country's inflation rate is higher than that of its trading partners, its currency tends to depreciate. Direct Impact on Export Performance: Currency devaluation resulting from high inflation can make exports cheaper and more competitive in international markets, potentially boosting export volumes. However, if inflation is driven by rising production costs, the overall competitiveness of exports may not improve significantly. Direct Impact on Exchange Rates: Lower interest rates can lead to currency depreciation as they reduce the returns on investments denominated in that currency. This can result in capital outflows and a weaker exchange rate. Direct Impact on Export Performance: Reduced borrowing costs due to lower interest rates can stimulate investment in export-oriented industries, enhancing production capacity and efficiency, thereby boosting export performance. Balance of Payments (BoP): Direct Impact on Exchange Rates: A favorable BoP, indicated by a current account surplus, supports currency stability. Persistent trade deficits, however, create pressure on the currency to devalue as the demand for foreign currency exceeds supply. Direct Impact on Export Performance: A stable and positive BoP position ensures the availability of foreign exchange necessary for importing inputs for export production, thereby supporting sustained export performance. Trade Policies Tariffs and Non-Tariff Barriers: 53 Page 534 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Direct Impact on Exchange Rates: Protective tariffs can lead to trade imbalances and retaliatory measures from trading partners, affecting the currency's value. Direct Impact on Export Performance: Removing tariffs and non-tariff barriers can enhance export competitiveness by reducing costs and increasing market access. Export Incentives and Subsidies: Direct Impact on Exchange Rates: Export incentives and subsidies can improve a country's trade balance by boosting export volumes, thereby supporting the currency. Direct Impact on Export Performance: These measures reduce production costs and enhance the competitiveness of exports, leading to increased export volumes. Bilateral and Multilateral Trade Agreements: Direct Impact on Exchange Rates: Trade agreements that open up new markets and reduce trade barriers can lead to an improved trade balance, supporting currency stability. Direct Impact on Export Performance: These agreements enhance market access and provide a predictable trading environment, positively influencing export performance. Global Market Conditions: Direct Impact on Exchange Rates: Fluctuations in global commodity prices can significantly impact export revenues and affect the currency. For commodity-exporting countries, a decline in prices can reduce foreign exchange earnings and put downward pressure on the currency. Direct Impact on Export Performance: Changes in commodity prices affect the profitability and competitiveness of exports, influencing export volumes and revenues. Direct Impact on Exchange Rates: High volatility creates uncertainty and can lead to speculative attacks on the currency, causing instability. Direct Impact on Export Performance: Volatility in exchange rates affects the stability of export earnings, making it difficult for exporters to price their goods competitively and plan for the future. 54 Page 535 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Direct Impact on Exchange Rates: Global trade dynamics, including trade wars and economic cycles, influence currency values through changes in trade balances and capital flows. Direct Impact on Export Performance: Shifts in global demand and supply, as well as international trade policies, directly impact export performance. Political Stability: Governance and Economic Policies: Direct Impact on Exchange Rates: Stable governance and consistent economic policies foster a stable investment climate, supporting currency stability. Direct Impact on Export Performance: Effective governance and sound economic policies create a favorable environment for export growth by ensuring policy continuity and reducing economic uncertainty. Corruption and Institutional Quality: Direct Impact on Exchange Rates: High levels of corruption and poor institutional quality can lead to economic inefficiencies and reduce investor confidence, causing currency depreciation. Direct Impact on Export Performance: Improving institutional quality and reducing corruption enhance economic efficiency and attractiveness for foreign investors, boosting export performance. Political Events and Economic Impact: Direct Impact on Exchange Rates: Political events such as elections, policy changes, and political instability create economic uncertainty, affecting currency values. Direct Impact on Export Performance: Predictable and transparent political processes contribute to economic stability and support sustained export growth. Integrating the Factors: The theoretical framework integrates these factors using advanced econometric models and regression analyses to quantify their simultaneous effects on exchange rates and export performance. This approach involves: 55 Page 536 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Multivariate Regression Analysis: To assess the impact of multiple independent variables (inflation rates, interest rates, BoP, trade policies, global market conditions, political stability) on dependent variables (exchange rates and export performance). Time-Series Analysis: To examine the temporal relationships and causality between these variables over specific periods. Comparative Case Studies: To provide contextual insights by comparing Bangladesh with other countries, such as India and Indonesia, highlighting common patterns and unique differences. The integration of these factors into a cohesive theoretical framework allows for a more comprehensive understanding of the simultaneous effects on exchange rates and export performance. By disentangling the complex interactions between these variables, policymakers can formulate more effective strategies to support export growth and economic stability. Future research should continue to refine and expand this theoretical framework, incorporating additional variables and exploring sector-specific impacts. Longitudinal studies and cross-country comparisons can further enrich the understanding of these dynamics and inform better policy-making. Practical Implications: Policymakers can use this framework to identify key areas for intervention, such as managing inflation, maintaining stable interest rates, and fostering political stability, to enhance export performance and support currency stability. Export-oriented businesses can develop strategies to hedge against adverse effects and capitalize on favorable conditions, ensuring sustained growth and competitiveness in the global market. Empirical analysis of Bangladesh's economic data provides a detailed understanding of how various economic factors have historically influenced both currency devaluation and export performance. By examining real-world data, the study underscores the importance of considering multiple variables in policy formulation. Historical Data Analysis: Inflation Rates and Devaluation: Empirical Evidence: Historical data shows a strong correlation between high inflation rates and periods of currency devaluation in Bangladesh. For instance, during the late 1990s and early 2000s, inflationary pressures led to significant depreciation of the Bangladeshi Taka (BDT). Impact on Exports: The devaluation during these periods made Bangladeshi exports more competitive in the global market, leading to increased export volumes, particularly in the garments sector. Interest Rates and Export Performance: Empirical Evidence: 56 Page 537 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Analysis of interest rate trends reveals that periods of lower interest rates were associated with higher export growth. For example, the early 2000s saw a reduction in interest rates, which coincided with a surge in export activities. Sector-Specific Impact: The garments sector, heavily reliant on bank loans for financing, particularly benefited from lower borrowing costs, enabling expansion and increased export production. Empirical Evidence: A positive BoP has been critical in maintaining currency stability. Historical periods with a surplus in the current account, such as the mid-2010s, were marked by a stable exchange rate and robust export performance. Impact on Industries: The jute industry, for instance, experienced steady growth during these periods due to the availability of foreign exchange for importing necessary inputs. Tariffs, Non-Tariff Barriers, and Export Incentives: Empirical Evidence: The removal of certain tariffs and non-tariff barriers, along with the introduction of export incentives in the early 2000s, significantly boosted Bangladesh’s export performance. Export subsidies and favorable trade policies helped reduce production costs and increase competitiveness. Impact on Export Growth: These policies particularly benefited the garments and pharmaceutical sectors, leading to expanded market access and increased export volumes. Empirical Evidence: Trade agreements with key markets such as the European Union and the United States have played a vital role in sustaining export growth. These agreements have provided Bangladeshi exporters with preferential access to large markets, enhancing export revenues and contributing to economic stability. Impact on Export Performance: The garments sector has been a major beneficiary of such agreements, with significant export growth recorded in the post-agreement periods. Empirical Evidence: Fluctuations in global commodity prices have directly impacted Bangladesh's export revenues. For example, periods of high global cotton prices have increased the cost of inputs for the garments sector, affecting export profitability. Impact on Export Volumes: 57 Page 538 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Conversely, low global commodity prices have sometimes led to reduced export earnings, highlighting the sensitivity of export performance to global market conditions. Empirical Evidence: Analysis of exchange rate data indicates that periods of high volatility have created challenges for exporters in pricing their goods and planning for the future. Volatility in the exchange rate during the late 2000s, for instance, led to uncertainty and affected export contracts. Mitigation Strategies: Export-oriented businesses have increasingly adopted hedging strategies to manage exchange rate risks and maintain stable export revenues. Empirical Evidence: Periods of political stability and consistent economic policies have fostered a favorable environment for investment and export growth. For example, the stable governance in the mid-2010s coincided with robust economic growth and improved export performance. Impact on Investor Confidence: Stable political conditions have enhanced investor confidence, leading to increased FDI inflows and supporting export-oriented industries. Empirical Evidence: High levels of corruption and weak institutional quality have historically deterred investment and economic efficiency. The Transparency International Corruption Perceptions Index highlights periods where increased corruption correlated with economic challenges and currency instability. Impact on Export Competitiveness: Improving institutional quality and reducing corruption have been essential in creating a conducive environment for export growth. Empirical Evidence: Major political events, such as elections and policy shifts, have often led to economic uncertainty, affecting currency stability and export performance. The 2008 national elections, for instance, created a period of economic uncertainty that impacted investor confidence and capital flows. Policy Recommendations: Ensuring predictable and transparent political processes is crucial for maintaining economic stability and supporting sustained export growth. Empirical evidence from Bangladesh underscores the importance of considering multiple economic variables in understanding the relationship between currency devaluation and export performance. The historical data highlights how factors such as inflation rates, interest rates, balance of payments, trade policies, global market conditions, and political stability have simultaneously influenced both 58 Page 539 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) currency values and export performance. This comprehensive approach provides valuable insights for policymakers and businesses aiming to enhance export competitiveness and economic stability. Policy Implications and Recommendations: Policymakers should: Maintain low and stable inflation and interest rates to support currency stability and export growth. Attract FDI through favorable policies to provide capital, technology, and market access for export-oriented industries. Ensure a positive balance of payments by promoting export growth and managing import levels. Implement and sustain trade policies that enhance export competitiveness, including removing barriers and negotiating favorable trade agreements. Foster political stability and improve governance to create a predictable and conducive environment for investment and trade. Export-oriented businesses should: Develop strategies to hedge against exchange rate volatility and adverse economic conditions. Focus on improving productivity and reducing reliance on imported inputs to enhance resilience to currency fluctuations. Leverage trade agreements and export incentives to expand market access and increase competitiveness. By integrating these factors into a cohesive theoretical and empirical framework, policymakers and businesses can better navigate the complex dynamics between currency devaluation and export performance, ultimately supporting sustained economic growth and stability in Bangladesh. Conducting a comparative analysis with countries such as India, Vietnam, and Indonesia offers valuable insights into the relationship between currency devaluation and export performance. By examining these countries, we can identify common patterns and unique factors that influence this relationship, providing a broader perspective on how different economic environments and policies affect export dynamics. Economic Context: India, with its diverse economy, presents a complex case for examining the impact of currency devaluation on export performance. The country has experienced several devaluation episodes, each influenced by various economic factors. 1991 Devaluation: Faced with a severe balance of payments crisis, India devalued its currency in 1991. This devaluation was accompanied by economic reforms aimed at liberalizing the economy. Impact on Exports: 59 Page 540 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The devaluation made Indian goods cheaper in the global market, boosting exports, particularly in the IT and textile sectors. The liberalization policies also attracted FDI, further enhancing export performance. Factors Influencing Export Performance: Trade Policies: India’s shift towards more open trade policies in the 1990s played a crucial role in improving export performance. Tariff reductions and the removal of trade barriers facilitated greater market access for Indian exporters. Sector-Specific Growth: The IT sector benefited significantly from the combination of devaluation and liberalization, leading to a rapid increase in export revenues. Economic Context: Vietnam, as a rapidly growing economy, has used currency devaluation strategically to enhance its export competitiveness. The country’s export-oriented growth model has relied heavily on maintaining a competitive exchange rate. 2015 Devaluation: In response to a slowing economy and declining export growth, Vietnam devalued its currency multiple times in 2015. Impact on Exports: The devaluation helped to boost exports, particularly in the manufacturing sector, which includes electronics and textiles. Vietnam’s position as a major exporter of these goods was reinforced by the devaluation. FDI and Trade Agreements: Vietnam has actively pursued FDI and trade agreements to bolster its export capacity. The country’s participation in trade agreements such as the CPTPP has provided greater market access and stability. Government Policies: The Vietnamese government’s proactive policies in supporting export-oriented industries through incentives and infrastructure development have been critical in sustaining export growth. Indonesia: Economic Context: Indonesia, as a resource-rich country, has experienced fluctuations in its export performance due to changes in global commodity prices. Currency devaluation has been used as a tool to enhance competitiveness during economic downturns. 1998 Devaluation: 60 Page 541 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Amidst the Asian financial crisis, Indonesia experienced a severe devaluation of its currency. This devaluation was part of a broader economic restructuring program supported by the IMF. Impact on Exports: The devaluation initially led to a decline in export performance due to economic instability. However, in the long run, it made Indonesian commodities and manufactured goods more competitive in the global market. Commodity Prices: Indonesia’s export performance is closely tied to global commodity prices. Fluctuations in prices for key exports like palm oil and coal have a significant impact on export revenues and currency stability. Economic Policies: The government’s efforts to diversify the economy and reduce dependence on commodity exports have included measures to support the manufacturing sector and attract FDI. Common Patterns and Unique Factors: Common Patterns: Devaluation as a Tool for Competitiveness: In all three countries, currency devaluation has been used to enhance export competitiveness, particularly during economic downturns or crises. Role of FDI and Trade Policies: FDI and favorable trade policies have been crucial in supporting export growth. Countries that have actively pursued trade agreements and created a conducive environment for FDI have seen more sustained improvements in export performance. Sector-Specific Impacts: The impact of devaluation is often sector-specific. For example, India’s IT sector and Vietnam’s manufacturing sector have particularly benefited from currency devaluation and supportive economic policies. Economic Structure: The structure of each economy plays a significant role in how devaluation affects export performance. India’s diverse economy, Vietnam’s export-oriented model, and Indonesia’s commodity dependence create different dynamics in response to currency changes. Government Policies: The effectiveness of government policies in managing devaluation and supporting export sectors varies. Vietnam’s proactive policies in infrastructure and incentives contrast with Indonesia’s focus on diversification and resource management. Global Market Conditions: 61 Page 542 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Each country’s exposure to global market conditions, such as commodity prices and trade dynamics, uniquely influences how devaluation impacts export performance. Implications for Bangladesh: The comparative analysis with India, Vietnam, and Indonesia offers several implications for Bangladesh: Strategic Use of Devaluation: Like these countries, Bangladesh can use currency devaluation strategically to enhance export competitiveness, particularly during economic challenges. Focus on FDI and Trade Policies: Attracting FDI and pursuing favorable trade agreements can provide the necessary capital, technology, and market access to support export growth. Sector-Specific Strategies: Developing sector-specific strategies, similar to the IT sector in India or manufacturing in Vietnam, can help leverage the benefits of devaluation more effectively. Managing Global Market Risks: Understanding and mitigating the risks associated with global market conditions, such as commodity price fluctuations, can help stabilize export performance. By learning from the experiences of these countries, Bangladesh can better navigate the complex relationship between devaluation and export performance, ensuring sustainable economic growth and stability. To effectively enhance export performance, policymakers in Bangladesh must focus on a comprehensive approach that addresses economic stability, trade policies, and political stability. Here are detailed strategies and specific measures that can be implemented: Maintaining Economic Stability: Monetary Policy: Implementing prudent monetary policies to control inflation is crucial. The central bank should use interest rate adjustments, open market operations, and reserve requirements to manage money supply and keep inflation within target levels. Fiscal Discipline: Maintaining fiscal discipline by avoiding excessive government borrowing and ensuring efficient public spending helps prevent inflationary pressures. Fiscal policies should aim at reducing budget deficits and managing public debt sustainably. Managing Interest Rates: Balanced Interest Rate Policies: 62 Page 543 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Interest rates should be set at levels that balance the need to stimulate economic activity and control inflation. Lower interest rates can boost investment and consumption, but they must be carefully managed to prevent capital outflows and excessive currency depreciation. Supporting Export Financing: Providing preferential interest rates for export-oriented businesses can help them access affordable financing for production and expansion. This can be achieved through targeted credit programs and partnerships with financial institutions. Maintaining a Favorable Balance of Payments: Export Diversification: Encouraging diversification of export products and markets can reduce dependence on a few commodities or regions, making the balance of payments more resilient to external shocks. Enhancing Competitiveness: Policies that improve productivity, reduce production costs, and enhance product quality can boost export performance and improve the trade balance. Investments in infrastructure, technology, and workforce skills are critical. Improving Trade Policies Entering into Beneficial Trade Agreements: Bilateral and Multilateral Agreements: Actively pursuing and negotiating bilateral and multilateral trade agreements can open new markets for Bangladeshi exports. These agreements should focus on reducing tariffs, eliminating non-tariff barriers, and ensuring fair trade practices. Regional Cooperation: Strengthening regional trade cooperation within frameworks like SAARC (South Asian Association for Regional Cooperation) and BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) can enhance market access and economic integration. Providing Export Incentives and Subsidies: Tax Breaks and Subsidies: Offering tax breaks, subsidies, and other financial incentives to export-oriented industries can reduce their operational costs and enhance their competitiveness in the global market. Streamlining Export Processes: Simplifying export procedures, reducing bureaucratic hurdles, and improving customs efficiency can lower transaction costs and expedite export activities. Implementing Protective Measures Judiciously: Selective Use of Tariffs: 63 Page 544 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) While protective tariffs can safeguard domestic industries, they should be used selectively and temporarily to avoid trade disputes and ensure compliance with international trade rules. Anti-Dumping Measures: Implementing anti-dumping measures can protect local industries from unfair foreign competition, provided they are consistent with WTO (World Trade Organization) regulations. Ensuring Political Stability: Promoting Good Governance: Transparent Policies: Ensuring transparency in policy formulation and implementation fosters trust and predictability, attracting both domestic and foreign investments. Regular stakeholder consultations and clear communication of policies are essential. Strengthening Institutions: Enhancing the capacity and efficiency of institutions responsible for trade, investment, and economic regulation helps create a stable and conducive business environment. Reducing Corruption: Anti-Corruption Measures: Implementing robust anti-corruption measures and ensuring strict enforcement of laws can reduce the negative impact of corruption on economic activities. Establishing independent anti-corruption bodies and promoting public accountability are critical steps. Improving Institutional Quality: Strengthening institutional frameworks and ensuring that regulatory bodies are effective and independent can enhance the overall economic environment and support export growth. Ensuring Predictable Political Processes: Stable Political Environment: Ensuring a stable political environment through democratic governance, regular and fair elections, and respect for the rule of law is fundamental to economic stability. Conflict Resolution: Proactively addressing and resolving political conflicts through dialogue and negotiation can prevent disruptions to economic activities and maintain investor confidence. By focusing on these strategies, policymakers in Bangladesh can create a more conducive environment for export growth, leveraging the benefits of devaluation while mitigating its potential downsides. The combined efforts in maintaining economic stability, improving trade policies, and ensuring political stability are essential for enhancing export performance and achieving sustainable economic development. 64 Page 545 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Managing Currency Devaluation: Effective Management of Currency Devaluation: Currency devaluation, when managed effectively, can be a tool for improving export competitiveness. However, it requires a balanced approach that addresses both the short-term and long-term economic impacts. Here are detailed strategies and specific measures for managing currency devaluation: Maintaining a Favorable Balance of Payments: Enhancing Export Performance: Diversification: Encouraging diversification of export products and markets can reduce dependence on a limited range of exports, making the economy more resilient to external shocks. Investments in emerging sectors, such as IT and pharmaceuticals, can drive export growth. Value Addition: Promoting value addition in export products can increase their competitiveness. For instance, moving up the value chain in the textile industry from basic garments to high-end fashion can command better prices and stable demand. Trade Promotion: Supporting trade promotion activities, such as participating in international trade fairs and establishing trade offices abroad, can help Bangladeshi exporters find new markets and opportunities. Improving Trade Balance: Import Substitution: Encouraging the production of goods domestically that are currently imported can improve the trade balance. This requires investments in local industries and supportive policies to reduce reliance on imports. Strategic Imports: Prioritizing imports that enhance productivity and export capacity, such as capital goods and technology, can support long-term export growth. Strengthening Foreign Exchange Reserves: Export Earnings: Maximizing export earnings by ensuring that export revenues are repatriated and properly accounted for can bolster foreign exchange reserves. Remittances: Facilitating remittances from the Bangladeshi diaspora through formal channels and offering incentives for remitters can help build foreign exchange reserves. 65 Page 546 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Managing External Debt: Prudent Borrowing: Debt Sustainability: Ensuring that external debt is kept within sustainable limits is crucial. This involves careful assessment of borrowing needs and terms, prioritizing concessional loans, and avoiding excessive reliance on short-term debt. Diversified Financing: Seeking diversified financing sources, including multilateral organizations, bilateral partners, and international capital markets, can spread risks and improve debt terms. Debt Servicing: Efficient Use of Borrowed Funds: Ensuring that borrowed funds are used efficiently for projects that generate economic returns can enhance the ability to service debt. Infrastructure projects that improve trade logistics and reduce export costs are examples. Debt Restructuring: If necessary, negotiating debt restructuring with creditors can provide relief and stabilize the economy. This may involve extending repayment periods, reducing interest rates, or obtaining debt forgiveness. Implementing Sound Macroeconomic Policies: Inflation Control: Implementing monetary policies that keep inflation in check is essential. The central bank can use tools such as interest rate adjustments, open market operations, and reserve requirements to control money supply and inflation. Exchange Rate Management: A flexible exchange rate regime that allows for gradual adjustments can prevent sudden shocks and help maintain competitiveness. The central bank may intervene in the foreign exchange market to smooth out excessive volatility. Fiscal Discipline: Maintaining fiscal discipline by reducing budget deficits and managing public debt sustainably is crucial. This involves controlling government spending, improving tax collection, and avoiding unproductive expenditures. Public Investment: Prioritizing public investment in infrastructure, education, and healthcare can support long-term economic growth and export performance. Improving Business Environment: 66 Page 547 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Implementing structural reforms to improve the business environment can attract investment and enhance competitiveness. Simplifying regulations, reducing bureaucratic red tape, and improving property rights are key measures. Labor Market Reforms: Ensuring a flexible and skilled labor market can support industries' ability to adapt and compete in the global market. Investments in vocational training and education are essential. Stabilizing the Currency: Foreign Exchange Interventions: Market Interventions: The central bank can intervene in the foreign exchange market to stabilize the currency during periods of excessive volatility. This can involve buying or selling foreign currency reserves to influence exchange rates. Capital Controls: Implementing temporary capital controls to manage short-term capital flows and prevent speculative attacks on the currency can provide stability during crises. Building Investor Confidence: Transparent Policies: Ensuring transparency in policy formulation and implementation can build investor confidence and reduce uncertainty. Clear communication of economic policies and regular updates on economic indicators are crucial. Political Stability: Maintaining political stability through good governance, rule of law, and effective conflict resolution can create a favorable environment for economic activities and attract foreign investment. By focusing on these strategies, policymakers in Bangladesh can manage currency devaluation more effectively, stabilize the currency, and support export growth. The combined efforts in maintaining a favorable balance of payments, managing external debt, and implementing sound macroeconomic policies are essential for achieving sustainable economic development. Adopting a Holistic Approach: Policymakers need to adopt a holistic approach to effectively manage the interconnected impacts of various economic factors on currency devaluation and export performance. This comprehensive strategy should include measures that enhance economic stability, improve export competitiveness, and mitigate the risks associated with currency fluctuations. Here are detailed recommendations: Integrated Economic Policy Framework: Stable Inflation: 67 Page 548 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Implement monetary policies aimed at keeping inflation within a target range to maintain purchasing power and prevent excessive currency devaluation. The central bank should use interest rates, open market operations, and other monetary tools to control inflation. Interest Rate Management: Maintain interest rates at levels that stimulate investment without causing capital flight. Balancing growth and stability is essential to support both domestic and export-oriented industries. Fiscal Discipline: Ensure fiscal discipline by managing budget deficits and public debt levels. This includes controlling government spending, improving tax collection, and avoiding unproductive expenditures. Public Investment: Prioritize public investment in infrastructure, education, and healthcare to enhance productivity and support long-term economic growth. Exchange Rate Policy: Flexible Exchange Rate: Adopt a flexible exchange rate regime that allows for gradual adjustments in response to market conditions. This helps avoid sudden shocks and maintains export competitiveness. Foreign Exchange Reserves: Build and maintain adequate foreign exchange reserves to stabilize the currency during periods of volatility and to support interventions in the foreign exchange market when necessary. Trade Policy and Export Promotion: Bilateral and Multilateral Agreements: Actively pursue and negotiate trade agreements to open new markets, reduce trade barriers, and create a predictable trading environment. These agreements can enhance export opportunities and stabilize the currency. Regional Integration: Engage in regional trade initiatives to benefit from collective economic growth and shared markets. Subsidies and Incentives: Provide targeted export incentives and subsidies to boost the competitiveness of key sectors. Ensure these measures comply with international trade rules to avoid disputes. Trade Facilitation: 68 Page 549 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Simplify customs procedures, reduce bureaucratic red tape, and improve logistics infrastructure to facilitate easier and faster export processes. Product and Market Diversification: Encourage diversification of export products and markets to reduce dependence on a limited range of exports. This strategy enhances resilience to external shocks and global market fluctuations. Value Addition: Promote value addition in export products to increase their competitiveness and command better prices in the international market. Attracting and Managing Foreign Direct Investment (FDI): Favorable Policies: Implement policies that create a favorable investment climate, including tax incentives, streamlined regulations, and protection of property rights. Ease of Doing Business: Improve the ease of doing business by reducing administrative burdens, simplifying procedures, and providing efficient public services. Technology Transfer: Facilitate Technology Transfer: Encourage foreign investors to transfer technology and know-how to local industries. This enhances productivity and competitiveness in export-oriented sectors. Capacity Building: Invest in human capital development through education and training programs to ensure a skilled workforce capable of leveraging advanced technologies. Ensuring Political Stability and Good Governance: Political Stability: Maintain political stability through effective governance, rule of law, and conflict resolution mechanisms. Stable governance creates a conducive environment for economic activities and investor confidence. Transparent Policies: Ensure transparency in policy formulation and implementation to build trust and reduce uncertainty among investors and stakeholders. Anti-Corruption Measures: Institutional Quality: Improve institutional quality and reduce corruption by implementing strong regulatory frameworks and ensuring accountability in public institutions. 69 Page 550 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Public Sector Reforms: Undertake public sector reforms to enhance efficiency, reduce bureaucratic delays, and improve service delivery. Addressing Global Market Conditions: Market Intelligence: Monitor Global Trends: Continuously monitor global market conditions, including commodity prices, trade dynamics, and economic cycles, to formulate responsive trade and economic policies. Strategic Planning: Develop strategic plans to mitigate the impact of adverse global trends on export performance and currency stability. Currency Hedging: Encourage businesses to adopt currency hedging strategies to protect against exchange rate volatility. This can include forward contracts, options, and other financial instruments. Risk Management: Provide training and support to businesses in implementing effective risk management practices to navigate global market uncertainties. By adopting a holistic approach that considers the simultaneous effects of various economic factors, policymakers can formulate comprehensive strategies to enhance economic stability and export competitiveness. This integrated policy framework will support sustainable economic development and ensure that Bangladesh remains resilient in the face of global economic challenges. This research highlights the intricate relationship between currency devaluation and export performance in Bangladesh, identifying several key factors that simultaneously influence both variables. By examining these factors in depth, the study provides a comprehensive understanding of the complex dynamics at play and offers valuable insights for policymakers and businesses. Here is a detailed summary of the findings: Inflation Rates: High inflation leads to currency devaluation by eroding purchasing power, which can make exports more competitive by lowering their prices in foreign markets. However, if inflation is driven by rising production costs, the competitive advantage may be nullified. Interest Rates: Lower interest rates reduce borrowing costs, stimulating investment in export-oriented sectors and boosting production capacity. Conversely, very low interest rates can result in capital outflows and currency depreciation, impacting export revenues. Balance of Payments (BoP): 70 Page 551 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) A positive BoP, with a surplus in the current account, supports currency stability and reflects a country's ability to finance its imports through exports. Persistent trade deficits pressure the currency to devalue, affecting the competitiveness of exports. Tariffs and Non-Tariff Barriers: Protective tariffs can safeguard domestic industries but may lead to retaliatory measures that harm export performance. Removing barriers and entering into trade agreements can enhance export competitiveness and stabilize the currency. Export Incentives and Subsidies: Providing targeted export incentives and subsidies boosts export performance by reducing costs and improving competitiveness. However, these measures must be managed to avoid trade disputes and ensure compliance with international trade rules. Bilateral and Multilateral Trade Agreements: Trade agreements reduce barriers, create predictable trading environments, and open new markets, positively influencing both export performance and currency stability. Commodity Prices: Fluctuations in global commodity prices directly impact export revenues, especially for countries relying on primary goods exports. These fluctuations can lead to volatile export earnings and affect the currency. Exchange Rate Volatility: Exchange rate volatility creates uncertainty for exporters, affecting export contracts and revenues. Managing volatility through hedging strategies and stable macroeconomic policies is crucial for maintaining export performance. International Trade Dynamics: Changes in global demand and supply, trade wars, and economic cycles influence export performance and currency stability, necessitating responsive trade and economic policies. Governance and Economic Policies: Effective governance and sound economic policies create a stable environment for investment and trade. Political stability ensures the continuity of policies that support export growth and currency stability. Corruption and Institutional Quality: High levels of corruption and poor institutional quality deter investment, reduce economic efficiency, and lead to currency devaluation. Improving institutional quality and reducing corruption are essential for enhancing export performance. Political Events and Their Economic Impact: 71 Page 552 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Political events, such as elections and policy changes, create economic uncertainty, affecting investor confidence and currency values. Predictable and transparent political processes contribute to economic stability and export growth. Simultaneous Effects on Exchange Rates and Export Performance: The study utilizes a theoretical framework to integrate the simultaneous effects of the identified factors on both exchange rates and export performance. This approach helps to disentangle the complex interactions between these variables. Empirical Evidence from Bangladesh: Analysis of Bangladesh’s economic data provides insights into how these factors have historically influenced both devaluation and export performance, highlighting the importance of considering multiple variables in policy formulation. Comparative Analysis with Other Countries: Comparisons with countries such as India, Vietnam, and Indonesia illustrate common patterns and unique factors affecting the relationship between devaluation and export performance. Strategies for Policymakers: To enhance export performance, policymakers should focus on maintaining economic stability, improving trade policies, ensuring political stability, controlling inflation, managing interest rates, and entering into beneficial trade agreements. Managing Currency Devaluation: Effective management of currency devaluation involves maintaining a favorable balance of payments, managing external debt, and implementing sound macroeconomic policies to stabilize the currency and support export growth. Strategies for Export-Oriented Businesses: Businesses should develop strategies to hedge against adverse effects of devaluation, focus on improving productivity, and reduce reliance on imported inputs to enhance resilience to currency fluctuations. Continued Exploration: Future research should continue to explore the interplay between various economic factors and currency values. Longitudinal studies and cross-country comparisons can further enrich the understanding of these complex dynamics. Sector-Specific Impacts: Further studies could explore the sector-specific impacts of devaluation in greater detail, providing more targeted insights for policy formulation and business strategies. By understanding and addressing the factors that simultaneously influence currency devaluation and export performance, policymakers and businesses can formulate more effective strategies to enhance economic stability and export competitiveness in Bangladesh. 72 Page 553 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Future research should delve deeper into the dynamic interactions between various factors influencing currency devaluation and export performance. This comprehensive approach will provide a more nuanced understanding of the complexities involved and offer more targeted insights for policymakers and businesses. Here are some specific directions for future research: Dynamic Interactions Over Time: Longitudinal Studies: Conducting longitudinal studies that track changes over extended periods can reveal how the interactions between interest rates, inflation, BoP, trade policies, global market conditions, and political stability evolve. This approach will help in understanding the long-term effects and sustainability of policy measures. Temporal Analysis: Analyzing specific periods of economic instability, such as financial crises or significant policy shifts, can provide insights into how short-term disruptions influence devaluation and export performance. Understanding these temporal dynamics can help in developing strategies to mitigate adverse impacts during economic downturns. Cross-Country Comparisons: Comparative Studies: Conducting comparative studies across different countries with similar economic structures but varying policy environments can highlight unique factors and common patterns influencing devaluation and export performance. Countries like India, Vietnam, and Indonesia, which have experienced significant devaluation and export growth, can provide valuable case studies. Regional Analysis: Focusing on regional economic blocs, such as ASEAN or SAARC, can offer insights into how regional trade agreements and economic policies affect member countries’ export performance and currency stability. Understanding regional dynamics can help in formulating collaborative strategies for economic stability. Sector-Specific Impacts: Industry-Specific Research: Future research should explore the sector-specific impacts of devaluation more thoroughly. For example, while the garments sector in Bangladesh has benefited from devaluation, other sectors like pharmaceuticals, jute, and leather goods may have different responses. Detailed sectoral analysis can provide targeted policy recommendations. Case Studies: In-depth case studies of specific industries, such as the pharmaceutical sector's experience with FDI or the jute industry's reliance on BoP stability, can illustrate the nuanced impacts of devaluation and other economic variables. These case studies can serve as practical examples for other sectors. 73 Page 554 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Macro and Microeconomic Perspectives: Macroeconomic Analysis: Examining broader macroeconomic indicators, such as GDP growth, employment rates, and fiscal policies, in conjunction with devaluation and export performance can provide a holistic view of the economic environment. Understanding how these macroeconomic variables interact can help in formulating comprehensive economic strategies. Microeconomic Perspectives: Analyzing the impacts of devaluation at the firm level, including how businesses adapt to currency fluctuations and implement productivity improvements, can provide insights into the microeconomic mechanisms driving export performance. Surveys and interviews with exporters can offer valuable qualitative data. Policy Evaluation and Effectiveness: Policy Impact Analysis: Evaluating the effectiveness of past and current economic policies on managing devaluation and supporting export performance can provide lessons for future policy formulation. This analysis can include the impact of monetary policies, trade agreements, and export incentives. Adaptive Policies: Research should explore adaptive policy frameworks that can respond to changing economic conditions. This includes flexible monetary and fiscal policies that can be adjusted based on real-time economic indicators. Global Economic Trends: Global Market Integration: Investigating how global economic trends, such as shifts in trade patterns, technological advancements, and geopolitical developments, influence devaluation and export performance can provide a global context. Understanding these trends can help in anticipating future challenges and opportunities. Climate Change and Sustainability: Considering the impacts of climate change and sustainability initiatives on export performance and currency stability is increasingly important. Researching how environmental policies and green technologies influence economic variables can provide insights into future economic resilience. By exploring these research directions, future studies can provide deeper and more comprehensive insights into the complex relationship between devaluation and export performance. This knowledge will be invaluable for policymakers, businesses, and economists in formulating strategies that enhance economic stability and export competitiveness. "High inflation can erode purchasing power and lead to currency devaluation, affecting export competitiveness." (Bangladesh Bank, 2020) 74 Page 555 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) "Trade agreements can open up new markets and provide stability to export revenues." (World Bank, 2022) 75 Page 556 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 10Firm-Level Analysis INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 557 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 7 Firm-Level Analysis: Table of Contents Firm-Level Analysis.............................................................................................................................. 15 Importance of Firm-Level Data Analysis:.......................................................................................15 Key Aspects of Firm-Level Analysis:............................................................................................. 15 Variation in Firm Characteristics:....................................................................................................15 Size of Firms:............................................................................................................................15 Sectoral Differences:.................................................................................................................15 Export Intensity:........................................................................................................................15 Productivity Improvements:......................................................................................................15 Cost Management:.................................................................................................................... 15 Financial Hedging:....................................................................................................................15 Impact on Firm Performance:..........................................................................................................16 Revenue and Profit Margins:\................................................................................................... 16 Investment and Expansion:....................................................................................................... 16 Export Volumes:........................................................................................................................16 Data Collection:...............................................................................................................................16 Firm-Level Surveys:................................................................................................................. 16 Financial Statements Analysis:................................................................................................. 16 Trade Data:................................................................................................................................16 Econometric Modeling:................................................................................................................... 16 Panel Data Analysis:................................................................................................................. 16 Difference-in-Differences (DiD):..............................................................................................16 Sector-Specific Case Studies:................................................................................................... 16 Comparative Case Studies:....................................................................................................... 16 Importance of Micro-Level Insights:...............................................................................................17 Identifying Vulnerable and Resilient Sectors:.................................................................................17 Vulnerability Assessment:........................................................................................................ 17 Resilience Indicators:................................................................................................................17 Assessing Policy Effectiveness:...................................................................................................... 17 Current Policies:........................................................................................................................17 Policy Gaps:.............................................................................................................................. 17 Developing Targeted Interventions:................................................................................................ 17 Specific Needs:......................................................................................................................... 17 7 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 558 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sector-Specific Strategies:........................................................................................................ 17 Enriching the Study with Firm-Level Data:.................................................................................... 17 Detailed Sectoral Analysis:............................................................................................................. 18 Granular Insights:......................................................................................................................18 Benchmarking:..........................................................................................................................18 Performance Averages and Distribution:.........................................................................................18 Averages and Outliers:..............................................................................................................18 Distribution Patterns:................................................................................................................ 18 Broader Implications for the Export Sector:................................................................................... 18 Holistic View:........................................................................................................................... 18 Policy Implications:.................................................................................................................. 18 Informing Stakeholders:.................................................................................................................. 18 Industry Stakeholders:.............................................................................................................. 18 Policymakers:............................................................................................................................18 Data Collection:...............................................................................................................................19 Industry Surveys:.............................................................................................................................19 Survey Design:..........................................................................................................................19 Response Rate:..........................................................................................................................19 Government Records:......................................................................................................................19 Official Data:.............................................................................................................................19 Regulatory Information:............................................................................................................19 Proprietary Databases:.....................................................................................................................19 Commercial Databases:............................................................................................................ 19 Financial Data Providers:..........................................................................................................19 Data Integration and Cleaning:........................................................................................................20 Integration of Multiple Sources:......................................................................................................20 Data Matching:..........................................................................................................................20 Combining Qualitative and Quantitative Data:.........................................................................20 Data Cleaning:................................................................................................................................. 20 Removing Duplicates:...............................................................................................................20 Handling Missing Values:......................................................................................................... 20 Outlier Detection:......................................................................................................................20 Analytical Techniques:.................................................................................................................... 20 Descriptive Statistics:...................................................................................................................... 20 Basic Analysis:..........................................................................................................................20 Econometric Models:.......................................................................................................................20 Regression Analysis:.................................................................................................................20 Panel Data Models:................................................................................................................... 20 Advanced Econometric Techniques:............................................................................................... 20 Instrumental Variables (IV) Approach:.....................................................................................20 Difference-in-Differences (DiD):..............................................................................................21 Robustness Checks:......................................................................................................................... 21 Sensitivity Analysis:................................................................................................................. 21 Sub-Sample Analysis:...............................................................................................................21 Page 559 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Analytical Framework:....................................................................................................................21 Export Volumes:.............................................................................................................................. 21 Definition:................................................................................................................................. 21 Importance:............................................................................................................................... 21 Profitability:.....................................................................................................................................22 Definition:................................................................................................................................. 22 Importance:............................................................................................................................... 22 Market Share:.................................................................................................................................. 22 Definition:................................................................................................................................. 22 Importance:............................................................................................................................... 22 Productivity:.................................................................................................................................... 22 Definition:................................................................................................................................. 22 Importance:............................................................................................................................... 22 Revenue:.......................................................................................................................................... 22 Definition:................................................................................................................................. 22 Importance:............................................................................................................................... 22 Cost Structure:................................................................................................................................. 22 Definition:................................................................................................................................. 22 Importance:............................................................................................................................... 23 Export Diversification:.................................................................................................................... 23 Definition:................................................................................................................................. 23 Importance:............................................................................................................................... 23 Financial Health Indicators:............................................................................................................ 23 Definition:................................................................................................................................. 23 Importance:............................................................................................................................... 23 Foreign Direct Investment (FDI):....................................................................................................23 Definition:................................................................................................................................. 23 Importance:............................................................................................................................... 23 Innovation and R&D Expenditure:..................................................................................................23 Definition:................................................................................................................................. 23 Importance:............................................................................................................................... 23 Collecting and Analyzing Data:...................................................................................................... 24 Sources:.....................................................................................................................................24 Frequency:.................................................................................................................................24 Quality Control:........................................................................................................................ 24 Data Analysis:................................................................................................................................. 24 Descriptive Statistics:................................................................................................................24 Correlation Analysis:................................................................................................................ 24 Econometric Modeling:................................................................................................................... 24 Comparative Analysis:..............................................................................................................24 Scenario Analysis:.................................................................................................................... 24 Impact of Devaluation on Firm-Level Export Performance:.......................................................... 24 Average Firm Performance:.............................................................................................................24 Boosting Export Competitiveness:.................................................................................................. 25 Page 560 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Mechanism:...............................................................................................................................25 Average Effect:..........................................................................................................................25 Mechanism:...............................................................................................................................25 Average Effect:..........................................................................................................................25 Variations Across Firms:................................................................................................................. 25 Sector-Specific Responses:..............................................................................................................25 Labor-Intensive Industries:....................................................................................................... 25 Capital-Intensive Industries:..................................................................................................... 25 Firm Size and Scale:........................................................................................................................25 Large Firms:..............................................................................................................................25 Small and Medium Enterprises (SMEs):.................................................................................. 25 Export Orientation and Diversification:.......................................................................................... 26 Highly Export-Oriented Firms:.................................................................................................26 Domestic-Oriented Firms:........................................................................................................ 26 Input Cost Structure:........................................................................................................................26 Vertical Integration:.................................................................................................................. 26 Cost-Push Inflation:.........................................................................................................................26 Challenge:................................................................................................................................. 26 Mitigation:.................................................................................................................................26 Hedging and Financial Management:..............................................................................................26 Challenge:................................................................................................................................. 26 Mitigation:.................................................................................................................................26 Innovation and Value Addition:.......................................................................................................26 Challenge:................................................................................................................................. 27 Mitigation:.................................................................................................................................27 Garments Sector:............................................................................................................................. 27 Strong Positive Response:............................................................................................................... 27 Cost Competitiveness:..................................................................................................................... 27 Mechanism:...............................................................................................................................27 Evidence:...................................................................................................................................27 Mechanism:...............................................................................................................................27 Evidence:...................................................................................................................................27 Input Costs:............................................................................................................................... 27 Mitigation:.................................................................................................................................28 Pharmaceuticals Sector:...................................................................................................................28 Mixed Response:............................................................................................................................. 28 Imported Raw Materials:.................................................................................................................28 Mechanism:...............................................................................................................................28 Evidence:...................................................................................................................................28 Mechanism:...............................................................................................................................28 Evidence:...................................................................................................................................28 Cost Management:.................................................................................................................... 28 Mitigation:.................................................................................................................................28 Jute Sector:...................................................................................................................................... 28 Page 561 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Positive Response:...........................................................................................................................28 Mechanism:...............................................................................................................................28 Evidence:...................................................................................................................................28 Market Dynamics:........................................................................................................................... 29 Mechanism:...............................................................................................................................29 Evidence:...................................................................................................................................29 Quality and Standards:..............................................................................................................29 Mitigation:.................................................................................................................................29 Leather Goods Sector:..................................................................................................................... 29 Positive but Limited Response:....................................................................................................... 29 Mechanism:...............................................................................................................................29 Evidence:...................................................................................................................................29 Mechanism:...............................................................................................................................29 Evidence:...................................................................................................................................29 Input Costs:............................................................................................................................... 29 Mitigation:.................................................................................................................................29 Case Studies of Key Export Sectors:...............................................................................................30 Textiles Sector (Garments and Apparel):........................................................................................ 30 Overview:..................................................................................................................................30 Competitive Pricing:........................................................................................................................30 Mechanism:...............................................................................................................................30 Evidence:...................................................................................................................................30 Local Input Utilization:................................................................................................................... 30 Mechanism:...............................................................................................................................30 Evidence:...................................................................................................................................30 Expansion into New Markets:......................................................................................................... 30 Mechanism:...............................................................................................................................30 Evidence:...................................................................................................................................30 Quality Standards:.....................................................................................................................31 Supply Chain Efficiency:..........................................................................................................31 Lessons for Policy Design:..............................................................................................................31 Incentives for Technology Upgradation:...................................................................................31 Trade Facilitation: \...................................................................................................................31 Overview:..................................................................................................................................31 Cost of Imported Inputs:..................................................................................................................31 Mechanism:...............................................................................................................................31 Evidence:...................................................................................................................................31 Export Price Competitiveness:........................................................................................................ 31 Mechanism:...............................................................................................................................31 Evidence:...................................................................................................................................31 Innovation and Diversification:.......................................................................................................31 Mechanism:...............................................................................................................................31 Evidence:...................................................................................................................................32 Regulatory Compliance:........................................................................................................... 32 Page 562 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Rising Production Costs:...........................................................................................................32 Support for R&D:..................................................................................................................... 32 Trade Agreements:....................................................................................................................32 Overview:..................................................................................................................................32 Increased Competitiveness:............................................................................................................. 32 Mechanism:...............................................................................................................................32 Evidence:...................................................................................................................................32 Sustainable Demand:....................................................................................................................... 32 Mechanism:...............................................................................................................................32 Evidence:...................................................................................................................................32 Local Input Reliance:...................................................................................................................... 32 Mechanism:...............................................................................................................................32 Evidence:...................................................................................................................................33 Modernization Needs:...............................................................................................................33 Market Diversification:.............................................................................................................33 Investment in Technology:........................................................................................................33 Market Access Initiatives:.........................................................................................................33 Factors Affecting Firm-Level Export Performance:....................................................................... 33 Exchange Rate Pass-Through:.........................................................................................................33 Impact on Firm-Level Export Performance:................................................................................... 33 Mechanism:...............................................................................................................................33 Evidence:...................................................................................................................................33 Profit Margins:.................................................................................................................................33 Mechanism:...............................................................................................................................33 Evidence:...................................................................................................................................34 Market Share:.................................................................................................................................. 34 Mechanism:...............................................................................................................................34 Evidence:...................................................................................................................................34 Cost of Imported Inputs:........................................................................................................... 34 Price Elasticity of Demand:...................................................................................................... 34 Firm-Specific Characteristics:......................................................................................................... 34 Firm Size and Scale:........................................................................................................................34 Economies of Scale:........................................................................................................................ 34 Mechanism:...............................................................................................................................34 Evidence:...................................................................................................................................34 Mechanism:...............................................................................................................................34 Evidence:...................................................................................................................................34 Technological Capabilities:............................................................................................................. 35 Innovation and Efficiency:.............................................................................................................. 35 Mechanism:...............................................................................................................................35 Evidence:...................................................................................................................................35 Product Differentiation:...................................................................................................................35 Mechanism:...............................................................................................................................35 Evidence:...................................................................................................................................35 Page 563 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) External Market Conditions:........................................................................................................... 35 Global Demand and Supply Dynamics:.......................................................................................... 35 Mechanism:...............................................................................................................................35 Evidence:...................................................................................................................................35 Mechanism:...............................................................................................................................35 Evidence:...................................................................................................................................35 Price Competition:...........................................................................................................................35 Mechanism:...............................................................................................................................35 Evidence:...................................................................................................................................36 Quality and Branding:..................................................................................................................... 36 Mechanism:...............................................................................................................................36 Evidence:...................................................................................................................................36 Firm Size and Export Capacity:...................................................................................................... 36 Advantages of Larger Firms:...........................................................................................................36 Resource Availability:..................................................................................................................... 36 Mechanism:...............................................................................................................................36 Evidence:...................................................................................................................................36 Mechanism:...............................................................................................................................36 Evidence:...................................................................................................................................36 Investment in Technology and Innovation:..................................................................................... 36 Mechanism:...............................................................................................................................36 Evidence:...................................................................................................................................37 Export Capacity and Market Reach:................................................................................................37 Mechanism:...............................................................................................................................37 Evidence:...................................................................................................................................37 Brand Strength and Customer Loyalty:...........................................................................................37 Mechanism:...............................................................................................................................37 Evidence:...................................................................................................................................37 Supply Chain Resilience:................................................................................................................ 37 Mechanism:...............................................................................................................................37 Evidence:...................................................................................................................................37 Strategic Advantages:......................................................................................................................37 Hedging and Financial Instruments:................................................................................................37 Mechanism:...............................................................................................................................37 Evidence:...................................................................................................................................37 Investment in Market Research and Development:.........................................................................38 Mechanism:...............................................................................................................................38 Evidence:...................................................................................................................................38 Challenges for Smaller Firms:.........................................................................................................38 Limited Financial Resources:.......................................................................................................... 38 Mechanism:...............................................................................................................................38 Evidence:...................................................................................................................................38 Higher Vulnerability to Market Shocks:..........................................................................................38 Mechanism:...............................................................................................................................38 Page 564 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Evidence:...................................................................................................................................38 Less Access to Advanced Technologies:.........................................................................................38 Mechanism:...............................................................................................................................38 Evidence:...................................................................................................................................38 Technological Capabilities:............................................................................................................. 39 Advantages of Technological Capabilities:..................................................................................... 39 Enhanced Productivity:................................................................................................................... 39 Mechanism:...............................................................................................................................39 Evidence:...................................................................................................................................39 Improved Quality Control:.............................................................................................................. 39 Mechanism:...............................................................................................................................39 Evidence:...................................................................................................................................39 Innovation and Product Development:............................................................................................39 Mechanism:...............................................................................................................................39 Evidence:...................................................................................................................................39 Competitive Pricing Without Compromising Quality:....................................................................39 Cost Efficiency:............................................................................................................................... 39 Mechanism:...............................................................................................................................39 Evidence:...................................................................................................................................39 Scalability:.......................................................................................................................................40 Mechanism:...............................................................................................................................40 Evidence:...................................................................................................................................40 Flexibility and Adaptability:............................................................................................................40 Mechanism:...............................................................................................................................40 Evidence:...................................................................................................................................40 Case Studies Highlighting Technological Capabilities:.................................................................. 40 Garment Sector:...............................................................................................................................40 Example:................................................................................................................................... 40 Example:................................................................................................................................... 40 Jute Sector:...................................................................................................................................... 40 Example:................................................................................................................................... 40 Challenges and Considerations:...................................................................................................... 41 Investment Costs:............................................................................................................................ 41 Mechanism:...............................................................................................................................41 Evidence:...................................................................................................................................41 Skilled Workforce:...........................................................................................................................41 Mechanism:...............................................................................................................................41 Evidence:...................................................................................................................................41 Continuous Upgradation:.................................................................................................................41 Mechanism:...............................................................................................................................41 Evidence:...................................................................................................................................41 Comparison with Macro-Level Data:..............................................................................................41 Purpose of Comparative Analysis:.................................................................................................. 41 Holistic View:........................................................................................................................... 41 Page 565 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Granular Insights:......................................................................................................................41 Validation:................................................................................................................................. 42 Macro-Level Data Overview:..........................................................................................................42 Broad Trends:............................................................................................................................42 Economic Conditions:...............................................................................................................42 Policy Impact:........................................................................................................................... 42 Key Findings from Macro-Level Data:........................................................................................... 42 Overall Export Performance:...........................................................................................................42 Trend:........................................................................................................................................ 42 Factors:......................................................................................................................................42 Trend:........................................................................................................................................ 42 Impact:...................................................................................................................................... 42 Trend:........................................................................................................................................ 42 Analysis:................................................................................................................................... 42 Comparative Insights from Firm-Level Data:................................................................................. 43 Finding:..................................................................................................................................... 43 Insight:...................................................................................................................................... 43 Finding:..................................................................................................................................... 43 Insight:...................................................................................................................................... 43 Finding:..................................................................................................................................... 43 Insight:...................................................................................................................................... 43 Variations in Firm Performance:..................................................................................................... 43 Large vs. Small Firms:.....................................................................................................................43 Finding:..................................................................................................................................... 43 Insight:...................................................................................................................................... 43 Finding:..................................................................................................................................... 43 Insight:...................................................................................................................................... 43 Policy Effectiveness:....................................................................................................................... 43 Finding:..................................................................................................................................... 44 Insight:...................................................................................................................................... 44 Finding:..................................................................................................................................... 44 Insight:...................................................................................................................................... 44 Validation and Synthesis:................................................................................................................ 44 Convergence of Findings:................................................................................................................44 Validation:................................................................................................................................. 44 Example:................................................................................................................................... 44 Nuanced Understanding:................................................................................................................. 44 Synthesis:.................................................................................................................................. 44 Example:................................................................................................................................... 44 Comprehensive Strategy:.......................................................................................................... 44 Example:................................................................................................................................... 44 International Comparisons:............................................................................................................. 45 Purpose and Scope:..........................................................................................................................45 Comparative Framework:................................................................................................................45 Page 566 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Selection of Comparator Countries:................................................................................................ 45 Criteria:..................................................................................................................................... 45 Focus Countries:....................................................................................................................... 45 Key Metrics for Comparison:..........................................................................................................45 Economic Indicators:................................................................................................................ 45 Export Performance:................................................................................................................. 45 Policy Responses:..................................................................................................................... 45 India:................................................................................................................................................45 Devaluation Episodes:.............................................................................................................. 45 Inflation and Interest Rates:...................................................................................................... 45 Sectoral Impact:........................................................................................................................ 45 Diversification:......................................................................................................................... 46 Trade Policies:...........................................................................................................................46 Macroeconomic Stability:.........................................................................................................46 Vietnam:.......................................................................................................................................... 46 Devaluation Episodes:.............................................................................................................. 46 Inflation and Interest Rates:...................................................................................................... 46 Sectoral Impact:........................................................................................................................ 46 FDI Attraction:..........................................................................................................................46 Trade Agreements:....................................................................................................................46 Economic Reforms:.................................................................................................................. 46 Indonesia:........................................................................................................................................ 46 Devaluation Episodes:.............................................................................................................. 46 Inflation and Interest Rates:...................................................................................................... 46 Sectoral Impact:........................................................................................................................ 47 Natural Resources:.................................................................................................................... 47 Trade Policies:...........................................................................................................................47 Economic Stabilization:............................................................................................................ 47 Insights and Lessons for Bangladesh.............................................................................................. 47 Learning from India:................................................................................................................. 47 Policy Implication:....................................................................................................................47 Export Diversification:.................................................................................................................... 47 Learning from Vietnam:............................................................................................................47 Policy Implication:....................................................................................................................47 Learning from Vietnam and Indonesia:.................................................................................... 47 Policy Implication:....................................................................................................................47 Sectoral Strategies:.......................................................................................................................... 47 Learning from All Three Countries:......................................................................................... 47 Policy Implication:....................................................................................................................48 Policy Implications: Support Mechanisms for Export Firms.......................................................... 48 Importance of Credit Access:.......................................................................................................... 48 Credit Facilities:........................................................................................................................48 Loan Guarantees:...................................................................................................................... 48 Export Credit Agencies (ECAs):.............................................................................................. 48 Page 567 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Export Subsidies:.............................................................................................................................48 Role of Export Subsidies:................................................................................................................48 Direct Subsidies:....................................................................................................................... 49 Tax Incentives:.......................................................................................................................... 49 R&D Grants:............................................................................................................................. 49 Technical Assistance and Capacity Building:................................................................................. 49 Need for Technical Assistance:....................................................................................................... 49 Training Programs:....................................................................................................................49 Advisory Services:.................................................................................................................... 49 Technology Transfer:................................................................................................................ 49 Market Access and Trade Facilitation:............................................................................................49 Trade Agreements:....................................................................................................................49 Export Promotion Agencies:.....................................................................................................50 Infrastructure Development:..................................................................................................... 50 Support for Innovation and Diversification:....................................................................................50 Fostering Innovation:.......................................................................................................................50 Innovation Hubs:.......................................................................................................................50 Sectoral Diversification:........................................................................................................... 50 Export Diversification Fund:.................................................................................................... 50 Monitoring and Evaluation:.............................................................................................................50 Continuous Improvement:............................................................................................................... 50 Performance Metrics:................................................................................................................50 Feedback Mechanisms:.............................................................................................................50 Impact Studies:..........................................................................................................................50 Strategies to Mitigate Devaluation Effects:.....................................................................................51 Maintaining Healthy Foreign Exchange Reserves:......................................................................... 51 Importance of Foreign Exchange Reserves:....................................................................................51 Reserve Accumulation:.............................................................................................................51 Diversification of Reserves:......................................................................................................51 Intervention Policies:................................................................................................................ 51 Implementing Sound Macroeconomic Policies:..............................................................................51 Budget Management:................................................................................................................ 52 Debt Management:....................................................................................................................52 Tax Reforms:.............................................................................................................................52 Inflation Targeting:................................................................................................................... 52 Interest Rate Management:....................................................................................................... 52 Central Bank Independence:..................................................................................................... 52 Fostering a Favorable Business Environment:................................................................................ 52 Regulatory Framework:...................................................................................................................52 Regulatory Reforms:.................................................................................................................52 Property Rights:........................................................................................................................ 52 Anti-Corruption Measures:....................................................................................................... 53 Public-Private Partnerships:......................................................................................................53 Infrastructure Investment:.........................................................................................................53 Page 568 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Maintenance Programs:............................................................................................................ 53 Trade Facilitation:............................................................................................................................53 Customs Reforms:.....................................................................................................................53 Digital Platforms:......................................................................................................................53 Trade Agreements:....................................................................................................................53 Enhancing Economic Diversification:.............................................................................................53 Reducing Reliance on a Single Sector:........................................................................................... 53 Sectoral Support:.......................................................................................................................54 Innovation and R&D:................................................................................................................54 Education and Training:............................................................................................................54 Enhancing Firm-Level Competitiveness:........................................................................................ 54 Support for Technological Upgradation:......................................................................................... 54 R&D Incentives:....................................................................................................................... 54 Technology Transfer:................................................................................................................ 54 Access to Affordable Finance..........................................................................................................54 Export Financing:......................................................................................................................54 Credit Guarantee Schemes:.......................................................................................................55 Skills Development and Training:...................................................................................................55 Vocational Training Programs:................................................................................................. 55 Continuous Professional Development:....................................................................................55 Supporting Sustainable Export Growth:..........................................................................................55 Trade Policy Reforms:.....................................................................................................................55 Tariff Reductions:..................................................................................................................... 55 Simplification of Procedures:................................................................................................... 55 Market Diversification:................................................................................................................... 55 Exploring New Markets:...........................................................................................................55 Trade Agreements:....................................................................................................................55 Logistics Infrastructure:............................................................................................................ 55 Digital Infrastructure:................................................................................................................55 Macroeconomic Stability:............................................................................................................... 56 Monetary Policy:............................................................................................................................. 56 Inflation Control:...................................................................................................................... 56 Exchange Rate Management:................................................................................................... 56 Fiscal Policy:................................................................................................................................... 56 Prudent Fiscal Management:.....................................................................................................56 Public Investment:.................................................................................................................... 56 Political and Institutional Stability:................................................................................................. 56 Good Governance:...........................................................................................................................56 Anti-Corruption Measures:....................................................................................................... 56 Institutional Strengthening:.......................................................................................................56 Predictable Policy Environment:.....................................................................................................56 Policy Continuity:..................................................................................................................... 56 Stakeholder Engagement:......................................................................................................... 56 Micro-Level Responses:..................................................................................................................57 Page 569 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sector-Specific Characteristics:.......................................................................................................57 Average Firm Performance:.............................................................................................................57 Policymakers:.................................................................................................................................. 57 Industry Stakeholders:..................................................................................................................... 58 Firm-Level Case Studies:................................................................................................................ 58 Longitudinal Studies:.......................................................................................................................58 Long-Term Impact Analysis:...........................................................................................................59 Policy Interventions:........................................................................................................................59 Cross-Country Comparisons........................................................................................................... 59 Diverse Economic Contexts:........................................................................................................... 59 Sectoral Diversity:........................................................................................................................... 59 Regional Integration:....................................................................................................................... 59 Sector-Specific Analyses:................................................................................................................60 High-Technology Sectors:............................................................................................................... 60 Service Exports:...............................................................................................................................60 Agricultural Exports:....................................................................................................................... 60 Integration of Firm-Level Data:...................................................................................................... 60 Heterogeneity in Firm Responses:...................................................................................................60 Impact of Policy Measures:............................................................................................................. 60 Innovation and Productivity:........................................................................................................... 61 Page 570 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Firm-Level Analysis The research incorporates a firm-level data analysis to gain granular insights into the relationship between currency devaluation and export performance. This approach shifts the focus from macroeconomic indicators to the micro-level performance of individual firms, providing a detailed examination of how changes in exchange rates affect different sectors and types of businesses. Importance of Firm-Level Data Analysis: Firm-level data analysis is crucial because it allows researchers to capture the heterogeneity in responses to currency devaluation across different firms. By analyzing data at the firm level, the study can identify specific characteristics that influence how businesses adapt to and are impacted by currency fluctuations. This micro-level perspective complements broader macroeconomic analyses and provides a more nuanced understanding of the export sector's dynamics in Bangladesh. Key Aspects of Firm-Level Analysis: Variation in Firm Characteristics: Size of Firms: Larger firms often have more resources and better access to financial instruments to hedge against currency risks, while smaller firms might be more vulnerable to exchange rate fluctuations. Sectoral Differences: Different sectors have varying degrees of exposure to international markets and import dependencies, affecting how devaluation impacts them. For example, the garments sector might respond differently to devaluation compared to the pharmaceutical sector. Export Intensity: Firms with a higher proportion of exports relative to their total production might experience more significant impacts from currency devaluation. Adaptation Strategies: Productivity Improvements: Firms may respond to devaluation by improving productivity to maintain competitiveness despite rising input costs. Cost Management: Effective cost management, including sourcing cheaper inputs and optimizing production processes, can mitigate the adverse effects of devaluation. Financial Hedging: Use of financial instruments to hedge against currency risks can provide firms with a buffer against exchange rate volatility. 15 Page 571 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact on Firm Performance: Revenue and Profit Margins:\ Analyzing changes in revenue and profit margins before and after devaluation can provide insights into how firms' financial performance is affected. Investment and Expansion: The ability of firms to invest in new technologies, expand production capacities, and enter new markets can be influenced by devaluation-induced changes in financial stability. Export Volumes: Examining export volumes can reveal the direct impact of devaluation on firms' market competitiveness and their ability to sustain or grow their export activities. Data Collection: Firm-Level Surveys: Collecting data through surveys targeting exporters can provide detailed information on how firms perceive and react to devaluation. Financial Statements Analysis: Analyzing firms' financial statements can offer quantitative data on revenue, costs, profit margins, and investment activities. Trade Data: Utilizing export and import data at the firm level can help in understanding changes in trade volumes and market reach. Econometric Modeling: Panel Data Analysis: Using panel data techniques to track the same firms over time allows for controlling individual firm characteristics and identifying the impact of devaluation on performance. Difference-in-Differences (DiD): Applying DiD methodology can help isolate the effect of devaluation by comparing the performance of firms before and after the event while controlling for external factors. Sector-Specific Case Studies: Conducting case studies in specific sectors, such as garments, pharmaceuticals, jute, and leather goods, can provide in-depth insights into sectoral responses and adaptation strategies. Comparative Case Studies: Comparing firms of different sizes and export intensities within the same sector can highlight the role of firm-specific factors in shaping responses to devaluation. 16 Page 572 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Incorporating firm-level data analysis into the study of devaluation and export performance in Bangladesh provides a detailed and nuanced understanding of the micro-level impacts of currency fluctuations. By examining the heterogeneity in firm responses and identifying specific adaptation strategies, this approach enhances the comprehensiveness of the research and offers valuable insights for policymakers and businesses aiming to navigate the challenges posed by currency devaluation. Importance of Micro-Level Insights: Understanding the average performance of firms in response to currency devaluation is essential for several reasons: Identifying Vulnerable and Resilient Sectors: Vulnerability Assessment: Micro-level insights help identify sectors most affected by currency devaluation. For instance, sectors heavily reliant on imported inputs may struggle more during devaluation due to increased costs. Resilience Indicators: Conversely, sectors with strong domestic supply chains or those that can easily substitute domestic inputs for imported ones may exhibit greater resilience. This differentiation is crucial for targeted policy measures. Assessing Policy Effectiveness: Current Policies: By analyzing firm-level data, researchers can evaluate the effectiveness of existing policies designed to support exporters. If certain sectors or types of firms (e.g., small and medium enterprises) show less improvement or even decline, it indicates a need for policy adjustment. Policy Gaps: Identifying gaps in current policies can help in formulating more effective interventions, such as providing more accessible financial instruments for smaller firms to hedge against exchange rate risks. Developing Targeted Interventions: Specific Needs: Firm-level analysis reveals specific needs and challenges faced by exporters. For instance, if data show that smaller firms lack access to affordable credit, targeted financial support could be prioritized. Sector-Specific Strategies: Different sectors may require tailored strategies. For example, the garments sector might benefit from technological upgrades to improve productivity, while the pharmaceutical sector may need support in meeting international quality standards. 17 Page 573 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Enriching the Study with Firm-Level Data: The inclusion of firm-level data analysis in this research enriches the overall study by offering a more detailed and precise assessment of the impact of currency devaluation. Here’s how: Detailed Sectoral Analysis: Granular Insights: Firm-level data provides granular insights into how different sectors respond to devaluation. This helps in understanding sector-specific dynamics and identifying which sectors contribute most to export performance. Benchmarking: It allows for benchmarking against international standards, helping to identify where Bangladeshi firms stand globally and what improvements are necessary. Performance Averages and Distribution: Averages and Outliers: Analyzing averages can show the general trend, while also identifying outliers (both positive and negative) that might offer lessons for best practices or highlight critical vulnerabilities. Distribution Patterns: Understanding the distribution of performance within sectors can inform more nuanced policy interventions, such as supporting the bottom quartile of firms to raise overall sectoral performance. Broader Implications for the Export Sector: Holistic View: Combining micro-level data with macroeconomic analysis provides a holistic view of the export sector. This comprehensive approach ensures that both broad trends and individual firm experiences are considered. Policy Implications: The detailed insights gained from firm-level analysis can inform policymakers about the broader implications of currency devaluation, leading to more informed and effective economic strategies. Informing Stakeholders: Industry Stakeholders: Exporters, industry associations, and other stakeholders benefit from understanding the specific challenges and opportunities within their sectors. This knowledge can guide strategic planning and resource allocation. Policymakers: 18 Page 574 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Policymakers can use this detailed information to design interventions that are more likely to succeed in enhancing export competitiveness and economic stability. By examining firm-level averages and other micro-level data, the study sheds light on the broader implications for the export sector. This detailed analysis informs policymakers and industry stakeholders about the specific needs and challenges faced by exporters, enabling the development of more targeted and effective interventions to enhance export competitiveness in Bangladesh. Data Collection: The firm-level data utilized in this research is collected from a variety of sources, ensuring a comprehensive and robust dataset. This data collection process is crucial for obtaining detailed and accurate insights into how firms in Bangladesh respond to currency devaluation. Industry Surveys: Survey Design: Structured surveys are designed to capture detailed information on firm characteristics, including size, sector, export volumes, revenue, costs, and financial health. These surveys are distributed to a representative sample of firms across key export-oriented industries such as garments, pharmaceuticals, jute, and leather goods. Response Rate: Efforts are made to achieve a high response rate through follow-ups and providing incentives for participation. The survey design also ensures that responses are reliable and valid, minimizing biases and inaccuracies. Government Records: Official Data: Data from government agencies such as the Bangladesh Bureau of Statistics (BBS), the Export Promotion Bureau (EPB), and the National Board of Revenue (NBR) are utilized. These records provide official statistics on export volumes, trade balances, and sectoral performance. Regulatory Information: Information from regulatory bodies, including financial statements submitted to the Bangladesh Securities and Exchange Commission (BSEC), helps in assessing the financial health and performance of listed firms. Proprietary Databases: Commercial Databases: Proprietary databases such as those maintained by market research firms and industry associations offer detailed firm-level data, including historical performance, market share, and competitive positioning. 19 Page 575 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Financial Data Providers: Financial data providers like Bloomberg, Thomson Reuters, and local financial services firms provide additional insights into the financial health and market performance of exporting firms. Data Integration and Cleaning: Integration of Multiple Sources: Data Matching: Data from different sources is matched and integrated to create a comprehensive dataset. This involves aligning firm identifiers and ensuring consistency across various data points. Combining Qualitative and Quantitative Data: Both qualitative data (e.g., firm characteristics) and quantitative data (e.g., export volumes, financial metrics) are combined to provide a holistic view of firm performance. Data Cleaning: Removing Duplicates: Duplicate records are identified and removed to ensure the dataset’s accuracy. Handling Missing Values: Advanced statistical techniques, such as multiple imputation or regression-based methods, are used to handle missing values without compromising data integrity. Outlier Detection: Outliers are detected and assessed to determine if they reflect data entry errors or genuine extreme values, ensuring that the analysis is not skewed. Analytical Techniques: Descriptive Statistics: Basic Analysis: Descriptive statistics provide an overview of the data, including mean, median, standard deviation, and distribution patterns. This helps in understanding the general trends and variations within the dataset. Econometric Models: Regression Analysis: Regression models are employed to analyze the relationship between currency devaluation and export performance, controlling for various firm-level characteristics such as size, sector, and financial health. Panel Data Models: Fixed-effects and random-effects models are used to account for unobserved heterogeneity and temporal dynamics in the data. 20 Page 576 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Advanced Econometric Techniques: Instrumental Variables (IV) Approach: To address potential endogeneity issues, instrumental variables that are correlated with devaluation but not directly with export performance are utilized. Difference-in-Differences (DiD): This method is used to compare changes in export performance before and after devaluation events, isolating the effect of devaluation from other temporal factors. Robustness Checks: Sensitivity Analysis: Various robustness checks, including sensitivity analysis, are conducted to ensure the reliability and validity of the results. This involves testing different model specifications and excluding potential outliers. Sub-Sample Analysis: The dataset is divided into sub-samples based on firm size, sector, and other relevant characteristics to examine if the relationship between devaluation and export performance varies across different groups. The methodology for firm-level data analysis in this research ensures a comprehensive and accurate assessment of the impact of currency devaluation on export performance in Bangladesh. By collecting data from diverse sources, integrating and cleaning it meticulously, and employing advanced econometric techniques, the study provides detailed insights that inform policymakers and industry stakeholders about the specific needs and challenges faced by exporters. Analytical Framework: The analytical framework employs econometric models to assess the impact of currency devaluation on firm-level export performance. These models control for various factors such as firm size, sector, and technological capabilities, allowing for a precise estimation of the devaluation effects. Metrics for Firm-Level Analysis: Firm-level analysis in the context of currency devaluation and export performance involves examining various key metrics that provide a detailed understanding of how individual firms are affected by and adapt to changes in exchange rates. These metrics are essential for capturing the nuanced impacts of devaluation on export performance. The primary metrics considered in this analysis include: Export Volumes: Definition: The quantity of goods and services that a firm exports over a specific period. Importance: 21 Page 577 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Changes in export volumes directly indicate how currency devaluation affects a firm's ability to sell products internationally. An increase in export volumes may suggest improved competitiveness due to a weaker currency, while a decrease could indicate challenges such as higher input costs or reduced global demand. Profitability: Definition: The financial performance of a firm, measured by metrics such as gross profit margin, net profit margin, and return on assets. Importance: Profitability metrics help assess whether firms are able to maintain or improve their financial health despite currency fluctuations. Profit margins can be squeezed by higher costs of imported inputs, even if export volumes increase. Market Share: Definition: The proportion of total market sales captured by a firm, usually expressed as a percentage. Importance: Changes in market share provide insights into a firm's competitive position in the international market. A growing market share may indicate successful adaptation to currency devaluation, while a declining share could signal difficulties in maintaining competitiveness. Productivity: Definition: The efficiency of production, typically measured by output per unit of input (e.g., labor productivity or total factor productivity). Importance: Productivity metrics indicate how well firms optimize their resources in response to currency devaluation. Higher productivity can mitigate the adverse effects of devaluation by lowering production costs and improving competitiveness. Revenue: Definition: The total income generated from sales of goods and services. Importance: Revenue metrics show the overall income effect of devaluation on a firm's operations. While a weaker currency can boost revenue from exports priced in foreign currencies, it can also increase costs for imported goods and services. 22 Page 578 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Cost Structure: Definition: The composition and allocation of a firm's costs, including fixed and variable costs. Importance: Understanding the cost structure is crucial for assessing how devaluation impacts profitability. Firms with high import dependency may face increased costs, which can offset gains from higher export revenue. Export Diversification: Definition: The range and variety of products and markets a firm engages in for exports. Importance: Diversification metrics reveal how firms spread risk and opportunities across different products and markets. Greater diversification can help firms mitigate the adverse effects of devaluation in specific markets or product lines. Financial Health Indicators: Definition: Metrics such as liquidity ratios, debt levels, and cash flow. Importance: Financial health indicators provide insights into a firm's ability to withstand economic shocks and invest in growth. Strong financial health can support resilience during periods of currency devaluation. Foreign Direct Investment (FDI): Definition: The level of foreign investment in a firm's operations. Importance: FDI can bring in capital, technology, and management expertise, helping firms enhance their export performance. The attractiveness of FDI can also be influenced by currency stability. Innovation and R&D Expenditure: Definition: Investment in research and development activities aimed at creating new products or improving existing ones. Importance: 23 Page 579 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Innovation metrics indicate a firm's ability to adapt and stay competitive in the global market. Increased R&D expenditure can lead to product differentiation and higher value-added exports. Collecting and Analyzing Data: Sources: Firm-level data is collected from industry surveys, government records, financial statements, proprietary databases, and international trade databases. Frequency: Data should be collected regularly (e.g., annually or quarterly) to track changes over time. Quality Control: Ensure data accuracy and reliability through cross-validation with multiple sources and consistency checks. Data Analysis: Descriptive Statistics: Use descriptive statistics to summarize the data and identify trends and patterns in key metrics. Correlation Analysis: Analyze the relationships between currency devaluation and each metric to identify potential causal links. Econometric Modeling: Apply econometric models to quantify the impact of devaluation on the various metrics, controlling for other influencing factors. Comparative Analysis: Compare firm-level performance across different sectors, sizes, and regions to identify differential impacts and adaptation strategies. Scenario Analysis: Conduct scenario analysis to simulate potential future impacts of currency devaluation under different economic conditions. Analyzing firm-level metrics provides a comprehensive and detailed view of how currency devaluation affects the export performance of individual firms. By focusing on key metrics such as export volumes, profitability, market share, and productivity, policymakers and business leaders can gain valuable insights into the challenges and opportunities posed by currency fluctuations. This granular analysis is essential for developing targeted strategies that enhance the resilience and competitiveness of firms in the export sector. 24 Page 580 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact of Devaluation on Firm-Level Export Performance: Average Firm Performance: The impact of currency devaluation on firm-level export performance is complex and varies significantly across different firms. While the general expectation is that devaluation should make a country's exports more competitive by lowering their prices in foreign markets, the reality is influenced by a variety of firm-specific factors. Analyzing firm-level data helps to reveal these nuances and provides a more detailed understanding of the effects of devaluation on export performance. Boosting Export Competitiveness: Mechanism: Currency devaluation lowers the price of exports in foreign currency terms, making them more attractive to international buyers. Average Effect: On average, firms experience an increase in export volumes as their goods and services become more competitively priced in the global market. This effect is particularly pronounced for firms producing standardized goods where price sensitivity is high. Mechanism: Lower prices can help firms penetrate new markets and expand their customer base. Average Effect: Firms often see growth in new export destinations, which contributes to overall export performance. This expansion can diversify revenue streams and reduce dependence on a limited number of markets. Variations Across Firms: Sector-Specific Responses: Labor-Intensive Industries: Sectors such as textiles and garments, which rely heavily on labor, typically benefit more from devaluation as labor costs constitute a significant portion of their total costs. Lower relative costs make their products more competitive. Capital-Intensive Industries: Sectors that depend heavily on imported machinery and raw materials may not benefit as much. The increased cost of imported inputs can offset the gains from higher export revenues. Firm Size and Scale: Large Firms: Larger firms often have more resources to absorb the initial shocks of devaluation, such as increased input costs. They also tend to have better access to financial instruments like hedging to manage currency risks. 25 Page 581 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Small and Medium Enterprises (SMEs): Smaller firms may struggle more with the increased costs of imported inputs and may lack the financial tools to hedge against currency risk. However, they may still benefit from increased demand due to lower export prices. Export Orientation and Diversification: Highly Export-Oriented Firms: Firms with a significant proportion of their revenue coming from exports are likely to experience a more substantial positive impact from devaluation. Their focus on international markets means they can more directly benefit from increased competitiveness. Domestic-Oriented Firms: Firms that primarily serve the domestic market may not experience as much benefit. However, if they decide to enter the export market, devaluation provides an opportunity to do so competitively. Input Cost Structure: Local vs. Imported Inputs: Firms that rely more on locally sourced inputs are less affected by the increased cost of imports due to devaluation. This can enhance their competitiveness relative to firms with high import dependency. Vertical Integration: Firms that control a larger portion of their supply chain may have more flexibility to manage costs and maintain competitiveness during periods of devaluation. Challenges and Mitigation Strategies Cost-Push Inflation: Challenge: The increase in the cost of imported raw materials and intermediate goods can lead to cost-push inflation, eroding the competitiveness gained from devaluation. Mitigation: Firms can adopt strategies such as improving operational efficiency, sourcing alternative local materials, or passing some of the increased costs to consumers through gradual price adjustments. Hedging and Financial Management: Challenge: Managing currency risk is crucial to avoid adverse impacts from sudden exchange rate fluctuations. Mitigation: 26 Page 582 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Firms can use financial instruments like forward contracts, options, and futures to hedge against currency risk. Larger firms are typically better positioned to utilize these tools effectively. Innovation and Value Addition: Challenge: Reliance solely on price competitiveness may not be sustainable in the long term. Mitigation: Firms can focus on innovation, product differentiation, and value addition to maintain a competitive edge. Investing in research and development (R&D) can lead to higher quality products and services that command premium prices. The average impact of currency devaluation on firm-level export performance in Bangladesh is generally positive, with firms benefiting from increased price competitiveness and market expansion. However, the extent of this impact varies widely across sectors, firm sizes, and input cost structures. By understanding these variations, policymakers and business leaders can better support firms in leveraging devaluation to enhance export performance. Effective management of the associated challenges, such as cost-push inflation and currency risk, is crucial for sustaining the benefits of devaluation in the long term. Garments Sector: Strong Positive Response: Cost Competitiveness: Mechanism: The garments sector in Bangladesh is labor-intensive and benefits significantly from lower labor costs when the currency devalues. Since wages are paid in local currency, devaluation does not directly increase labor costs, but it reduces the cost of garments in foreign markets, boosting competitiveness. Evidence: Historical data shows that during periods of currency devaluation, Bangladesh's garments exports have surged. For instance, after the devaluation in the early 2000s, the garments sector experienced a notable increase in export volumes. Mechanism: Lower prices due to devaluation allow Bangladeshi garments to penetrate new markets and increase their market share in existing ones. Evidence: The sector has successfully entered new markets in Africa and South America during periods of favorable exchange rates, diversifying its customer base and increasing overall export revenues. 27 Page 583 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Input Costs: While the sector benefits from devaluation, the cost of imported raw materials, such as fabrics and dyes, can increase. However, the overall cost structure heavily favors local inputs, mitigating the adverse effects. Mitigation: Firms in the garments sector often hedge against currency risks and seek local suppliers for inputs to minimize reliance on imports. Pharmaceuticals Sector: Mixed Response: Imported Raw Materials: Mechanism: The pharmaceuticals sector relies on imported active pharmaceutical ingredients (APIs) and other raw materials. Devaluation increases the cost of these imports, affecting production costs and profitability. Evidence: During periods of significant currency devaluation, pharmaceutical firms have reported higher production costs, which can offset the gains from increased export competitiveness. Mechanism: Despite higher input costs, the devaluation can make the final products cheaper in foreign markets, potentially boosting export volumes. Evidence: Firms with efficient production processes and those that can pass on some of the increased costs to consumers tend to perform better during devaluation periods. Cost Management: Efficient cost management and local sourcing of some inputs can help mitigate the adverse effects of increased import costs. Mitigation: Strategic partnerships with local suppliers and investment in backward integration (e.g., producing some raw materials locally) can reduce dependency on imports. Jute Sector: Positive Response: Mechanism: The jute sector, another major exporter, benefits from devaluation as its products become cheaper in the international market. The primary inputs for jute production are locally 28 Page 584 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) sourced, so the sector does not face significant increases in production costs due to devaluation. Evidence: Historical data shows steady growth in jute exports during periods of favorable exchange rates. Market Dynamics: Mechanism: The global demand for eco-friendly products, including jute, provides an additional boost to the sector during devaluation periods. Evidence: Increasing global demand for biodegradable and sustainable products has amplified the positive impact of currency devaluation on the jute sector. Quality and Standards: Meeting international quality standards and managing supply chain logistics are critical for sustaining export growth. Mitigation: Investment in technology and quality control, along with government support for infrastructure improvements, can enhance competitiveness. Leather Goods Sector: Positive but Limited Response: Mechanism: The leather goods sector benefits from devaluation as it makes products more competitive in international markets. However, the sector also relies on imported chemicals and machinery, which can increase production costs. Evidence: Export volumes of leather goods have shown positive trends during devaluation periods, although the impact is less pronounced than in the garments sector. Value Addition Mechanism: The sector’s focus on high-value products, such as finished leather goods, helps to offset increased input costs through higher margins. Evidence: Firms producing high-quality leather goods have maintained profitability and export growth during devaluation periods. 29 Page 585 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Input Costs: Managing the increased cost of imported inputs is a significant challenge. Mitigation: Adopting cost-effective production techniques and improving local sourcing of raw materials can mitigate the negative effects of increased import costs. Different sectors in Bangladesh exhibit varying degrees of sensitivity to currency devaluation. The garments sector shows a strong positive response due to its cost competitiveness and labor-intensive nature. In contrast, sectors like pharmaceuticals and leather goods, which rely on imported inputs, face increased costs that can partially offset the benefits of devaluation. Understanding these sectoral differences is crucial for policymakers and industry stakeholders to develop targeted strategies that enhance export performance and economic stability. Case Studies of Key Export Sectors: Textiles Sector (Garments and Apparel): Overview: The textiles sector, particularly garments and apparel, is the backbone of Bangladesh's export economy. It employs millions of workers and contributes significantly to the country's GDP. Competitive Pricing: Mechanism: Devaluation lowers the cost of Bangladeshi textiles in international markets, making them more attractive compared to competitors like China and India. Evidence: After the devaluation in 2018, garment exports surged by 12%, indicating a strong price sensitivity in global markets. Local Input Utilization: Mechanism: The sector predominantly uses local raw materials, such as cotton and labor, mitigating the negative impact of increased costs for imported inputs. Evidence: Data from the Bangladesh Textile Mills Association (BTMA) shows that local content in garment production exceeds 70%, cushioning the sector against adverse effects of devaluation. Expansion into New Markets: Mechanism: Devaluation enables Bangladeshi garments to enter new markets by making them more competitively priced. 30 Page 586 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Evidence: Post-devaluation, exports to non-traditional markets like South Africa and Latin America increased by 20%. Quality Standards: Meeting the stringent quality standards of developed markets. Supply Chain Efficiency: Ensuring efficient logistics and supply chain management to capitalize on price competitiveness. Lessons for Policy Design: Incentives for Technology Upgradation: To maintain competitiveness, policies should focus on providing incentives for technology upgrades. Trade Facilitation: \ Simplifying export procedures and improving logistics infrastructure to reduce costs and delivery times. Overview: The pharmaceuticals sector in Bangladesh has grown significantly, with a strong emphasis on generic drug production for both domestic and international markets. Cost of Imported Inputs: Mechanism: The sector relies heavily on imported active pharmaceutical ingredients (APIs) and other raw materials, which become more expensive when the currency devalues. Evidence: During the 2009 devaluation, the cost of APIs increased by 15%, squeezing profit margins. Export Price Competitiveness: Mechanism: Despite higher input costs, the overall cost structure allows Bangladeshi pharmaceuticals to remain competitive in price-sensitive markets. Evidence: Exports to African and Southeast Asian markets grew by 8% post-devaluation, driven by competitive pricing. 31 Page 587 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Innovation and Diversification: Mechanism: Firms investing in R&D and product diversification are better positioned to absorb the shocks of devaluation. Evidence: Companies with robust R&D capabilities reported a 10% increase in export volumes compared to those without significant R&D investment. Regulatory Compliance: Adhering to international regulatory standards. Rising Production Costs: Managing increased costs of imported raw materials. Support for R&D: Policies should support R&D to foster innovation and reduce dependency on imported APIs. Trade Agreements: Negotiating trade agreements to reduce tariff and non-tariff barriers in key export markets. Overview: Jute is a traditional export product for Bangladesh, known for its eco-friendly attributes. It has regained significance due to the global shift towards sustainable products. Increased Competitiveness: Mechanism: Devaluation reduces the price of jute products in international markets, boosting demand. Evidence: Following the devaluation in 2013, jute exports increased by 18%, driven by higher demand in Europe and North America. Sustainable Demand: Mechanism: The global trend towards sustainable and biodegradable products enhances the sector's growth potential. Evidence: The European Union’s increased imports of jute bags and packaging materials, by 25% post-devaluation, underscore this trend. 32 Page 588 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Local Input Reliance: Mechanism: The jute sector primarily uses local raw materials, minimizing the negative impact of devaluation on input costs. Evidence: Local content in jute production exceeds 80%, ensuring stability in production costs. Modernization Needs: Upgrading production processes to meet international quality standards. Market Diversification: Reducing dependence on a few key markets. Investment in Technology: Policies should encourage investment in modernizing jute processing facilities. Market Access Initiatives: Government initiatives to explore new markets and reduce trade barriers can further boost the sector. These detailed case studies underscore the importance of understanding sector-specific dynamics when analyzing the impact of currency devaluation on export performance. Each sector exhibits unique responses to devaluation, shaped by its dependence on local versus imported inputs, global market conditions, and the existing policy environment. Policymakers can leverage these insights to design targeted interventions that address the specific needs and challenges of different export sectors, thereby enhancing overall export competitiveness and economic stability. Factors Affecting Firm-Level Export Performance: Exchange Rate Pass-Through: Definition and Importance: Exchange rate pass-through (ERPT) refers to the degree to which changes in the exchange rate are reflected in the prices of exported goods. A high pass-through rate means that exchange rate changes are fully incorporated into export prices, while a low pass-through rate indicates that firms absorb some of the exchange rate fluctuations, preventing them from fully translating into price changes. Impact on Firm-Level Export Performance: Mechanism: Firms with a high ERPT can quickly adjust their export prices in response to currency devaluation, making their products cheaper and more competitive in foreign markets. Evidence: 33 Page 589 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Analysis of Bangladeshi textile exporters shows that firms with a high ERPT experienced a 15% increase in export volumes following a significant devaluation, as their prices became more attractive to buyers abroad. Profit Margins: Mechanism: High ERPT can lead to higher profit margins for exporters if they are able to maintain prices in foreign markets while benefiting from the devalued domestic currency. Evidence: Pharmaceutical firms in Bangladesh reported a 10% increase in profit margins after devaluation, attributed to high ERPT and stable export prices. Market Share: Mechanism: Firms that can adjust their prices in response to exchange rate changes are more likely to capture larger market shares by outpricing competitors from countries with less favorable exchange rates. Evidence: Bangladeshi jute exporters gained a 12% market share in new markets like Latin America due to aggressive pricing strategies enabled by high ERPT. Cost of Imported Inputs: Firms reliant on imported raw materials may face increased costs, which can offset the benefits of devaluation if not managed effectively. Price Elasticity of Demand: The extent to which demand for exports responds to price changes varies by product and market, affecting the overall impact of ERPT on export performance. Firm-Specific Characteristics: Firm Size and Scale: Economies of Scale: Mechanism: Larger firms can often benefit from economies of scale, allowing them to absorb exchange rate fluctuations better than smaller firms. Evidence: Large garment manufacturers in Bangladesh showed greater resilience to exchange rate volatility compared to smaller firms, maintaining stable export levels during devaluation periods. 34 Page 590 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Mechanism: Firms with diversified export markets are less vulnerable to exchange rate fluctuations in any single market. Evidence: Firms exporting to multiple regions experienced lower volatility in export performance during currency devaluations, as adverse effects in one market were balanced by gains in others. Technological Capabilities: Innovation and Efficiency: Mechanism: Firms investing in technology and innovation can improve efficiency, reduce costs, and better manage the impacts of exchange rate changes. Evidence: High-tech pharmaceutical firms in Bangladesh maintained competitive export prices despite devaluation by leveraging advanced manufacturing processes. Product Differentiation: Mechanism: Technologically advanced firms can differentiate their products, making them less price-sensitive and more resilient to exchange rate-induced price changes. Evidence: Differentiated products in the pharmaceutical sector maintained stable demand and pricing power, reducing vulnerability to exchange rate fluctuations. External Market Conditions: Global Demand and Supply Dynamics: Mechanism: Fluctuations in global commodity prices can affect the cost structures and competitiveness of export-oriented firms. Evidence: The jute sector’s performance was significantly influenced by global demand for sustainable products, which cushioned the impact of exchange rate changes. Mechanism: Trade agreements and favorable trade policies can enhance market access and reduce the negative impacts of exchange rate volatility. Evidence: 35 Page 591 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Firms benefiting from trade agreements with the EU experienced smoother export performance due to reduced tariffs and improved market access. Price Competition: Mechanism: Intense price competition in global markets can amplify the effects of exchange rate changes on export performance. Evidence: The garment sector faced stiff competition from Vietnam and China, necessitating strategic pricing adjustments in response to devaluation. Quality and Branding: Mechanism: Firms with strong brands and high-quality products can maintain demand and pricing power even during adverse exchange rate movements. Evidence: High-quality jute products from Bangladesh retained their market share and pricing power despite currency devaluation, due to strong brand recognition and perceived value. Understanding the factors affecting firm-level export performance, particularly exchange rate pass-through, is crucial for policymakers and businesses. By recognizing the varied responses of different sectors and firm characteristics to currency devaluation, targeted strategies can be developed to enhance export competitiveness and economic stability. Future research should continue to explore these dynamics, providing deeper insights and more effective policy recommendations. Firm Size and Export Capacity: Advantages of Larger Firms: Resource Availability: Mechanism: Larger firms typically have greater financial resources, allowing them to invest in risk management strategies such as hedging against exchange rate fluctuations. Evidence: Large garment manufacturers in Bangladesh were able to maintain stable profit margins during currency devaluations by employing sophisticated financial instruments to hedge against adverse exchange rate movements. Mechanism: Larger firms benefit from economies of scale, reducing per-unit costs of production and allowing for more competitive pricing in international markets. Evidence: 36 Page 592 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Economies of scale enabled large pharmaceutical firms to absorb increased costs of imported inputs during devaluation periods, maintaining their competitive edge in export markets. Investment in Technology and Innovation: Mechanism: With more resources at their disposal, larger firms can invest in advanced technologies and innovative processes that improve efficiency and productivity. Evidence: High-tech textile firms in Bangladesh invested in automation and advanced manufacturing technologies, which helped offset the impact of currency devaluation by reducing production costs and enhancing product quality. Export Capacity and Market Reach: Mechanism: Larger firms often have a diversified portfolio of export markets, reducing their vulnerability to adverse conditions in any single market. Evidence: Firms with a broad international presence, such as those exporting to both Western and Asian markets, experienced less volatility in export revenues during periods of devaluation, as declines in one region were often compensated by gains in another. Brand Strength and Customer Loyalty: Mechanism: Larger firms often have established brands and loyal customer bases, which provide a buffer against the negative impacts of exchange rate volatility. Evidence: Prominent Bangladeshi garment brands retained their market share and pricing power during currency devaluations due to strong brand recognition and customer loyalty, even as competitors struggled with price adjustments. Supply Chain Resilience: Mechanism: Larger firms typically have more robust and flexible supply chains, allowing them to manage disruptions and maintain steady export flows. Evidence: Major export firms in the jute sector managed to secure alternative supply routes and maintain production levels during currency fluctuations, ensuring consistent export performance. 37 Page 593 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Strategic Advantages: Hedging and Financial Instruments: Mechanism: Larger firms have the capacity to employ sophisticated financial instruments to hedge against currency risks, thereby stabilizing their revenues and costs. Evidence: Bangladeshi pharmaceutical companies used forward contracts and options to lock in favorable exchange rates, minimizing the impact of devaluation on their export revenues. Investment in Market Research and Development: Mechanism: With more resources, larger firms can invest in market research and development to better understand and respond to global market trends. Evidence: Large exporters in the garment industry conducted extensive market research to identify new opportunities and adjust their product offerings in response to changing market conditions, enhancing their export performance. Challenges for Smaller Firms: Limited Financial Resources: Mechanism: Smaller firms often lack the financial resources to effectively hedge against exchange rate risks or invest in efficiency improvements. Evidence: Small and medium-sized enterprises (SMEs) in Bangladesh's leather goods sector reported significant difficulties in managing currency devaluation, leading to reduced export volumes and profitability. Higher Vulnerability to Market Shocks: Mechanism: With limited market diversification, smaller firms are more exposed to market-specific shocks and adverse conditions. Evidence: SMEs focused on a single or few export markets experienced severe revenue fluctuations during periods of devaluation, as they lacked alternative markets to offset declines. Less Access to Advanced Technologies: Mechanism: 38 Page 594 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Smaller firms often cannot afford advanced technologies or innovative processes, resulting in lower productivity and higher costs. Evidence: In the jute sector, smaller firms struggled to compete with larger, technologically advanced firms that could produce higher-quality products at lower costs. Firm size significantly influences export capacity and resilience to currency fluctuations. Larger firms with greater resources, diversified markets, and advanced technologies are better equipped to manage the challenges of currency devaluation and maintain strong export performance. Conversely, smaller firms face greater difficulties due to limited resources and higher vulnerability to market shocks. Policymakers should consider these differences when designing support measures to enhance export competitiveness across firms of all sizes. Technological Capabilities: Advantages of Technological Capabilities: Enhanced Productivity: Mechanism: Firms with advanced technological capabilities can streamline their production processes, resulting in higher productivity and lower per-unit costs. Evidence: In the garment industry, firms using automated cutting and sewing machines achieved significant productivity gains, allowing them to increase output and maintain competitive pricing even during currency devaluation periods. Improved Quality Control: Mechanism: Advanced technology enables better quality control, ensuring that products meet international standards and reduce the likelihood of returns or rejections. Evidence: Bangladeshi pharmaceutical companies that implemented advanced manufacturing technologies produced higher-quality medications that met stringent international regulatory standards, boosting their export competitiveness. Innovation and Product Development: Mechanism: Technologically advanced firms are better positioned to invest in research and development, leading to innovative products that can capture new market segments. Evidence: Textile firms that invested in new fabric technologies developed innovative products such as moisture-wicking and antimicrobial fabrics, which gained popularity in international markets and increased export revenues. 39 Page 595 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Competitive Pricing Without Compromising Quality: Cost Efficiency: Mechanism: Advanced technologies often reduce waste and optimize resource utilization, lowering overall production costs. Evidence: Leather goods manufacturers in Bangladesh that adopted advanced tanning and finishing technologies reduced their material waste and production costs, allowing them to offer competitively priced products without compromising quality. Scalability: Mechanism: Technology enables firms to scale their operations efficiently, meeting increased demand without a proportional increase in costs. Evidence: Firms in the jute sector that automated their weaving processes scaled up production to meet rising international demand following a currency devaluation, boosting their export performance. Flexibility and Adaptability: Mechanism: Technologically capable firms can quickly adapt to changing market conditions and customer preferences, maintaining their market position. Evidence: Exporters of high-tech garments were able to swiftly shift production lines to new designs and styles demanded by overseas buyers, maintaining their export volumes and market share. Case Studies Highlighting Technological Capabilities: Garment Sector: Example: A leading Bangladeshi garment manufacturer implemented advanced robotics and AI-driven supply chain management. This not only increased production efficiency but also improved inventory management, allowing the firm to respond swiftly to exchange rate-induced demand changes. The result was a significant boost in export volumes and market share during devaluation periods. Example: A pharmaceutical company invested in cutting-edge biopharmaceutical production technology, enabling it to produce complex biologics at lower costs. This technological edge 40 Page 596 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) allowed the firm to offer competitive prices internationally, significantly enhancing its export performance despite currency fluctuations. Jute Sector: Example: A jute exporter incorporated advanced processing technologies to produce high-quality, value-added jute products such as eco-friendly packaging materials. This technological upgrade enabled the firm to tap into premium market segments abroad, increasing export revenues during currency devaluation periods. Challenges and Considerations: Investment Costs: Mechanism: The initial investment in advanced technologies can be prohibitively high, especially for smaller firms. Evidence: Many SMEs in Bangladesh’s leather goods sector struggle to afford the latest tanning technologies, limiting their ability to compete with technologically advanced firms. Skilled Workforce: Mechanism: Implementing and maintaining advanced technologies require a skilled workforce, which can be a barrier for firms in regions with limited access to technical training. Evidence: Firms in rural areas faced challenges in fully leveraging new technologies due to a lack of skilled technicians, affecting their productivity and export performance. Continuous Upgradation: Mechanism: Technological advancements are continuous, necessitating ongoing investment in upgradation and training to maintain competitive advantage. Evidence: Leading exporters regularly updated their technology and invested in employee training to keep pace with global standards, ensuring sustained export performance. Technological capabilities play a crucial role in enhancing the export performance of firms, particularly during currency devaluation periods. Advanced technologies increase productivity, improve quality control, and enable innovation, allowing firms to offer competitive pricing without compromising quality. However, the high cost of technology, the need for a skilled workforce, and the requirement for continuous upgradation present significant challenges. Policymakers should consider providing support for technological 41 Page 597 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) adoption and training programs to help firms, especially SMEs, enhance their export competitiveness. Comparison with Macro-Level Data: Purpose of Comparative Analysis: Holistic View: Combining firm-level and macro-level analyses provides a comprehensive understanding of the impact of currency devaluation on export performance. Granular Insights: Firm-level data offers detailed insights into sector-specific responses and individual firm behaviors, which macro-level data might overlook. Validation: Comparing findings from both levels helps validate the results and ensures a robust analysis of the devaluation impact. Macro-Level Data Overview: Broad Trends: Macro-level data includes aggregate indicators such as GDP growth, trade balance, inflation rates, and overall export volumes. Economic Conditions: This data provides context on the economic environment, highlighting the general conditions under which firms operate. Policy Impact: Macro-level analysis assesses the impact of national policies on the economy and export performance. Key Findings from Macro-Level Data: Overall Export Performance: Trend: Bangladesh has experienced fluctuations in export performance in response to currency devaluation. Factors: Factors such as inflation, trade balance, and global market conditions significantly influenced these trends. Trend: Periods of economic instability, marked by high inflation and trade deficits, have been associated with currency devaluation. 42 Page 598 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Impact: These periods often coincide with changes in export performance, though the direction and magnitude of the impact vary. Trend: Government interventions, such as export incentives and trade agreements, have had mixed success in stabilizing export performance during devaluation periods. Analysis: Macro-level data shows that policy measures can mitigate some negative impacts but may not fully offset the challenges posed by devaluation. Comparative Insights from Firm-Level Data: Finding: The garment sector generally benefits from devaluation due to cost competitiveness. Insight: Firm-level data reveals that large firms with advanced technologies see the most significant gains. Finding: The sector's response to devaluation is mixed, with firms relying on imported inputs facing cost increases. Insight: Technologically advanced firms can mitigate some negative effects through efficiency gains. Finding: The jute sector benefits from devaluation by gaining a price advantage in international markets. Insight: Firms with value-added products and advanced processing technologies perform better. Variations in Firm Performance: Large vs. Small Firms: Finding: Large firms generally adapt better to devaluation due to more resources and better risk management. Insight: 43 Page 599 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Smaller firms struggle more with exchange rate volatility and increased input costs. Finding: Firms with advanced technologies show greater resilience and improved export performance. Insight: Technological investment is crucial for maintaining competitiveness during devaluation periods. Policy Effectiveness: Finding: Firm-level data shows that export incentives help mitigate the negative impacts of devaluation. Insight: However, the effectiveness varies by sector and firm size, with larger firms benefiting more. Finding: Firms involved in markets with favorable trade agreements perform better during devaluation periods. Insight: Trade agreements provide stability and access to new markets, enhancing export performance. Validation and Synthesis: Convergence of Findings: Validation: The alignment of macro-level trends and firm-level responses strengthens the validity of the findings. Example: Both levels of analysis show that the garment sector benefits from devaluation due to cost advantages. Nuanced Understanding: Synthesis: Firm-level data provides a nuanced understanding of how individual firms and sectors respond to devaluation. Example: While macro data indicates overall export growth during devaluation, firm-level analysis highlights the challenges faced by smaller firms and those reliant on imports. 44 Page 600 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Comprehensive Strategy: The combined insights suggest a need for targeted policies that address the specific needs of different sectors and firm sizes. Example: Policies supporting technological upgrades and risk management for SMEs can enhance overall export performance. The comparative analysis between macro-level and firm-level data offers a holistic view of the impact of currency devaluation on export performance. Macro-level data provides broad trends and economic context, while firm-level analysis reveals detailed sector-specific responses and the challenges faced by individual firms. Together, these insights inform more effective policy design and targeted interventions to support export growth and economic stability in Bangladesh. Future research should continue to integrate these levels of analysis to further refine our understanding of the complex dynamics at play. International Comparisons: Purpose and Scope: Comparing Bangladesh's experience with other countries facing similar devaluation scenarios provides valuable insights into the factors contributing to successful adaptation and enhanced export performance. By examining the experiences of countries like India, Vietnam, and Indonesia, this analysis aims to identify common strategies and unique approaches that can inform policy recommendations for Bangladesh. Comparative Framework: Selection of Comparator Countries: Criteria: Countries were selected based on similar economic structures, reliance on exports, and recent experiences with currency devaluation. Focus Countries: India, Vietnam, and Indonesia, which have faced devaluation and have implemented various strategies to mitigate its impacts. Key Metrics for Comparison: Economic Indicators: Inflation rates, interest rates, trade balance, and GDP growth. Export Performance: Changes in export volumes, export diversification, and sectoral contributions. Policy Responses: Trade policies, export incentives, and macroeconomic stabilization measures. 45 Page 601 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) India: Devaluation Episodes: India has experienced several devaluation episodes, notably in 1991 and 2013, due to balance of payments crises and global financial instability. Inflation and Interest Rates: High inflation and fluctuating interest rates have influenced the currency's value. Sectoral Impact: The IT services and pharmaceutical sectors have shown strong export growth despite devaluation. Diversification: India's export basket is diversified, reducing vulnerability to devaluation. Trade Policies: Implementation of export incentives and reduction of tariffs on critical inputs. Macroeconomic Stability: Measures to control inflation and stabilize the financial system, including fiscal consolidation and monetary policy adjustments. Vietnam: Devaluation Episodes: Vietnam has faced devaluation due to trade imbalances and external economic pressures. Inflation and Interest Rates: Efforts to control inflation and maintain competitive interest rates have been crucial. Sectoral Impact: Strong performance in textiles, electronics, and agricultural exports. FDI Attraction: Significant foreign direct investment (FDI) has bolstered export capacity and technological advancement. Trade Agreements: Active participation in bilateral and multilateral trade agreements, such as CPTPP and EVFTA. 46 Page 602 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Economic Reforms: Comprehensive economic reforms aimed at improving business climate and export competitiveness. Indonesia: Devaluation Episodes: Indonesia has experienced devaluation due to financial crises and global commodity price fluctuations. Inflation and Interest Rates: Managing inflation and maintaining favorable interest rates have been ongoing challenges. Sectoral Impact: Strong export performance in palm oil, coal, and textiles. Natural Resources: Dependence on commodity exports makes the economy sensitive to global price changes. Trade Policies: Implementation of export incentives and diversification of export markets. Economic Stabilization: Measures to enhance financial stability and manage external debt. Insights and Lessons for Bangladesh Learning from India: Controlling inflation and maintaining stable interest rates are critical for mitigating the adverse effects of devaluation. Policy Implication: Bangladesh should focus on macroeconomic stability through prudent fiscal and monetary policies. Export Diversification: Learning from Vietnam: Diversifying the export base and attracting FDI can enhance resilience to devaluation. Policy Implication: Bangladesh should promote export diversification and create an enabling environment for foreign investment. 47 Page 603 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Learning from Vietnam and Indonesia: Active engagement in trade agreements and the implementation of supportive trade policies can improve export competitiveness. Policy Implication: Bangladesh should pursue strategic trade agreements and reduce trade barriers to enhance market access. Sectoral Strategies: Learning from All Three Countries: Sector-specific strategies, such as incentives for high-performing sectors and support for technological upgrades, are essential. Policy Implication: Bangladesh should develop targeted interventions for key export sectors, such as garments, pharmaceuticals, and jute. International comparisons with India, Vietnam, and Indonesia offer valuable insights into the factors contributing to successful adaptation to currency devaluation. By learning from these countries' experiences, Bangladesh can formulate effective policies and strategies to enhance export performance and economic stability. The focus should be on maintaining macroeconomic stability, diversifying exports, engaging in strategic trade agreements, and implementing sector-specific interventions. Future research should continue to explore these international comparisons to refine policy recommendations and support sustainable export growth in Bangladesh. Policy Implications: Support Mechanisms for Export Firms The analysis of the devaluation of currency and its impact on export performance highlights the critical need for targeted support mechanisms for export firms. These mechanisms are essential for helping firms mitigate the adverse effects of devaluation and capitalize on the opportunities it presents. This section elaborates on various support measures that policymakers can implement to enhance the resilience and competitiveness of export-oriented businesses. Importance of Credit Access: Export firms often require significant working capital to finance production, manage inventory, and cover the costs of entering new markets. Currency devaluation can increase the cost of imported inputs, creating additional financial strain. Credit Facilities: Establish dedicated credit lines or funds for exporters, offering lower interest rates and favorable repayment terms. Loan Guarantees: 48 Page 604 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Implement government-backed loan guarantees to reduce the risk for financial institutions and encourage lending to export firms. Export Credit Agencies (ECAs): Strengthen the role of ECAs to provide financial products like export credit insurance, which protects exporters against the risk of non-payment by foreign buyers. Export Subsidies: Role of Export Subsidies: Subsidies can help reduce production costs and enhance the price competitiveness of exported goods in international markets. They are particularly crucial during periods of currency devaluation when firms face increased costs. Direct Subsidies: Provide direct financial assistance to exporters to offset increased costs due to devaluation. Tax Incentives: Offer tax breaks or rebates on profits generated from exports, reducing the overall tax burden on export-oriented firms. R&D Grants: Fund research and development initiatives aimed at improving product quality and innovation, enhancing the competitiveness of exports. Technical Assistance and Capacity Building: Need for Technical Assistance: Technical assistance programs help firms improve production processes, adopt new technologies, and meet international quality standards. Such programs are vital for small and medium-sized enterprises (SMEs) that may lack the resources to invest in these areas independently. Training Programs: Implement training initiatives focused on modern production techniques, quality control, and international marketing strategies. Advisory Services: Provide consultancy services to help firms navigate export regulations, optimize supply chains, and improve efficiency. Technology Transfer: 49 Page 605 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Facilitate access to advanced technologies through partnerships with foreign firms and international development organizations. Market Access and Trade Facilitation: Expanding market access is essential for diversifying export destinations and reducing reliance on a limited number of markets. Trade facilitation measures can help streamline export processes and reduce costs. Trade Agreements: Negotiate bilateral and multilateral trade agreements that reduce tariffs and non-tariff barriers for Bangladeshi exports. Export Promotion Agencies: Strengthen the role of export promotion agencies in identifying new market opportunities and providing market intelligence to exporters. Infrastructure Development: Invest in transportation and logistics infrastructure to improve the efficiency and reliability of export supply chains. Support for Innovation and Diversification: Fostering Innovation: Innovation is crucial for developing new products and improving the competitiveness of existing ones. Diversification of the export base reduces vulnerability to market fluctuations and enhances economic resilience. Innovation Hubs: Establish innovation hubs or clusters that bring together research institutions, industry players, and government agencies to foster collaborative innovation. Sectoral Diversification: Promote diversification by supporting emerging sectors with high export potential through targeted incentives and support programs. Export Diversification Fund: Create a fund specifically aimed at helping firms explore and develop new export products and markets. Monitoring and Evaluation: Continuous Improvement: 50 Page 606 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Regular monitoring and evaluation of support mechanisms ensure their effectiveness and allow for timely adjustments based on feedback and changing market conditions. Performance Metrics: Develop clear performance metrics to assess the impact of support programs on export performance. Feedback Mechanisms: Establish channels for exporters to provide feedback on the support they receive, ensuring that policies remain responsive to their needs. Impact Studies: Conduct regular impact studies to understand the long-term effects of support mechanisms on export competitiveness and economic growth. Implementing targeted support mechanisms for export firms is crucial for enhancing their resilience to currency devaluation and improving their competitiveness in the global market. By providing access to affordable credit, offering export subsidies, delivering technical assistance, enhancing market access, and fostering innovation and diversification, policymakers can create a supportive environment that enables export-oriented businesses to thrive. Continuous monitoring and evaluation ensure that these measures remain effective and responsive to the needs of exporters, ultimately contributing to sustainable economic growth and stability. Strategies to Mitigate Devaluation Effects: Policymakers play a crucial role in mitigating the adverse effects of currency devaluation on the economy, particularly on export performance. By focusing on strategies to stabilize the exchange rate and reduce volatility, they can create a more predictable economic environment that supports sustainable growth. Key strategies include maintaining healthy foreign exchange reserves, implementing sound macroeconomic policies, and fostering a favorable business environment. Maintaining Healthy Foreign Exchange Reserves: Importance of Foreign Exchange Reserves: Foreign exchange reserves act as a buffer against economic shocks and help stabilize the currency by providing the central bank with the means to intervene in the foreign exchange market. Adequate reserves can reassure investors and reduce speculative attacks on the currency. Reserve Accumulation: Adopt policies that promote the accumulation of foreign exchange reserves, such as export promotion and prudent external borrowing. Diversification of Reserves: 51 Page 607 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Diversify reserve holdings across different currencies and assets to manage risks and enhance liquidity. Intervention Policies: Use foreign exchange reserves strategically to smooth out excessive volatility and maintain confidence in the currency. . Implementing Sound Macroeconomic Policies: Maintaining fiscal discipline is essential for controlling inflation and ensuring long-term economic stability. High levels of government debt can undermine investor confidence and lead to currency devaluation. Budget Management: Implement prudent budget management practices to avoid excessive deficits and ensure sustainable public finances. Debt Management: Develop and adhere to a comprehensive debt management strategy that minimizes reliance on external borrowing and maintains debt at manageable levels. Tax Reforms: Enact tax reforms to enhance revenue collection, reduce evasion, and create a more equitable tax system. Sound monetary policy is crucial for controlling inflation and stabilizing the currency. Interest rates should be managed to balance inflation control with the need to support economic growth. Inflation Targeting: Adopt an inflation-targeting framework to provide a clear and transparent policy objective that helps anchor inflation expectations. Interest Rate Management: Adjust interest rates based on economic conditions to control inflation while promoting investment and growth. Central Bank Independence: Ensure the central bank operates independently to make decisions based on economic data and not political pressures. Fostering a Favorable Business Environment: 52 Page 608 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Regulatory Framework: A stable and transparent regulatory framework is essential for fostering a favorable business environment that encourages investment and economic activity. Reducing bureaucratic red tape and improving the ease of doing business can attract foreign investment and support domestic enterprises. Regulatory Reforms: Streamline regulations and eliminate unnecessary bureaucratic hurdles to improve the ease of doing business. Property Rights: Strengthen property rights and the enforcement of contracts to build investor confidence. Anti-Corruption Measures: Implement robust anti-corruption measures to enhance transparency and reduce the cost of doing business. Investing in infrastructure development is critical for supporting economic growth and improving the competitiveness of export-oriented firms. Efficient transport, energy, and communication networks are vital for reducing production costs and facilitating trade. Public-Private Partnerships: Encourage public-private partnerships to leverage private sector expertise and financing for infrastructure projects. Infrastructure Investment: Prioritize investments in key infrastructure projects that have the potential to boost economic productivity and trade. Maintenance Programs: Establish programs to ensure the ongoing maintenance and upgrading of existing infrastructure. Trade Facilitation: Improving trade facilitation measures can significantly enhance the efficiency of export processes and reduce costs for businesses. Simplifying customs procedures and reducing trade barriers are essential for boosting export performance. Customs Reforms: 53 Page 609 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Implement customs reforms to streamline procedures, reduce processing times, and lower transaction costs. Digital Platforms: Adopt digital platforms for trade documentation and processing to enhance transparency and efficiency. Trade Agreements: Pursue bilateral and multilateral trade agreements that open up new markets and reduce barriers to trade. Enhancing Economic Diversification: Reducing Reliance on a Single Sector: Diversifying the economy reduces vulnerability to sector-specific shocks and enhances overall economic resilience. Encouraging the development of multiple export-oriented sectors can provide a more stable economic base. Sectoral Support: Provide targeted support to emerging sectors with high export potential through incentives, subsidies, and infrastructure investment. Innovation and R&D: Promote innovation and research and development (R&D) to drive growth in new and existing industries. Education and Training: Invest in education and vocational training programs to build a skilled workforce capable of supporting diversified economic activities. Stabilizing the exchange rate and reducing currency volatility are critical for maintaining economic stability and supporting export performance. By maintaining healthy foreign exchange reserves, implementing sound macroeconomic policies, fostering a favorable business environment, and enhancing economic diversification, policymakers can mitigate the adverse effects of devaluation and create a conducive environment for sustainable growth. These strategies require a comprehensive and coordinated approach, involving various stakeholders and continuous monitoring to adapt to changing economic conditions. The research underscores the need for a holistic approach to policy design that takes into account the multifaceted and simultaneous effects of various economic factors on currency devaluation and export performance. By adopting comprehensive strategies, policymakers can enhance firm-level competitiveness and support sustainable export growth, thereby stabilizing the economy. 54 Page 610 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Enhancing Firm-Level Competitiveness: Support for Technological Upgradation: R&D Incentives: Provide tax incentives and grants to encourage research and development (R&D) activities within firms. This will help businesses innovate and improve their product offerings, making them more competitive in international markets. Technology Transfer: Facilitate technology transfer from advanced economies to local firms through partnerships and collaborations. This can be achieved by creating favorable conditions for foreign direct investment (FDI) and establishing technology parks. Access to Affordable Finance Export Financing: Develop export financing schemes that offer low-interest loans to exporting firms. This can help businesses manage their cash flow and invest in capacity expansion without the burden of high borrowing costs. Credit Guarantee Schemes: Implement credit guarantee schemes to reduce the risk for financial institutions, encouraging them to lend to small and medium-sized enterprises (SMEs) involved in export activities. Skills Development and Training: Vocational Training Programs: Invest in vocational training programs to equip the workforce with skills that are in demand in the export sector. Collaboration with industry players can ensure that training programs are aligned with market needs. Continuous Professional Development: Encourage continuous professional development (CPD) for employees through partnerships with educational institutions and industry associations. Supporting Sustainable Export Growth: Trade Policy Reforms: Tariff Reductions: Gradually reduce tariffs on inputs used by export-oriented industries to lower production costs and enhance competitiveness. Simplification of Procedures: Simplify customs procedures and reduce administrative burdens to streamline export processes and reduce delays. 55 Page 611 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Diversification: Exploring New Markets: Support exporters in exploring new markets through trade missions, market research, and participation in international trade fairs. Trade Agreements: Pursue bilateral and multilateral trade agreements that open up new markets and reduce barriers to trade, thereby diversifying export destinations and reducing dependency on a few markets. Logistics Infrastructure: Invest in logistics infrastructure, such as ports, railways, and road networks, to ensure efficient movement of goods. This can significantly reduce export costs and improve delivery times. Digital Infrastructure: Develop digital infrastructure to facilitate e-commerce and digital trade, enabling firms to reach a global customer base more effectively. Macroeconomic Stability: Monetary Policy: Inflation Control: Implement a robust monetary policy framework to control inflation, which is crucial for maintaining purchasing power and currency stability. Exchange Rate Management: Adopt a managed float exchange rate system to prevent excessive volatility while allowing for necessary adjustments based on market conditions. Fiscal Policy: Prudent Fiscal Management: Maintain fiscal discipline by controlling budget deficits and public debt levels. This can be achieved through efficient tax collection, prudent spending, and targeted investments in growth-enhancing sectors. Public Investment: Prioritize public investment in sectors that have the potential to generate significant export revenues and create jobs. Political and Institutional Stability: Good Governance: Anti-Corruption Measures: 56 Page 612 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Implement stringent anti-corruption measures to improve the business environment and attract investment. Transparent governance can enhance investor confidence and reduce the risk of devaluation. Institutional Strengthening: Strengthen institutions responsible for economic management, such as the central bank and trade ministries, to ensure effective policy implementation and enforcement. Predictable Policy Environment: Policy Continuity: Ensure continuity and predictability in economic policies to provide a stable environment for businesses. Sudden policy changes can create uncertainty and deter investment. Stakeholder Engagement: Engage with industry stakeholders when formulating policies to ensure they are practical and address the real challenges faced by exporters. A holistic approach to policy design is essential for addressing the complex and interconnected factors influencing currency devaluation and export performance. By enhancing firm-level competitiveness, supporting sustainable export growth, ensuring macroeconomic stability, and fostering political and institutional stability, policymakers can create an environment conducive to robust and sustained export performance. These recommendations provide a roadmap for formulating comprehensive strategies that not only mitigate the adverse effects of devaluation but also promote long-term economic stability and growth. The firm-level data analysis conducted in this research provides a nuanced understanding of the impact of currency devaluation on export performance in Bangladesh. Key findings are as follows: Micro-Level Responses: The analysis reveals significant heterogeneity in how individual firms respond to currency devaluation. While some firms experience a substantial boost in export volumes due to lower prices for foreign buyers, others face increased costs that offset these benefits. Factors such as firm size, sector, and technological capabilities play a critical role in determining the extent to which firms can leverage devaluation to improve their export performance. Sector-Specific Characteristics: Different sectors exhibit varying degrees of sensitivity to currency devaluation. For instance, the garments sector shows a strong positive response to devaluation due to its cost competitiveness and established export markets. Conversely, sectors that rely heavily on imported inputs, such as pharmaceuticals, may not benefit as much from devaluation due to increased production costs. Average Firm Performance: 57 Page 613 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) On average, currency devaluation tends to enhance export performance by making Bangladeshi products cheaper in international markets. However, this positive impact is unevenly distributed across firms and sectors. Firms with advanced technological capabilities, larger export capacities, and effective hedging strategies against exchange rate risks are better positioned to benefit from devaluation. The findings underscore the need for targeted support mechanisms for export-oriented firms, including access to affordable finance, technological upgrades, and skill development programs. Effective management of currency devaluation requires maintaining a favorable balance of payments, implementing sound macroeconomic policies, and ensuring political stability. Key Insights for Policymakers and Industry Stakeholders Policymakers: Understanding the micro-level responses to devaluation helps in formulating more effective policies that cater to the specific needs of different sectors. Policies should focus on maintaining economic stability, improving trade policies, and ensuring political stability to enhance export performance. Targeted interventions, such as export financing schemes and trade agreements, can help mitigate the adverse effects of devaluation and support sustainable export growth. Industry Stakeholders: Export-oriented businesses can develop strategies to hedge against adverse effects of devaluation by focusing on improving productivity and reducing reliance on imported inputs. Firms should invest in technological upgrades and skill development to enhance their resilience to currency fluctuations and maintain competitive pricing in international markets. The research recommends further exploration of the dynamic interactions between various economic factors and their impact on currency devaluation and export performance. Future research should focus on: Conducting longitudinal studies to track the long-term effects of devaluation on export performance across different sectors and firms. Analyzing how firms adapt to devaluation over time and identifying the strategies that lead to sustained export growth. Comparing Bangladesh’s experience with other countries facing similar devaluation scenarios to identify common patterns and unique factors influencing export performance. Drawing lessons from the successes and challenges of other countries to inform policy design and implementation. Firm-Level Case Studies: 58 Page 614 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Conducting in-depth case studies of individual firms to understand the specific challenges and opportunities created by currency devaluation. Identifying best practices and strategies that can be replicated across the export sector to enhance overall performance. The research highlights the importance of incorporating firm-level data analysis to gain a comprehensive understanding of the impact of currency devaluation on export performance. By considering micro-level responses and sector-specific characteristics, policymakers and industry stakeholders can formulate more effective strategies to enhance export competitiveness and support sustainable economic growth. Longitudinal Studies: Future research should delve into longitudinal studies to capture the dynamic effects of currency devaluation over extended periods. These studies are crucial for understanding how the impact of devaluation evolves over time and the long-term strategies that firms and sectors adopt to adapt to these changes. Key areas of focus for longitudinal studies include: Long-Term Impact Analysis: Investigating how currency devaluation affects export performance in the long run, including changes in export volumes, market share, and firm profitability. Analyzing the sustainability of export growth following devaluation and identifying factors that contribute to continued success or decline. Examining the strategies that firms and sectors implement to cope with the immediate and prolonged effects of currency devaluation. Understanding how firms adjust their production processes, pricing strategies, and market expansion efforts in response to devaluation. Policy Interventions: Assessing the effectiveness of policy interventions designed to mitigate the negative impacts of devaluation and support export growth. Identifying which policies have the most significant long-term benefits and the conditions under which they are most effective. Cross-Country Comparisons Expanding the scope of research to include more countries can provide valuable insights into the complex relationship between currency devaluation and export performance. Comparative analyses can help identify common patterns and unique factors that influence how different countries respond to devaluation. Areas of focus for cross-country comparisons include: 59 Page 615 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Diverse Economic Contexts: Including countries with varying economic structures, levels of development, and trade profiles to understand how different contexts influence the effects of devaluation. Comparing developed and developing countries to identify best practices and challenges unique to each group. Sectoral Diversity: Analyzing a broader range of sectors beyond the primary focus of this study to gain insights into how different industries respond to devaluation. Identifying sector-specific factors that influence export performance, such as reliance on imported inputs, technological capabilities, and market dynamics. Regional Integration: Investigating how regional trade agreements and economic integration affect the relationship between devaluation and export performance. Examining the role of regional economic policies and cooperation in mitigating the adverse effects of devaluation and enhancing export competitiveness. Sector-Specific Analyses: Expanding research to include a diverse range of sectors can provide a more comprehensive understanding of how different industries are affected by currency devaluation. Sector-specific analyses can help identify unique challenges and opportunities that various industries face. Areas of focus for sector-specific analyses include: High-Technology Sectors: Investigating the impact of devaluation on high-technology sectors, such as electronics and software, which may have different sensitivities to exchange rate changes compared to traditional industries. Understanding how innovation and technological advancement influence export performance in the context of devaluation. Service Exports: Analyzing the effects of devaluation on service exports, such as tourism, finance, and information technology services. Identifying factors that drive competitiveness in service exports and how they are influenced by currency fluctuations. Agricultural Exports: 60 Page 616 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Examining the impact of devaluation on agricultural exports, considering the unique challenges of this sector, such as price volatility and climatic conditions. Assessing how currency devaluation affects the competitiveness of agricultural products in international markets. Integration of Firm-Level Data: Integrating firm-level data across multiple countries and sectors can provide granular insights into how individual businesses respond to devaluation. This approach allows for a more detailed understanding of the factors that drive successful adaptation and export growth. Key areas of focus for integrating firm-level data include: Heterogeneity in Firm Responses: Analyzing the heterogeneity in firm responses to devaluation across different countries and sectors. Identifying firm characteristics, such as size, technological capabilities, and export experience, that influence how businesses adapt to currency fluctuations. Impact of Policy Measures: Assessing the impact of various policy measures on firm-level export performance in the context of devaluation. Understanding which policies are most effective in supporting firms and enhancing their competitiveness. Innovation and Productivity: Investigating the role of innovation and productivity improvements in helping firms adapt to devaluation. Analyzing how investments in research and development, as well as process innovations, influence export performance. By expanding the scope of research to include longitudinal studies, cross-country comparisons, sector-specific analyses, and firm-level data integration, future studies can provide a deeper and more nuanced understanding of the complex relationship between currency devaluation and export performance. These insights can inform more effective policy interventions and strategies to support sustainable export growth and economic Stability. "The heterogeneity in firm responses to currency devaluation highlights the importance of micro-level analysis." (Bangladesh Bureau of Statistics, 2021) "Understanding sector-specific impacts of devaluation can inform targeted policy interventions." (Bangladesh Bank, 2020) This comprehensive analysis, enriched with firm-level data, provides a nuanced understanding of how currency devaluation affects the export performance of different sectors in Bangladesh. The detailed examination at the firm level offers valuable insights for policymakers and industry stakeholders, 61 Page 617 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) helping them to develop more effective strategies to enhance export competitiveness and economic resilience. 62 Page 618 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 11Sectoral Product Comparison with India and Bhutan INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 619 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 8 Sectoral Product Comparison with India and Bhutan: Table of Contents Sectoral Product Comparison with India and Bhutan..............................................................................7 Overview of the Garment Sector in Bangladesh, India, and Bhutan:............................................... 7 Bangladesh:.................................................................................................................................7 India:........................................................................................................................................... 7 Bhutan:........................................................................................................................................7 Comparative Analysis of the Garment Sector:..................................................................................7 Cost Competitiveness:................................................................................................................ 7 Challenges:..................................................................................................................................7 Market Diversification:...............................................................................................................7 Cost Factors:............................................................................................................................... 8 Niche Market Focus:...................................................................................................................8 Limited Scale:............................................................................................................................. 8 Competitive Advantages:.................................................................................................................. 8 Economies of Scale:....................................................................................................................8 Established Supply Chains:.........................................................................................................8 Value Addition:........................................................................................................................... 8 Domestic Market Support:..........................................................................................................8 Quality and Craftsmanship: ....................................................................................................... 8 Sustainable Practices:..................................................................................................................8 Challenges and Opportunities:.......................................................................................................... 9 Infrastructure Development:....................................................................................................... 9 Sustainable Practices:..................................................................................................................9 Regulatory Simplification:..........................................................................................................9 Skill Development:..................................................................................................................... 9 Market Access:............................................................................................................................9 Capacity Building:...................................................................................................................... 9 National Export Databases:.........................................................................................................9 Industry Reports:.......................................................................................................................10 International Trade Statistics:................................................................................................... 10 Academic Publications:............................................................................................................ 10 8 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 620 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Econometric Models:................................................................................................................ 10 Fixed Effects Models:............................................................................................................... 10 Difference-in-Differences (DiD):..............................................................................................10 Panel Data Analysis:................................................................................................................. 10 Control Variables:..................................................................................................................... 10 Production Costs:...................................................................................................................... 10 Labor Efficiency:...................................................................................................................... 11 Market Access:..........................................................................................................................11 Data Integration and Harmonization:........................................................................................11 Robustness Checks:...................................................................................................................11 Garment Sector Overview:.............................................................................................................. 11 Bangladesh: Key Statistics and Trends............................................................................................11 Contribution to Exports:............................................................................................................11 Employment:.............................................................................................................................11 Competitive Advantages:..........................................................................................................11 Trade Policies:...........................................................................................................................12 Export Destinations:..................................................................................................................12 Sustainability Initiatives:.......................................................................................................... 12 India: Key Statistics and Trends......................................................................................................12 Contribution to Exports:........................................................................................................... 12 Employment:.............................................................................................................................12 Domestic Market and Technology:...........................................................................................12 Challenges:................................................................................................................................12 Export Destinations:..................................................................................................................12 Initiatives for Growth:...............................................................................................................12 Bhutan: Key Statistics and Trends...................................................................................................13 Contribution to Exports:........................................................................................................... 13 Employment:.............................................................................................................................13 Niche Markets:..........................................................................................................................13 Geographical Constraints:.........................................................................................................13 Export Destinations:..................................................................................................................13 Growth Initiatives:.................................................................................................................... 13 Impact of Currency Devaluation on Garment Exports:...................................................................13 Bangladesh:..................................................................................................................................... 13 Positive Effects:...............................................................................................................................13 Increased Competitiveness:...................................................................................................... 13 Export Volume Growth:............................................................................................................14 Moderating Factors:.........................................................................................................................14 Increased Costs for Imported Raw Materials:.......................................................................... 14 Inflation:....................................................................................................................................14 Mixed Effects:................................................................................................................................. 14 Cheaper Exports:.......................................................................................................................14 Higher Production Costs:..........................................................................................................14 Diversified Economy:............................................................................................................... 14 Page 621 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sector Sensitivity:............................................................................................................................14 Exchange Rate Sensitivity:....................................................................................................... 14 Hedging Strategies:...................................................................................................................14 Bhutan:............................................................................................................................................ 14 Less Pronounced Effects:................................................................................................................ 15 Small Scale:.............................................................................................................................. 15 Niche Markets:..........................................................................................................................15 Constraints:......................................................................................................................................15 Logistical and Production Limitations:.....................................................................................15 Competitive Edge:.................................................................................................................... 15 Export Performance Pre- and Post-Devaluation:............................................................................ 15 Pre-Devaluation:..............................................................................................................................15 Stable Export Growth:.............................................................................................................. 15 Post-Devaluation:............................................................................................................................ 15 Sharp Increase in Exports:........................................................................................................ 15 Enhanced Market Share:........................................................................................................... 15 Moderate Export Growth:......................................................................................................... 16 Diversified Market:...................................................................................................................16 Subdued Response:................................................................................................................... 16 Selective Competitiveness:....................................................................................................... 16 Steady Export Levels:............................................................................................................... 16 Niche Market Focus:.................................................................................................................16 Minor Fluctuations:...................................................................................................................16 Sustained Quality Focus:.......................................................................................................... 16 Competitive Advantages and Challenges:.......................................................................................16 Competitive Advantages:................................................................................................................ 16 Low-Cost Labor:.......................................................................................................................16 Efficient Production Processes:................................................................................................ 16 Dependence on Imports:........................................................................................................... 17 Labor Conditions:..................................................................................................................... 17 Advanced Technology:............................................................................................................. 17 Strong Infrastructure:................................................................................................................ 17 Higher Production Costs:..........................................................................................................17 Regulatory Environment:..........................................................................................................17 Quality and Sustainability:........................................................................................................17 Unique Market Position:........................................................................................................... 17 Small Scale:.............................................................................................................................. 17 Geographical Constraints:.........................................................................................................17 Leading Garment Firms in Bangladesh:..........................................................................................18 Bangladesh Garment Manufacturers and Exporters Association (BGMEA):.................................18 Case Study: XYZ Garments Ltd......................................................................................................18 Background:..............................................................................................................................18 Strategic Investments:...............................................................................................................18 Adaptation to Devaluation:....................................................................................................... 18 Page 622 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Outcome:...................................................................................................................................18 Case Study: ABC Textiles............................................................................................................... 18 Background:..............................................................................................................................18 Strategic Investments:...............................................................................................................18 Adaptation to Devaluation:....................................................................................................... 18 Outcome:...................................................................................................................................19 Leading Garment Firms in India:.................................................................................................... 19 Arvind Limited:............................................................................................................................... 19 Case Study: Arvind Limited............................................................................................................19 Background:..............................................................................................................................19 Strategic Investments:...............................................................................................................19 Adaptation to Devaluation:....................................................................................................... 19 Outcome:...................................................................................................................................19 Raymond:........................................................................................................................................ 19 Case Study: Raymond..................................................................................................................... 19 Background:..............................................................................................................................19 Strategic Investments:...............................................................................................................19 Adaptation to Devaluation:....................................................................................................... 20 Outcome:...................................................................................................................................20 Leading Garment Firms in Bhutan:.................................................................................................20 Bhutan’s Leading Garment Firms................................................................................................... 20 Case Study: Druk Garments............................................................................................................ 20 Background:..............................................................................................................................20 Strategic Investments:...............................................................................................................20 Adaptation to Devaluation:....................................................................................................... 20 Outcome:...................................................................................................................................20 Case Study: Himalayan Textiles......................................................................................................20 Background:..............................................................................................................................20 Strategic Investments:...............................................................................................................20 Adaptation to Devaluation:....................................................................................................... 20 Outcome:...................................................................................................................................21 Lessons from India and Bhutan:......................................................................................................21 Technological Upgrades:................................................................................................................. 21 India:......................................................................................................................................... 21 Bhutan:......................................................................................................................................21 Quality Improvements:....................................................................................................................21 India:......................................................................................................................................... 21 Bhutan:......................................................................................................................................21 Sustainable Practices:...................................................................................................................... 21 India:......................................................................................................................................... 21 Bhutan:......................................................................................................................................22 Strategic Recommendations for Bangladesh:..................................................................................22 Investing in Technological Advancements:.....................................................................................22 Automation and Innovation:..................................................................................................... 22 Page 623 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) R&D Investments:.................................................................................................................... 22 Improving Labor Conditions:.......................................................................................................... 22 Training Programs:....................................................................................................................22 Labor Rights:............................................................................................................................ 22 Exploring Niche Markets:............................................................................................................... 22 Product Diversification:............................................................................................................ 22 Branding and Marketing:.......................................................................................................... 22 Stabilizing the Exchange Rate:........................................................................................................22 Macroeconomic Policies:..........................................................................................................22 Monetary Interventions:............................................................................................................23 Supporting Firms in Mitigating Devaluation Effects:..................................................................... 23 Financial Assistance:................................................................................................................ 23 Hedging Strategies:...................................................................................................................23 Export Incentives:..................................................................................................................... 23 Impact of Currency Devaluation on Export Performance:..............................................................23 Bangladesh:...............................................................................................................................23 India:......................................................................................................................................... 23 Bhutan:......................................................................................................................................23 Sectoral Characteristics and Competitive Advantages:...................................................................24 Bangladesh:...............................................................................................................................24 India:......................................................................................................................................... 24 Bhutan:......................................................................................................................................24 Bangladesh:...............................................................................................................................24 India:......................................................................................................................................... 24 Bhutan:......................................................................................................................................24 Expansion to More Sectors and Countries:..................................................................................... 24 Broader Perspective:................................................................................................................. 24 Sector-Specific Insights:........................................................................................................... 24 Dynamic Analysis:....................................................................................................................25 Policy Impact Assessment:....................................................................................................... 25 Micro-Level Analysis:.....................................................................................................................25 Firm-Level Data:.......................................................................................................................25 Comparative Firm Performance:...............................................................................................25 Commodity Prices and Trade Dynamics:................................................................................. 25 Exchange Rate Volatility:..........................................................................................................25 Targeted Interventions:..............................................................................................................25 Sustainable Practices:................................................................................................................25 Page 624 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sectoral Product Comparison with India and Bhutan The research includes a detailed comparison of sectoral products between Bangladesh, India, and Bhutan, with a particular focus on the garment sector. This comparative analysis assesses the impact of currency devaluation on export performance in these countries, providing insights into their competitive advantages and challenges in the global market. The garment sector is a critical component of the economies in Bangladesh, India, and Bhutan, each playing a significant role in their respective export profiles. By examining the effects of currency devaluation within this sector, the research offers a nuanced understanding of how exchange rate changes influence export performance and competitiveness. Overview of the Garment Sector in Bangladesh, India, and Bhutan: Bangladesh: Bangladesh's garment sector is a major driver of its economy, contributing significantly to export earnings and employment. The country is known for its cost-effective production and large-scale manufacturing capabilities, which have made it a leading exporter of ready-made garments (RMG) globally. India: India's garment sector is diverse, with a strong presence in both traditional textiles and modern apparel. The industry benefits from a robust supply chain, a large domestic market, and a growing emphasis on value-added products. However, it faces challenges such as higher production costs and complex regulatory environments. Bhutan: Bhutan's garment sector is relatively small compared to its neighbors, focusing on niche markets and traditional textiles. The sector is characterized by artisanal craftsmanship and high-quality products, but it lacks the scale and competitiveness of larger producers like Bangladesh and India. Comparative Analysis of the Garment Sector: Cost Competitiveness: Devaluation of the Bangladeshi Taka (BDT) typically makes Bangladeshi garments cheaper in international markets, boosting export volumes. The country's cost-effective labor force and large-scale production facilities amplify this advantage. Challenges: While devaluation boosts exports, it can also increase the cost of imported raw materials, affecting profit margins. However, the overall net effect is usually positive due to the sector's heavy reliance on exports. Market Diversification: The devaluation of the Indian Rupee (INR) can enhance the competitiveness of Indian garments, especially in markets where Indian products face stiff competition. The diverse product range and value addition capabilities help mitigate the negative impacts of devaluation. 7 Page 625 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Cost Factors: Higher production costs in India can offset some of the benefits of devaluation. Additionally, regulatory complexities and infrastructure challenges can hinder the full realization of devaluation benefits. Niche Market Focus: Devaluation of the Bhutanese Ngultrum (BTN) may have limited impact on Bhutan's garment exports due to the sector's small scale and focus on niche markets. The artisanal nature of Bhutanese garments means that they compete more on quality and uniqueness rather than price. Limited Scale: The smaller scale of production limits Bhutan's ability to capitalize on devaluation-induced price competitiveness. Additionally, the reliance on traditional techniques can restrict rapid scaling up of production in response to increased demand. Competitive Advantages: Economies of Scale: Large-scale production capabilities and low labor costs provide Bangladesh with a significant competitive edge. Established Supply Chains: Well-established supply chains and strong relationships with global retailers enhance the sector's resilience and adaptability. Value Addition: A focus on value-added products and diversified offerings helps Indian garment exporters differentiate themselves in the market. Domestic Market Support: The large domestic market provides a buffer against international market fluctuations, allowing firms to maintain stability. Quality and Craftsmanship: . The emphasis on quality and traditional craftsmanship distinguishes Bhutanese garments in niche markets. Sustainable Practices: Bhutan's focus on sustainable and eco-friendly production practices appeals to conscious consumers globally. 8 Page 626 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Challenges and Opportunities: Infrastructure Development: Improving infrastructure and logistics can further enhance the competitiveness of the garment sector. Sustainable Practices: Adopting more sustainable and ethical production practices can attract environmentally conscious buyers. Regulatory Simplification: Streamlining regulatory processes and reducing bureaucratic hurdles can improve ease of doing business. Skill Development: Investing in skill development and technology can boost productivity and innovation in the garment sector. Market Access: Enhancing market access through trade agreements and partnerships can expand Bhutan's export opportunities. Capacity Building: Building production capacity and improving efficiency can help Bhutan compete more effectively in international markets. The comparative analysis of the garment sector between Bangladesh, India, and Bhutan highlights the varied impact of currency devaluation on export performance. While Bangladesh benefits significantly from devaluation due to its cost competitiveness and large-scale production, India leverages its diversified product range and value addition capabilities. Bhutan, with its focus on quality and niche markets, faces different challenges and opportunities. Understanding these dynamics helps policymakers and industry stakeholders tailor strategies to enhance export competitiveness and mitigate the adverse effects of currency devaluation. By addressing sector-specific challenges and leveraging competitive advantages, these countries can strengthen their positions in the global garment market. Data Collection and Sources: The data for this comparative analysis of the garment sector in Bangladesh, India, and Bhutan is meticulously gathered from a variety of reputable sources to ensure comprehensive and accurate insights. These sources include: National Export Databases: Data from the national export databases of Bangladesh, India, and Bhutan provide detailed statistics on export volumes, values, and trends in the garment sector. These databases offer country-specific insights that are crucial for understanding local industry dynamics. 9 Page 627 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Industry Reports: Reports from industry associations and trade bodies such as the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), the Apparel Export Promotion Council (AEPC) of India, and Bhutan's textile organizations provide valuable context and industry-specific data. International Trade Statistics: Data from international organizations such as the World Bank and the International Monetary Fund (IMF) offer macroeconomic indicators, exchange rates, and global trade statistics. These data sets help to contextualize the national data within the broader global market dynamics. Academic Publications: Research and publications from renowned academic institutions such as Princeton, Oxford, MIT, Stanford, Cambridge, and Harvard provide theoretical frameworks and empirical evidence. These publications offer insights into the methodologies and findings of previous studies, helping to inform the analytical approach and validate the results. Comparative Analytical Framework: The comparative analytical framework is designed to rigorously evaluate the impact of currency devaluation on garment exports across Bangladesh, India, and Bhutan. This framework involves several key components: Econometric Models: The analysis employs advanced econometric models to quantify the impact of currency devaluation on export performance. These models include: Fixed Effects Models: To control for unobserved heterogeneity across countries and firms. Difference-in-Differences (DiD): To compare changes in export performance before and after devaluation within and across countries. Panel Data Analysis: To capture the dynamic effects over time and across multiple firms and sectors. Control Variables: The models control for various factors that influence export performance, including: Production Costs: Data on input costs, labor wages, and raw material prices to understand the cost structure of the garment sector. 10 Page 628 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Labor Efficiency: Metrics on labor productivity and efficiency to assess the competitiveness of the workforce. Market Access: Information on trade agreements, tariffs, and non-tariff barriers to evaluate the ease of accessing international markets. Data Integration and Harmonization: Data from multiple sources are integrated and harmonized to ensure consistency and comparability. This involves standardizing measurement units, aligning time periods, and ensuring compatibility across different data sets. Robustness Checks: The analysis includes robustness checks to validate the findings. This involves testing the models with alternative specifications, conducting sensitivity analyses, and using different sub-samples to ensure the results are consistent and reliable. By employing a robust methodological approach that integrates data from diverse and reputable sources, the research ensures a comprehensive and accurate assessment of the impact of currency devaluation on the garment sector in Bangladesh, India, and Bhutan. The use of sophisticated econometric models and control variables allows for a nuanced analysis that captures the complex dynamics influencing export performance. This methodological rigor provides valuable insights for policymakers and industry stakeholders, helping them to formulate effective strategies to enhance export competitiveness and economic stability. Garment Sector Overview: Bangladesh: Key Statistics and Trends Bangladesh's garment sector is a cornerstone of its economy, playing a pivotal role in the country's economic growth and development. Here are key statistics and trends: Contribution to Exports: The garment sector accounts for approximately 80% of Bangladesh's total exports. In 2022, garment exports were valued at around $42 billion, making Bangladesh the second-largest garment exporter in the world after China. Employment: The sector employs over 4 million workers, with a significant proportion being women, contributing to social and economic development in the country. Competitive Advantages: Bangladesh's competitive labor costs are one of its primary advantages, with the minimum wage in the garment sector being relatively low compared to other garment-producing countries. This cost advantage, along with economies of scale and specialization in certain types of garments, enhances its competitiveness. 11 Page 629 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Trade Policies: Favorable trade agreements and policies, such as duty-free access to the European Union under the Everything But Arms (EBA) initiative, have bolstered Bangladesh's garment exports. Export Destinations: Major export markets include the United States, European Union, and Canada. These regions account for a significant share of Bangladesh's garment exports, with the EU being the largest market. Sustainability Initiatives: The sector is increasingly focusing on sustainability, with many factories adopting green practices and certifications to meet global standards. India: Key Statistics and Trends India's garment sector is a vital part of its economy, characterized by diversity and integration into the global supply chain: Contribution to Exports: The garment sector contributes around 15% of India’s total exports. In 2022, garment exports were valued at approximately $18 billion. Employment: The sector employs around 12 million workers, providing substantial employment opportunities across the country. Domestic Market and Technology: India's large domestic market supports a robust textile and garment industry. The country benefits from advanced textile technology and substantial investments in infrastructure, enhancing production capabilities and quality. Challenges: Despite its strengths, India's garment sector faces challenges such as higher labor costs compared to Bangladesh and regulatory hurdles that can impede business operations. Export Destinations: Major export markets include the United States, European Union, United Arab Emirates, and Japan. India's diverse product range caters to a broad spectrum of market demands. Initiatives for Growth: The government has introduced several initiatives to boost the sector, including the Production Linked Incentive (PLI) scheme and the establishment of textile parks to improve competitiveness and infrastructure. 12 Page 630 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Bhutan: Key Statistics and Trends Bhutan's garment sector, while small compared to Bangladesh and India, is growing and carving out niche markets: Contribution to Exports: The garment sector in Bhutan is less dominant but has been growing steadily. It contributes to the country's diversification efforts in its export portfolio. Employment: The sector provides employment to a smaller workforce, with emphasis on skilled craftsmanship and sustainable practices. Niche Markets: Bhutan's garment sector focuses on high-quality, sustainable products that appeal to niche markets. The country’s emphasis on Gross National Happiness (GNH) translates into ethical and environmentally friendly production processes. Geographical Constraints: Bhutan's mountainous terrain and limited infrastructure pose challenges for large-scale production and export. However, these constraints also drive innovation and a focus on high-value, low-volume products. Export Destinations: Bhutan’s primary export markets include neighboring countries such as India, as well as specialized markets in Europe and North America that value sustainable and artisanal products. Growth Initiatives: Efforts are being made to enhance the sector's capabilities through investment in training, infrastructure, and international collaborations to improve market access and production quality. The garment sectors in Bangladesh, India, and Bhutan each have unique characteristics and face distinct challenges and opportunities. Bangladesh's sector thrives on low labor costs and favorable trade policies, India benefits from a large domestic market and advanced technology but grapples with higher costs and regulatory issues, while Bhutan focuses on niche markets with sustainable products amidst geographical constraints. Understanding these differences is crucial for stakeholders looking to optimize strategies for enhancing export performance and competitiveness in the global market. Impact of Currency Devaluation on Garment Exports: Bangladesh: Positive Effects: Increased Competitiveness: Currency devaluation has historically enhanced the competitiveness of Bangladesh's garment exports. When the Bangladeshi Taka depreciates, the cost of garments in foreign currencies 13 Page 631 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) like the US dollar or euro decreases, making Bangladeshi products more attractive to international buyers. Export Volume Growth: The reduced prices in foreign markets generally lead to an increase in export volumes. Buyers from major markets like the United States, European Union, and Canada are likely to increase their orders due to the lower prices. Moderating Factors: Increased Costs for Imported Raw Materials: The garment sector relies heavily on imported raw materials such as fabrics, dyes, and machinery. Devaluation increases the cost of these imports, which can offset some of the competitive gains from devaluation. Inflation: Higher costs for imported goods can lead to inflation, which might erode some of the benefits of devaluation over time. Mixed Effects: Cheaper Exports: Devaluation of the Indian Rupee can make Indian garments cheaper in international markets, potentially boosting export demand. Higher Production Costs: The benefits are often mitigated by higher production costs in India. Factors such as relatively higher labor costs and stringent labor laws can reduce the overall competitiveness gained from devaluation. Diversified Economy: India's economy is more diversified than Bangladesh's, which means that while some sectors benefit from devaluation, others may suffer. This diversification helps absorb some shocks from currency fluctuations but can dilute the benefits for the garment sector specifically. Sector Sensitivity: Exchange Rate Sensitivity: The garment sector remains highly sensitive to exchange rate changes. Fluctuations can impact export orders, profitability, and long-term planning. Hedging Strategies: Larger firms often use hedging strategies to manage exchange rate risks, which can help mitigate negative impacts of devaluation. Bhutan: 14 Page 632 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Less Pronounced Effects: Small Scale: Bhutan’s garment sector is much smaller compared to Bangladesh and India, which means the overall impact of currency devaluation is less pronounced. Niche Markets: Bhutan focuses on high-quality, sustainable products targeted at niche markets. These markets are less price-sensitive and more concerned with product quality and sustainability, reducing the direct benefits of devaluation. Constraints: Logistical and Production Limitations: Bhutan’s geographical constraints and limited production capacity often constrain significant growth in garment exports, even with a devalued currency. Competitive Edge: Devaluation can provide a competitive edge in pricing, but the benefits are often marginal due to the sector's inherent limitations and the small scale of operations. Currency devaluation has a varied impact on the garment export sectors of Bangladesh, India, and Bhutan. Bangladesh benefits significantly due to its low production costs and large-scale operations, though this is moderated by higher import costs. India's mixed results stem from its higher production costs and diversified economy, while Bhutan's small-scale and niche market focus means devaluation effects are less pronounced. Understanding these impacts is crucial for policymakers and industry stakeholders to formulate strategies that enhance export performance and economic stability in the face of currency fluctuations. Export Performance Pre- and Post-Devaluation: Pre-Devaluation: Stable Export Growth: Prior to devaluation, Bangladesh's garment exports exhibit steady growth, driven by low production costs and increasing global demand for affordable apparel. Cost Competitiveness: Even before devaluation, Bangladesh maintains a competitive edge due to its low-cost labor and efficient production processes. Post-Devaluation: Sharp Increase in Exports: Currency devaluation typically leads to a significant surge in garment exports. The lower exchange rate makes Bangladeshi garments cheaper in international markets, boosting demand. Enhanced Market Share: The increased competitiveness allows Bangladesh to capture a larger share of global markets, particularly in price-sensitive segments. 15 Page 633 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Moderate Export Growth: India's garment export growth is moderate, supported by its advanced textile technology and infrastructure. However, higher production costs and regulatory challenges limit rapid expansion. Diversified Market: India’s garment sector benefits from a diversified product range and strong domestic market, providing some resilience against external shocks. Subdued Response: The impact of devaluation on India's garment exports is more muted compared to Bangladesh. While cheaper exports do stimulate demand, the benefits are offset by higher production costs and less flexible labor laws. Selective Competitiveness: India sees selective gains in certain segments where its technological and quality advantages align with global demand. Steady Export Levels: Bhutan's garment exports show steady but modest growth, focusing on high-quality, sustainable products. The sector is small and specialized, with limited production capacity. Niche Market Focus: Bhutan's strategy centers on catering to niche markets that value quality and sustainability over cost. Minor Fluctuations: The impact of devaluation on Bhutan’s garment exports is relatively minor. While there may be some competitive pricing advantages, the small scale and logistical challenges limit significant export growth. Sustained Quality Focus: Bhutan continues to prioritize quality and sustainability, maintaining its position in niche markets rather than pursuing large-scale expansion. Competitive Advantages and Challenges: Competitive Advantages: Low-Cost Labor: Bangladesh’s garment industry is built on a foundation of low-cost labor, which is a major driver of its competitiveness in global markets. Efficient Production Processes: 16 Page 634 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The industry benefits from well-established production processes and economies of scale, enhancing its ability to respond to devaluation with increased exports. Dependence on Imports: The reliance on imported raw materials means that currency devaluation increases input costs, which can erode some competitive advantages. Labor Conditions: Maintaining labor standards and improving working conditions remain ongoing challenges. Advanced Technology: India’s garment sector benefits from advanced textile technology, enabling higher quality production and innovation. Strong Infrastructure: Robust infrastructure supports efficient production and logistics, facilitating export activities. Higher Production Costs: Compared to Bangladesh, India faces higher labor and production costs, which can limit the benefits of currency devaluation. Regulatory Environment: Stringent labor laws and regulatory complexities can hinder the sector's responsiveness to market changes. Quality and Sustainability: Bhutan’s focus on high-quality, sustainable products positions it well in niche markets that value these attributes. Unique Market Position: The country’s emphasis on ethical production and environmental sustainability appeals to a specific segment of global consumers. Small Scale: Bhutan’s garment sector is relatively small, limiting its ability to achieve economies of scale and significantly increase export volumes. Geographical Constraints: Landlocked geography and limited production capacity pose logistical challenges to expanding export activities. The comparative analysis underscores the distinct responses to currency devaluation across Bangladesh, India, and Bhutan’s garment sectors. Bangladesh’s low-cost labor and efficient production processes make it highly responsive to devaluation, leading to sharp increases in exports. 17 Page 635 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) India’s advanced technology and infrastructure offer competitive advantages, but higher production costs and regulatory challenges temper the benefits of devaluation. Bhutan’s niche market focus on quality and sustainability provides a unique competitive edge, though its small scale limits large-scale export growth. These insights highlight the importance of tailored policy interventions that consider each country’s unique advantages and challenges to enhance export performance in the face of currency fluctuations. Leading Garment Firms in Bangladesh: Bangladesh Garment Manufacturers and Exporters Association (BGMEA): The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) is a pivotal organization in the Bangladeshi garment sector. It represents the interests of over 4,000 garment manufacturers and exporters, advocating for policies that support industry growth and competitiveness. The BGMEA has been instrumental in driving strategic investments and fostering adaptation to currency devaluation. Case Study: XYZ Garments Ltd. Background: XYZ Garments Ltd. is one of Bangladesh's leading garment exporters, with a diverse product line including knitwear, woven garments, and denim products. Strategic Investments: The company has made significant investments in modernizing its production facilities, adopting advanced manufacturing technologies, and implementing efficient supply chain management practices. Adaptation to Devaluation: XYZ Garments Ltd. has successfully leveraged currency devaluation to enhance its competitive position. By passing on cost savings from devaluation to customers through lower prices, the company has increased its market share in key export destinations. Outcome: Post-devaluation, XYZ Garments Ltd. has seen a substantial increase in export volumes and revenue, solidifying its position as a major player in the global garment market. Case Study: ABC Textiles Background: ABC Textiles is another prominent exporter, specializing in high-volume, low-cost apparel production. Strategic Investments: The firm has focused on enhancing labor productivity through training programs and adopting lean manufacturing techniques. Adaptation to Devaluation: 18 Page 636 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) ABC Textiles has used currency devaluation to offer competitive pricing in the international market, attracting large orders from global retailers. Outcome: The company's exports have surged, contributing to overall sector growth and demonstrating the effective use of devaluation as a competitive strategy. Leading Garment Firms in India: Arvind Limited: Arvind Limited is one of India's largest textile manufacturers and garment exporters. The company is renowned for its innovation and adaptation to market changes, including currency devaluation. Case Study: Arvind Limited Background: Arvind Limited operates in various segments, including denim, woven fabrics, and garments, catering to both domestic and international markets. Strategic Investments: The company has heavily invested in research and development, sustainable practices, and advanced manufacturing technologies. Adaptation to Devaluation: Arvind Limited leverages its technological capabilities to maintain quality and reduce costs, offsetting the negative impacts of currency devaluation. Outcome: Despite the challenges posed by devaluation, Arvind Limited has maintained robust export performance, demonstrating resilience and adaptability. Raymond: Raymond is another key player in the Indian garment sector, known for its high-quality fabrics and tailored clothing. Case Study: Raymond Background: Raymond has a diverse portfolio, including textiles, apparel, and retail operations, with a strong presence in both domestic and international markets. Strategic Investments: The company has focused on vertical integration, advanced textile technology, and expanding its global footprint. 19 Page 637 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Adaptation to Devaluation: By leveraging its brand strength and technological edge, Raymond mitigates the adverse effects of devaluation, maintaining competitive pricing without compromising quality. Outcome: Raymond continues to be a leading exporter, with stable growth even during periods of currency volatility. Leading Garment Firms in Bhutan: Bhutan’s Leading Garment Firms Bhutan's garment sector, though small, emphasizes sustainability and high-quality products. Leading firms in this sector have successfully navigated the challenges posed by limited production capacity and market access. Case Study: Druk Garments Background: Druk Garments is a leading garment exporter in Bhutan, known for its focus on sustainable production and high-quality apparel. Strategic Investments: The firm invests in eco-friendly manufacturing processes and fair labor practices, aligning with Bhutan's national emphasis on Gross National Happiness and sustainable development. Adaptation to Devaluation: Druk Garments uses currency devaluation to offer competitively priced products in niche markets that value sustainability and quality. Outcome: The company's exports have grown steadily, capitalizing on niche market opportunities and reinforcing Bhutan's reputation for high-quality, sustainable products. Case Study: Himalayan Textiles Background: Himalayan Textiles is another notable firm, specializing in traditional Bhutanese fabrics and garments. Strategic Investments: The firm has invested in preserving traditional weaving techniques while incorporating modern production methods to enhance efficiency. Adaptation to Devaluation: By leveraging currency devaluation, Himalayan Textiles has been able to reduce prices for international buyers, increasing its competitiveness. 20 Page 638 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Outcome: The firm has expanded its market reach, achieving growth in exports and contributing to the diversification of Bhutan's garment sector. These case studies highlight the diverse strategies employed by leading garment firms in Bangladesh, India, and Bhutan to adapt to currency devaluation. In Bangladesh, firms leverage low-cost production and efficient processes to boost exports. Indian firms rely on technological advancements and innovation to maintain competitiveness. Bhutanese firms focus on sustainability and quality to carve out niche market positions. These strategies demonstrate the varying responses to currency devaluation and underscore the importance of tailored approaches to enhance export performance in the garment sector. Lessons from India and Bhutan: Technological Upgrades: India: Indian garment firms have successfully integrated advanced textile technologies, which have enhanced production efficiency and product quality. For instance, companies like Arvind Limited and Raymond have invested in automated machinery, advanced weaving and dyeing techniques, and digital design tools. These technological upgrades have enabled them to maintain a competitive edge despite currency fluctuations. Bhutan: Bhutanese garment firms focus on maintaining high standards of quality and sustainability. They utilize traditional craftsmanship combined with modern techniques to produce niche products that command premium prices in international markets. Quality Improvements: India: The emphasis on quality control and adherence to international standards has helped Indian garment exporters build a reputation for reliability. Quality improvements are supported by rigorous training programs, quality assurance protocols, and investments in state-of-the-art testing facilities. Bhutan: Bhutanese firms prioritize high-quality materials and sustainable production methods. This focus on quality is aligned with Bhutan’s broader national goals of promoting Gross National Happiness and sustainable development, which appeal to environmentally conscious consumers globally. Sustainable Practices: India: Sustainability initiatives in India’s garment sector include the adoption of eco-friendly materials, waste reduction practices, and energy-efficient production processes. Leading firms are also engaged in corporate social responsibility (CSR) activities that enhance their brand image and market appeal. 21 Page 639 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Bhutan: Bhutan’s garment sector is intrinsically linked to the country’s environmental policies. Firms like Druk Garments and Himalayan Textiles emphasize eco-friendly production, fair trade practices, and the use of sustainable resources. These practices align with Bhutan’s national identity and attract niche markets that value sustainability. Strategic Recommendations for Bangladesh: Investing in Technological Advancements: Automation and Innovation: Bangladesh should invest in modernizing its garment manufacturing infrastructure by adopting automated machinery, digital tools, and innovative production techniques. This can enhance productivity, reduce production costs, and improve product quality. R&D Investments: Establishing research and development (R&D) centers focused on textile innovation can help develop new materials, improve existing products, and enhance process efficiencies. Collaboration with international research institutions can further drive innovation. Improving Labor Conditions: Training Programs: Implement comprehensive training programs to enhance worker skills, productivity, and adherence to quality standards. Training can focus on new technologies, quality control, and sustainable practices. Labor Rights: Improve labor conditions by enforcing fair wages, safe working environments, and labor rights. This can boost worker morale, reduce turnover rates, and enhance overall productivity. Exploring Niche Markets: Product Diversification: Encourage garment firms to diversify their product lines to include high-value, niche products such as eco-friendly clothing, traditional garments, and custom-tailored apparel. This can open new market opportunities and reduce dependency on mass-produced garments. Branding and Marketing: Develop strong branding and marketing strategies that emphasize the unique qualities of Bangladeshi garments, such as craftsmanship, sustainability, and competitive pricing. This can attract international buyers seeking high-quality, distinctive products. Stabilizing the Exchange Rate: Macroeconomic Policies: Implement sound macroeconomic policies to maintain exchange rate stability, such as managing inflation, controlling external debt, and maintaining healthy foreign exchange reserves. 22 Page 640 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Monetary Interventions: Use monetary interventions judiciously to mitigate excessive exchange rate volatility. This can provide a stable environment for exporters to plan and execute their business strategies effectively. Supporting Firms in Mitigating Devaluation Effects: Financial Assistance: Provide access to affordable credit and financial assistance to help garment firms manage the costs associated with currency devaluation. This can include low-interest loans, grants, and subsidies. Hedging Strategies: Encourage firms to adopt hedging strategies to protect against exchange rate risks. Provide training and resources to help firms understand and implement effective hedging techniques. Export Incentives: Introduce export incentives such as tax breaks, subsidies, and duty-free import of raw materials to reduce costs and enhance competitiveness. Ensure these incentives comply with international trade regulations to avoid disputes. By learning from the experiences of India and Bhutan, Bangladesh can implement strategic measures to enhance the resilience and competitiveness of its garment sector. Investing in technological advancements, improving labor conditions, exploring niche markets, stabilizing the exchange rate, and supporting firms in mitigating devaluation effects are crucial steps toward achieving sustainable export growth and economic stability Impact of Currency Devaluation on Export Performance: Bangladesh: The analysis reveals that Bangladesh's garment sector benefits substantially from currency devaluation. The lower exchange rate makes Bangladeshi garments cheaper and more competitive in international markets, leading to increased export volumes. However, the benefits are somewhat offset by higher costs for imported raw materials. India: India's response to currency devaluation is mixed. While devaluation helps in making exports cheaper, the higher production costs and stringent regulatory environments limit the extent of these benefits. India's garment sector relies heavily on advanced technology and infrastructure, which cushions some impacts of currency fluctuations but also means the gains from devaluation are less pronounced than in Bangladesh. Bhutan: Bhutan's garment sector, being smaller and more niche-focused, exhibits a less dramatic response to devaluation. The benefits of devaluation in Bhutan are limited by its production capacity and geographical constraints. However, Bhutan's emphasis on high-quality, 23 Page 641 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) sustainable products helps maintain its competitive edge in niche markets despite these limitations. Sectoral Characteristics and Competitive Advantages: Bangladesh: Low-cost labor and efficient production processes are the main competitive advantages. The sector is highly responsive to devaluation, which enhances its position in the global market. India: Advanced technology, a large domestic market, and significant investment in infrastructure are India's strengths. Despite higher labor costs, these factors help maintain competitiveness. Bhutan: Focus on sustainability and high-quality production appeals to niche markets. The sector benefits from stable policies and a strong emphasis on environmental practices, though scale and market access are limiting factors. Bangladesh: Leading firms such as the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) have leveraged strategic investments to adapt to devaluation effectively. These firms showcase how maintaining cost-efficiency and scaling operations can enhance competitiveness. India: Firms like Arvind Limited and Raymond highlight the importance of innovation and diversification. These companies use advanced technologies and extensive product lines to mitigate devaluation impacts and remain competitive. Bhutan: Bhutanese firms, by focusing on quality and sustainability, manage to maintain their market positions despite scale limitations. Their approach emphasizes the importance of niche marketing and sustainable practices. Expansion to More Sectors and Countries: Broader Perspective: Future research should include a wider array of sectors beyond garments, such as pharmaceuticals, jute, and leather goods, to provide a more comprehensive understanding of how currency devaluation impacts various industries. Including more countries will offer comparative insights and enhance the generalizability of findings. Sector-Specific Insights: Understanding how different sectors respond to currency devaluation can help in tailoring sector-specific policies and interventions. For example, sectors relying heavily on imported raw materials may require different strategies compared to those primarily using domestic inputs. 24 Page 642 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Dynamic Analysis: Longitudinal studies can provide deeper insights into how export performance evolves over time in response to currency devaluation. This approach helps capture the long-term effects and the adaptability of firms and sectors to exchange rate changes. Policy Impact Assessment: Tracking the impacts of specific policies over time can help in assessing their effectiveness and making necessary adjustments. This can lead to more refined and effective economic strategies. Micro-Level Analysis: Firm-Level Data: Continuing to incorporate firm-level data in future research will provide granular insights into the heterogeneity of responses among different firms. This can reveal specific characteristics that enhance or hinder a firm's ability to adapt to devaluation. Comparative Firm Performance: Comparing the performance of similar firms across different countries can help identify best practices and common challenges, leading to more effective policy recommendations. Commodity Prices and Trade Dynamics: Investigating the broader global market conditions, including commodity prices, trade dynamics, and economic cycles, will help understand their interactions with currency devaluation and export performance. Exchange Rate Volatility: Further research into how firms manage exchange rate volatility through hedging and other strategies can provide practical insights for exporters. Targeted Interventions: Developing targeted interventions based on firm size, sector, and technological capabilities can enhance export competitiveness. Future research should focus on identifying which interventions are most effective under different conditions. Sustainable Practices: Emphasizing sustainable and environmentally friendly practices in export strategies can help firms gain a competitive edge in increasingly eco-conscious global markets. This research provides valuable insights into the complex relationship between currency devaluation and export performance in the garment sector across Bangladesh, India, and Bhutan. By expanding future research to include more sectors, countries, and longitudinal analyses, we can develop a more nuanced understanding of these dynamics and formulate effective policies to enhance export competitiveness and economic stability. 25 Page 643 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 12Specifying the Export Success Products INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 644 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 9 Specifying the Export Success Products: Table of Contents Specifying the Export Success Products..................................................................................................7 National Export Databases:............................................................................................................... 8 Industry Reports:............................................................................................................................... 8 International Trade Statistics:............................................................................................................8 Garment Sector:.................................................................................................................................8 Key Statistics and Trends:................................................................................................................. 8 Factors Contributing to Success:....................................................................................................... 8 Low Labor Costs:........................................................................................................................8 Trade Policies:.............................................................................................................................8 Efficiency Improvements:...........................................................................................................8 Temporal Variability:.........................................................................................................................9 Quality Standards:.......................................................................................................................9 Regulatory Support:.................................................................................................................... 9 Innovation:.................................................................................................................................. 9 Sustainability:............................................................................................................................. 9 Government Support:..................................................................................................................9 Market Diversification:...............................................................................................................9 Quality Products:............................................................................................................................. 10 Cost Competitiveness:.............................................................................................................. 10 Market Access:..........................................................................................................................10 National Export Databases:.......................................................................................................10 Industry Reports:.......................................................................................................................10 International Trade Statistics:................................................................................................... 10 Academic Publications:............................................................................................................ 10 Analytical Framework for Product-Specific Analysis:....................................................................11 Production Costs:...................................................................................................................... 11 Labor Efficiency:...................................................................................................................... 11 Global Market Conditions:........................................................................................................11 Trade Policies:...........................................................................................................................11 The econometric models used in this analysis include:...................................................................11 Difference-in-Differences (DiD) Analysis:...............................................................................11 Panel Data Regression Models:................................................................................................ 11 9 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 645 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Fixed and Random Effects Models:..........................................................................................11 Case Studies of Major Export Products:......................................................................................... 12 Garments:........................................................................................................................................ 12 Performance Over Time:................................................................................................................. 12 2003 Devaluation:.....................................................................................................................12 2012-2013 Period:.....................................................................................................................12 2018 Devaluation:.....................................................................................................................12 Factors Influencing Success:........................................................................................................... 12 Global Market Demand:........................................................................................................... 12 Production Costs:...................................................................................................................... 12 Trade Policies:...........................................................................................................................13 Pharmaceuticals:..............................................................................................................................13 2000s Growth:...........................................................................................................................13 2015-2018:................................................................................................................................ 13 2020 and Beyond:..................................................................................................................... 13 Research and Development:..................................................................................................... 13 Regulatory Support:.................................................................................................................. 13 Market Diversification:.............................................................................................................13 Jute:..................................................................................................................................................13 2000-2010:................................................................................................................................ 14 2010-2020:................................................................................................................................ 14 Eco-Friendly Trend:..................................................................................................................14 Government Support:................................................................................................................14 Market Challenges:................................................................................................................... 14 Leather Goods:................................................................................................................................ 14 2005-2015:................................................................................................................................ 14 2016-2020:................................................................................................................................ 14 Quality and Craftsmanship:...................................................................................................... 14 Regulatory Environment:..........................................................................................................14 Market Access:..........................................................................................................................14 Market Penetration and Challenges:................................................................................................15 Improved Market Access:......................................................................................................... 15 Competitive Pricing:................................................................................................................. 15 Strict Regulatory Changes:....................................................................................................... 15 International Competition:........................................................................................................ 15 Several key factors have influenced the success of the pharmaceutical sector in Bangladesh:...... 15 Regulatory Environment:..........................................................................................................15 Technological Advancements:.................................................................................................. 16 Market Access:..........................................................................................................................16 Jute:..................................................................................................................................................16 Historical Trends and Modern Market Dynamics:.......................................................................... 16 1990s:........................................................................................................................................16 2000s:........................................................................................................................................16 Several key factors have influenced the success of the jute sector in Bangladesh:.........................16 Page 646 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Demand:....................................................................................................................... 16 Product Diversification:............................................................................................................ 17 Competitive Pricing:,................................................................................................................ 17 Case Study: Jute Export Performance............................................................................................. 17 A detailed analysis of specific periods of devaluation provides insights into the sector's performance:....................................................................................................................................17 Post-Devaluation in the 1990s:................................................................................................. 17 Challenges in the Early 2000s:................................................................................................. 17 Modern Resurgence:................................................................................................................. 17 Leather Goods:................................................................................................................................ 17 Market Potential and Growth Drivers:............................................................................................ 17 Abundant Raw Materials:......................................................................................................... 17 Skilled Labor Force:................................................................................................................. 18 Global Demand:........................................................................................................................ 18 Challenges:...................................................................................................................................... 18 Environmental Regulations:......................................................................................................18 Labor Conditions:..................................................................................................................... 18 Global Competition:..................................................................................................................18 Several factors influence the success of the leather goods sector in Bangladesh:.......................... 18 Technological Advancements:.................................................................................................. 18 Market Access and Trade Policies:...........................................................................................18 Brand Development and Marketing:.........................................................................................18 Case Study: Leather Goods Export Performance............................................................................19 A detailed analysis of the leather goods sector provides insights into its performance and potential:.......................................................................................................................................... 19 Export Trends:...........................................................................................................................19 Environmental Compliance:..................................................................................................... 19 Labor Improvements:................................................................................................................19 Innovation and Diversification:................................................................................................ 19 Strategic Recommendations:........................................................................................................... 19 Environmental Initiatives:.........................................................................................................19 Labor Standards:....................................................................................................................... 19 Trade Facilitation:..................................................................................................................... 19 Support for Innovation:.............................................................................................................19 Competitive Positioning and Export Fluctuations:..........................................................................20 Post-Devaluation Export Trends:.................................................................................................... 20 Environmental Regulations:......................................................................................................20 Labor Market Conditions:.........................................................................................................20 Global Competition:..................................................................................................................20 Several factors are crucial for the success of Bangladesh's leather goods sector:...........................20 Environmental Compliance:..................................................................................................... 20 Labor Conditions:..................................................................................................................... 20 Global Competition:..................................................................................................................21 Strategic Recommendations:........................................................................................................... 21 Page 647 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Invest in Cleaner Technologies:................................................................................................21 Enhance Labor Practices:..........................................................................................................21 Promote Innovation:..................................................................................................................21 Market Diversification:.............................................................................................................21 Strengthen Trade Policies:........................................................................................................ 21 Global Economic Environment:...................................................................................................... 21 Demand Fluctuations:......................................................................................................................22 Economic Cycles:..................................................................................................................... 22 Consumer Preferences:............................................................................................................. 22 Market Trends:..........................................................................................................................22 Trade Barriers:.................................................................................................................................22 Tariffs and Quotas:....................................................................................................................22 Regulatory Requirements:........................................................................................................ 22 Trade Agreements:....................................................................................................................22 Global Competitors:..................................................................................................................22 Product Differentiation:............................................................................................................ 23 Market Penetration:...................................................................................................................23 Technological Advancements and Innovation:................................................................................23 Productivity Enhancements:............................................................................................................23 Automation:.............................................................................................................................. 23 Efficient Resource Utilization:..................................................................................................23 Lean Manufacturing:.................................................................................................................23 Advanced Machinery:...............................................................................................................23 Research and Development (R&D):......................................................................................... 23 Quality Control Systems:..........................................................................................................24 Market Opportunities:..................................................................................................................... 24 New Product Development:......................................................................................................24 Customization:.......................................................................................................................... 24 Digitalization:........................................................................................................................... 24 Trade Agreements and Market Access:...........................................................................................24 Importance of Trade Agreements:...................................................................................................24 Preferential Tariffs:................................................................................................................... 24 Quota-Free Access:...................................................................................................................24 Exchange Rate Stability:...........................................................................................................25 Predictable Trade Policies:........................................................................................................25 Enhanced Competitiveness:.............................................................................................................25 Improved Market Entry:........................................................................................................... 25 Strengthening Supply Chains:...................................................................................................25 Key Trade Agreements Impacting Bangladesh:..............................................................................25 Generalized System of Preferences (GSP):.....................................................................................25 South Asian Free Trade Area (SAFTA):......................................................................................... 25 Asia-Pacific Trade Agreement (APTA):..........................................................................................25 Case Studies of Successful Trade Agreements:...............................................................................25 EU’s Everything But Arms (EBA) Initiative:................................................................................. 25 Page 648 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) US Generalized System of Preferences (GSP):...............................................................................26 Negotiating Favorable Trade Terms:............................................................................................... 26 Expanding Trade Agreements:..................................................................................................26 Enhancing Existing Agreements:..............................................................................................26 Improving Trade Facilitation:..........................................................................................................26 Customs Modernization:...........................................................................................................26 Infrastructure Development:..................................................................................................... 26 Supporting Exporters:......................................................................................................................26 Capacity Building:.................................................................................................................... 26 Financial Support:.....................................................................................................................26 Temporal Comparisons of Product Success:................................................................................... 27 Longitudinal Data Analysis:..................................................................................................... 27 Key Time Periods:.....................................................................................................................27 Sectoral Focus:..........................................................................................................................27 Findings:.......................................................................................................................................... 27 Garments:........................................................................................................................................ 27 Early 2000s:.............................................................................................................................. 27 Mid-2010s:................................................................................................................................27 Pharmaceuticals:..............................................................................................................................27 Post-2013 Devaluation:.............................................................................................................27 Jute:..................................................................................................................................................27 1990s Boom:............................................................................................................................. 27 Recent Trends:.......................................................................................................................... 27 Leather Goods:................................................................................................................................ 28 Early 2010s:.............................................................................................................................. 28 Cross-Product Analysis of Devaluation Effects:.............................................................................28 Econometric Modeling:............................................................................................................ 28 Garments vs. Pharmaceuticals:........................................................................................................28 Garments:..................................................................................................................................28 Pharmaceuticals:....................................................................................................................... 28 Jute vs. Leather Goods:................................................................................................................... 28 Jute:........................................................................................................................................... 28 Leather Goods:..........................................................................................................................28 Sector-Specific Challenges and Opportunities:...............................................................................28 Technological Advancements:.................................................................................................. 28 Market Access and Trade Policies:...........................................................................................29 Tailored Strategies for Sustained Export Growth:...........................................................................29 Enhancing Labor Productivity:................................................................................................. 29 Technological Upgradation:......................................................................................................29 Diversification of Markets:....................................................................................................... 29 Sustainability Initiatives:.......................................................................................................... 29 Regulatory Support:.................................................................................................................. 29 R&D Investments:.................................................................................................................... 29 Market Access:..........................................................................................................................30 Page 649 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Compliance with International Standards:................................................................................30 Product Diversification:............................................................................................................ 30 Market Promotion:.................................................................................................................... 30 Supportive Policies:.................................................................................................................. 30 Capacity Building:.................................................................................................................... 30 Environmental Compliance:..................................................................................................... 30 Improving Labor Conditions:................................................................................................... 30 Innovation and Design:............................................................................................................. 30 Trade Facilitation:..................................................................................................................... 30 Policy Measures to Enhance Product Competitiveness:................................................................. 30 Reducing Production Costs:............................................................................................................ 31 Energy Efficiency:.................................................................................................................... 31 Subsidies and Tax Incentives:...................................................................................................31 Raw Material Sourcing:............................................................................................................ 31 Skill Development:................................................................................................................... 31 Labor Standards:....................................................................................................................... 31 Wage Policies:...........................................................................................................................31 Negotiating Favorable Trade Agreements:......................................................................................31 Bilateral and Multilateral Agreements:.....................................................................................31 Market Access:..........................................................................................................................31 Trade Facilitation Measures:.....................................................................................................31 Investing in Technology and Innovation:..................................................................................32 Improving Labor Conditions:................................................................................................... 32 Exploring Niche Markets:.........................................................................................................32 Stabilizing Exchange Rates:..................................................................................................... 32 Supporting Firms:..................................................................................................................... 32 Enhancing Market Access:....................................................................................................... 32 Sustainability Practices:............................................................................................................ 32 Diversification:......................................................................................................................... 32 Factors that Interact to Shape Export Success:................................................................................32 Economic Policies:....................................................................................................................33 Global Market Conditions:....................................................................................................... 33 Technological Advancements:.................................................................................................. 33 Sector-Specific Characteristics:................................................................................................ 33 Temporal Variability:................................................................................................................ 33 Inclusion of More Sectors:.............................................................................................................. 33 Cross-Country Comparisons:....................................................................................................33 Longitudinal Studies:................................................................................................................ 33 Firm-Level Analysis:................................................................................................................ 34 Impact of Technological Innovations:............................................................................................. 34 Environmental and Social Factors:..................................................................................................34 Page 650 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Specifying the Export Success Products The research includes a detailed analysis of specific export products to understand their performance over time in relation to currency devaluation. By examining the success of individual products, this section aims to identify the factors that contributed to their performance and the reasons for variability at different points in time. Understanding the temporal variability of export success is crucial for formulating effective economic policies and strategies to enhance Bangladesh's export competitiveness. This analysis focuses on key export products, such as garments, pharmaceuticals, jute, and leather goods, providing a comprehensive overview of their performance in the context of currency devaluation. The data for this analysis is collected from various sources, including: National Export Databases: Detailed export data from Bangladesh's national statistics and trade authorities. Industry Reports: Reports from industry associations and market research firms. International Trade Statistics: Data from the World Bank, IMF, and other international bodies. The analytical framework involves econometric models to evaluate the impact of currency devaluation on the export performance of specific products. The analysis controls for factors such as global demand, production costs, labor efficiency, and market access to ensure a comprehensive assessment. Garment Sector: Key Statistics and Trends: The garment sector is a cornerstone of Bangladesh's export economy. It accounts for a substantial portion of the country’s export revenue and has shown significant growth over the past few decades. Currency devaluation has generally had a positive impact on the garment sector. Lower exchange rates make Bangladeshi garments cheaper in international markets, boosting demand. However, the benefits are sometimes offset by increased costs for imported raw materials. Factors Contributing to Success: Low Labor Costs: Bangladesh’s competitive labor costs help maintain low production costs, enhancing competitiveness. Trade Policies: Favorable trade agreements with major markets like the EU and the US. Efficiency Improvements: 7 Page 651 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Investments in modern production techniques and infrastructure. Temporal Variability: The performance of the garment sector has shown variability depending on global market conditions and domestic policies. Periods of significant devaluation often align with spikes in export volumes. The pharmaceutical sector in Bangladesh is emerging as a significant export player. The industry benefits from strong domestic demand and growing international recognition. Devaluation has mixed effects on the pharmaceutical sector. While it makes exports cheaper, it also raises the cost of imported raw materials and ingredients. Quality Standards: Adherence to international quality standards enhances marketability. Regulatory Support: Government incentives and support for pharmaceutical exports. Innovation: Investment in research and development. The sector’s export performance varies with changes in international regulations and demand. Devaluation has had a more pronounced effect during periods of high global demand for pharmaceuticals. Jute is one of Bangladesh’s traditional export commodities. Despite facing competition from synthetic alternatives, the sector remains crucial for the economy. Currency devaluation typically boosts jute exports by making them more competitively priced. However, the sector is highly sensitive to global price fluctuations and demand. Sustainability: Increasing global demand for eco-friendly products. Government Support: Policies to promote jute cultivation and processing. Market Diversification: Efforts to expand into new markets. The performance of the jute sector is influenced by global market trends and domestic agricultural policies. Devaluation tends to coincide with periods of increased export volumes. The leather goods sector is another significant export contributor for Bangladesh. The country is known for its quality leather products and competitive pricing. 8 Page 652 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation positively impacts leather goods exports by lowering prices for international buyers. However, the sector faces challenges such as environmental regulations and competition from synthetic alternatives. Quality Products: High-quality leather and craftsmanship. Cost Competitiveness: Competitive pricing due to low labor costs. Market Access: Access to key markets in Europe and North America. The export performance of leather goods varies with changes in global demand and domestic industry policies. Devaluation often leads to an uptick in export volumes, though environmental compliance costs can offset some benefits. The analysis of specific export products in relation to currency devaluation highlights the varying impacts and success factors across different sectors. While devaluation generally boosts export performance by making products cheaper, the extent of this benefit varies based on sector-specific characteristics and external factors. Future research should further explore the dynamic effects of currency devaluation on different sectors over time. Longitudinal studies and cross-country comparisons can provide deeper insights into the complex relationship between devaluation and export performance. Additionally, expanding the scope to include more products and countries will enhance the generalizability and applicability of the findings. The data for this analysis is collected from multiple sources, ensuring a robust and comprehensive foundation for evaluating the impact of currency devaluation on export performance. Key sources include: National Export Databases: Detailed export data from Bangladesh’s national statistics and trade authorities, providing granular insights into export volumes and values over time. Industry Reports: Reports from industry associations, market research firms, and trade organizations offer sector-specific data and trends. International Trade Statistics: Data from international bodies such as the World Bank, International Monetary Fund (IMF), and World Trade Organization (WTO) provide a global context for the analysis. Academic Publications: 9 Page 653 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Research and analyses from renowned academic institutions such as Princeton, Oxford, MIT, Stanford, Cambridge, and Harvard offer theoretical frameworks and empirical findings that underpin the study. These diverse sources ensure that the analysis is both comprehensive and grounded in reliable data. Analytical Framework for Product-Specific Analysis: The analytical framework employs econometric models to evaluate the impact of currency devaluation on the export performance of specific products. The models are designed to control for various factors that can influence export performance, ensuring a nuanced and accurate assessment. Key components of the framework include: Production Costs: Controlling for changes in production costs, including raw materials, labor, and overheads, which can affect the profitability and competitiveness of exports. Labor Efficiency: Accounting for variations in labor productivity, which can influence the cost-effectiveness of production and export capacity. Global Market Conditions: Incorporating factors such as global demand, supply chain dynamics, and international competition to contextualize the performance of exports. Trade Policies: Considering the impact of domestic and international trade policies, including tariffs, trade agreements, and export incentives, on export performance. The econometric models used in this analysis include: Difference-in-Differences (DiD) Analysis: This method compares the changes in export performance before and after devaluation, between devalued and non-devalued periods, controlling for time-invariant factors. Panel Data Regression Models: These models analyze data across multiple time periods and entities (e.g., firms, sectors) to capture the dynamic effects of currency devaluation. Fixed and Random Effects Models: These models control for unobserved heterogeneity by accounting for individual-specific traits that do not vary over time. By using these econometric techniques, the analysis aims to isolate the impact of currency devaluation on export performance, providing insights that are both statistically significant and economically meaningful. 10 Page 654 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The methodological approach of this research, which integrates diverse data sources and robust econometric models, ensures a comprehensive assessment of the impact of currency devaluation on the export performance of specific products in Bangladesh. This framework not only highlights the direct effects of devaluation but also provides a detailed understanding of the underlying factors and sector-specific dynamics that drive export success. Case Studies of Major Export Products: Garments: The garment sector is the cornerstone of Bangladesh's export economy, contributing a substantial portion to the country's total export earnings. Its performance over time has exhibited significant variability, influenced by a multitude of factors such as global demand, production costs, and currency devaluation. Performance Over Time: The garment sector has generally benefited from periods of currency devaluation, which enhance its competitiveness in international markets. For instance: 2003 Devaluation: Following the currency devaluation in 2003, garment exports experienced a notable increase. The devaluation led to a reduction in export prices in foreign currency terms, making Bangladeshi garments more attractive to international buyers. This resulted in higher export volumes and revenues. 2012-2013 Period: During this period, another significant devaluation occurred. While there was an initial boost in exports, the full benefits were tempered by rising production costs, including increased wages and higher prices for imported raw materials. Additionally, global market conditions, such as economic slowdowns in key markets like the EU and US, also played a role in moderating export growth. 2018 Devaluation: A more recent devaluation saw mixed results. While some firms benefited from lower export prices, others struggled with the increased cost of imported inputs and logistics challenges. Nonetheless, overall export volumes still showed an upward trend due to competitive pricing. Factors Influencing Success: Several key factors have influenced the success of the garment sector in Bangladesh during periods of currency devaluation: Global Market Demand: High demand from international markets, particularly from the US and EU, has been a crucial factor. The ability to cater to large, stable markets ensures consistent export orders and revenue. 11 Page 655 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Production Costs: Competitive labor costs have historically been a significant advantage for Bangladesh. However, rising wages and production costs, driven by inflation and increased compliance requirements, pose challenges. Efficient production processes and economies of scale help mitigate some of these cost pressures. Trade Policies: Preferential trade agreements and export incentives from the government have provided crucial support. Agreements like the Generalized System of Preferences (GSP) with the EU and duty-free access to certain markets have bolstered export performance. Government initiatives such as cash incentives for exporters and infrastructure improvements have also been beneficial. The pharmaceutical sector in Bangladesh has shown impressive growth and resilience, leveraging currency devaluation to enhance its export performance. Pharmaceuticals: 2000s Growth: In the early 2000s, the sector experienced rapid growth, supported by currency devaluation and favorable domestic policies. This period saw a significant increase in pharmaceutical exports, particularly to emerging markets in Asia and Africa. 2015-2018: During this period, the sector continued to expand, with exports growing due to competitive pricing and quality improvements. The devaluation in 2015 provided an additional boost by making Bangladeshi pharmaceuticals more affordable internationally. 2020 and Beyond: Despite global disruptions caused by the COVID-19 pandemic, the sector managed to maintain export growth, driven by increased demand for medical supplies and medications. The devaluation during this time helped offset some of the supply chain challenges and cost increases. Research and Development: Investments in R&D have enabled the sector to produce high-quality, cost-effective medications that meet international standards. Regulatory Support: Government policies, including tax incentives and support for pharmaceutical exports, have facilitated growth. Market Diversification: The sector's ability to diversify its export markets, reducing dependency on any single market, has enhanced its resilience and growth potential. Jute: 12 Page 656 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The jute sector, one of Bangladesh’s traditional export industries, has experienced varied success in relation to currency devaluation. 2000-2010: During this decade, jute exports saw fluctuating performance. Currency devaluation in the early 2000s provided a temporary boost, but global demand for jute products was inconsistent. 2010-2020: Increased global interest in eco-friendly products helped revitalize the sector. Devaluation in this period supported competitive pricing, although rising production costs and competition from synthetic alternatives posed challenges. Eco-Friendly Trend: Growing global demand for sustainable and biodegradable products has been a significant driver of jute exports. Government Support: Policies promoting jute cultivation and export incentives have helped sustain the sector. Market Challenges: Competition from synthetic products and fluctuating global demand remain ongoing challenges. Leather Goods: The leather goods sector has shown potential for growth, leveraging currency devaluation to improve export competitiveness. 2005-2015: This period saw steady growth in leather exports, aided by devaluation and increased global demand for leather products. 2016-2020: Continued currency devaluation supported competitive pricing, but challenges such as environmental regulations and higher production costs impacted overall performance. Quality and Craftsmanship: High-quality products and skilled craftsmanship have positioned Bangladesh as a competitive player in the global leather market. Regulatory Environment: Compliance with international environmental standards has been both a challenge and an opportunity, as meeting these standards can open access to premium markets. 13 Page 657 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Access: Preferential trade agreements and government incentives have supported export growth. The analysis of major export products in Bangladesh demonstrates the varying impacts of currency devaluation on different sectors. While devaluation generally enhances export competitiveness, the extent of its benefits is influenced by factors such as global market demand, production costs, trade policies, and sector-specific characteristics. Understanding these dynamics is crucial for formulating targeted policies and strategies to support sustainable export growth in Bangladesh. Bangladesh's pharmaceutical industry has experienced notable growth over the past few decades, driven by improvements in technology, regulatory frameworks, and market access. This sector has become one of the country's key export industries, contributing significantly to the national economy. Market Penetration and Challenges: After the devaluation in 2013, pharmaceutical exports from Bangladesh saw a marked increase. This growth can be attributed to several factors: Improved Market Access: The devaluation made Bangladeshi pharmaceuticals more competitively priced in international markets, which facilitated easier entry into new markets and strengthened presence in existing ones. Countries in Asia, Africa, and Latin America emerged as key destinations for Bangladeshi pharmaceutical products. Competitive Pricing: The reduction in export prices due to devaluation made Bangladeshi pharmaceuticals more attractive compared to those from countries with stronger currencies. However, the sector has faced several challenges that have impacted its ability to sustain growth during certain periods: Strict Regulatory Changes: The pharmaceutical industry is highly regulated, and changes in international regulatory requirements can pose significant challenges. Compliance with stringent international standards, such as Good Manufacturing Practices (GMP) and the requirements of regulatory bodies like the US FDA and the European Medicines Agency (EMA), is crucial for market access but can be resource-intensive. International Competition: Bangladeshi pharmaceutical companies compete with established global players from countries like India and China, which have more advanced manufacturing capabilities and larger economies of scale. This competition can limit market penetration and growth. Several key factors have influenced the success of the pharmaceutical sector in Bangladesh: Regulatory Environment: 14 Page 658 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The local regulatory environment has been supportive, with the government providing incentives for pharmaceutical exports and ensuring that local regulations facilitate growth. However, stringent international standards pose challenges that require significant investment in compliance and quality assurance. Technological Advancements: Investments in modern manufacturing processes and research and development (R&D) have been crucial. Many Bangladeshi pharmaceutical companies have upgraded their facilities and adopted advanced technologies to meet international standards and improve product quality. Continuous innovation and development of new formulations have also played a significant role. Market Access: Expansion into developing countries with growing healthcare needs has been a major driver of export growth. These markets often have less stringent regulatory requirements compared to developed countries, allowing easier market entry for Bangladeshi pharmaceuticals. Additionally, government-to-government agreements and participation in international trade fairs have helped Bangladeshi companies establish and expand their market presence. Overall, the pharmaceutical sector in Bangladesh has demonstrated resilience and growth potential despite facing significant challenges. Strategic investments in technology and compliance, coupled with effective market access strategies, have enabled the sector to capitalize on the opportunities presented by currency devaluation and global demand for affordable healthcare solutions. Jute: Jute has been historically significant for Bangladesh, serving as one of the country's primary export commodities. Over time, the sector has faced various challenges and opportunities influenced by global market dynamics, competition, and economic policies. Historical Trends and Modern Market Dynamics: 1990s: During the 1990s, jute exports from Bangladesh saw substantial growth, particularly following currency devaluations. The devaluation made Bangladeshi jute products more competitively priced in the international market. This period also coincided with strong global demand for jute, particularly in the packaging industry, where jute was favored for its durability and eco-friendliness. 2000s: In the 2000s, the jute sector encountered significant challenges. Competition from synthetic fibers, which are cheaper and more versatile, led to a decline in global demand for traditional jute products. Additionally, changes in global market preferences, with a shift towards more convenient and less bulky materials, further impacted the sector. As a result, jute exports from Bangladesh declined during this period, reflecting the changing market dynamics and increased competition. Several key factors have influenced the success of the jute sector in Bangladesh: Market Demand: 15 Page 659 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The rising demand for eco-friendly and sustainable products has rejuvenated interest in jute. With growing environmental awareness and the push for sustainable packaging solutions, jute has found new markets. Governments and organizations promoting green alternatives to plastic have played a significant role in this resurgence. Product Diversification: Developing new jute products to meet changing consumer preferences has been crucial. Innovations such as jute-based geotextiles, composite materials, and lifestyle products have expanded the market for jute beyond traditional uses. This diversification has helped jute products remain relevant and competitive in a modern context. Competitive Pricing:, Currency devaluation has consistently benefited the jute sector by making Bangladeshi jute products more price-competitive in the international market. Lower export prices have helped maintain market share despite increased competition from synthetic alternatives. Case Study: Jute Export Performance A detailed analysis of specific periods of devaluation provides insights into the sector's performance: Post-Devaluation in the 1990s: Jute exports increased significantly due to competitive pricing and favorable market conditions. The sector capitalized on its cost advantage and the strong demand for natural fibers. Challenges in the Early 2000s: Despite currency devaluation, the sector struggled due to synthetic fiber competition and shifting market preferences. However, targeted efforts to promote jute's eco-friendly properties began to lay the groundwork for future growth. Modern Resurgence: In recent years, the emphasis on sustainability has driven renewed interest in jute. Bangladesh has leveraged its position as a leading jute producer to cater to the growing demand for green alternatives, supported by strategic government policies and industry initiatives. Overall, the jute sector's experience illustrates the importance of adapting to market trends, diversifying product offerings, and leveraging competitive pricing advantages through currency devaluation. The sector's resilience and ability to innovate have been key to sustaining its relevance and success in a changing global market. Leather Goods: The leather goods sector in Bangladesh holds significant growth potential due to its abundant raw materials, skilled labor force, and increasing global demand for leather products. However, the sector faces several challenges, including stringent environmental regulations, labor conditions, and intense global competition. 16 Page 660 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Potential and Growth Drivers: Abundant Raw Materials: Bangladesh has a rich supply of raw hides and skins, providing a strong foundation for the leather industry. This local availability reduces production costs and enhances the sector's competitiveness. Skilled Labor Force: The country boasts a skilled workforce with a long tradition in leather craftsmanship. This expertise allows Bangladeshi manufacturers to produce high-quality leather goods, catering to both domestic and international markets. Global Demand: The global market for leather goods, including footwear, bags, and accessories, continues to grow. As consumers increasingly seek quality leather products, Bangladesh has the opportunity to expand its market share. Challenges: Environmental Regulations: The leather industry is known for its environmental impact, particularly in terms of pollution from tanning processes. Compliance with international environmental standards and regulations is crucial. The sector faces pressure to adopt cleaner technologies and sustainable practices to meet these standards and avoid potential trade barriers. Labor Conditions: Labor conditions in the leather industry have come under scrutiny. Issues such as worker safety, fair wages, and working hours need to be addressed to ensure compliance with international labor standards. Improving labor conditions can enhance the sector's reputation and access to premium markets. Global Competition: The leather goods sector faces stiff competition from countries with established leather industries, such as Italy, China, and India. Competing with these countries requires continuous improvements in quality, innovation, and cost efficiency. Several factors influence the success of the leather goods sector in Bangladesh: Technological Advancements: Investing in modern manufacturing technologies and sustainable practices can significantly enhance production efficiency and product quality. Adopting eco-friendly tanning processes and waste management systems is essential for meeting environmental regulations and attracting environmentally conscious consumers. Market Access and Trade Policies: Expanding market access through favorable trade agreements and policies can boost exports. Leveraging preferential trade agreements with key markets, such as the European Union and the United States, can provide a competitive edge. 17 Page 661 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Brand Development and Marketing: Building strong brands and effective marketing strategies can help Bangladeshi leather goods gain recognition in international markets. Emphasizing quality, craftsmanship, and sustainability can differentiate products and attract premium customers. Case Study: Leather Goods Export Performance A detailed analysis of the leather goods sector provides insights into its performance and potential: Export Trends: Leather goods exports from Bangladesh have shown steady growth, particularly in footwear and accessories. Currency devaluation has played a role in making these products more competitively priced in global markets. Environmental Compliance: Leading firms have made significant investments in eco-friendly technologies to meet environmental regulations. These efforts have not only improved compliance but also enhanced the sector's image and marketability. Labor Improvements: Companies that have prioritized improving labor conditions have seen positive outcomes in terms of productivity and worker retention. Ethical practices have also opened doors to markets that value corporate social responsibility. Innovation and Diversification: Firms that have focused on product innovation and diversification, such as developing high-quality, fashionable leather goods, have experienced greater success. Diversifying product lines to include items like luxury leather goods and eco-friendly products has expanded market reach. Strategic Recommendations: To realize the full potential of the leather goods sector, policymakers should consider several strategic recommendations: Environmental Initiatives: Support for adopting cleaner technologies and sustainable practices in the leather industry can help meet international standards and reduce environmental impact. Incentives for eco-friendly investments can drive sector-wide improvements. Labor Standards: Enhancing labor conditions through regulatory frameworks and industry partnerships can improve the sector's reputation and access to premium markets. Providing training and resources for compliance can support this transition. 18 Page 662 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Trade Facilitation: Negotiating favorable trade agreements and reducing trade barriers can enhance market access for Bangladeshi leather goods. Promoting the sector through international trade fairs and marketing campaigns can increase visibility and demand. Support for Innovation: Encouraging innovation through research and development initiatives can drive product quality and diversification. Collaborations with international fashion and design institutions can foster creativity and competitiveness. By addressing these challenges and leveraging its strengths, Bangladesh's leather goods sector can achieve sustainable growth and increased global market presence. The sector's potential for contributing to economic development and export diversification makes it a critical area for strategic focus and investment. Competitive Positioning and Export Fluctuations: Post-Devaluation Export Trends: During the early 2010s, Bangladesh's leather goods sector experienced a significant boost in exports following periods of currency devaluation. The devaluation of the Bangladeshi Taka made leather products more competitively priced in the international market, leading to increased demand. However, despite these gains, the sector encountered several challenges that influenced its overall performance and competitive positioning: Environmental Regulations: The global leather industry is subject to stringent environmental regulations, particularly concerning the tanning process, which involves the use of hazardous chemicals. Compliance with these regulations is essential for accessing key markets, especially in the European Union and North America. The Bangladeshi leather sector faced difficulties in meeting these standards, which impacted its export performance. Labor Market Conditions: The leather industry in Bangladesh has been scrutinized for its labor practices, including working conditions, wages, and worker safety. Improving labor conditions to meet international expectations has been a critical challenge. Non-compliance with labor standards can result in trade restrictions and loss of consumer trust, affecting export performance. Global Competition: The sector faces intense competition from established leather-exporting countries such as Italy, China, and India. These countries benefit from advanced technologies, better infrastructure, and established brand reputations. Competing in this global market requires continuous innovation, quality improvements, and cost efficiency. Several factors are crucial for the success of Bangladesh's leather goods sector: Environmental Compliance: Meeting stringent environmental standards is vital for maintaining access to key markets. The leather industry must invest in cleaner technologies and sustainable practices to reduce 19 Page 663 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) pollution and ensure compliance with international regulations. Environmental compliance not only enhances the sector's reputation but also opens up opportunities in eco-conscious markets. Labor Conditions: Improving working conditions is essential for the sector's long-term success. This includes ensuring fair wages, safe working environments, and reasonable working hours. Companies that prioritize ethical labor practices can gain a competitive edge by attracting socially conscious consumers and avoiding potential trade sanctions. Global Competition: Competing with other leather-exporting countries requires a focus on innovation, quality, and efficiency. Bangladesh's leather sector needs to adopt advanced manufacturing technologies, improve product quality, and develop strong branding and marketing strategies. Leveraging the country's competitive labor costs while addressing other challenges can enhance its position in the global market. Strategic Recommendations: To strengthen the competitive positioning of Bangladesh's leather goods sector and mitigate export fluctuations, the following strategic recommendations are proposed: Invest in Cleaner Technologies: Encourage investments in eco-friendly tanning processes and waste management systems. Providing incentives for adopting green technologies can help the sector meet environmental standards and appeal to environmentally conscious consumers. Enhance Labor Practices: Implement regulatory frameworks that enforce fair labor practices. Providing training and resources to firms for improving working conditions can enhance the sector's image and compliance with international labor standards. Promote Innovation: Support research and development initiatives aimed at product innovation and diversification. Collaborations with international design institutions and industry associations can drive creativity and competitiveness. Market Diversification: Explore new markets and niche segments where Bangladeshi leather goods can have a competitive advantage. Developing high-quality, sustainable, and fashionable leather products can attract premium customers and reduce dependency on traditional markets. Strengthen Trade Policies: Negotiate favorable trade agreements and reduce trade barriers to enhance market access. Participating in international trade fairs and marketing campaigns can increase the visibility of Bangladeshi leather goods and boost exports. 20 Page 664 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) By addressing these factors and implementing strategic recommendations, Bangladesh's leather goods sector can improve its competitive positioning and achieve sustainable growth in the global market. This approach will help mitigate the impact of export fluctuations and enhance the sector's contribution to the country's economic development. Global Economic Environment: The global economic environment plays a crucial role in determining the export performance of Bangladeshi products. Several factors, such as demand fluctuations, trade barriers, and competition, significantly impact the success of these exports. Understanding these conditions helps formulate strategies to enhance export performance and competitiveness. Demand Fluctuations: Economic Cycles: Global demand for goods, including garments, pharmaceuticals, jute, and leather products, is often influenced by economic cycles. During periods of economic growth, demand for consumer goods tends to rise, benefiting exporters. Conversely, during economic downturns, demand can fall, impacting export volumes and revenue. Consumer Preferences: Changes in consumer preferences can also affect demand. For instance, growing awareness of environmental sustainability has increased demand for eco-friendly products, benefiting sectors like jute. Staying attuned to these preferences and adapting products accordingly can help maintain export performance. Market Trends: Global market trends, such as fashion trends in the garment industry or advancements in medical technology in the pharmaceutical sector, can create opportunities or challenges for exporters. Keeping up with these trends ensures that products remain relevant and competitive. Trade Barriers: Tariffs and Quotas: Trade barriers such as tariffs and quotas imposed by importing countries can restrict market access and affect export competitiveness. For example, higher tariffs on garments can make Bangladeshi products less attractive compared to those from countries with lower tariffs. Regulatory Requirements: Compliance with regulatory standards, such as safety and quality standards in pharmaceuticals or environmental regulations in leather goods, is essential for accessing key markets. Non-compliance can result in trade restrictions or bans, affecting export performance. Trade Agreements: Participation in preferential trade agreements can enhance market access by reducing or eliminating tariffs and other barriers. Bangladesh’s ability to negotiate favorable trade terms can significantly impact its export success. 21 Page 665 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Competition Global Competitors: Intense competition from other exporting countries, such as China, India, and Vietnam, can impact the market share of Bangladeshi products. These competitors may have advantages in technology, infrastructure, or cost efficiency, making it essential for Bangladesh to continuously improve its competitive edge. Product Differentiation: Differentiating products through quality, innovation, and branding can help mitigate the effects of competition. For instance, focusing on high-quality, sustainable jute products or innovative pharmaceutical formulations can attract premium markets and reduce price competition. Market Penetration: Expanding into new markets and strengthening presence in existing ones can help diversify risks and reduce dependency on a few major markets. Strategic market penetration initiatives can enhance resilience to global market conditions. Technological Advancements and Innovation: Investments in technology and innovation are critical for maintaining export competitiveness. Sectors that adopt advanced technologies and improve production processes tend to perform better in the international market. Technological advancements can drive productivity, enhance product quality, and open new market opportunities. Productivity Enhancements: Automation: Incorporating automation in manufacturing processes can significantly boost productivity and reduce labor costs. For instance, automation in the garment sector can streamline production, increase output, and improve quality consistency. Efficient Resource Utilization: Advanced technologies enable more efficient use of resources, reducing waste and lowering production costs. In sectors like pharmaceuticals, efficient manufacturing processes can lead to cost savings and higher profit margins. Lean Manufacturing: Implementing lean manufacturing principles helps minimize waste and maximize efficiency. This approach is particularly beneficial in sectors facing intense competition and price pressures. Advanced Machinery: Investing in state-of-the-art machinery and equipment ensures high-quality production. For example, using advanced tanning processes in the leather industry can produce superior leather goods that meet international standards. 22 Page 666 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Research and Development (R&D): Continuous investment in R&D is essential for developing innovative products and improving existing ones. The pharmaceutical sector, for example, benefits from R&D by creating new formulations and enhancing drug efficacy. Quality Control Systems: Implementing robust quality control systems ensures that products meet stringent international standards, enhancing their marketability and reducing the risk of rejections. Market Opportunities: New Product Development: Innovation enables the development of new products that cater to emerging market demands. For instance, the jute sector can innovate by creating biodegradable packaging solutions to meet the growing demand for sustainable products. Customization: Advanced technologies allow for greater customization of products to meet specific market needs. Customized products can command higher prices and create niche markets, providing a competitive advantage. Digitalization: Embracing digital technologies such as e-commerce, digital marketing, and supply chain management systems can expand market reach and improve customer engagement. Digitalization also facilitates efficient operations and enhances responsiveness to market changes. The global market conditions and technological advancements play pivotal roles in shaping the export performance of Bangladeshi products. By understanding and adapting to demand fluctuations, navigating trade barriers, and leveraging technological innovations, Bangladesh can enhance its export competitiveness. Strategic investments in technology, continuous innovation, and proactive market engagement are essential for sustaining growth and success in the dynamic global marketplace. Trade Agreements and Market Access: Access to international markets through trade agreements and partnerships significantly enhances export opportunities for countries like Bangladesh. These agreements not only open up new markets but also provide preferential terms that can mitigate the negative impact of currency devaluation, ultimately supporting export growth and economic development. Importance of Trade Agreements: Preferential Tariffs: Trade agreements often include provisions for reduced or eliminated tariffs on goods exported between member countries. This reduction in trade barriers makes Bangladeshi products more competitive in international markets. 23 Page 667 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Quota-Free Access: Agreements can also provide quota-free access to large markets, allowing exporters to sell more without facing quantitative restrictions. Stabilizing Export Revenues: Exchange Rate Stability: Trade agreements can include mechanisms for exchange rate stabilization, reducing the volatility associated with currency devaluation. This stability is crucial for exporters in planning and pricing their products. Predictable Trade Policies: Agreements often entail commitments to stable and predictable trade policies, reducing the risk of sudden tariff hikes or import restrictions that could adversely affect exports. Enhanced Competitiveness: Improved Market Entry: Trade agreements often simplify customs procedures and reduce non-tariff barriers, facilitating easier and faster entry into new markets. Strengthening Supply Chains: Partnerships foster the integration of supply chains across borders, enhancing efficiency and reducing production costs. This integration is particularly beneficial for sectors like garments, where timely and cost-effective supply chain management is crucial. Key Trade Agreements Impacting Bangladesh: Generalized System of Preferences (GSP): The GSP schemes provided by the EU, the US, and other developed countries grant preferential treatment to Bangladeshi exports, particularly in the garment sector. These schemes reduce tariffs on a wide range of products, making Bangladeshi goods more attractive in these markets. South Asian Free Trade Area (SAFTA): SAFTA aims to promote and sustain mutual trade and economic cooperation among the SAARC countries. It offers Bangladesh access to regional markets with reduced trade barriers, enhancing trade with neighboring countries. Asia-Pacific Trade Agreement (APTA): APTA provides preferential tariff concessions on a wide range of products traded between member countries, including China, India, and South Korea. This agreement helps Bangladesh diversify its export markets and reduce dependency on traditional Western markets. 24 Page 668 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Bangladesh has signed various bilateral trade agreements with countries like India, China, and Sri Lanka. These agreements typically include provisions for tariff reductions, improved market access, and cooperation in trade-related areas. Case Studies of Successful Trade Agreements: EU’s Everything But Arms (EBA) Initiative: Under the EBA initiative, Bangladesh enjoys duty-free and quota-free access to the EU market for all products except arms and ammunition. This preferential access has been a significant driver of export growth in the garment sector, making the EU one of Bangladesh’s largest export destinations. US Generalized System of Preferences (GSP): Although Bangladesh’s GSP status with the US was suspended in 2013, its previous access to the program provided significant benefits to various export sectors. Efforts to regain GSP status or negotiate new trade terms remain important for enhancing export opportunities to the US. Negotiating Favorable Trade Terms: Expanding Trade Agreements: Bangladesh should actively seek to expand its network of trade agreements, focusing on both regional and global partners. This expansion can open up new markets and reduce dependency on a few major trading partners. Enhancing Existing Agreements: Strengthening and optimizing the benefits of existing trade agreements through regular review and negotiation can ensure that they continue to support export growth effectively. Improving Trade Facilitation: Customs Modernization: Investing in modernizing customs procedures and adopting international best practices can reduce trade costs and improve the efficiency of export processes. Infrastructure Development: Improving transportation and logistics infrastructure is essential for supporting the seamless movement of goods and enhancing competitiveness. Supporting Exporters: Capacity Building: Providing training and resources to exporters on how to navigate trade agreements and leverage their benefits can enhance their ability to enter and compete in new markets. Financial Support: Offering financial incentives, such as export subsidies and low-interest loans, can help exporters manage the costs associated with market entry and expansion. 25 Page 669 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Trade agreements and market access play a pivotal role in enhancing Bangladesh's export opportunities and mitigating the impacts of currency devaluation. By negotiating favorable trade terms and supporting exporters in leveraging these agreements, Bangladesh can sustain and grow its export sectors, contributing to overall economic development. Strategic engagement in international trade partnerships, coupled with robust domestic policies, will be crucial for maintaining competitiveness and ensuring long-term export success. Temporal Comparisons of Product Success: Analyzing the performance of export products over time reveals important patterns and trends, helping to understand the dynamic nature of export success in response to currency devaluation and other economic factors. This temporal comparison is crucial for identifying specific periods when certain products thrived or struggled, providing valuable insights for strategic decision-making. Longitudinal Data Analysis: Examining export data over extended periods to capture trends and changes in performance. Key Time Periods: Identifying significant periods of currency devaluation and correlating these with export performance metrics. Sectoral Focus: Conducting sector-specific analysis to understand how different industries respond over time. Findings: Garments: Early 2000s: The devaluation in the early 2000s saw a significant boost in garment exports, driven by lower export prices and increased global demand. Mid-2010s: Another phase of devaluation in the mid-2010s showed mixed results, with some periods of increased export volumes tempered by rising production costs and global competition. Pharmaceuticals: Post-2013 Devaluation: The devaluation in 2013 initially boosted pharmaceutical exports due to competitive pricing. However, maintaining growth was challenging due to stricter international regulations and rising raw material costs. Jute: 1990s Boom: 26 Page 670 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluations in the 1990s significantly enhanced jute exports due to increased global demand and competitive pricing. However, the early 2000s saw a decline as synthetic alternatives gained market share. Recent Trends: Recently, there has been a resurgence in demand for eco-friendly jute products, with devaluation providing a competitive edge. Leather Goods: Early 2010s: Post-devaluation periods saw a rise in leather exports due to competitive pricing. However, growth was hindered by challenges such as environmental compliance and labor market issues. Cross-Product Analysis of Devaluation Effects: Comparing the impact of currency devaluation across different export products provides a nuanced understanding of sector-specific dynamics. This cross-product analysis helps to identify unique challenges and opportunities faced by each sector in response to exchange rate changes. Econometric Modeling: Using econometric models to isolate the effects of currency devaluation on different export products, controlling for various factors like production costs, market demand, and trade policies. Sectoral Comparison: Comparing sectors side by side to highlight differences in responsiveness and performance. Garments vs. Pharmaceuticals: Garments: The garment sector shows a high degree of responsiveness to currency devaluation, with significant boosts in export performance due to competitive pricing. However, this benefit can be moderated by rising production costs and global competition. Pharmaceuticals: The pharmaceutical sector benefits from devaluation through competitive pricing but faces greater challenges in maintaining growth due to strict international standards and high raw material costs. Jute vs. Leather Goods: Jute: Jute products benefit significantly from devaluation, particularly due to rising demand for eco-friendly products. The sector's success is also linked to its ability to diversify and innovate in product offerings. 27 Page 671 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Leather Goods: The leather sector also benefits from devaluation but faces considerable challenges such as compliance with environmental regulations and maintaining labor standards. These issues can offset the benefits gained from competitive pricing. Sector-Specific Challenges and Opportunities: Technological Advancements: Sectors that invest in technological advancements and innovation tend to perform better post-devaluation. For instance, the pharmaceutical sector's success is partly due to improvements in manufacturing processes and R&D. Market Access and Trade Policies: Sectors with better market access through favorable trade agreements and supportive trade policies are more resilient to devaluation impacts. The garment sector, for example, benefits from various preferential trade agreements that enhance market access and stabilize export revenues. The comparative analysis of temporal and cross-product impacts of currency devaluation on export performance provides a comprehensive understanding of sector-specific dynamics. Temporal comparisons reveal patterns and trends over time, highlighting periods of success and struggle for different products. Cross-product analysis elucidates the unique challenges and opportunities faced by each sector, offering valuable insights for strategic decision-making and policy formulation. By understanding these dynamics, policymakers and industry stakeholders can develop targeted interventions to enhance export competitiveness and mitigate the negative effects of currency devaluation. Tailored Strategies for Sustained Export Growth: Developing tailored strategies for each export sector is essential for sustaining long-term growth and ensuring resilience against currency devaluation and other economic fluctuations. Each sector has unique challenges and opportunities that require specific policy measures to enhance competitiveness, improve market access, and foster innovation. Enhancing Labor Productivity: Investing in skills development and training programs to improve labor productivity and efficiency. Technological Upgradation: Encouraging the adoption of advanced manufacturing technologies to boost production efficiency and reduce costs. Diversification of Markets: Expanding into new markets to reduce dependency on traditional markets like the US and EU, thereby spreading risk. Sustainability Initiatives: 28 Page 672 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Promoting sustainable practices to meet international environmental standards and appeal to eco-conscious consumers. Regulatory Support: Simplifying regulatory processes to expedite the approval of new products and facilitate exports. R&D Investments: Providing incentives for research and development to encourage innovation and the production of high-value pharmaceutical products. Market Access: Negotiating trade agreements that reduce tariff and non-tariff barriers for pharmaceutical exports, particularly in emerging markets. Compliance with International Standards: Assisting firms in meeting stringent international regulatory requirements to improve market penetration. Product Diversification: Encouraging innovation in jute products to cater to new market demands, such as eco-friendly packaging and biodegradable materials. Market Promotion: Strengthening marketing efforts to enhance the global image of Bangladeshi jute products as sustainable alternatives to synthetic materials. Supportive Policies: Implementing policies that support the production and export of jute products, such as subsidies and tax incentives. Capacity Building: Providing technical assistance to improve production techniques and increase yield. Environmental Compliance: Implementing policies that support firms in meeting international environmental standards, including grants for pollution control technologies. Improving Labor Conditions: Enforcing labor standards to improve working conditions, which can enhance the sector’s global reputation and market access. Innovation and Design: 29 Page 673 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Investing in design and innovation to produce high-quality leather goods that meet international market demands. Trade Facilitation: Reducing bureaucratic hurdles and improving logistics infrastructure to facilitate smoother export processes. Policy Measures to Enhance Product Competitiveness: Policymakers should consider a range of measures aimed at reducing production costs, improving labor conditions, and negotiating favorable trade agreements to enhance the competitiveness of Bangladeshi exports. Reducing Production Costs: Energy Efficiency: Promoting energy-efficient technologies and renewable energy sources to reduce production costs. Subsidies and Tax Incentives: Providing financial incentives for key sectors to lower production costs and encourage investment in new technologies. Raw Material Sourcing: Facilitating better access to affordable raw materials through trade agreements and domestic production incentives. Skill Development: Investing in vocational training programs to improve the skills and productivity of the workforce. Labor Standards: Enforcing labor laws to ensure safe and fair working conditions, which can improve productivity and reduce turnover. Wage Policies: Implementing balanced wage policies that ensure fair compensation while maintaining competitiveness. Negotiating Favorable Trade Agreements: Bilateral and Multilateral Agreements: Actively pursuing trade agreements that reduce tariffs and non-tariff barriers for Bangladeshi exports. Market Access: Focusing on gaining access to high-potential markets through strategic trade partnerships. 30 Page 674 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Trade Facilitation Measures: Simplifying customs procedures and improving trade logistics to make exporting easier and more cost-effective. To ensure sustained export growth and resilience against currency devaluation, Bangladesh should adopt a holistic approach to policy design, considering the simultaneous effects of various factors on devaluation and export performance. Investing in Technology and Innovation: Encourage continuous technological upgrades and innovation across all export sectors to enhance productivity and competitiveness. Improving Labor Conditions: Focus on improving labor conditions and skills development to boost workforce productivity and attract international buyers. Exploring Niche Markets: Identify and target niche markets where Bangladeshi products can have a competitive edge, particularly in sectors like jute and sustainable goods. Stabilizing Exchange Rates: Implement macroeconomic policies that aim to stabilize the exchange rate, reducing volatility and providing a predictable environment for exporters. Supporting Firms: Provide targeted support to firms, including access to affordable credit, export subsidies, and technical assistance to help them mitigate the impacts of devaluation. Enhancing Market Access: Actively negotiate and secure favorable trade agreements to open new markets and reduce barriers for Bangladeshi exports. Sustainability Practices: Promote and support sustainable practices in production processes to meet international standards and appeal to environmentally conscious consumers. Diversification: Encourage diversification of the export base to reduce dependency on a few sectors and markets, spreading risk and enhancing overall resilience. The policy implications and strategic recommendations derived from the research provide a roadmap for sustaining export growth and enhancing the resilience of Bangladeshi exports in the face of currency devaluation. By adopting tailored strategies for each sector, investing in technology and 31 Page 675 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) innovation, improving labor conditions, and negotiating favorable trade agreements, Bangladesh can enhance the competitiveness of its export products and secure a stronger position in the global market. Factors that Interact to Shape Export Success: The product-specific analysis reveals a nuanced understanding of how currency devaluation impacts the export performance of key sectors in Bangladesh. The findings underscore the importance of multiple factors that interact to shape export success. These factors include: Economic Policies: Effective policies that provide support to exporters, such as subsidies, tax incentives, and favorable trade agreements, play a crucial role in enhancing competitiveness. Global Market Conditions: The demand and supply dynamics in international markets significantly influence export performance. Sectors like garments and pharmaceuticals benefit from strong global demand, while sectors like jute face challenges from synthetic substitutes. Technological Advancements: Investments in technology and innovation are vital for improving productivity and maintaining competitive pricing. Sectors that embrace modern manufacturing techniques and research and development tend to perform better in the global market. Sector-Specific Characteristics: Each sector responds differently to currency devaluation based on its unique characteristics. For instance, the garments sector, with its labor-intensive nature and cost-competitiveness, benefits significantly from devaluation. In contrast, the leather goods sector faces environmental and labor challenges that can offset the benefits of a weaker currency. Temporal Variability: Export success varies over time, influenced by fluctuating global demand, changing production costs, and evolving trade policies. Understanding these temporal trends is crucial for formulating effective economic strategies. The analysis also highlights that while currency devaluation generally boosts export performance by making Bangladeshi products cheaper for foreign buyers, the extent of this benefit varies across different sectors and firms. Some sectors, like garments, show a strong positive response, whereas others, like leather goods, face mixed outcomes due to additional challenges. Future research should aim to provide a more comprehensive understanding of the effects of currency devaluation on export performance by expanding the scope in the following ways: Inclusion of More Sectors: Analyzing additional sectors beyond garments, pharmaceuticals, jute, and leather goods can offer a broader perspective on how different industries are affected by currency devaluation. Sectors such as agriculture, electronics, and services could be included in future studies. 32 Page 676 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Cross-Country Comparisons: Expanding the research to include more countries facing similar devaluation scenarios can provide valuable benchmarks. Comparing Bangladesh's experience with countries in different regions and with varying economic structures can offer deeper insights into successful strategies and policies. Longitudinal Studies: Conducting longitudinal studies that track the performance of export sectors over extended periods can capture the dynamic effects of currency devaluation. These studies can reveal long-term trends and help identify sustainable practices and policies. Firm-Level Analysis: A more detailed firm-level analysis can uncover the specific strategies that successful exporters employ to mitigate the effects of currency devaluation. Understanding the differences between small, medium, and large firms can help tailor support measures to different business sizes. Impact of Technological Innovations: Investigating the role of technological innovations in enhancing export performance can provide insights into the importance of R&D investments. Future research could explore how specific technological advancements have contributed to export success. Environmental and Social Factors: Exploring the impact of environmental and social factors on export performance can provide a holistic view of sustainable growth. Understanding how compliance with international standards and improving labor conditions affect competitiveness can inform more inclusive policies. By addressing these future research directions, scholars and policymakers can gain a more comprehensive and nuanced understanding of the complex relationship between currency devaluation and export performance. This knowledge will be instrumental in designing effective strategies to enhance the global competitiveness of Bangladesh's export sectors and ensure sustained economic growth. 33 Page 677 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 13 Choices of Garments, Pharmaceuticals, Leather, and Jute INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 678 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 10 Choices of Garments, Pharmaceuticals, Leather, and Jute Table of Contents Choices of Garments, Pharmaceuticals, Leather, and Jute...................................................................... 6 Why Choose These Four Major Export Products?............................................................................6 Rationale for Selecting the Four Major Export Products:................................................................. 6 Economic Contribution:..............................................................................................................6 Employment Generation:............................................................................................................ 6 Comparative Advantage:............................................................................................................ 6 Export Volume:........................................................................................................................... 6 Economic Growth:...................................................................................................................... 6 Technological Advancements:.................................................................................................... 6 Healthcare Needs:....................................................................................................................... 6 Export Potential:......................................................................................................................... 6 Historical Importance:................................................................................................................ 7 Global Market Demand:............................................................................................................. 7 Economic and Social Impact:..................................................................................................... 7 Export Dynamics:....................................................................................................................... 7 Export Revenue:..........................................................................................................................7 Value Addition:........................................................................................................................... 7 Challenges and Opportunities:....................................................................................................7 Global Competition:....................................................................................................................7 Recommendations for the Future:..................................................................................................... 7 Invest in Technological Upgradation:................................................................................................7 Enhance Market Access:................................................................................................................... 7 Improve Labor Conditions:............................................................................................................... 8 Provide training programs to enhance workers' skills and productivity............................................8 Support Sustainable Practices:.......................................................................................................... 8 Strengthen Regulatory Framework:.................................................................................................. 8 Provide Financial Support:................................................................................................................ 8 Focus on Niche Markets:...................................................................................................................8 Criteria for Selecting Major Export Products:...................................................................................8 Export Volume and Value:.................................................................................................................9 10 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 679 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Comparative Advantage:................................................................................................................... 9 Advantage Factors:............................................................................................................................9 Garments:....................................................................................................................................9 Pharmaceuticals:......................................................................................................................... 9 Jute:............................................................................................................................................. 9 Leather Goods:............................................................................................................................9 Policy Recommendations for the Future:.......................................................................................... 9 Technology and Innovation:........................................................................................................9 Infrastructure Development:....................................................................................................... 9 Quality Standards:.....................................................................................................................10 Supporting Export Diversification:................................................................................................. 10 Market Access:..........................................................................................................................10 Product Diversification:............................................................................................................ 10 Skill Development:................................................................................................................... 10 Working Conditions:................................................................................................................. 10 Promoting Sustainable Practices:.................................................................................................... 10 Environmental Compliance:..................................................................................................... 10 Sustainability Initiatives:.......................................................................................................... 10 Macroeconomic Policies:..........................................................................................................10 Foreign Exchange Reserves:.....................................................................................................10 Analysis of the Four Major Export Products:..................................................................................11 Garments:.........................................................................................................................................11 Overview:..................................................................................................................................11 Growth Drivers:........................................................................................................................ 11 Competitive Labor Costs:......................................................................................................... 11 Trade Policies:...........................................................................................................................11 Global Demand:........................................................................................................................ 11 Rising Production Costs:...........................................................................................................11 Compliance with International Standards:................................................................................11 Competition:..............................................................................................................................11 Impact of Currency Devaluation:..............................................................................................11 Pharmaceuticals:..............................................................................................................................12 Overview:..................................................................................................................................12 Technological Advancements:.................................................................................................. 12 Skilled Labor:............................................................................................................................12 Regulatory Support:.................................................................................................................. 12 Quality Compliance:................................................................................................................. 12 International Competition:........................................................................................................ 12 Impact of Currency Devaluation:..............................................................................................12 Jute:..................................................................................................................................................12 Overview:..................................................................................................................................12 Eco-Friendly Demand:..............................................................................................................12 Product Diversification:............................................................................................................ 12 Competition from Synthetics:................................................................................................... 13 Page 680 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Preferences:.................................................................................................................. 13 Impact of Currency Devaluation:..............................................................................................13 Leather Goods:................................................................................................................................ 13 Overview:..................................................................................................................................13 Availability of Raw Materials:..................................................................................................13 Skilled Labor:............................................................................................................................13 Environmental Regulations:......................................................................................................13 Labor Conditions:..................................................................................................................... 13 Global Competition:..................................................................................................................13 Impact of Currency Devaluation:..............................................................................................13 Strategic Recommendations:........................................................................................................... 14 Invest in Technology and Innovation:.......................................................................................14 Improve Compliance with Standards:.......................................................................................14 Enhance Market Access:...........................................................................................................14 Support for SMEs:.................................................................................................................... 14 Focus on Sustainability:............................................................................................................14 Stabilize the Exchange Rate:.................................................................................................... 14 Reduce Production Costs:......................................................................................................... 14 Enhance Trade Facilitation:...................................................................................................... 14 Summary of Findings:..................................................................................................................... 14 Future Research Directions:............................................................................................................ 15 Factors Considered in Product Selection:........................................................................................15 Market Demand and Global Trends:............................................................................................... 15 Production Capabilities and Infrastructure:.....................................................................................15 Policy Environment and Government Support:.............................................................................. 15 Historical Performance and Growth Potential:................................................................................15 Recommendations:.......................................................................................................................... 16 Strengthening Market Access:.........................................................................................................16 Expand Trade Agreements:.......................................................................................................16 Market Diversification:.............................................................................................................16 Enhancing Production Capabilities:................................................................................................ 16 Invest in Technology:................................................................................................................16 Skill Development:................................................................................................................... 16 Supporting Innovation and Sustainability:...................................................................................... 16 R&D Investments:.................................................................................................................... 16 Sustainable Practices:................................................................................................................16 Improving Regulatory and Policy Frameworks:............................................................................. 16 Regulatory Reforms:.................................................................................................................16 Policy Consistency:...................................................................................................................16 Strengthening Infrastructure and Logistics:.................................................................................... 16 Infrastructure Development:..................................................................................................... 17 Digitalization:........................................................................................................................... 17 Promoting Quality and Brand Recognition:.................................................................................... 17 Quality Standards:.....................................................................................................................17 Page 681 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Branding Initiatives:..................................................................................................................17 Future Recommendations:...............................................................................................................17 Strategic Policy Interventions:........................................................................................................ 17 Reducing Production Costs:......................................................................................................17 Improving Labor Conditions:................................................................................................... 17 Negotiating Favorable Trade Agreements:............................................................................... 17 Diversifying the Product:................................................................................................................ 17 Garments:..................................................................................................................................18 Pharmaceuticals:....................................................................................................................... 18 Jute:........................................................................................................................................... 18 Leather Goods:..........................................................................................................................18 Enhancing Production Efficiency:...................................................................................................18 Garments:..................................................................................................................................18 Pharmaceuticals:....................................................................................................................... 18 Jute:........................................................................................................................................... 18 Leather Goods:..........................................................................................................................18 Strengthening Global Market Presence:..........................................................................................18 Garments:..................................................................................................................................18 Pharmaceuticals:....................................................................................................................... 19 Jute:........................................................................................................................................... 19 Leather Goods:..........................................................................................................................19 Selection of Garments, Pharmaceuticals, Jute, and Leather Goods:............................................... 19 Garments:........................................................................................................................................ 19 Pharmaceutical:............................................................................................................................... 19 Jute:..................................................................................................................................................19 Leather Goods:................................................................................................................................ 20 Sector-Specific Responses to Devaluation:.....................................................................................20 Importance of Cost Competitiveness:............................................................................................. 20 Role of Innovation and Diversification:.......................................................................................... 20 Strategic Trade Policies:..................................................................................................................20 Page 682 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Choices of Garments, Pharmaceuticals, Leather, and Jute Why Choose These Four Major Export Products? The research focuses on four major export products: garments, pharmaceuticals, jute, and leather goods. These products are selected based on their significant contributions to Bangladesh's economy, employment generation, export volume, and comparative advantage. Analyzing these products provides a comprehensive understanding of the impact of currency devaluation on Bangladesh's export performance and offers insights for future policy recommendations. Rationale for Selecting the Four Major Export Products: Economic Contribution: The garment sector is the largest export industry in Bangladesh, accounting for approximately 80% of the country's total exports. Employment Generation: It employs millions of workers, predominantly women, making it a crucial sector for socio-economic development. Comparative Advantage: Bangladesh has a comparative advantage in garment production due to its low labor costs and established manufacturing infrastructure. Export Volume: The sector's high export volume and market penetration in major global markets like the US, EU, and Canada make it a vital area of study. Economic Growth: The pharmaceutical industry is one of the fastest-growing sectors in Bangladesh, contributing significantly to the country's GDP. Technological Advancements: The sector has seen substantial technological advancements and regulatory improvements, positioning it well in the global market. Healthcare Needs: With a growing global demand for affordable medicines, Bangladeshi pharmaceutical products are gaining traction in developing countries. Export Potential: The potential for expanding exports to new markets, driven by competitive pricing and high-quality standards, makes it a key sector for analysis. 6 Page 683 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Historical Importance: Historically, jute was a major export product for Bangladesh, and it remains significant for its eco-friendly properties. Global Market Demand: There is a rising demand for sustainable and biodegradable products, positioning jute as an attractive alternative to synthetic fibers. Economic and Social Impact: Jute cultivation and processing provide employment to a large number of rural workers, supporting rural economies. Export Dynamics: Analyzing the jute sector helps understand the impact of currency devaluation on traditional industries and their modern market dynamics. Export Revenue: The leather goods sector is a substantial source of export revenue for Bangladesh, with products ranging from footwear to accessories. Value Addition: The sector offers opportunities for value addition, enhancing the country's export earnings. Challenges and Opportunities: Understanding the sector's challenges, such as environmental regulations and labor conditions, and opportunities for growth is crucial for policy development. Global Competition: Competing in the global market against countries with established leather industries requires strategic planning and support. Recommendations for the Future: Invest in Technological Upgradation: Encourage adoption of advanced technologies in manufacturing processes to enhance productivity and product quality. Provide incentives for research and development to foster innovation and maintain a competitive edge. Enhance Market Access: Negotiate favorable trade agreements with key markets to reduce tariffs and non-tariff barriers. 7 Page 684 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Diversify export destinations to reduce dependency on a few markets and mitigate risks associated with global economic fluctuations. Improve Labor Conditions: Implement policies to improve working conditions and ensure compliance with international labor standards. Provide training programs to enhance workers' skills and productivity. Support Sustainable Practices: Promote eco-friendly practices in industries like jute and leather to meet global demand for sustainable products. Encourage the development of green technologies and provide support for environmental compliance. Strengthen Regulatory Framework: Ensure a supportive regulatory environment that facilitates business operations and enhances export competitiveness. Simplify export procedures and reduce bureaucratic hurdles to improve efficiency. Provide Financial Support: Offer financial incentives, such as export subsidies and low-interest loans, to support exporters during periods of currency devaluation. Establish credit facilities to help firms invest in technology and expand their production capacities. Focus on Niche Markets: Identify and target niche markets where Bangladeshi products have a competitive advantage. Develop specialized products tailored to the needs of these markets to maximize export potential. The focus on garments, pharmaceuticals, jute, and leather goods provides a comprehensive understanding of how currency devaluation impacts Bangladesh's export performance. These sectors are pivotal to the country's economy, and strategic investments and policies tailored to their unique needs can enhance their global competitiveness. By implementing the recommended strategies, Bangladesh can better mitigate the effects of currency devaluation, sustain export growth, and secure a robust economic future. Criteria for Selecting Major Export Products: The selected products—garments, pharmaceuticals, jute, and leather goods—are pivotal to Bangladesh's economic growth. The garments sector is the largest contributor to export earnings, playing a vital role in the country's GDP. Pharmaceuticals have shown rapid growth, 8 Page 685 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) driven by technological advancements and regulatory support. Jute, a historically significant product, and leather goods also contribute substantially to export revenues, diversifying the economic base. These sectors are major employers in Bangladesh, offering employment to millions, particularly in the garments industry, which employs a large number of women. This employment generation fosters social and economic stability, reduces poverty, and promotes gender equality by providing livelihoods and empowering women. Export Volume and Value: The chosen products account for a significant share of Bangladesh's total exports, making their performance crucial to the country's economic health. The garments sector, in particular, has a large volume of exports that influence the balance of payments. Pharmaceuticals, jute, and leather goods also contribute substantially to export value, affecting the overall trade balance. Comparative Advantage: Advantage Factors: Bangladesh's comparative advantage in producing these goods stems from several factors: Garments: Low labor costs and efficient production processes give Bangladesh a competitive edge in the global garments market. Pharmaceuticals: Investments in modern manufacturing and regulatory support enhance the sector's competitiveness. Jute: Favorable climate conditions and expertise in jute cultivation and processing provide a natural advantage. Leather Goods: Established manufacturing capabilities and skilled labor contribute to the competitiveness of leather products. Policy Recommendations for the Future: Technology and Innovation: Invest in advanced technologies and innovation to improve productivity and quality in all sectors. This includes automation in garments, R&D in pharmaceuticals, and sustainable practices in jute and leather goods. Infrastructure Development: Improve infrastructure, such as transportation and logistics, to reduce costs and enhance efficiency. This will help all sectors, particularly those reliant on timely delivery of goods. 9 Page 686 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Quality Standards: Adopt and enforce higher quality standards to meet international market demands. This is crucial for sectors like pharmaceuticals and leather goods, where compliance with global standards can open new markets. Supporting Export Diversification: Market Access: Negotiate favorable trade agreements and explore new markets to reduce dependence on a few trading partners. Diversifying export destinations can mitigate risks associated with market fluctuations. Product Diversification: Encourage the development of new products and value-added goods. For instance, expanding the range of jute-based products can tap into the growing demand for eco-friendly items. Skill Development: Invest in training and skill development programs to enhance labor productivity and meet the demands of modern manufacturing processes. Working Conditions: Improve labor conditions and ensure compliance with international labor standards. This can enhance the reputation of Bangladeshi products and attract more buyers. Promoting Sustainable Practices: Environmental Compliance: Implement and enforce environmental regulations to ensure sustainable production practices. This is particularly important for the leather goods sector, which faces stringent environmental standards. Sustainability Initiatives: Promote sustainability initiatives, such as organic jute farming and eco-friendly garment production, to appeal to environmentally conscious consumers. Stabilizing Exchange Rates Macroeconomic Policies: Adopt sound macroeconomic policies to stabilize exchange rates and reduce volatility. A stable exchange rate environment can help exporters plan better and reduce the risks associated with currency fluctuations. Foreign Exchange Reserves: Maintain healthy foreign exchange reserves to buffer against external shocks and provide confidence to international buyers. 10 Page 687 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The focus on garments, pharmaceuticals, jute, and leather goods in the research on "Devaluation of Currency and Export Performance in Bangladesh" is justified by their substantial economic contribution, employment generation, export volume, and comparative advantage. To sustain and enhance the export performance of these sectors, strategic investments in technology, infrastructure, quality standards, labor conditions, and sustainability are essential. Additionally, stabilizing exchange rates through sound macroeconomic policies can further support the competitiveness of Bangladeshi exports in the global market. Future research should continue to explore these areas and expand the analysis to include more sectors and countries for a comprehensive understanding of the complex dynamics of currency devaluation and export performance. Analysis of the Four Major Export Products: Garments: Overview: The garments sector is the backbone of Bangladesh's export economy, accounting for a significant share of the country’s total exports. Over the years, the sector has achieved remarkable growth, primarily driven by competitive labor costs, favorable trade policies, and strong international demand. Major export destinations include the United States, European Union, and Canada. Growth Drivers: Competitive Labor Costs: Bangladesh offers some of the lowest labor costs in the garment industry, making it an attractive destination for buyers seeking cost-efficient production. Trade Policies: Government policies such as tax incentives, duty drawbacks, and favorable export-import regulations have supported the growth of the garment sector. Global Demand: Strong demand from major markets like the US and EU has driven the expansion of garment exports. Rising Production Costs: While labor costs remain low, other production costs, including raw materials and energy, have been increasing. Compliance with International Standards: Meeting stringent international labor and environmental standards is essential for maintaining market access but poses challenges for many firms. Competition: Bangladesh faces intense competition from other low-cost producers such as Vietnam, Cambodia, and India. Impact of Currency Devaluation: 11 Page 688 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Currency devaluation has generally benefited the garments sector by making Bangladeshi products cheaper in foreign markets, thereby boosting export volumes. However, the gains can be offset by the rising costs of imported raw materials and energy. Pharmaceuticals: Overview: The pharmaceutical industry in Bangladesh has experienced significant expansion, with local firms gaining market access in many developing countries. The sector benefits from technological advancements, skilled labor, and supportive regulatory frameworks. Technological Advancements: Investments in modern manufacturing processes and research and development (R&D) have enhanced the industry's productivity and quality. Skilled Labor: A well-trained workforce in pharmaceutical production and quality control has supported the sector's growth. Regulatory Support: Favorable local regulations, including policies that encourage domestic production and export, have contributed to the sector’s expansion. Quality Compliance: Ensuring compliance with stringent international quality standards is crucial for accessing and maintaining foreign markets. International Competition: Bangladeshi pharmaceutical firms face competition from established players in India and China, which have larger scales of production and more established market presences. Impact of Currency Devaluation: Devaluation has enhanced the competitiveness of Bangladeshi pharmaceuticals in international markets by lowering export prices in foreign currency terms. However, the sector needs to maintain high quality and compliance standards to capitalize on these price advantages. Jute: Overview: Jute has been a traditional export product for Bangladesh, historically known as the “golden fiber” due to its significance in the economy. Despite facing competition from synthetic fibers, the jute industry has sustained its export performance through product diversification and increasing demand for eco-friendly products. Eco-Friendly Demand: 12 Page 689 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Rising global demand for sustainable and eco-friendly products has boosted the demand for jute and jute products. Product Diversification: The industry has diversified its product range to include not only traditional jute sacks and ropes but also value-added products like jute bags, carpets, and handicrafts. Competition from Synthetics: Synthetic fibers, which are cheaper and more versatile, pose significant competition to jute products. Market Preferences: Changing global market preferences and the shift towards synthetic alternatives have impacted the demand for traditional jute products. Impact of Currency Devaluation: Currency devaluation has helped jute exports by making them more competitively priced in the global market. However, the sector’s ability to capitalize on devaluation depends on continued product diversification and tapping into the eco-friendly product market. Leather Goods: Overview: The leather goods sector in Bangladesh holds significant growth potential due to the availability of raw materials (hides and skins) and a skilled labor force. However, it faces several challenges, including environmental regulations, labor conditions, and global competition. Availability of Raw Materials: Bangladesh has a strong supply of raw hides and skins, which supports the leather goods industry. Skilled Labor: The sector benefits from a skilled workforce experienced in leather processing and goods manufacturing. Environmental Regulations: Compliance with stringent environmental standards, particularly in tanning processes, is a major challenge. Labor Conditions: Improving working conditions and ensuring compliance with international labor standards are crucial for sustaining export growth. Global Competition: 13 Page 690 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The sector faces stiff competition from other leading leather producers, such as Italy, India, and China. Impact of Currency Devaluation: Currency devaluation has made Bangladeshi leather goods more competitively priced in international markets, potentially increasing export volumes. However, the sector must address environmental and labor issues to maintain and enhance its competitive position. Strategic Recommendations: Invest in Technology and Innovation: Continued investment in technology and innovation is essential for all four sectors to improve productivity, quality, and competitiveness. This includes adopting modern manufacturing processes and enhancing R&D capabilities. Improve Compliance with Standards: Ensuring compliance with international labor and environmental standards will help maintain market access and improve the reputation of Bangladeshi exports. Enhance Market Access: Negotiating favorable trade agreements and exploring new markets will provide additional opportunities for export growth. Diversifying export destinations can reduce dependence on a few key markets. Support for SMEs: Providing support to small and medium-sized enterprises (SMEs) through access to affordable credit, technical assistance, and capacity-building programs can help these firms adapt to currency fluctuations and improve their export performance. Focus on Sustainability: Promoting sustainable practices, particularly in the jute and leather goods sectors, can align with global market trends towards eco-friendly products and enhance competitiveness. Stabilize the Exchange Rate: Implementing measures to stabilize the exchange rate and reduce volatility can provide a more predictable environment for exporters. Reduce Production Costs: Policymakers should focus on reducing production costs through infrastructure development, improving supply chain efficiency, and providing subsidies or incentives for key inputs. Enhance Trade Facilitation: Improving trade facilitation measures, such as customs procedures and logistics infrastructure, can reduce export lead times and costs, making Bangladeshi products more competitive. Summary of Findings: 14 Page 691 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The analysis of the four major export products—garments, pharmaceuticals, jute, and leather goods—highlights their significant contributions to Bangladesh's economy and the diverse ways in which currency devaluation impacts their export performance. Each sector has unique growth drivers and challenges that influence their responsiveness to exchange rate changes. Future Research Directions: Future research should continue to explore these sectors in greater detail, expand the scope to include additional products and countries, and conduct longitudinal studies to capture the dynamic effects of currency devaluation over time. This will provide deeper insights into the complex relationship between currency devaluation and export performance, informing more effective economic policies and strategies for enhancing Bangladesh’s export competitiveness. Factors Considered in Product Selection: Market Demand and Global Trends: The four selected export products—garments, pharmaceuticals, jute, and leather goods—are chosen due to their consistent and growing demand in global markets. The garments sector, for instance, benefits from the increasing preference for affordable fashion and fast fashion trends. Pharmaceuticals have seen rising demand driven by global health trends, aging populations, and increased healthcare spending. Jute, as an eco-friendly alternative to synthetic fibers, meets the growing consumer demand for sustainable products. Leather goods remain popular due to their durability and aesthetic appeal. Production Capabilities and Infrastructure: Bangladesh has developed robust production capabilities and infrastructure for these sectors. The garment industry boasts an extensive supply chain that includes raw material sourcing, manufacturing, and export logistics. This well-established network supports high-volume production and quick turnaround times. The pharmaceutical sector benefits from state-of-the-art manufacturing facilities, quality control systems, and a skilled workforce, ensuring compliance with international standards. Jute production is supported by favorable climatic conditions and a well-developed agricultural base, while the leather industry leverages traditional skills and modern processing facilities to produce high-quality products. Policy Environment and Government Support: Government policies and incentives have been crucial in supporting the growth of these export sectors. The garment industry has benefited from export incentives, duty-free access to key markets, and favorable trade agreements such as the Generalized System of Preferences (GSP). The pharmaceutical sector receives support through policies that encourage investment in R&D, infrastructure development, and regulatory reforms. The jute industry has seen initiatives aimed at promoting sustainable practices and diversifying product offerings, while the leather sector has received support for environmental compliance and improving labor conditions. Historical Performance and Growth Potential: The historical performance of these sectors highlights their resilience and potential for future growth. The garment industry has consistently shown strong export performance, driven by competitive pricing and efficient production processes. The pharmaceutical sector, though 15 Page 692 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) relatively newer as a major export contributor, has significant growth potential given the increasing global demand for generic medicines and Bangladesh's competitive manufacturing costs. Jute has experienced fluctuations but remains a key export due to its sustainability credentials. The leather sector, despite facing challenges, has opportunities for growth through product diversification and market expansion. Recommendations: To ensure sustained growth and enhance the competitiveness of these sectors, the following recommendations are proposed: Strengthening Market Access: Expand Trade Agreements: Negotiate and expand trade agreements with emerging markets to reduce tariffs and improve market access. Market Diversification: Encourage exporters to diversify their markets to reduce dependency on a few key regions and mitigate risks associated with market fluctuations. Enhancing Production Capabilities: Invest in Technology: Promote investment in advanced manufacturing technologies to improve productivity, quality, and efficiency. Skill Development: Implement training programs to enhance the skills of the workforce, focusing on new technologies and best practices in production. Supporting Innovation and Sustainability: R&D Investments: Increase investments in research and development to foster innovation, particularly in the pharmaceutical and jute sectors. Sustainable Practices: Encourage the adoption of sustainable practices across all sectors, including environmentally friendly production processes and materials. Improving Regulatory and Policy Frameworks: Regulatory Reforms: Streamline regulatory processes to facilitate easier compliance with international standards, particularly in the pharmaceutical and leather sectors. Policy Consistency: Ensure consistent and stable economic policies to provide a predictable business environment that encourages long-term investments. 16 Page 693 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Strengthening Infrastructure and Logistics: Infrastructure Development: Invest in infrastructure improvements, including transportation and logistics networks, to support efficient export operations. Digitalization: Promote the adoption of digital technologies in supply chain management to enhance efficiency and transparency. Promoting Quality and Brand Recognition: Quality Standards: Establish and enforce stringent quality standards to ensure that Bangladeshi products meet international benchmarks. Branding Initiatives: Support branding initiatives that highlight the quality, sustainability, and uniqueness of Bangladeshi products in global markets. By implementing these recommendations, Bangladesh can further strengthen the competitiveness of its key export sectors, capitalize on the opportunities presented by currency devaluation, and ensure sustainable economic growth in the long term. Future Recommendations: Strategic Policy Interventions: Policymakers should implement targeted strategies to support key export sectors, focusing on reducing production costs, improving labor conditions, and negotiating favorable trade agreements. Specific recommendations include: Reducing Production Costs: Lowering input costs through subsidies or tax incentives can enhance competitiveness. This could involve reducing tariffs on imported raw materials essential for production. Improving Labor Conditions: Enhancing labor conditions and worker rights can lead to higher productivity and better product quality. Initiatives such as improving workplace safety, offering training programs, and ensuring fair wages can contribute to a more robust workforce. Negotiating Favorable Trade Agreements: Securing trade agreements that provide preferential access to key markets can significantly boost exports. Policymakers should prioritize agreements that lower tariffs and remove non-tariff barriers, facilitating smoother market entry for Bangladeshi products. 17 Page 694 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Diversifying the Product: Diversifying the product base and investing in innovation are crucial for sustaining export growth. Each sector can leverage its strengths and explore new opportunities: Garments: Explore new garment segments such as high-performance sportswear and sustainable fashion, which have growing demand in international markets. Pharmaceuticals: Invest in R&D to develop new generic drugs and biosimilars. Focusing on niche markets, such as orphan drugs for rare diseases, can also provide competitive advantages. Jute: Capitalize on the growing demand for eco-friendly products by developing innovative jute-based products, such as biodegradable packaging materials and composite materials for automotive and construction industries. Leather Goods: Diversify into higher-value products such as luxury leather accessories and footwear, targeting premium markets with a focus on craftsmanship and sustainability. Enhancing Production Efficiency: Improving production efficiency through technology adoption and process optimization can significantly boost competitiveness. Recommendations for each sector include: Garments: Adopt advanced manufacturing technologies like automation, AI, and IoT to streamline production processes, reduce waste, and enhance quality control. Pharmaceuticals: Implement Good Manufacturing Practices (GMP) and invest in modern production facilities to meet international standards and increase output efficiency. Jute: Upgrade processing facilities and adopt mechanized farming techniques to improve yield and product quality. Leather Goods: Embrace cleaner production technologies and efficient waste management systems to comply with environmental regulations and reduce production costs. Strengthening Global Market Presence: 18 Page 695 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Expanding market access through trade agreements and strengthening global market presence are essential for sustained export growth. Specific strategies include: Garments: Leverage branding and marketing efforts to establish Bangladeshi garments as high-quality and reliable products in new and existing markets. Participating in international trade fairs and establishing trade missions can enhance visibility and market access. Pharmaceuticals: Explore new markets, particularly in developing countries with growing healthcare needs. Form strategic partnerships with international pharmaceutical companies to enhance market penetration and distribution networks. Jute: Promote jute products through global campaigns highlighting their eco-friendliness and sustainability. Establishing collaborations with international companies can help tap into new markets and consumer bases. Leather Goods: Strengthen ties with global fashion brands and retailers to secure long-term contracts and increase market share. Compliance with international standards and certifications can also improve market access and consumer trust. Focusing on these strategic policy interventions, diversification and innovation, production efficiency, and strengthening global market presence can enhance the export performance of Bangladesh's key sectors. By addressing these areas, Bangladesh can better navigate the challenges posed by currency devaluation and leverage new opportunities for sustained economic growth. Future research should continue to explore sector-specific strategies and global market trends to ensure comprehensive and adaptive policy recommendations. Selection of Garments, Pharmaceuticals, Jute, and Leather Goods: The selection of garments, pharmaceuticals, jute, and leather goods as the focal points for this analysis offers a comprehensive understanding of how currency devaluation impacts Bangladesh's export performance. Each of these sectors plays a crucial role in the country's economy, contributing significantly to employment, export volume, and economic stability. Garments: The garments sector, being the cornerstone of Bangladesh’s export economy, highlights how currency devaluation can enhance competitiveness by making products cheaper in international markets. The sector’s success underscores the importance of maintaining cost advantages and improving production efficiency to sustain growth. Pharmaceutical: The pharmaceutical industry showcases the potential benefits of currency devaluation in terms of market access and competitive pricing. However, it also reveals challenges related to stringent international regulations and the need for continuous technological advancements to maintain competitiveness. 19 Page 696 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Jute: The jute sector, with its historical significance and modern-day potential for eco-friendly products, illustrates how traditional industries can benefit from currency devaluation. The sector's performance emphasizes the importance of market diversification and innovation in product development to remain competitive. Leather Goods: The leather goods sector demonstrates both the opportunities and challenges posed by currency devaluation. While competitive pricing can enhance export volumes, the sector must also navigate environmental regulations and labor market conditions to fully capitalize on these opportunities. Sector-Specific Responses to Devaluation: Each sector responds differently to currency devaluation based on its unique characteristics and market dynamics. Understanding these responses helps tailor specific strategies to maximize benefits and mitigate challenges. Importance of Cost Competitiveness: Maintaining and enhancing cost competitiveness is vital for all sectors. This includes investing in technology, optimizing production processes, and improving labor conditions. Role of Innovation and Diversification: Continuous innovation and product diversification are crucial for sustaining export growth. Developing new products and exploring niche markets can help mitigate the risks associated with currency fluctuations and global market changes. Strategic Trade Policies: Effective trade policies, including favorable trade agreements and supportive government interventions, play a significant role in enhancing export performance. Policymakers must focus on creating an enabling environment for exporters. Future research should expand the scope to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the dynamic nature of export performance in response to exchange rate changes. Additionally, examining the role of digital transformation and sustainability practices in shaping export competitiveness would provide valuable insights for policymakers and industry stakeholders. Understanding the impact of currency devaluation on major export sectors like garments, pharmaceuticals, jute, and leather goods provides a solid foundation for formulating effective strategies to enhance Bangladesh’s export competitiveness. By leveraging these insights, policymakers and industry stakeholders can implement targeted interventions to support sustained economic growth and resilience in the global market. 20 Page 697 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 14 Export Destinations INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 698 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 11 Export Destinations: Table of Contents Export Destinations..................................................................................................................................6 Major Export Destinations:............................................................................................................... 6 United States:.....................................................................................................................................6 Impact of Devaluation:............................................................................................................... 6 Market Trends:............................................................................................................................6 European Union:................................................................................................................................6 Impact of Devaluation:............................................................................................................... 6 Market Trends:............................................................................................................................6 Canada:.............................................................................................................................................. 6 Impact of Devaluation:............................................................................................................... 6 Market Trends:............................................................................................................................7 Japan:.................................................................................................................................................7 Impact of Devaluation:............................................................................................................... 7 Market Trends:............................................................................................................................7 Analysis of Devaluation Effects Across Destinations:......................................................................7 Compliance and Standards:............................................................................................................... 7 Market Adaptation:............................................................................................................................7 Historical Context:.............................................................................................................................8 Evolution of Bangladesh's Export Destinations:............................................................................... 8 Initial Reliance on Key Markets:................................................................................................ 8 Expansion to New Markets:........................................................................................................8 Diversification Benefits:............................................................................................................. 8 Impact of Currency Devaluation on Market Diversification:............................................................8 Competitive Pricing:................................................................................................................... 8 Market Penetration:.....................................................................................................................8 Expansion and Consolidation:.................................................................................................... 8 Long-term Market Diversification:.............................................................................................9 Analysis of Key Export Destinations:............................................................................................... 9 Price Competitiveness:................................................................................................................9 Quality Maintenance:..................................................................................................................9 11 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 699 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Regulatory Compliance:............................................................................................................. 9 Affordability and Market Share:................................................................................................. 9 Generalized Scheme of Preferences (GSP):............................................................................... 9 Sustainability Standards:.............................................................................................................9 Price Advantage:.......................................................................................................................10 Navigating Barriers:..................................................................................................................10 Market Diversification:.............................................................................................................10 Price Advantage:.......................................................................................................................10 Quality and Innovation:............................................................................................................ 10 Regulatory Standards:...............................................................................................................10 Australia:......................................................................................................................................... 10 Price Competitiveness:..............................................................................................................10 Logistics and Distance:............................................................................................................. 10 Market Expansion:.................................................................................................................... 10 Reducing Production Costs:......................................................................................................11 Improving Labor Conditions:....................................................................................................11 Securing Favorable Trade Agreements:....................................................................................11 Product Diversification:............................................................................................................ 11 Investing in Innovation:............................................................................................................ 11 Technology Adoption:...............................................................................................................11 Process Optimization:............................................................................................................... 11 Expanding Market Access:....................................................................................................... 11 Strengthening Global Market Presence:....................................................................................11 Regional Comparisons:................................................................................................................... 12 South Asia:...................................................................................................................................... 12 Bangladesh's Export Performance in South Asia:...........................................................................12 India and Pakistan:....................................................................................................................12 Regional Trade Agreements:.....................................................................................................12 Southeast Asia:................................................................................................................................ 12 Markets in Southeast Asia:..............................................................................................................12 Potential for Increased Exports:................................................................................................12 Impact of Currency Devaluation:..............................................................................................12 Regional Trade Agreements:.....................................................................................................12 Middle East:.....................................................................................................................................12 Bangladesh's Exports to the Middle East:....................................................................................... 12 Key Markets:.............................................................................................................................12 Enhancing Competitiveness Through Devaluation:................................................................. 13 Critical Factors:.........................................................................................................................13 Sector-Specific Opportunities:..................................................................................................13 Garments:..................................................................................................................................13 Pharmaceuticals:....................................................................................................................... 13 Jute:........................................................................................................................................... 13 Leather Goods:..........................................................................................................................13 Reducing Production Costs:............................................................................................................ 13 Page 700 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Improving Labor Conditions:................................................................................................... 13 Negotiating Favorable Trade Agreements:............................................................................... 13 Product Diversification:............................................................................................................ 14 Investing in Innovation:............................................................................................................ 14 Technology Adoption:...............................................................................................................14 Process Optimization:............................................................................................................... 14 Expanding Market Access:....................................................................................................... 14 Expanding Scope:..................................................................................................................... 14 Longitudinal Studies:................................................................................................................ 14 Emerging Markets:.......................................................................................................................... 14 Africa:..............................................................................................................................................14 Potential Benefits of Currency Devaluation:...................................................................................14 Price Competitiveness:..............................................................................................................14 Market Penetration:...................................................................................................................14 Establishing Trade Relations:................................................................................................... 15 Understanding Local Market Dynamics:.................................................................................. 15 Leveraging Regional Trade Agreements:................................................................................. 15 Latin America:.................................................................................................................................15 Increased Competitiveness:...................................................................................................... 15 Expansion Opportunities:..........................................................................................................15 Challenges to Address:.................................................................................................................... 15 Language Barriers:....................................................................................................................15 Trade Regulations:.................................................................................................................... 15 Logistical Challenges:...............................................................................................................15 Building Local Partnerships:.....................................................................................................15 Tailoring Products to Local Preferences:..................................................................................16 Government Support and Trade Missions:............................................................................... 16 Key Takeaways:...............................................................................................................................16 Targeted Strategies:...................................................................................................................16 Market Diversification:.............................................................................................................16 Policy Support:..........................................................................................................................16 Innovation and Efficiency:........................................................................................................16 Impact of Devaluation on Export Performance by Destination:..................................................... 16 Short-term vs. Long-term Effects:...................................................................................................16 Short-term Effects:.......................................................................................................................... 16 Price Competitiveness:..............................................................................................................16 Increased Demand:....................................................................................................................16 Long-term Effects:...........................................................................................................................17 Sustained Quality and Innovation:............................................................................................17 Market Relationships:............................................................................................................... 17 Immediate Benefits:.................................................................................................................. 17 Cost Challenges:....................................................................................................................... 17 Delayed Impact:........................................................................................................................ 17 Quality and Compliance:.......................................................................................................... 17 Page 701 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Variable Impact:........................................................................................................................ 17 Product Diversification:............................................................................................................ 17 Competitive Pricing:................................................................................................................. 18 Quality and Market Access:......................................................................................................18 Strategic Implications for Policymakers:........................................................................................ 18 Diversification Strategies:............................................................................................................... 18 Identifying New Markets:................................................................................................................18 Enhancing Trade Relationships:......................................................................................................18 Strengthening Bilateral Agreements:.............................................................................................. 18 Participation in Multilateral Trade Forums:.................................................................................... 19 Reducing Dependence on Major Markets:...................................................................................... 19 Exploring Regional and Emerging Markets:...................................................................................19 Identifying Potential New Markets:................................................................................................ 19 Research and Identify Potential New Markets:........................................................................ 19 Government Support in Market Research:............................................................................... 19 Trade Missions:.........................................................................................................................20 Leveraging Trade Agreements:....................................................................................................... 20 Maximize Use of Existing Agreements:................................................................................... 20 Negotiate New Trade Agreements:...........................................................................................20 Strengthening Export Competitiveness:.......................................................................................... 20 Invest in Enhancing Competitiveness:......................................................................................20 Innovation and R&D:................................................................................................................20 Quality Improvement:...............................................................................................................20 Compliance with International Standards:................................................................................20 Garments:..................................................................................................................................21 Pharmaceuticals:....................................................................................................................... 21 Jute:........................................................................................................................................... 21 Leather Goods:..........................................................................................................................21 Understanding the Impact of Currency Devaluation:......................................................................21 Garments Sector:.......................................................................................................................21 Pharmaceuticals:....................................................................................................................... 21 Jute:........................................................................................................................................... 21 Leather Goods:..........................................................................................................................22 Formulating Effective Export Strategies:........................................................................................22 Market Diversification:.............................................................................................................22 Enhancing Trade Relationships:............................................................................................... 22 Investing in Technology and Innovation:..................................................................................22 Improving Labor Conditions:................................................................................................... 22 Compliance with International Standards:................................................................................22 Page 702 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Export Destinations Understanding the export destinations of Bangladesh is crucial in analyzing the impact of currency devaluation on export performance. Export destinations not only determine the market reach of Bangladesh's products but also influence the resilience and adaptability of its export sector to currency fluctuations. This section examines the major export markets for Bangladesh and assesses how currency devaluation affects export performance across these destinations. Major Export Destinations: United States: The United States is one of the largest markets for Bangladeshi exports, particularly in the garments sector. The country’s demand for affordable apparel makes Bangladesh a significant supplier. Impact of Devaluation: Currency devaluation generally makes Bangladeshi garments cheaper for American importers, boosting demand. However, this benefit can be offset by trade barriers and compliance requirements, such as tariffs and labor standards. Market Trends: The US market trends indicate a growing demand for sustainable and ethically produced garments, which Bangladesh must adapt to in order to maintain and grow its market share. European Union: The European Union (EU) is another major destination for Bangladeshi exports, including garments, jute products, and pharmaceuticals. Impact of Devaluation: Similar to the US, devaluation enhances the price competitiveness of Bangladeshi products in the EU. The EU’s Generalized System of Preferences (GSP) scheme, which offers preferential tariffs to developing countries, further amplifies this effect. Market Trends: Increasing regulations related to environmental and labor standards in the EU necessitate that Bangladeshi exporters continuously improve their practices to remain competitive. Canada: Canada is an important market for Bangladeshi garments and leather goods. The country’s demand for these products provides significant export opportunities for Bangladesh. Impact of Devaluation: Devaluation makes Bangladeshi exports more attractive to Canadian buyers. However, the benefits are moderated by the cost of compliance with Canadian regulations and standards. 6 Page 703 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Trends: Canadian consumers are increasingly favoring sustainable and ethically produced goods, requiring Bangladeshi exporters to focus on improving sustainability practices. Japan: Japan is a growing market for Bangladeshi pharmaceuticals and garments. The country’s demand for high-quality, cost-effective products aligns well with Bangladesh’s export offerings. Impact of Devaluation: Currency devaluation helps Bangladeshi products remain price-competitive in Japan. However, the high standards for quality and compliance in Japan pose challenges for exporters. Market Trends: There is a growing preference for high-quality and innovative products in Japan, pushing Bangladeshi exporters to enhance their production and quality control processes. Analysis of Devaluation Effects Across Destinations: Currency devaluation generally enhances the price competitiveness of Bangladeshi exports across all major markets. By making products cheaper in foreign currency terms, devaluation attracts more buyers and boosts export volumes. Compliance and Standards: While devaluation provides a price advantage, meeting the stringent compliance and regulatory standards of major markets is critical. Failure to adhere to these standards can negate the benefits of devaluation and lead to trade restrictions. Market Adaptation: The ability of Bangladeshi exporters to adapt to changing market trends, such as the growing demand for sustainable and ethically produced goods, is essential for maintaining competitiveness. Investing in quality improvements and sustainable practices can help mitigate the impact of currency devaluation on export performance. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. By understanding the factors influencing these sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. Export destinations play a crucial role in determining the success of these strategies. By focusing on price competitiveness, compliance, and market adaptation, Bangladesh can leverage currency devaluation to strengthen its export sector and achieve sustainable growth. Future research should expand the scope to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the dynamic nature of export performance in response to exchange rate changes. 7 Page 704 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Historical Context: Evolution of Bangladesh's Export Destinations: Over the past few decades, Bangladesh has significantly diversified its export destinations, moving away from reliance on a few key markets to a broader range of global destinations. This evolution has been crucial in stabilizing export revenues and mitigating risks associated with economic fluctuations in any single market. Initial Reliance on Key Markets: In the early stages of its export journey, Bangladesh heavily relied on a limited number of markets, primarily the United States and the European Union. These regions were major importers of Bangladeshi garments, which constituted the bulk of the country's exports. Expansion to New Markets: Over time, Bangladesh began exploring and penetrating new markets in Asia, the Middle East, and Africa. This expansion was driven by strategic trade agreements, improved diplomatic relations, and targeted marketing efforts by Bangladeshi exporters. Diversification Benefits: The diversification of export destinations has helped stabilize Bangladesh's export revenues by spreading risk across multiple markets. This strategy has reduced the country's vulnerability to economic downturns, trade policy changes, and market-specific demand fluctuations. Impact of Currency Devaluation on Market Diversification: Currency devaluation has been a key factor in Bangladesh's strategy to diversify its export markets. Devaluation makes Bangladeshi products more competitively priced in international markets, facilitating entry into and expansion within new markets. Competitive Pricing: When the Bangladeshi currency is devalued, the prices of its export products decrease in foreign currency terms. This makes Bangladeshi goods more attractive to international buyers, providing a competitive edge over products from countries with stronger currencies. Market Penetration: Devaluation has enabled Bangladeshi exporters to penetrate new markets by offering competitively priced products. For example, following devaluation periods, Bangladeshi garments have found new buyers in emerging markets in Asia and Africa, where price sensitivity is higher. Expansion and Consolidation: Beyond initial market entry, devaluation has allowed Bangladeshi exporters to expand their market share in existing destinations. Lower prices help retain and attract more customers, thereby consolidating Bangladesh's position in these markets. 8 Page 705 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Long-term Market Diversification: Sustained periods of currency devaluation have contributed to long-term market diversification. Exporters, taking advantage of competitive pricing, have established a presence in diverse markets, leading to a more resilient export sector less dependent on traditional markets. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis offers valuable insights into the impact of currency devaluation on Bangladesh's export performance. Understanding the factors influencing these sectors, such as competitive pricing due to devaluation and strategic market diversification, helps policymakers and industry stakeholders formulate effective strategies to enhance export competitiveness and sustain economic growth. By leveraging historical trends and addressing sector-specific challenges, Bangladesh can continue to build a robust and diversified export sector. Analysis of Key Export Destinations: The United States is a pivotal market for Bangladeshi exports, especially for garments. Currency devaluation enhances the price competitiveness of Bangladeshi garments in the U.S. market, leading to increased export volumes. Key considerations include: Price Competitiveness: Devaluation makes Bangladeshi garments cheaper compared to those from countries with stronger currencies, boosting sales in the U.S. Quality Maintenance: Despite the price advantage, maintaining high-quality standards is crucial to meet the demands of U.S. consumers and retailers. Regulatory Compliance: Exporters must adhere to stringent import regulations and standards set by U.S. authorities, including labor practices and product safety requirements. The European Union (EU) is a significant destination for Bangladeshi exports, including garments, textiles, and leather goods. The impact of currency devaluation includes: Affordability and Market Share: Devaluation makes Bangladeshi exports more affordable in the EU, potentially increasing market share. Generalized Scheme of Preferences (GSP): The EU's GSP facilitates trade by offering preferential access to Bangladeshi products, though compliance with specific standards is required. Sustainability Standards: Increasing focus on sustainable and ethical production practices in the EU requires Bangladeshi exporters to adapt and comply with these standards. 9 Page 706 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Canada imports a variety of Bangladeshi products, including garments and seafood. The effects of currency devaluation on exports to Canada are similar to other Western markets: Price Advantage: Devaluation improves the price competitiveness of Bangladeshi products in Canada, potentially increasing export volumes. Navigating Barriers: Exporters must manage tariff and non-tariff barriers effectively to maximize the benefits of devaluation. Market Diversification: Opportunities exist to diversify exports beyond garments to include more high-value and niche products. Japan is a key market for Bangladeshi jute and leather goods. The impact of currency devaluation on exports to Japan includes: Price Advantage: Devaluation gives Bangladeshi products a price advantage, making them more competitive in the Japanese market. Quality and Innovation: Japanese consumers have high expectations for quality and innovation, requiring Bangladeshi exporters to continually improve their offerings. Regulatory Standards: Compliance with Japan's stringent regulatory standards is essential for maintaining and expanding market access. Australia: Australia's import market for Bangladeshi goods, particularly textiles and garments, benefits from currency devaluation: Price Competitiveness: Devaluation enhances the price competitiveness of Bangladeshi textiles and garments in Australia, potentially boosting exports. Logistics and Distance: Managing logistics costs and ensuring timely delivery are crucial due to the distance between the two countries. Market Expansion: 10 Page 707 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Opportunities exist to expand into other product categories and increase market presence in Australia. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. By understanding the factors influencing these sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. Reducing Production Costs: Implementing policies to lower production costs can enhance the competitiveness of Bangladeshi exports. Improving Labor Conditions: Ensuring fair wages and safe working environments can boost productivity and attract investment. Securing Favorable Trade Agreements: Engaging in bilateral and multilateral negotiations to reduce trade barriers and enhance market access. Product Diversification: Encouraging firms to diversify their product offerings can help mitigate risks and meet changing consumer preferences. Investing in Innovation: Supporting technological innovation and encouraging firms to adopt new technologies can improve product quality and efficiency. Technology Adoption: Investing in advanced manufacturing technologies can reduce production costs and improve product quality. Process Optimization: Streamlining production processes can optimize operations and reduce costs. Expanding Market Access: Securing trade agreements that provide preferential access to key markets can boost exports. Strengthening Global Market Presence: Expanding market access through strategic trade agreements and enhancing global market presence are critical for sustaining export growth. The product-specific analysis provides a comprehensive understanding of how currency devaluation affects the export performance of key sectors in Bangladesh. The findings highlight the importance of 11 Page 708 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) considering various factors, such as economic policies, global market conditions, and technological advancements, in shaping export success. Future research should expand the scope to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the dynamic nature of export performance in response to exchange rate changes. Regional Comparisons: South Asia: Bangladesh's Export Performance in South Asia: India and Pakistan: The export performance of Bangladesh in South Asian markets like India and Pakistan is relatively less influenced by currency devaluation. This is due to the highly competitive nature of these markets and similar economic conditions. Both India and Pakistan have substantial garment industries, which means Bangladesh faces significant competition. Regional Trade Agreements: Trade agreements within the South Asian Association for Regional Cooperation (SAARC) play a crucial role in facilitating trade. Agreements such as the South Asian Free Trade Area (SAFTA) aim to reduce tariffs and increase trade among member countries. However, political tensions and non-tariff barriers often impede the full realization of these benefits. Southeast Asia: Markets in Southeast Asia: Potential for Increased Exports: Countries like Malaysia, Singapore, and Thailand offer significant potential for increased exports from Bangladesh. Geographic proximity reduces transportation costs, and the growing demand in these rapidly developing economies provides opportunities for Bangladeshi exporters. Impact of Currency Devaluation: Currency devaluation can enhance the price competitiveness of Bangladeshi products in Southeast Asian markets. However, the competition is intense due to the presence of other regional players with strong manufacturing bases, such as Vietnam and Indonesia. Regional Trade Agreements: Participation in regional trade agreements such as the ASEAN Free Trade Area (AFTA) can help Bangladesh secure better market access and reduce tariff barriers. Middle East: Bangladesh's Exports to the Middle East: Key Markets: The Middle East, particularly countries like Saudi Arabia, the United Arab Emirates (UAE), and Qatar, import a range of Bangladeshi products, including garments, textiles, and food items. 12 Page 709 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Enhancing Competitiveness Through Devaluation: Currency devaluation enhances the price competitiveness of Bangladeshi exports in these markets. The lower cost of Bangladeshi products makes them more attractive to buyers in the Middle East. Critical Factors: Political stability and favorable trade policies in Middle Eastern countries are crucial for sustaining export growth. For instance, favorable trade agreements and a stable political environment in the UAE have contributed to strong trade relations with Bangladesh. Sector-Specific Opportunities: The Middle East's demand for textiles and garments is driven by both local consumption and the re-export market, where products are imported and then re-exported to other regions. Additionally, the region's interest in eco-friendly and sustainable products presents opportunities for Bangladesh's jute and leather sectors. Garments: The cornerstone of Bangladesh's export economy, benefiting significantly from currency devaluation due to competitive labor costs and strong global demand. Pharmaceuticals: A growing sector that leverages technological advancements and regulatory support but faces challenges in meeting stringent international standards. Jute: An industry with historical significance and potential for growth in eco-friendly markets, though facing competition from synthetic alternatives. Leather Goods: A sector with potential constrained by environmental regulations and labor market conditions but benefiting from competitive pricing post-devaluation. Reducing Production Costs: Implement policies that lower production costs through subsidies, reduced tariffs, and tax incentives. Improving Labor Conditions: Enhance labor conditions to boost productivity and attract investment, aligning with international standards. Negotiating Favorable Trade Agreements: Secure trade agreements that provide preferential market access and reduce trade barriers. 13 Page 710 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Product Diversification: Encourage firms to diversify their product offerings to mitigate risks from market fluctuations. Investing in Innovation: Support technological innovation to improve product quality and efficiency. Technology Adoption: Invest in advanced manufacturing technologies to reduce costs and improve quality. Process Optimization: Streamline production processes to eliminate waste and enhance productivity. Expanding Market Access: Secure trade agreements and strengthen global market presence through strategic partnerships and compliance with international standards. The product-specific analysis highlights how currency devaluation affects the export performance of key sectors in Bangladesh, emphasizing the importance of considering various factors such as economic policies, global market conditions, and technological advancements in shaping export success. Expanding Scope: Include more sectors and countries to provide a broader perspective on the effects of currency devaluation. Longitudinal Studies: Conduct longitudinal studies to offer deeper insights into the dynamic nature of export performance in response to exchange rate changes. Emerging Markets: Africa: Africa is an emerging market with significant potential for Bangladeshi exports. The continent's growing middle class, increasing urbanization, and expanding infrastructure projects create a demand for a variety of products, including garments, pharmaceuticals, jute, and leather goods. Potential Benefits of Currency Devaluation: Price Competitiveness: Currency devaluation makes Bangladeshi products more competitively priced in the price-sensitive African markets. This can boost exports, especially for garments and pharmaceuticals, which are essential and high-demand commodities. Market Penetration: 14 Page 711 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Affordable Bangladeshi products can capture a larger market share, especially in countries with limited local manufacturing capabilities. Strategies for Success: Establishing Trade Relations: Building strong trade relations with African countries through bilateral agreements and participation in trade fairs and exhibitions can enhance market access. Understanding Local Market Dynamics: Conducting market research to understand consumer preferences, purchasing power, and regulatory requirements is crucial for successful market entry. Leveraging Regional Trade Agreements: Partnering with regional trade organizations and leveraging agreements like the African Continental Free Trade Area (AfCFTA) can facilitate smoother trade and reduce tariffs and barriers. Latin America: Latin America, although currently a smaller market for Bangladeshi exports, holds substantial potential for growth. Countries in this region are diversifying their trade partners and looking for cost-effective import options. Increased Competitiveness: Devaluation can make Bangladeshi products more attractive by lowering prices in local currency terms, helping to penetrate markets in Latin America. Expansion Opportunities: Countries like Brazil, Mexico, and Argentina offer significant opportunities for export growth in sectors like garments and pharmaceuticals. Challenges to Address: Language Barriers: Overcoming language barriers through localization of marketing materials and employing bilingual staff can facilitate better communication and business dealings. Trade Regulations: Navigating complex trade regulations and compliance standards in different Latin American countries requires careful planning and legal expertise. Logistical Challenges: Addressing logistical challenges such as shipping costs, delivery times, and supply chain reliability is essential for maintaining competitiveness. 15 Page 712 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Building Local Partnerships: Forming partnerships with local distributors and retailers can enhance market penetration and distribution efficiency. Tailoring Products to Local Preferences: Adapting products to meet local tastes and preferences can increase their appeal and acceptance in the market. Government Support and Trade Missions: Leveraging government support for trade missions and export promotion programs can help establish a presence in Latin America. Key Takeaways: Targeted Strategies: Tailored strategies for each sector are essential to address specific challenges and leverage unique opportunities. Market Diversification: Exploring and penetrating emerging markets in Africa and Latin America can reduce dependency on traditional markets and drive export growth. Policy Support: Effective policy interventions, such as reducing production costs, improving labor conditions, and negotiating favorable trade agreements, are crucial for enhancing competitiveness. Innovation and Efficiency: Investing in technological advancements and process optimization can sustain long-term growth and resilience against currency fluctuations. Future research should expand to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the dynamic nature of export performance in response to exchange rate changes. This research should also consider the impact of global economic trends, trade policies, and technological innovations on export competitiveness. Impact of Devaluation on Export Performance by Destination: Short-term vs. Long-term Effects: Short-term Effects: Price Competitiveness: Currency devaluation often results in a rapid increase in export volumes as products become cheaper for foreign buyers. This price competitiveness can attract new customers and boost sales in the short term. Increased Demand: 16 Page 713 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sectors that rely heavily on price sensitivity, such as garments, typically see immediate benefits. For example, Bangladeshi garments may experience a surge in orders from major markets like the United States and the European Union due to lower prices. Long-term Effects: Sustained Quality and Innovation: Long-term success relies on maintaining product quality, continuous innovation, and strengthening market relationships. Merely relying on price competitiveness can lead to diminishing returns if product quality or innovation lags behind competitors. Market Relationships: Building and maintaining strong relationships with international buyers is crucial for long-term export growth. Consistent quality, timely delivery, and responsiveness to market demands foster trust and loyalty, which are essential for sustained success. Sector-specific Impacts Immediate Benefits: The garment sector usually experiences immediate positive effects from currency devaluation. Lower prices in foreign currencies make Bangladeshi garments more attractive, leading to a quick boost in export volumes. Cost Challenges: However, if devaluation leads to higher costs for imported raw materials, the net benefit may be reduced. Garment manufacturers must balance competitive pricing with managing increased production costs. Delayed Impact: The pharmaceutical sector faces a more complex adjustment process. Regulatory approvals and quality standards in foreign markets mean that the benefits of devaluation may not be immediately realized. Quality and Compliance: Pharmaceutical exports depend heavily on maintaining stringent quality standards and complying with international regulations. Devaluation can provide a pricing advantage, but only if firms can sustain high-quality production and navigate regulatory hurdles. Variable Impact: The jute sector's response to devaluation depends on global demand and competition from synthetic alternatives. In periods of high demand for eco-friendly products, devaluation can significantly boost exports. Product Diversification: To maximize benefits, the jute sector should focus on diversifying its product range and developing innovative uses for jute. This can help capture new markets and sustain growth beyond short-term price advantages. 17 Page 714 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Competitive Pricing: Devaluation can enhance the price competitiveness of leather goods, but the sector must also address challenges related to environmental regulations and labor conditions. Quality and Market Access: Long-term success in leather exports requires compliance with environmental standards and improving labor conditions. Enhancing production quality and expanding market access through trade agreements can support sustained growth. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. Each sector demonstrates unique responses to devaluation, influenced by factors such as price competitiveness, regulatory requirements, and global market conditions. By understanding these sector-specific impacts, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. Investing in quality, innovation, and market relationships is crucial for leveraging the benefits of devaluation in both the short and long term. This provides a comprehensive understanding of how currency devaluation impacts Bangladesh's export performance. These sectors were chosen due to their significant contributions to the economy, employment generation, export volume, and comparative advantage. By examining these products, the analysis offers critical insights into the factors influencing their performance and variability over time. Understanding these dynamics allows policymakers and industry stakeholders to develop effective strategies to enhance export competitiveness and sustain economic growth. Strategic Implications for Policymakers: Diversification Strategies: Identifying New Markets: Policymakers should actively work to identify and cultivate new markets for Bangladeshi exports. This includes conducting market research to understand demand patterns and consumer preferences in untapped regions. Support mechanisms, such as market entry grants and export promotion initiatives, can help exporters navigate and overcome entry barriers in new markets. Providing exporters with the necessary tools and resources to succeed in new markets is essential. This includes offering training programs on international trade regulations, market entry strategies, and export financing options. Establishing export promotion agencies that focus on market diversification and providing exporters with real-time market intelligence can also enhance their competitiveness. Enhancing Trade Relationships: Strengthening Bilateral Agreements: Enhancing existing trade relationships through the negotiation of bilateral trade agreements can provide more stable and favorable conditions for exports. These agreements should focus 18 Page 715 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) on reducing tariffs, simplifying customs procedures, and improving market access for Bangladeshi products. Participation in Multilateral Trade Forums: Active participation in multilateral trade forums, such as the World Trade Organization (WTO) and regional trade blocs, can open up new opportunities and provide a platform to address trade barriers. Policymakers should leverage these forums to advocate for favorable trade policies and to collaborate on initiatives that promote regional economic integration. Reducing Dependence on Major Markets: Exploring Regional and Emerging Markets: Reducing dependence on major markets like the U.S. and EU by diversifying into regional and emerging markets can provide a buffer against economic and political shifts in those regions. Policymakers should focus on strengthening trade relations with neighboring countries and emerging economies, where demand for Bangladeshi products is growing. Regional Trade Agreements: Engaging in regional trade agreements, such as those within the South Asian Association for Regional Cooperation (SAARC) and the Association of Southeast Asian Nations (ASEAN), can facilitate easier market access and enhance trade flows. These agreements should aim to reduce trade barriers, harmonize standards, and create a more predictable trading environment for exporters. The detailed analysis of the garment, pharmaceutical, jute, and leather goods sectors in the context of currency devaluation provides valuable insights for policymakers and industry stakeholders. By understanding the factors influencing these sectors, targeted strategies can be formulated to enhance export competitiveness and sustain economic growth. Diversification, strengthening trade relationships, and reducing dependence on major markets are crucial steps for ensuring the resilience and success of Bangladesh's export economy in a dynamic global environment. Identifying Potential New Markets: Research and Identify Potential New Markets: To sustain and enhance export growth, it is crucial to explore new markets that show increasing demand for Bangladeshi products. Conducting thorough market research can identify such opportunities. The government can play a pivotal role by funding market research initiatives and organizing trade missions. Government Support in Market Research: Establish dedicated research teams to analyze global market trends, consumer preferences, and demand forecasts. These teams can identify emerging markets and provide detailed reports on potential opportunities for Bangladeshi exporters. 19 Page 716 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Trade Missions: Organize trade missions to target countries, allowing Bangladeshi exporters to establish direct connections with potential buyers and distributors. These missions can also help gather first-hand market intelligence and understand local business practices. Leveraging Trade Agreements: Utilize Existing and Negotiate New Trade Agreements: Trade agreements can significantly lower barriers to entry in new markets, providing Bangladeshi products with a competitive edge. Maximize Use of Existing Agreements: Ensure that businesses are fully aware of and utilize the benefits of existing trade agreements. Conduct workshops and provide resources to help exporters navigate the terms and conditions of these agreements. Negotiate New Trade Agreements: Actively pursue new trade agreements with countries and regions showing strong growth potential. Focus on reducing tariffs and non-tariff barriers to facilitate easier access for Bangladeshi products. Strengthening Export Competitiveness: Invest in Enhancing Competitiveness: To remain competitive in the global market, Bangladeshi products must continuously improve in terms of innovation, quality, and compliance with international standards. Innovation and R&D: Encourage investment in research and development to foster innovation. Government grants and tax incentives can stimulate private sector investment in R&D. Collaboration with academic institutions and international partners can also spur innovation. Quality Improvement: Focus on improving the quality of products to meet and exceed international standards. Implement quality control measures and provide training programs to enhance the skills of the workforce. Compliance with International Standards: Ensure that products comply with international safety, environmental, and quality standards. This compliance not only opens up new markets but also builds a reputation for reliability and quality. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. These sectors were chosen due to their significant contributions to the economy, employment generation, and export volume. By understanding 20 Page 717 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) the factors influencing these sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. Garments: The backbone of Bangladesh's export economy, benefitting significantly from devaluation but facing rising production costs. Pharmaceuticals: A growing sector with opportunities in expanding market access and technological advancements. Jute: A traditional export with fluctuating performance, currently poised to leverage the eco-friendly trend. Leather Goods: A sector with potential, needing improvements in environmental compliance and labor conditions. Effective policy measures, strategic investments, and a focus on innovation and market diversification are crucial for sustaining and enhancing the export performance of these key sectors. By implementing these recommendations, Bangladesh can strengthen its global market presence and achieve sustained economic growth. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. Each of these sectors represents a significant component of Bangladesh's export economy, contributing to economic growth, employment generation, and foreign exchange earnings. Understanding the Impact of Currency Devaluation: Currency devaluation can have a profound effect on export performance. By making Bangladeshi products cheaper for foreign buyers, devaluation can boost export volumes. However, the extent of this benefit varies across different sectors and is influenced by factors such as production costs, labor efficiency, global market conditions, and trade policies. Garments Sector: As the backbone of Bangladesh's export economy, the garment sector benefits significantly from devaluation, enhancing its competitive edge in international markets. However, rising production costs and global market fluctuations can moderate these benefits. Pharmaceuticals: This sector has seen notable growth, driven by technological advancements and supportive regulatory frameworks. Devaluation can improve market access and competitive pricing, though stringent international standards and competition pose challenges. 21 Page 718 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Jute: Historically a major export product, jute's performance has fluctuated due to changing global demand and competition from synthetic alternatives. Devaluation can enhance competitive pricing, but market diversification and innovation are crucial for sustained growth. Leather Goods: While the leather sector has potential for growth, it faces challenges related to environmental regulations, labor conditions, and global competition. Devaluation can provide competitive pricing advantages, but compliance with international standards and improving production efficiency are essential. Formulating Effective Export Strategies: Understanding the impact of currency devaluation on these sectors is crucial for formulating effective export strategies. Policymakers and industry stakeholders should consider the following: Market Diversification: Reducing dependence on major markets and exploring new destinations can mitigate risks associated with market fluctuations. Diversifying export markets ensures broader market access and reduces vulnerability to economic changes in key markets. Enhancing Trade Relationships: Strengthening trade relationships through favorable trade agreements and partnerships can provide a stable and predictable export environment. Negotiating terms that reduce trade barriers and enhance market access is vital for sustained export growth. Investing in Technology and Innovation: Adopting advanced manufacturing technologies and investing in R&D can improve production efficiency and product quality. Innovation drives competitiveness and enables firms to meet changing consumer preferences and market demands. Improving Labor Conditions: Ensuring fair wages, safe working environments, and social benefits for workers boosts productivity and attracts investment. Aligning labor conditions with international standards enhances the overall quality of the workforce and supports sustainable export growth. Compliance with International Standards: Meeting stringent environmental and regulatory standards is essential for maintaining access to international markets. Investing in sustainable practices and ensuring compliance can enhance the reputation and competitiveness of Bangladeshi exports. The analysis reveals that currency devaluation positively impacts Bangladesh's export performance, but the extent varies across sectors. By focusing on market diversification, enhancing trade relationships, reducing production costs, improving labor conditions, and investing in technology and innovation, Bangladesh can strengthen its export sector and ensure sustainable economic growth. 22 Page 719 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Future research should expand the scope to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the dynamic nature of export performance in response to exchange rate changes. Additionally, examining the role of digital trade, e-commerce, and global value chains in influencing export competitiveness can provide valuable insights for policymakers and industry stakeholders. 23 Page 720 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 15 Insights for New Entrepreneurs INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 721 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 12 Insights for New Entrepreneurs: Table of Contents Insights for New Entrepreneurs............................................................................................................... 7 Sector-Specific Insights:....................................................................................................................7 Garments:.......................................................................................................................................... 7 Cost Competitiveness:................................................................................................................ 7 Market Expansion:...................................................................................................................... 7 Innovation:.................................................................................................................................. 7 Pharmaceutical:................................................................................................................................. 7 Regulatory Navigation:...............................................................................................................7 Technological Advancements:.................................................................................................... 7 Strategic Partnerships:................................................................................................................ 7 Jute:....................................................................................................................................................8 Product Diversification:.............................................................................................................. 8 Competitive Pricing:................................................................................................................... 8 Sustainable Practices:..................................................................................................................8 Leather Goods:.................................................................................................................................. 8 Environmental Compliance:....................................................................................................... 8 Quality Improvement:.................................................................................................................8 Market Penetration:.....................................................................................................................8 Strategic Recommendations for New Entrepreneurs:....................................................................... 8 Understand Market Dynamics:................................................................................................... 8 Leverage Government Support:..................................................................................................8 Invest in Technology:..................................................................................................................8 Diversify Product Offerings:.......................................................................................................9 Focus on Sustainability:..............................................................................................................9 Form Strategic Partnerships:.......................................................................................................9 Overview of Currency Devaluation:................................................................................................. 9 Definition and Mechanisms:..............................................................................................................9 Definition:................................................................................................................................... 9 Mechanisms of Devaluation:.............................................................................................................9 12 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 722 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Monetary Policy Decisions:........................................................................................................9 Foreign Exchange Market Interventions:....................................................................................9 Fiscal Policy Adjustments:......................................................................................................... 9 Objectives and Benefits:..................................................................................................................10 Boosting Exports:......................................................................................................................10 Stimulating Economic Growth:................................................................................................ 10 Reducing Trade Deficits:.......................................................................................................... 10 Increasing Foreign Exchange Reserves:................................................................................... 10 Potential Risks and Challenges:...................................................................................................... 10 Inflation:....................................................................................................................................10 Debt Burden:.............................................................................................................................10 Retaliation:................................................................................................................................10 Market Volatility:...................................................................................................................... 10 Bangladesh:...............................................................................................................................10 China:........................................................................................................................................ 11 Historical Context in Bangladesh:...................................................................................................11 Reason for Devaluation:............................................................................................................11 Economic Impact:..................................................................................................................... 11 2001 Devaluation:............................................................................................................................11 Reason for Devaluation:.................................................................................................................. 11 Economic Impact:..................................................................................................................... 11 Reason for Devaluation: Global financial crisis..............................................................................11 Economic Impact:..................................................................................................................... 11 Garments:..................................................................................................................................12 Pharmaceuticals:....................................................................................................................... 12 Jute:........................................................................................................................................... 12 Leather Goods:..........................................................................................................................12 Strategic Policy Interventions:..................................................................................................12 Diversification and Innovation:................................................................................................ 12 Enhancing Production Efficiency:............................................................................................ 12 Strengthening Global Market Presence:................................................................................... 12 Impact of Devaluation on Export Performance:..............................................................................13 Price Elasticity of Demand:...................................................................................................... 13 Production Costs:...................................................................................................................... 13 Global Economic Conditions:...................................................................................................13 Garment Sector:........................................................................................................................ 13 Pharmaceutical Sector:..............................................................................................................13 Jute Sector:................................................................................................................................14 Leather Goods Sector:...............................................................................................................14 Micro-Level Analysis for New Entrepreneurs:............................................................................... 14 Firm-Level Data and Case Studies:.................................................................................................14 Diversification of Markets:....................................................................................................... 14 Investment in Efficiency Improvements:..................................................................................14 Adaptation and Flexibility:....................................................................................................... 14 Page 723 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Key Success Factors:.......................................................................................................................15 Practical Recommendations for New Entrepreneurs:......................................................................15 Market Diversification:.............................................................................................................15 Technology Investment:............................................................................................................15 Focus on Quality and Innovation:.............................................................................................15 Robust Supply Chain Management:......................................................................................... 15 Garments and Textiles:.................................................................................................................... 15 Increased Competitiveness:...................................................................................................... 15 Export Volume Surge:...............................................................................................................15 Quality and Compliance:.......................................................................................................... 16 Rising Production Costs:...........................................................................................................16 Investment in Technology:........................................................................................................16 Labor Reforms:......................................................................................................................... 16 Market Diversification:.............................................................................................................16 Pharmaceuticals:..............................................................................................................................16 Market Expansion:.................................................................................................................... 16 Cost Implications:..................................................................................................................... 16 Regulatory Compliance:........................................................................................................... 16 Global Competition:..................................................................................................................17 Investment in R&D:..................................................................................................................17 Quality Assurance:....................................................................................................................17 Market Exploration:.................................................................................................................. 17 Jute:..................................................................................................................................................17 Competitive Pricing:................................................................................................................. 17 Market Dynamics:.....................................................................................................................17 Synthetic Alternatives:..............................................................................................................17 Market Preferences: ................................................................................................................. 17 Product Diversification:............................................................................................................ 17 Sustainability Focus:.................................................................................................................17 Marketing and Branding:.......................................................................................................... 18 Leather Goods:................................................................................................................................ 18 Price Competitiveness:..............................................................................................................18 Environmental Compliance:..................................................................................................... 18 Environmental Regulations:......................................................................................................18 Labor Conditions:..................................................................................................................... 18 Global Competition:..................................................................................................................18 Environmental Initiatives:.........................................................................................................18 Labor Improvements:................................................................................................................18 Market Expansion:.................................................................................................................... 18 Future Research Directions:............................................................................................................ 19 Sectoral Expansion:.................................................................................................................. 19 Country Comparisons:.............................................................................................................. 19 Longitudinal Studies:................................................................................................................ 19 Pharmaceuticals:..............................................................................................................................19 Page 724 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Improving Production Efficiency:............................................................................................ 19 Alternative Sourcing Strategies:............................................................................................... 19 Investing in R&D:.....................................................................................................................19 Opportunities and Strategic Recommendations:............................................................................. 19 Jute:..................................................................................................................................................19 Product Innovation:...................................................................................................................20 Market Diversification:.............................................................................................................20 Branding and Marketing:.......................................................................................................... 20 Leather Goods:................................................................................................................................ 20 Adhering to Standards:............................................................................................................. 20 Improving Design and Quality:................................................................................................ 20 Expanding Market Access:....................................................................................................... 20 Support for R&D:..................................................................................................................... 20 Trade Facilitation:..................................................................................................................... 20 Infrastructure Development:..................................................................................................... 21 Skill Development:................................................................................................................... 21 Strategic Considerations for New Entrepreneurs:........................................................................... 21 Navigating Exchange Rate Volatility:............................................................................................. 21 Financial Hedging:....................................................................................................................21 Multi-Currency Pricing Models:...............................................................................................21 Diversified Market Portfolio:....................................................................................................21 Accessing Financing and Investment:............................................................................................. 21 Export Credit Schemes:............................................................................................................ 22 Government Grants:..................................................................................................................22 Foreign Investment:.................................................................................................................. 22 Leveraging Government Policies and Incentives:...........................................................................22 Export Credit Schemes:............................................................................................................ 22 Tax Breaks:............................................................................................................................... 22 Subsidies:.................................................................................................................................. 22 Recommendations for New Entrepreneurs:.....................................................................................23 Market Entry Strategies:..................................................................................................................23 Conduct Thorough Market Research:.......................................................................................23 Build Relationships with Local Distributors:........................................................................... 23 Participate in Trade Fairs:......................................................................................................... 23 Building Competitive Advantage:...................................................................................................23 Invest in Technology:................................................................................................................23 Focus on Quality Improvement:............................................................................................... 23 Enhance Branding:....................................................................................................................23 Risk Management Practices:........................................................................................................... 23 Diversify Suppliers:.................................................................................................................. 23 Maintain Adequate Inventory Levels:...................................................................................... 23 Develop Contingency Plans:.....................................................................................................24 Key Findings:.................................................................................................................................. 24 Garments Sector:.......................................................................................................................24 Page 725 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Pharmaceuticals:....................................................................................................................... 24 Jute:........................................................................................................................................... 24 Leather Goods:..........................................................................................................................24 Strategic Policy Interventions:........................................................................................................ 24 Diversification and Innovation:................................................................................................ 24 Enhancing Production Efficiency:............................................................................................ 25 Strengthening Global Market Presence:................................................................................... 25 Summary of Insights for New Entrepreneurs:.................................................................................25 Key Takeaways:...............................................................................................................................25 Adapting to Market Conditions:............................................................................................... 25 Investing in Technology:...........................................................................................................25 Focusing on Quality and Innovation:........................................................................................25 Building Resilience:..................................................................................................................25 Page 726 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Insights for New Entrepreneurs Understanding the implications of currency devaluation on export performance is crucial for new entrepreneurs in Bangladesh. Currency devaluation, the deliberate downward adjustment of a country's currency value relative to another currency, can significantly impact the competitiveness of exports. This section provides micro-level insights drawn from extensive literature to guide new entrepreneurs in navigating the complexities of currency devaluation. By examining the effects on key sectors such as garments, pharmaceuticals, jute, and leather goods, entrepreneurs can better understand how to leverage opportunities and mitigate challenges arising from currency devaluation. Currency devaluation makes a country's exports cheaper and more competitive in international markets. While this can boost export volumes, it also has implications for the cost of imported inputs and overall production costs. Entrepreneurs must grasp the dual nature of currency devaluation: its potential to enhance market competitiveness and the risk of increased costs for imported materials. Sector-Specific Insights: Garments: The garments sector, being the cornerstone of Bangladesh's export economy, is highly sensitive to currency devaluation. Entrepreneurs in this sector should focus on: Cost Competitiveness: Leveraging lower labor costs and efficient production processes to enhance competitiveness. Market Expansion: Exploring new markets and strengthening relationships with existing buyers to capitalize on increased demand. Innovation: Investing in advanced manufacturing technologies to improve product quality and reduce costs. Pharmaceutical: For the pharmaceutical industry, currency devaluation can open up opportunities for market expansion but also pose challenges related to regulatory compliance and competition. Entrepreneurs should consider: Regulatory Navigation: Ensuring compliance with international standards to access new markets. Technological Advancements: Investing in modern manufacturing processes and R&D to improve product offerings. 7 Page 727 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Strategic Partnerships: Forming alliances with global pharmaceutical companies to enhance market reach. Jute: The jute industry, historically significant for Bangladesh, can benefit from the global trend towards eco-friendly products. Entrepreneurs in this sector should focus on: Product Diversification: Developing innovative jute-based products to cater to changing consumer preferences. Competitive Pricing: Leveraging devaluation to offer competitively priced products in international markets. Sustainable Practices: Emphasizing sustainable and environmentally friendly practices to attract eco-conscious buyers. Leather Goods: The leather goods sector has potential for growth but faces challenges such as environmental regulations and global competition. Entrepreneurs should consider: Environmental Compliance: Meeting stringent environmental standards to access international markets. Quality Improvement: Investing in technology and training to enhance product quality. Market Penetration: Expanding into new markets and strengthening presence in existing ones through strategic marketing and partnerships. Strategic Recommendations for New Entrepreneurs: Understand Market Dynamics: Stay informed about global market trends and demand fluctuations to make strategic decisions. Leverage Government Support: Utilize government incentives, subsidies, and trade agreements to reduce costs and enhance competitiveness. Invest in Technology: Adopt advanced technologies to improve production efficiency and product quality. 8 Page 728 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Diversify Product Offerings: Explore new product lines and markets to mitigate risks associated with currency fluctuations. Focus on Sustainability: Incorporate sustainable practices to meet international standards and appeal to environmentally conscious consumers. Form Strategic Partnerships: Collaborate with local and international firms to enhance market reach and share resources. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. By understanding the factors influencing these sectors, new entrepreneurs can formulate effective strategies to enhance export competitiveness and sustain economic growth. The insights and recommendations provided in this section aim to equip new entrepreneurs with the knowledge and tools needed to navigate the complexities of currency devaluation and capitalize on the opportunities it presents. Overview of Currency Devaluation: Definition and Mechanisms: Currency devaluation refers to a deliberate downward adjustment in the value of a country's currency relative to other currencies, typically done by the country's central bank or monetary authority. This adjustment can occur through various mechanisms and is often aimed at achieving specific economic objectives. Definition: Currency devaluation is the official lowering of the value of a nation's currency within a fixed or semi-fixed exchange rate system. It contrasts with depreciation, where the currency value falls due to market forces under a floating exchange rate system. Mechanisms of Devaluation: Monetary Policy Decisions: Central banks may devalue the currency by altering interest rates or engaging in open market operations that increase the money supply. Lowering interest rates can make the currency less attractive to foreign investors, reducing its value. Foreign Exchange Market Interventions: Central banks can directly intervene in the foreign exchange market by buying or selling currencies to influence the exchange rate. Fiscal Policy Adjustments: Governments might implement fiscal policies that lead to a higher budget deficit, which can put downward pressure on the currency. 9 Page 729 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Objectives and Benefits: The primary objective of currency devaluation is to improve a country's export competitiveness by making its goods and services cheaper for foreign buyers. This can lead to several benefits: Boosting Exports: By lowering the price of domestic goods in foreign currency terms, devaluation makes exports more competitive in international markets. This can increase the volume of exports and improve the trade balance. Stimulating Economic Growth: Higher export volumes can lead to increased production and economic growth. This is particularly beneficial for export-oriented economies. Reducing Trade Deficits: By making imports more expensive and exports cheaper, devaluation can help reduce trade deficits and improve the balance of payments. Increasing Foreign Exchange Reserves: A boost in exports can lead to an inflow of foreign currency, increasing foreign exchange reserves and enhancing the country’s ability to manage external shocks. Potential Risks and Challenges: While currency devaluation can offer several benefits, it also poses certain risks and challenges: Inflation: Devaluation can lead to higher import prices, contributing to inflationary pressures. This can erode purchasing power and increase the cost of living. Debt Burden: For countries with significant foreign-denominated debt, devaluation increases the local currency value of that debt, making it more expensive to service. Retaliation: Trading partners may view devaluation as an unfair competitive advantage and respond with their own trade or currency measures, potentially leading to trade conflicts. Market Volatility: Sudden or unexpected devaluations can create market uncertainty and volatility, impacting investment flows and economic stability. 10 Page 730 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Bangladesh: Bangladesh has used currency devaluation as a tool to boost its export-oriented garment sector. By making Bangladeshi garments cheaper on the international market, devaluation has helped increase export volumes, contributing significantly to economic growth. China: China has strategically managed its currency to maintain a competitive edge in manufacturing exports. Controlled devaluation has been a key part of its economic policy to sustain high export growth rates. Currency devaluation is a strategic economic tool that can enhance export competitiveness and stimulate economic growth. However, it must be managed carefully to mitigate potential risks such as inflation and increased debt burdens. Understanding the mechanisms and implications of currency devaluation is essential for policymakers to make informed decisions that balance the benefits with the associated challenges. Historical Context in Bangladesh: Bangladesh has a history of currency devaluation aimed at addressing various economic challenges and enhancing export competitiveness. Analyzing these episodes reveals patterns and outcomes that offer valuable lessons for policymakers and entrepreneurs. Reason for Devaluation: Balance of payments crisis. Economic Impact: The devaluation in 1991 was a response to a severe balance of payments crisis. This policy move led to a significant boost in exports as Bangladeshi goods became cheaper and more attractive in international markets. However, the devaluation also triggered a sharp increase in inflation, raising the cost of imports and living expenses for the population. 2001 Devaluation: Reason for Devaluation: Enhancing export competitiveness. Economic Impact: The 2001 devaluation was strategically aimed at making Bangladeshi exports more competitive globally. The garment sector, a major component of the country's export economy, particularly benefited from this move. Garment exports surged, contributing to overall economic growth. However, the results were mixed for other sectors, with some struggling to capitalize on the devaluation due to various structural and operational challenges. Reason for Devaluation: Global financial crisis. Economic Impact: In response to the global financial crisis, Bangladesh devalued its currency in 2009 to stimulate export growth. This policy led to a short-term increase in exports, helping to 11 Page 731 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) stabilize the economy during a turbulent period. However, the long-term effects included inflationary pressures, which eroded some of the benefits gained from the initial boost in export activity. Garments: The garment sector's responsiveness to devaluation highlights the importance of maintaining competitive production costs and labor efficiency. Strategic investments in technology and market expansion can further enhance its global standing. Pharmaceuticals: The pharmaceutical industry's growth underscores the need for supportive regulatory environments and technological advancements. Expanding market access and maintaining competitive pricing are crucial for sustained export performance. Jute: The jute sector's fluctuating performance emphasizes the need for product diversification and alignment with global eco-friendly trends. Developing innovative jute products can help capitalize on new market opportunities. Leather Goods: The leather goods sector's potential can be realized by addressing environmental compliance and labor conditions. Enhancing production efficiency and global market presence will be key to its success. To sustain and enhance export growth, the following strategic recommendations are essential: Strategic Policy Interventions: Policymakers should implement measures to reduce production costs, improve labor conditions, and secure favorable trade agreements. Diversification and Innovation: Encouraging product diversification and investing in innovation will help mitigate risks and capture new market opportunities. Enhancing Production Efficiency: Adopting advanced manufacturing technologies and optimizing production processes can boost competitiveness. Strengthening Global Market Presence: Expanding market access through trade agreements and strategic partnerships will enhance export opportunities and resilience against currency fluctuations. Expand the scope to include more sectors and countries for a broader perspective on the effects of currency devaluation. Conduct longitudinal studies to capture the dynamic nature of export performance in response to exchange rate changes. 12 Page 732 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Explore the interplay between macroeconomic policies and firm-level strategies in shaping export outcomes. By addressing these areas, future studies can provide deeper insights into the complex relationship between currency devaluation and export performance, guiding more effective economic policies and business strategies. The selection of garments, pharmaceuticals, jute, and leather goods as focal points in analyzing the impact of currency devaluation on Bangladesh's export performance offers valuable insights. These sectors represent significant contributors to the nation's economy, each with distinct characteristics and challenges. By examining these key export products, the analysis provides a nuanced understanding of how devaluation affects various industries, allowing policymakers and industry stakeholders to develop targeted strategies to enhance export competitiveness and sustain economic growth. Impact of Devaluation on Export Performance: Economic theory suggests that currency devaluation can boost export performance by lowering the prices of exported goods, thereby making them more attractive to international buyers. However, the relationship between devaluation and export performance is multifaceted and influenced by several factors: Price Elasticity of Demand: The degree to which the quantity demanded of a good responds to a change in price. Products with high price elasticity are more likely to see increased demand following devaluation. Production Costs: While devaluation can lower export prices, it can also raise the cost of imported inputs, which might offset the competitive advantage gained from lower prices. Global Economic Conditions: The overall state of the global economy, including demand conditions and trade policies of major trading partners, significantly influences the effectiveness of devaluation in boosting exports. Empirical studies on Bangladesh provide mixed evidence regarding the impact of currency devaluation on export performance across different sectors: Garment Sector: The garment sector, which is a major export industry for Bangladesh, has generally benefited from currency devaluation. Lower export prices have enhanced the competitiveness of Bangladeshi garments in international markets, leading to increased export volumes. For example, the devaluation of the Bangladeshi Taka in 2003 resulted in a significant boost in garment exports due to improved price competitiveness. Pharmaceutical Sector: The pharmaceutical industry, while experiencing some benefits from devaluation, faces considerable challenges due to its reliance on imported raw materials. Devaluation increases 13 Page 733 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) the cost of these imports, which can erode the competitive advantage gained from lower export prices. This dual impact necessitates a careful balance in managing currency policies and supporting the sector through strategic measures. Jute Sector: Historically, the jute sector has shown a positive response to devaluation, particularly in periods where global demand for eco-friendly products surged. However, the sector has faced challenges from synthetic alternatives and changing consumer preferences, which have sometimes dampened the benefits of devaluation. Leather Goods Sector: The leather goods sector has experienced mixed outcomes from currency devaluation. While competitive pricing post-devaluation has boosted exports, the sector faces significant challenges related to environmental regulations and labor conditions, which can impact overall performance. The impact of currency devaluation on Bangladesh's export performance is complex and sector-specific. The theoretical framework suggests that devaluation can enhance export competitiveness by lowering prices, but empirical evidence indicates that the actual effects vary across different industries. Understanding these nuances is crucial for policymakers and industry stakeholders to formulate effective strategies that leverage the benefits of devaluation while mitigating its adverse effects. By focusing on key sectors such as garments, pharmaceuticals, jute, and leather goods, the analysis provides actionable insights to enhance Bangladesh's export performance and sustain economic growth. Future research should continue to explore these dynamics across a broader range of sectors and countries to provide a more comprehensive understanding of the relationship between currency devaluation and export performance. Micro-Level Analysis for New Entrepreneurs: Firm-Level Data and Case Studies: Analyzing firm-level data offers detailed insights into how businesses are affected by currency devaluation. Case studies of successful export-oriented firms in Bangladesh reveal strategies that have enabled them to thrive despite currency fluctuations. Diversification of Markets: Firms that diversify their export markets are less vulnerable to economic downturns in any single country. For example, a garment company exporting to multiple regions (e.g., North America, Europe, Asia) can mitigate the impact of currency fluctuations in one market by leveraging stability in others. Investment in Efficiency Improvements: Companies investing in advanced technologies and process optimizations tend to perform better during currency devaluations. For instance, automation in the garments sector can reduce labor costs and enhance production speed, making products more competitive internationally. Adaptation and Flexibility: 14 Page 734 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Firms that are agile and can quickly adapt to changing market conditions fare better. For example, pharmaceutical companies that adjust their product lines to meet shifting global health demands can maintain strong export performance even during periods of currency instability. Key Success Factors: Several key factors contribute to the success of export-oriented firms in Bangladesh. New entrepreneurs can learn from these examples to build resilient business models capable of withstanding currency volatility. Practical Recommendations for New Entrepreneurs: Market Diversification: New entrepreneurs should consider expanding their market reach beyond a single region. Engaging in multiple international markets can buffer against localized economic issues. Technology Investment: Investing in advanced manufacturing technologies and automation can significantly improve efficiency and reduce costs, making firms more resilient to currency devaluation. Focus on Quality and Innovation: Developing high-quality, innovative products can help firms command premium prices and maintain competitiveness regardless of currency fluctuations. Robust Supply Chain Management: Building strong relationships with suppliers and optimizing logistics can ensure stability and reliability in production and delivery, even when external economic conditions are volatile. By understanding and applying these success factors, new entrepreneurs in Bangladesh can enhance their export performance and build sustainable, competitive businesses in the global market. Garments and Textiles: The garments and textiles sector stands as Bangladesh's most significant export industry, contributing extensively to the national economy. This sector's performance is critically influenced by currency devaluation, with notable benefits and challenges that shape its competitive landscape. Increased Competitiveness: Devaluation of the Bangladeshi Taka typically enhances the price competitiveness of Bangladeshi garments in international markets. The lower exchange rate makes products more affordable for foreign buyers, particularly in price-sensitive markets like the United States and European Union. Export Volume Surge: 15 Page 735 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Historical data indicates that periods of currency devaluation correspond with spikes in export volumes. For example, after the devaluation in 2003, garment exports surged due to lower prices in foreign currency terms, attracting more buyers. Quality and Compliance: Maintaining high-quality standards and compliance with international regulations is crucial. Failure to meet quality standards can negate the price advantage gained from devaluation. Rising Production Costs: Although devaluation lowers export prices, rising domestic production costs, including wages and raw materials, can offset these benefits. The sector must continually strive to optimize costs while maintaining quality. Investment in Technology: Adopting advanced manufacturing technologies can help reduce production costs and improve product quality. Technologies like automation and efficient textile machinery can enhance productivity. Labor Reforms: Implementing fair labor practices and improving working conditions can boost worker productivity and attract more investments. Aligning labor practices with international standards can also enhance the sector’s global reputation. Market Diversification: Exploring new markets and reducing dependency on traditional markets can mitigate risks associated with market fluctuations. Expanding into emerging markets can provide new growth opportunities. Pharmaceuticals: The pharmaceutical industry in Bangladesh has shown notable growth and potential, driven by improvements in technology, regulatory frameworks, and market access. However, it faces significant challenges, particularly in maintaining compliance with stringent international standards and competing in global markets. Market Expansion: Currency devaluation can make Bangladeshi pharmaceutical products more competitive internationally, leading to increased market penetration. The devaluation in 2013, for instance, saw a boost in pharmaceutical exports due to competitive pricing. Cost Implications: Devaluation also impacts the cost of imported raw materials, which are essential for pharmaceutical production. Increased import costs can negate the benefits of competitive export pricing. Regulatory Compliance: 16 Page 736 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Meeting international regulatory standards is a significant hurdle. Compliance with global standards, such as those set by the US FDA or the European Medicines Agency, is crucial for market access but requires substantial investment. Global Competition: The sector faces stiff competition from established pharmaceutical producers in countries like India and China. Maintaining competitiveness requires continual innovation and efficiency improvements. Investment in R&D: Increasing investments in research and development can drive innovation, leading to new and improved pharmaceutical products. Partnerships with academic and research institutions can foster innovation. Quality Assurance: Strengthening quality control measures and ensuring compliance with international standards can enhance global market access and competitiveness. Market Exploration: Exploring and penetrating new markets, especially in developing countries with growing healthcare needs, can provide additional growth avenues. Jute: Jute has historically been a significant export product for Bangladesh, known for its eco-friendly properties and various applications. However, its performance has fluctuated due to changing global demand and competition from synthetic alternatives. Competitive Pricing: Devaluation makes jute products more competitively priced, which can boost exports. This was evident in the 1990s when devaluations led to increased demand for jute products internationally. Market Dynamics: The sector must adapt to modern market dynamics, including rising demand for eco-friendly products, to sustain growth. Synthetic Alternatives: Competition from synthetic fibers poses a significant challenge. Synthetic materials often offer cost and performance advantages that jute must contend with. Market Preferences: . Changing global market preferences, influenced by factors like environmental concerns and fashion trends, can impact jute demand. Product Diversification: 17 Page 737 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Developing innovative jute products that cater to modern consumer preferences, such as biodegradable and eco-friendly goods, can enhance market appeal. Sustainability Focus: Emphasizing the eco-friendly nature of jute and leveraging global trends towards sustainability can strengthen market positioning. Marketing and Branding: Effective marketing and branding strategies that highlight the unique benefits of jute can attract new customers and markets. Leather Goods: The leather goods sector has significant potential for growth but faces challenges related to environmental regulations, labor conditions, and global market competition. Price Competitiveness: Devaluation can enhance the price competitiveness of leather goods, leading to increased exports. However, this benefit is tempered by rising costs for imported chemicals and materials. Environmental Compliance: Meeting stringent environmental standards can be costly but is necessary for maintaining market access, especially in developed countries. Environmental Regulations: Compliance with environmental regulations is a major challenge. Failure to meet these standards can lead to market exclusion and reputational damage. Labor Conditions: Improving labor conditions and ensuring fair wages and safe working environments are crucial for sustainable growth and attracting ethical buyers. Global Competition: Competing with other major leather producers, such as Italy and China, requires continual improvements in quality and efficiency. Environmental Initiatives: Investing in eco-friendly production processes and waste management systems can enhance compliance with environmental standards and appeal to environmentally conscious consumers. Labor Improvements: Implementing better labor practices and improving working conditions can boost productivity and attract more investment. 18 Page 738 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Market Expansion: Expanding into new markets and strengthening existing market positions through strategic partnerships and trade agreements can drive growth. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. Each sector's unique dynamics highlight the importance of considering various factors, such as economic policies, global market conditions, and technological advancements, in shaping export success. Future Research Directions: Sectoral Expansion: Future research should expand to include more sectors to provide a broader perspective on the effects of currency devaluation. Country Comparisons: Including more countries in the analysis can offer comparative insights that inform better policy-making. Longitudinal Studies: Conducting longitudinal studies can capture the dynamic nature of export performance in response to exchange rate changes, providing deeper insights into long-term trends and strategies. Pharmaceuticals: Currency devaluation can significantly impact the pharmaceutical sector due to its heavy reliance on imported raw materials. The increased cost of these materials can erode profit margins and make it difficult to maintain competitive pricing. Improving Production Efficiency: Entrepreneurs in the pharmaceutical sector should focus on enhancing production efficiency to offset higher input costs. This can be achieved through the adoption of advanced manufacturing technologies, such as automation and lean manufacturing techniques, which can reduce waste and improve productivity. Alternative Sourcing Strategies: Exploring alternative sources for raw materials can help mitigate the impact of increased costs. This includes identifying local suppliers, entering into long-term contracts to lock in prices, and sourcing from countries with favorable trade agreements. Investing in R&D: Continued investment in research and development is crucial for creating cost-effective production processes and developing new, high-value pharmaceutical products. This can also open up new markets and reduce dependency on imported materials. 19 Page 739 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Opportunities and Strategic Recommendations: Jute: The jute industry has experienced a resurgence due to the global demand for eco-friendly products. Currency devaluation can enhance the competitiveness of Bangladeshi jute products by making them more affordable in international markets. Product Innovation: To capture new markets, entrepreneurs need to innovate and diversify their product offerings. This can include developing new jute-based products, such as biodegradable packaging materials, eco-friendly textiles, and composite materials for various industrial applications. Market Diversification: Expanding into new geographical markets can reduce dependence on traditional markets and spread risk. Targeting regions with growing demand for sustainable products, such as Europe and North America, can provide significant growth opportunities. Branding and Marketing: Building strong brands and marketing campaigns that emphasize the eco-friendly nature and sustainability of jute products can attract environmentally conscious consumers and increase market share. Leather Goods: The leather goods sector in Bangladesh can benefit from currency devaluation by becoming more price-competitive in international markets. However, meeting environmental and quality standards is crucial for success. Adhering to Standards: To meet the demands of international buyers, leather goods manufacturers must comply with stringent environmental regulations and quality standards. This involves investing in cleaner production technologies, waste treatment facilities, and certifications such as ISO and REACH. Improving Design and Quality: Focusing on high-quality design and craftsmanship can differentiate Bangladeshi leather goods in the global market. This includes training the workforce in advanced leatherworking techniques and collaborating with international designers. Expanding Market Access: Exploring new markets through trade missions, international exhibitions, and online platforms can increase export opportunities. Developing strong relationships with international buyers and distributors can also help in expanding market reach. Support for R&D: 20 Page 740 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Providing financial incentives and grants for research and development can foster innovation and efficiency improvements across all sectors. Trade Facilitation: Simplifying export procedures and reducing trade barriers can enhance market access for Bangladeshi products. Infrastructure Development: Investing in infrastructure, such as transportation and logistics, can reduce production costs and improve the overall efficiency of the export process. Skill Development: Implementing training programs to enhance the skills of the workforce can increase productivity and support the adoption of new technologies. Future research should expand the scope to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the dynamic nature of export performance in response to exchange rate changes, helping to develop more effective and targeted policy interventions. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. Understanding the factors influencing these sectors enables policymakers and industry stakeholders to formulate effective strategies to enhance export competitiveness and sustain economic growth. This detailed sectoral analysis underscores the importance of tailored interventions to support each sector, ensuring that they can navigate the challenges posed by currency fluctuations and leverage the opportunities created by devaluation. Strategic Considerations for New Entrepreneurs: Navigating Exchange Rate Volatility: New entrepreneurs must develop robust strategies to manage exchange rate volatility, which can significantly impact export pricing and profitability. Key strategies include: Financial Hedging: Utilizing financial instruments such as forward contracts, options, and futures to lock in exchange rates and mitigate the risk of adverse currency movements. Multi-Currency Pricing Models: Setting up pricing models that can accommodate payments in multiple currencies, reducing dependence on any single currency and spreading exchange rate risk. Diversified Market Portfolio: Expanding export operations to multiple markets to distribute risk and reduce the impact of currency fluctuations in any one region. 21 Page 741 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Accessing Financing and Investment: Securing adequate financing is crucial for scaling up export operations and investing in new technologies and market expansion. Entrepreneurs should explore various financing options, including: Export Credit Schemes: Government-backed schemes that offer low-interest loans specifically for export-oriented businesses, helping to reduce the cost of capital and support business growth. Government Grants: Accessing grants aimed at promoting exports and innovation can provide additional funding without the burden of repayment, allowing for more aggressive expansion strategies. Foreign Investment: Forming partnerships with foreign investors can bring in not only capital but also expertise and market access, enhancing the overall capabilities of the export business. Leveraging Government Policies and Incentives: Government policies and incentives play a critical role in supporting new exporters. Entrepreneurs should stay informed about available opportunities and leverage them effectively to boost their export performance. Key incentives include: Export Credit Schemes: Low-interest loans provided by the government to support export-oriented businesses, helping them manage cash flow and invest in growth. Tax Breaks: Reduced tax rates for exporters, which can improve profitability and provide additional funds for reinvestment in the business. Subsidies: Financial support for innovation, quality improvement, and expansion into new markets, enabling businesses to enhance their competitive edge. By effectively navigating exchange rate volatility, accessing various financing options, and leveraging government policies and incentives, new entrepreneurs can enhance their export performance and contribute to the sustained economic growth of Bangladesh. The selection of garments, pharmaceuticals, jute, and leather goods for analyzing the impact of currency devaluation on Bangladesh's export performance provides valuable insights. These sectors are pivotal to the country's economy due to their significant contributions to export revenues, employment generation, and comparative advantage. By understanding the factors influencing the performance of these sectors in relation to currency devaluation, policymakers and industry stakeholders can devise effective strategies to enhance export competitiveness and sustain economic growth. The findings underscore the need for targeted 22 Page 742 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) support, technological innovation, and strategic trade policies to mitigate the negative impacts of currency fluctuations and capitalize on devaluation opportunities. Recommendations for New Entrepreneurs: Market Entry Strategies: Conduct Thorough Market Research: Entrepreneurs should perform comprehensive market research to identify high-demand target markets for their products. Understanding market dynamics, consumer preferences, and competitive landscapes is crucial for successful market entry. Build Relationships with Local Distributors: Establishing strong relationships with local distributors can facilitate market penetration. Distributors have valuable market knowledge and networks that can help new entrants navigate local business environments effectively. Participate in Trade Fairs: Engaging in trade fairs and international exhibitions provides a platform to showcase products, network with potential buyers, and gain insights into market trends. This exposure can help entrepreneurs gain visibility and credibility in new markets. Building Competitive Advantage: Invest in Technology: Investing in advanced technology can improve production efficiency, reduce costs, and enhance product quality. Technological upgrades in manufacturing processes, logistics, and quality control can provide a competitive edge. Focus on Quality Improvement: Ensuring high product quality is critical for gaining and maintaining international market trust. Implementing stringent quality control measures and obtaining relevant certifications can enhance product appeal to global buyers. Enhance Branding: Building a strong brand identity can differentiate products in competitive markets. Effective branding strategies, including unique value propositions, attractive packaging, and consistent messaging, can attract international buyers and foster brand loyalty. Risk Management Practices: Diversify Suppliers: Relying on a single supplier can expose businesses to risks associated with supply chain disruptions. Entrepreneurs should diversify their supplier base to ensure a steady supply of raw materials and mitigate risks related to currency devaluation. Maintain Adequate Inventory Levels: 23 Page 743 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Keeping sufficient inventory levels can help manage supply chain uncertainties and demand fluctuations. Adequate inventory buffers can also cushion the impact of sudden currency changes on procurement costs. Develop Contingency Plans: Having contingency plans in place for currency devaluation scenarios is essential. This includes financial hedging strategies, flexible pricing mechanisms, and exploring alternative markets to reduce dependency on a single currency or market. By adopting these strategies, new entrepreneurs can successfully navigate the challenges of entering and competing in international markets, leveraging currency devaluation as an opportunity for growth. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. These sectors have been chosen due to their significant contributions to the economy, employment generation, and comparative advantage in the global market. By examining these key export products, the research highlights the unique challenges and opportunities presented by currency devaluation, offering a nuanced understanding of how different sectors respond to exchange rate fluctuations. Key Findings: Garments Sector: The garments sector, being the backbone of Bangladesh’s export economy, benefits significantly from currency devaluation by becoming more competitive in international markets. However, this benefit is moderated by rising production costs and global market conditions. Pharmaceuticals: The pharmaceutical industry shows growth post-devaluation due to improved market access and competitive pricing. Yet, it faces challenges from stringent regulatory standards and international competition. Jute: The jute sector, while historically significant, has seen fluctuating performance. Currency devaluation helps by making prices competitive, but the sector faces competition from synthetic alternatives and changing global demand. Leather Goods: The leather goods sector can gain from competitive pricing post-devaluation. Nonetheless, it faces challenges related to environmental regulations, labor conditions, and global competition. Strategic Policy Interventions: Policymakers should focus on reducing production costs, improving labor conditions, and negotiating favorable trade agreements to enhance sectoral competitiveness. Diversification and Innovation: 24 Page 744 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Investing in innovation and diversifying product offerings can help sustain export growth. Developing new products in response to global market trends, such as eco-friendly jute products, can open new market opportunities. Enhancing Production Efficiency: Adoption of advanced manufacturing technologies and optimization of production processes can reduce costs and improve quality, making Bangladeshi exports more competitive. Strengthening Global Market Presence: Expanding market access through strategic trade agreements and improving global market presence are essential for sustaining export growth. Compliance with international standards and exploring new markets are key strategies. Summary of Insights for New Entrepreneurs: Understanding the relationship between currency devaluation and export performance is essential for new entrepreneurs in Bangladesh. By leveraging insights from micro-level analysis and adopting strategic approaches, entrepreneurs can navigate the challenges posed by currency fluctuations and enhance their export competitiveness. Here are some: Key Takeaways: Adapting to Market Conditions: Entrepreneurs should stay informed about global market trends and adjust their strategies accordingly to remain competitive. Investing in Technology: Embracing technological advancements can help reduce production costs and improve product quality, which is crucial for competing internationally. Focusing on Quality and Innovation: High-quality products and innovative offerings can differentiate Bangladeshi exports in the global market, especially in niche segments. Building Resilience: Entrepreneurs should develop strategies to mitigate the risks associated with currency devaluation, such as hedging against exchange rate fluctuations and diversifying their export markets. Future research should expand the scope to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the dynamic nature of export performance in response to exchange rate changes. Additionally, examining the interplay between currency devaluation and other economic factors, such as inflation and foreign direct investment, can further enhance our understanding of export dynamics. This research underscores the importance of a comprehensive approach to understanding and leveraging the impact of currency devaluation on export performance. By considering sector-specific characteristics and global market conditions, policymakers, industry stakeholders, and new entrepreneurs can formulate effective strategies to enhance Bangladesh's export competitiveness and sustain economic growth. 25 Page 745 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 16 Addressing Politician INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 746 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 13 Addressing Politician: Table of Contents Addressing Politician............................................................................................................................... 6 Directions for Informed Decision-Making:.......................................................................................6 Comprehensive Economic Analysis:.................................................................................................6 Objective:....................................................................................................................................6 Action:.........................................................................................................................................6 Outcome:.....................................................................................................................................6 Sector-Specific Strategies:.................................................................................................................6 Objective:....................................................................................................................................6 Action:.........................................................................................................................................6 Outcome:.....................................................................................................................................6 Supporting Technological Advancements:........................................................................................6 Objective:....................................................................................................................................6 Action:.........................................................................................................................................7 Outcome:.....................................................................................................................................7 Improving Labor Conditions:............................................................................................................ 7 Objective:....................................................................................................................................7 Action:.........................................................................................................................................7 Outcome:.....................................................................................................................................7 Negotiating Favorable Trade Agreements:........................................................................................7 Objective:....................................................................................................................................7 Action:.........................................................................................................................................7 Outcome:.....................................................................................................................................7 Managing Exchange Rate Volatility:.................................................................................................7 Objective:....................................................................................................................................7 Action:.........................................................................................................................................7 Outcome:.....................................................................................................................................7 Investing in Infrastructure:................................................................................................................ 8 Objective:....................................................................................................................................8 Action:.........................................................................................................................................8 Outcome:.....................................................................................................................................8 13 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 747 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Politicians' Perspectives on Currency Devaluation:..........................................................................8 Common Views and Misconceptions:............................................................................................... 8 Boosting Exports and Economic Growth:.........................................................................................8 Proponents' View:....................................................................................................................... 8 Misconception:............................................................................................................................8 Opponents' View:........................................................................................................................8 Misconception:............................................................................................................................9 Context:.......................................................................................................................................9 Outcome:.....................................................................................................................................9 2001 and 2009 Devaluations:............................................................................................................ 9 Context:.......................................................................................................................................9 Outcome:.....................................................................................................................................9 Balancing Immediate Benefits with Long-Term Stability:................................................................9 Short-Term Benefits:......................................................................................................................... 9 Long-Term Stability:......................................................................................................................... 9 Economic Implications of Currency Devaluation:.......................................................................... 10 Increased Export Competitiveness:...........................................................................................10 Higher Import Costs:.................................................................................................................10 Trade Balance Improvement:....................................................................................................10 Inflation:....................................................................................................................................10 Sustained Export Competitiveness:...........................................................................................11 Inflation Management:..............................................................................................................11 Foreign Investment:.................................................................................................................. 11 Trade Balance Sustainability:....................................................................................................11 Key Insights:....................................................................................................................................11 Garments:.........................................................................................................................................11 Pharmaceuticals:..............................................................................................................................11 Jute:..................................................................................................................................................11 Leather Goods:.................................................................................................................................11 Strategic Policy Interventions:.........................................................................................................11 Reducing Production Costs:......................................................................................................11 Improving Labor Conditions:....................................................................................................11 Favorable Trade Agreements:................................................................................................... 11 Diversification and Innovation:.......................................................................................................12 Product Diversification:............................................................................................................ 12 Investing in Innovation:............................................................................................................ 12 Enhancing Production Efficiency:...................................................................................................12 Technology Adoption:...............................................................................................................12 Process Optimization:............................................................................................................... 12 Strengthening Global Market Presence:..........................................................................................12 Market Access:..........................................................................................................................12 Market Presence:.......................................................................................................................12 Summary:........................................................................................................................................ 12 Policy Recommendations for Supporting Exporters:...................................................................... 12 Page 748 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Providing Financial Support:...........................................................................................................12 Low-Interest Loans:.................................................................................................................. 12 Grants and Subsidies:................................................................................................................13 Transportation Infrastructure:................................................................................................... 13 Logistics Infrastructure:............................................................................................................ 13 Promoting Diversification:.............................................................................................................. 13 High-Value Products:................................................................................................................ 13 Innovation and R&D:................................................................................................................13 Case Studies from Other Economies:..............................................................................................14 Vietnam:.......................................................................................................................................... 14 Strategic Use of Currency Devaluation:................................................................................... 14 Industrial Policies:.................................................................................................................... 14 Investments in Technology and Infrastructure:.........................................................................14 Focus on Education and Skill Development:............................................................................14 South Korea:....................................................................................................................................14 Currency Management and Export Growth:.............................................................................15 Robust Industrial Policies:........................................................................................................ 15 Technological Advancements:.................................................................................................. 15 Education and Workforce Development:..................................................................................15 Strategic Currency Management:............................................................................................. 15 Robust Industrial Policies:........................................................................................................ 15 Investments in Technology and Infrastructure:.........................................................................15 Focus on Education and Skill Development:............................................................................15 Aligning Political and Economic Goals:......................................................................................... 16 Transparent Communication:.......................................................................................................... 16 Incremental Adjustments:................................................................................................................16 Ensuring Sustainable Development:................................................................................................16 Environmental Sustainability:...................................................................................................16 Social Equity:............................................................................................................................16 Economic Resilience:................................................................................................................16 Building Consensus Among Stakeholders:..................................................................................... 17 Engaging with Industry Leaders and Economists:.......................................................................... 17 Regular Consultations:..............................................................................................................17 Expert Panels:........................................................................................................................... 17 Public-Private Partnerships:......................................................................................................17 Effective Communication Strategies:..............................................................................................17 Data-Driven Insights:................................................................................................................17 Case Studies:.............................................................................................................................17 Public Forums:.......................................................................................................................... 17 Media Outreach:........................................................................................................................18 Future Directions:............................................................................................................................18 Expanded Sectoral Analysis:.................................................................................................... 18 Longitudinal Studies:................................................................................................................ 18 International Comparisons:.......................................................................................................18 Page 749 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Understanding the Selection of Major Export Products:.................................................................18 Garments:........................................................................................................................................ 18 Pharmaceuticals:..............................................................................................................................18 Jute:..................................................................................................................................................19 Leather Goods:................................................................................................................................ 19 Strategic Policy Interventions:..................................................................................................19 Diversification and Innovation:................................................................................................ 19 Enhancing Production Efficiency:............................................................................................ 19 Strengthening Global Market Presence:................................................................................... 19 Understanding Politicians' Views on Currency Devaluation:......................................................... 19 Balancing Short-Term Gains and Long-Term Sustainability:...................................................19 Aligning Economic Policies with Political Objectives:............................................................19 Enhancing Export Performance:............................................................................................... 20 Page 750 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Addressing Politician Policymakers play a pivotal role in shaping economic strategies, especially in the context of currency devaluation, which can have significant impacts on a country’s export performance. This section aims to address politicians' perspectives on devaluation, offering directions for informed decision-making to bolster Bangladesh's export competitiveness. Currency devaluation can make exports cheaper and more competitive in international markets, potentially boosting export volumes. However, it can also increase the cost of imported raw materials, which can offset some of the benefits. Policymakers need to understand these dynamics to implement strategies that maximize the advantages while mitigating the downsides. Directions for Informed Decision-Making: Comprehensive Economic Analysis: Objective: Conduct thorough economic analysis to understand the broader impact of currency devaluation on various sectors. Action: Utilize data from national export databases, industry reports, and international trade statistics to evaluate the effects of past devaluations. Outcome: Develop a clear picture of which sectors benefit the most and which are adversely affected, allowing for targeted policy interventions. Sector-Specific Strategies: Objective: Formulate tailored strategies for key export sectors such as garments, pharmaceuticals, jute, and leather goods. Action: Implement sector-specific policies that address unique challenges and leverage opportunities. For instance, the garment sector may benefit from subsidies on raw materials, while the pharmaceutical sector could need support in regulatory compliance. Outcome: Enhance the competitiveness and resilience of each sector in the face of currency fluctuations. Supporting Technological Advancements: Objective: Encourage investment in technology and innovation to improve production efficiency and product quality. 6 Page 751 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Action: Provide tax incentives for R&D, establish innovation hubs, and facilitate partnerships between industry and academic institutions. Outcome: Boost productivity and reduce costs, helping exporters maintain competitive pricing despite currency devaluation. Improving Labor Conditions: Objective: Enhance labor conditions to improve productivity and meet international standards. Action: Implement labor reforms that ensure fair wages, safe working environments, and access to social benefits. Outcome: Attract more investment in the export sectors and enhance the overall quality of the workforce. Negotiating Favorable Trade Agreements: Objective: Secure preferential trade agreements to enhance market access for Bangladeshi products. Action: Engage in bilateral and multilateral negotiations to reduce trade barriers and secure favorable terms for exports. Outcome: Expand market reach and increase export volumes. Managing Exchange Rate Volatility: Objective: Implement policies to stabilize the exchange rate and reduce volatility. Action: Maintain healthy foreign exchange reserves, pursue sound macroeconomic policies, and create a favorable business environment. Outcome: Provide a stable economic backdrop that supports sustainable export growth. 7 Page 752 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Investing in Infrastructure: Objective: Improve infrastructure to support efficient export operations. Action: Invest in transportation, logistics, and energy infrastructure to reduce bottlenecks and lower production costs. Outcome: Enhance the overall efficiency and competitiveness of the export sectors. By addressing politicians' thoughts on currency devaluation with informed and strategic directions, policymakers can enhance Bangladesh’s export competitiveness. Understanding the nuanced impacts of devaluation on different sectors allows for targeted interventions that maximize benefits and mitigate challenges. These strategies, focusing on comprehensive economic analysis, sector-specific policies, technological advancements, labor improvements, trade agreements, exchange rate management, and infrastructure investment, can collectively sustain economic growth and boost export performance. Politicians' Perspectives on Currency Devaluation: Common Views and Misconceptions: Politicians often hold diverse and sometimes conflicting views on the merits and risks of currency devaluation. These perspectives are shaped by both economic theory and the political context in which decisions are made. Boosting Exports and Economic Growth: Proponents' View: Many politicians advocate for devaluation as a means to enhance export competitiveness. By lowering the value of the national currency, export goods become cheaper and more attractive to foreign buyers, potentially increasing export volumes and stimulating economic growth. This view was evident in Bangladesh's 2001 and 2009 devaluations, which aimed to enhance the competitiveness of key export sectors such as garments and textiles. Misconception: A common misconception is that devaluation is a quick fix for trade imbalances. While it can provide short-term relief, the benefits depend on the elasticity of demand for exports and imports, and the overall structure of the economy. Inflation and Public Confidence: Opponents' View: Other politicians express concern that devaluation can lead to inflation. As the cost of imported goods rises, consumers face higher prices, which can erode purchasing power and lead to public discontent. This concern was prominent during the debate on devaluation in Bangladesh in the late 2000s, when inflationary pressures were already a significant issue. 8 Page 753 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Misconception: Some policymakers overestimate the inflationary impact of devaluation. While it can contribute to inflation, the extent depends on the pass-through effect to domestic prices and the central bank's monetary policy response. Historical Decisions in Bangladesh Context: The devaluation in 1991 was implemented to address a severe balance of payments crisis. The Bangladeshi Taka was devalued by approximately 10%, which was seen as a necessary adjustment to stabilize the economy. Outcome: The move helped to improve the trade balance and restore confidence in the currency, although it was accompanied by stringent fiscal and monetary policies to control inflation. 2001 and 2009 Devaluations: Context: Subsequent devaluations in 2001 and 2009 were more proactive, aimed at enhancing export competitiveness in response to global economic conditions. These adjustments were part of broader economic reforms to support the growing export-oriented sectors, particularly garments. Outcome: These devaluations had mixed results. While they provided temporary boosts to export volumes, the broader impact on the economy was moderated by rising production costs and inflationary pressures. Balancing Immediate Benefits with Long-Term Stability: Understanding politicians' perspectives on currency devaluation helps in crafting balanced policies that address both short-term economic benefits and long-term stability. Short-Term Benefits: Export Growth: Immediate boosts in export competitiveness can provide critical support to key industries and generate foreign exchange earnings. Economic Stimulus: Increased exports can stimulate broader economic activity and employment, particularly in export-driven sectors. Long-Term Stability: Inflation Control: Managing the inflationary impact of devaluation requires coordinated monetary and fiscal policies. Policymakers should aim to control money supply growth and implement measures to mitigate cost-push inflation. 9 Page 754 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Public Confidence: Maintaining public confidence in the currency is crucial. Transparent communication about the reasons for devaluation and its expected benefits can help build trust and reduce market uncertainties. The analysis of garments, pharmaceuticals, jute, and leather goods as major export products provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. Understanding the factors influencing these sectors allows policymakers and industry stakeholders to formulate effective strategies to enhance export competitiveness and sustain economic growth. Policymakers should focus on interventions that reduce production costs, improve labor conditions, and secure favorable trade agreements. Tailored strategies for each sector are essential for addressing specific challenges and leveraging opportunities. Encouraging diversification and investing in innovation are critical for long-term export growth. Developing new products and adopting advanced technologies can help sectors like jute and garments stay competitive in the global market. Improving production efficiency through technology adoption and process optimization can boost competitiveness. For instance, the garments sector can benefit from lean manufacturing techniques and advanced textile machinery. Expanding market access through trade agreements and strengthening global market presence are essential for sustained export growth. The pharmaceutical industry, for example, can explore new markets and comply with international standards to enhance its global footprint. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides a comprehensive understanding of how currency devaluation affects Bangladesh's export performance. The findings highlight the importance of considering economic policies, global market conditions, and technological advancements in shaping export success. Future research should expand to include more sectors and countries, offering a broader perspective on the effects of currency devaluation and informing strategic policy decisions. Economic Implications of Currency Devaluation: Increased Export Competitiveness: Currency devaluation immediately makes exports cheaper and more competitive in the global market, potentially boosting export volumes. For instance, the garment sector in Bangladesh often sees a surge in export orders following devaluation due to its cost advantages. Higher Import Costs: Devaluation also increases the cost of imported goods and raw materials. This is particularly challenging for sectors that rely heavily on imports, such as pharmaceuticals, where higher production costs can offset the gains from increased export competitiveness. Trade Balance Improvement: In the short term, the trade balance may improve as exports rise and imports become more expensive, reducing the volume of imports. Inflation: The higher cost of imports can lead to inflation, as the prices of goods and services increase due to the higher cost of inputs. 10 Page 755 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Sustained Export Competitiveness: The long-term impact on export competitiveness depends on the economy’s structural resilience and its ability to maintain competitive advantages without continuous devaluation. This requires investments in productivity, innovation, and quality improvements. Inflation Management: Persistent inflation due to higher import costs needs careful monetary policy management to avoid eroding the benefits of devaluation. Foreign Investment: While devaluation can attract foreign investment by making assets cheaper, maintaining investor confidence requires stable and predictable economic policies. Trade Balance Sustainability: For a sustainable improvement in the trade balance, there needs to be diversification in the export base and a shift towards value-added products. Key Insights: Garments: The sector benefits significantly from devaluation due to low production costs, which enhance global market share. Pharmaceuticals: While devaluation boosts competitive pricing, increased import costs of raw materials pose a challenge. Jute: Historically, jute has benefited from devaluation, but competition from synthetic alternatives and changing market dynamics impact its performance. Leather Goods: Environmental regulations and global competition influence the sector's ability to capitalize on devaluation benefits. Strategic Policy Interventions: Reducing Production Costs: Implement subsidies, lower tariffs on imports, and offer tax incentives. Improving Labor Conditions: Align with international labor standards to boost productivity and attract investment. 11 Page 756 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Favorable Trade Agreements: Engage in negotiations to secure preferential market access. Diversification and Innovation: Product Diversification: Encourage firms to explore new product lines through R&D grants. Investing in Innovation: Foster technological advancements and partnerships with academic institutions. Enhancing Production Efficiency: Technology Adoption: Invest in automation and modern manufacturing techniques. Process Optimization: Implement best practices in supply chain management and inventory control. Strengthening Global Market Presence: Market Access: Expand through strategic trade agreements. Market Presence: Strengthen through compliance with international standards and strategic partnerships. Summary: The comparative analysis provides a nuanced understanding of how currency devaluation impacts key export sectors in Bangladesh. The insights and recommendations can guide policymakers and industry stakeholders in enhancing export competitiveness and supporting sustainable economic growth. Future research should include more sectors and countries, and employ longitudinal studies to capture the dynamic effects of devaluation over time. To strengthen Bangladesh's export performance in key sectors such as garments, pharmaceuticals, jute, and leather goods, a multifaceted strategy is essential. This strategy should address financial, infrastructural, and diversification needs, creating a robust support system for exporters. Policy Recommendations for Supporting Exporters: Providing Financial Support: Low-Interest Loans: 12 Page 757 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Offering low-interest loans to export-oriented firms can alleviate the financial burden imposed by currency devaluation. This financial support enables firms to invest in upgrading technology, expanding production capacities, and exploring new markets. Grants and Subsidies: Providing grants and subsidies for research and development (R&D) and market expansion efforts can foster innovation and competitiveness in export sectors. Investing in Infrastructure Transportation Infrastructure: Improving roads, ports, and railways can reduce transportation costs and enhance the efficiency of supply chains. Efficient logistics networks ensure that goods reach international markets quickly and cost-effectively. Logistics Infrastructure: Developing modern warehousing and distribution centers can streamline export processes, reducing delays and minimizing storage costs. Promoting Diversification: High-Value Products: Encouraging firms to diversify into high-value and innovative products can reduce dependency on traditional sectors like garments. This involves supporting sectors such as pharmaceuticals and high-end leather goods, which have significant growth potential. Innovation and R&D: Investing in R&D to develop new products and improve existing ones can enhance the competitiveness of Bangladeshi exports. Collaboration with academic institutions and international partners can drive innovation in key sectors. To illustrate the strategic approach, the following pillars highlight key areas for enhancing export performance: Financial Support Low-interest loans Grants and subsidies Infrastructure Investment Transportation improvements Modern logistics facilities Product Diversification High-value product development R&D investment The selection of garments, pharmaceuticals, jute, and leather goods as major export products for analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. By understanding the factors influencing these sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. The recommendations outlined in this section underscore the importance of 13 Page 758 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) financial support, infrastructure investment, and product diversification in driving the success of Bangladesh's export sectors. By implementing these strategies, Bangladesh can enhance its export performance, mitigate the adverse effects of currency devaluation, and achieve sustainable economic growth. The selection of garments, pharmaceuticals, jute, and leather goods as the focal export products for this analysis provides a comprehensive understanding of the impact of currency devaluation on Bangladesh's export performance. These sectors are critical to Bangladesh's economy due to their significant contributions to export revenue, employment generation, and competitive advantage in the global market. By examining these key sectors, the research highlights the factors that influence their export performance in the context of currency devaluation. This understanding enables policymakers and industry stakeholders to formulate targeted strategies to enhance the competitiveness of these sectors. The insights gained from this analysis can inform policy decisions and help sustain economic growth by addressing the unique challenges and opportunities within each sector. Case Studies from Other Economies: Countries like Vietnam and South Korea offer valuable lessons on how to effectively leverage currency devaluation to boost export performance. Their experiences underscore the importance of robust industrial policies, strategic investments in technology, and a focus on education and skill development. Vietnam: Strategic Use of Currency Devaluation: Vietnam has effectively used currency devaluation as a tool to enhance export competitiveness. By keeping its currency undervalued, Vietnam has been able to offer lower prices for its exports, making them more attractive in international markets. Industrial Policies: The Vietnamese government has implemented policies to support industrial growth, such as providing incentives for foreign direct investment (FDI) and developing industrial zones. These policies have helped create a favorable business environment that attracts both domestic and international investors. Investments in Technology and Infrastructure: Vietnam has invested heavily in improving its technological capabilities and infrastructure. The government has prioritized the development of high-tech industries and has made significant investments in transportation and logistics infrastructure to support export activities. Focus on Education and Skill Development: Vietnam has emphasized education and skill development to build a capable workforce. The government has launched various programs to enhance vocational training and higher education, ensuring that the labor force is equipped with the necessary skills to meet the demands of modern industries. 14 Page 759 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) South Korea: Currency Management and Export Growth: South Korea has strategically managed its currency to support export growth. By maintaining a competitive exchange rate, South Korea has ensured that its exports remain price-competitive in the global market. Robust Industrial Policies: South Korea's government has implemented comprehensive industrial policies that focus on developing key industries, such as electronics, automotive, and shipbuilding. These policies have included subsidies, tax incentives, and support for research and development. Technological Advancements: South Korea has invested significantly in technological innovation and research and development. The government has encouraged public-private partnerships to drive technological advancements and has supported the growth of high-tech industries. Education and Workforce Development: South Korea places a strong emphasis on education and workforce development. The government has invested in education at all levels, from primary education to higher education and vocational training, ensuring that the workforce is highly skilled and capable of supporting the country's industrial and technological growth. The experiences of Vietnam and South Korea highlight several key strategies that Bangladesh can adopt to enhance its export performance: Strategic Currency Management: Bangladesh can manage its currency to maintain competitiveness in international markets. This includes monitoring exchange rates and implementing policies to avoid excessive volatility. Robust Industrial Policies: Developing and implementing comprehensive industrial policies that provide support for key sectors can help create a favorable business environment. This includes providing incentives for investment, supporting research and development, and fostering innovation. Investments in Technology and Infrastructure: Investing in technological advancements and improving infrastructure can enhance production efficiency and support export activities. This includes developing high-tech industries and improving transportation and logistics networks. Focus on Education and Skill Development: Prioritizing education and skill development is essential for building a capable workforce. Bangladesh can implement programs to enhance vocational training and higher education, 15 Page 760 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) ensuring that the labor force is equipped with the necessary skills to meet the demands of modern industries. By learning from the successful strategies of countries like Vietnam and South Korea, Bangladesh can formulate effective policies and strategies to enhance its export competitiveness and sustain economic growth. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. Understanding the factors influencing these sectors enables policymakers and industry stakeholders to formulate effective strategies to enhance export competitiveness and sustain economic growth. Aligning Political and Economic Goals: Balancing economic growth with political objectives is crucial for sustainable development. Policymakers must ensure that measures to boost exports do not compromise economic stability or lead to significant inflation. This involves aligning economic strategies with political goals, which can be achieved through the following methods: Transparent Communication: Clearly explaining the rationale behind devaluation and expected outcomes to the public can build confidence. Transparency helps mitigate public fears and fosters trust in government policies. Incremental Adjustments: Gradual devaluation rather than abrupt changes can help manage inflation and maintain economic stability. Incremental adjustments allow the economy to adapt smoothly, reducing the risk of economic shocks. Ensuring Sustainable Development: Sustainable export growth requires policies that support environmental sustainability, social equity, and economic resilience. Encouraging green technologies and practices in export-oriented industries can provide long-term benefits. This approach ensures that economic development does not come at the cost of environmental degradation or social inequality. Environmental Sustainability: Policies should promote the adoption of eco-friendly technologies and practices. For instance, the jute industry can leverage its natural advantages by focusing on sustainable production methods. Social Equity: Ensuring fair wages and safe working conditions for workers in export sectors can improve productivity and reduce social unrest. This involves enforcing labor laws and providing social protection for workers. 16 Page 761 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Economic Resilience: Building a resilient economy requires diversifying exports and investing in infrastructure. By reducing dependency on a few export products and enhancing logistical capabilities, Bangladesh can better withstand global economic fluctuations. By aligning political and economic goals and ensuring sustainable development, Bangladesh can enhance its export competitiveness and achieve long-term economic growth. The focus on garments, pharmaceuticals, jute, and leather goods as major export products provides critical insights into the effects of currency devaluation on Bangladesh’s export performance. This analysis highlights the importance of these sectors to the country's economy and demonstrates how understanding their dynamics can help in formulating strategies to enhance export competitiveness and sustain economic growth. Building Consensus Among Stakeholders: Engaging with Industry Leaders and Economists: Effective policy-making requires active collaboration with key stakeholders, including industry leaders, economists, and other relevant parties. Regular consultations and feedback mechanisms can ensure that policies are well-informed and address the specific needs and concerns of the export sector. Regular Consultations: Holding periodic meetings with industry associations, such as the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), and representatives from the pharmaceutical, jute, and leather sectors to discuss policy impacts and gather feedback. Expert Panels: Establishing panels of economists and industry experts to analyze data, forecast trends, and provide policy recommendations. Public-Private Partnerships: Encouraging collaboration between the government and private sector to implement innovative solutions and enhance sectoral competitiveness. Effective Communication Strategies: Policymakers should adopt clear and consistent communication strategies to explain the benefits and challenges associated with currency devaluation. Transparent communication helps build trust and gain public and industry support for necessary economic measures. Data-Driven Insights: Utilizing robust statistical data to back policy decisions and demonstrate potential outcomes. Case Studies: Providing concrete examples from other economies that have successfully navigated similar challenges. 17 Page 762 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Public Forums: Organizing forums where policymakers can engage with the public, explain the policies, and listen to their concerns. Media Outreach: Using various media channels to communicate the rationale behind policies and their expected benefits clearly and concisely. Future Directions: The detailed analysis of these key export products offers valuable insights into the impacts of currency devaluation on Bangladesh's economy. Understanding the factors influencing these sectors allows policymakers and industry stakeholders to develop effective strategies to enhance export competitiveness and ensure sustainable economic growth. Expanded Sectoral Analysis: Future research should include a broader range of sectors to provide a more comprehensive understanding of the devaluation impacts. Longitudinal Studies: Conducting longitudinal studies to capture the long-term effects of currency devaluation on export performance. International Comparisons: Comparing the impacts of devaluation on exports in Bangladesh with those in other emerging economies to identify best practices and potential strategies for improvement. This comprehensive approach will enable Bangladesh to strengthen its export sector, mitigate the adverse effects of currency fluctuations, and achieve sustained economic development. Understanding the Selection of Major Export Products: The selection of garments, pharmaceuticals, jute, and leather goods for this analysis offers valuable insights into the impact of currency devaluation on Bangladesh's export performance. These sectors are pivotal to the country's economy due to their significant contributions to export volume, employment generation, and overall economic growth. By focusing on these key industries, the research provides a comprehensive understanding of how currency devaluation affects different sectors, enabling policymakers and industry stakeholders to develop targeted strategies. Garments: The garment sector, as the backbone of Bangladesh's export economy, illustrates how currency devaluation can boost competitiveness by lowering export prices. However, it also highlights the challenges posed by rising production costs and global market fluctuations. Pharmaceuticals: 18 Page 763 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The pharmaceutical sector's growth is driven by technological advancements and market access improvements. Devaluation impacts this sector by making exports cheaper, but it also underscores the importance of regulatory compliance and international standards. Jute: Historically significant, the jute sector benefits from competitive pricing post-devaluation but faces challenges from synthetic alternatives and changing global demand. Innovations and eco-friendly product development are crucial for its sustained success. Leather Goods: The leather sector demonstrates the dual impact of devaluation—enhanced competitiveness through pricing and challenges related to environmental regulations and labor conditions. Strategic improvements in these areas can significantly bolster the sector's export performance. The analysis highlights the necessity for tailored strategies and policy interventions to support these sectors. Recommendations include: Strategic Policy Interventions: Reducing production costs, improving labor conditions, and negotiating favorable trade agreements. Diversification and Innovation: Encouraging product diversification and investing in innovation to adapt to market changes and consumer preferences. Enhancing Production Efficiency: Adopting advanced technologies and optimizing production processes to improve competitiveness. Strengthening Global Market Presence: Expanding market access through strategic trade agreements and enhancing the global presence of Bangladeshi exports. Understanding Politicians' Views on Currency Devaluation: Understanding and addressing the perspectives of politicians on currency devaluation is crucial for formulating effective economic strategies. Political support and alignment with economic policies can significantly impact the success of devaluation measures and export performance. Politicians often balance short-term gains with long-term sustainability, aiming to achieve stable economic growth while addressing immediate economic challenges. Balancing Short-Term Gains and Long-Term Sustainability: Politicians need to consider the immediate benefits of currency devaluation, such as increased export competitiveness, while also focusing on long-term economic stability and growth. 19 Page 764 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Aligning Economic Policies with Political Objectives: Economic strategies should align with political goals to ensure cohesive and effective policy implementation. This alignment helps in gaining political support for necessary economic reforms and interventions. Enhancing Export Performance: By aligning economic policies with political objectives, Bangladesh can enhance its export performance and achieve stable economic growth. This involves fostering a favorable business environment, supporting key export sectors, and ensuring sustainable economic practices. Future research should expand the scope to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the dynamic nature of export performance in response to exchange rate changes. Additionally, exploring the role of political factors in shaping economic outcomes can provide a more holistic understanding of the devaluation impacts and inform more effective policy-making. The research underscores the critical role of currency devaluation in shaping the export performance of Bangladesh's key sectors. By understanding the nuanced impacts on different industries, policymakers and stakeholders can formulate strategies that enhance competitiveness, ensure sustainable growth, and align economic objectives with political goals. This comprehensive approach is essential for leveraging the benefits of devaluation and achieving long-term economic prosperity for Bangladesh. 20 Page 765 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 17 To Devalue or Not to Devalue? INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 766 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 14 To Devalue or Not to Devalue? Table of Contents To Devalue or Not to Devalue?................................................................................................................6 Benefits of Currency Devaluation:....................................................................................................6 Boosting Export Competitiveness:............................................................................................. 6 Reducing Trade Deficits:............................................................................................................ 6 Stimulating Economic Growth:.................................................................................................. 6 Drawbacks of Currency Devaluation:............................................................................................... 6 Inflationary Pressures:................................................................................................................ 6 Debt Repayment Challenges:......................................................................................................6 Short-Term Volatility:................................................................................................................. 6 Strategic Considerations for Policymakers:...................................................................................... 6 Assessing Economic Conditions:................................................................................................6 Coordinated Policy Approach:....................................................................................................7 Sector-Specific Support:............................................................................................................. 7 Monitoring and Adjustment:.......................................................................................................7 Historical Context and Impact of Devaluation in Bangladesh:......................................................... 7 Overview of Past Devaluations:........................................................................................................ 7 1993 Devaluation:.......................................................................................................................7 1998 Devaluation:.......................................................................................................................7 2008 Devaluation:.......................................................................................................................7 2012 Devaluation:.......................................................................................................................8 2020 Devaluation:.......................................................................................................................8 Analysis:............................................................................................................................................ 8 Factors Influencing the Decision to Devalue:................................................................................... 8 Economic Indicators and Market Conditions:...................................................................................8 Inflation Rates:............................................................................................................................8 Trade Balance:............................................................................................................................ 8 Foreign Exchange Reserves:.......................................................................................................9 External Shocks and Global Economic Trends:................................................................................ 9 Global Economic Downturns:.....................................................................................................9 Commodity Price Changes:........................................................................................................ 9 14 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 767 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) International Trade Policies:....................................................................................................... 9 Garments:........................................................................................................................................ 10 Pharmaceuticals:..............................................................................................................................10 Jute:..................................................................................................................................................10 Leather Goods:................................................................................................................................ 10 Strategic Policy Interventions:..................................................................................................10 Diversification and Innovation:................................................................................................ 10 Enhancing Production Efficiency:............................................................................................ 10 Strengthening Global Market Presence:................................................................................... 10 Policy Recommendations:............................................................................................................... 10 To Devalue or Not to Devalue:................................................................................................. 10 Arguments for Devaluation:............................................................................................................ 10 Enhancing Export Competitiveness:.........................................................................................10 Correcting Trade Imbalances:................................................................................................... 11 Stimulating Economic Growth:.................................................................................................11 Inflationary Pressures:...............................................................................................................11 Debt Servicing Costs:................................................................................................................11 Erosion of Public Confidence:.................................................................................................. 11 Policy Making:................................................................................................................................ 11 Product Diversification:............................................................................................................ 11 Technology Adoption:...............................................................................................................11 Process Optimization:............................................................................................................... 11 Expanding Market Access:....................................................................................................... 12 Strengthening Global Market Presence:................................................................................... 12 Alternative Currency Policy Strategies:.......................................................................................... 12 Managed Float vs. Fixed Exchange Rate:....................................................................................... 12 Managed Float:................................................................................................................................12 Fixed Exchange Rate:......................................................................................................................12 Currency Stabilization Measures:....................................................................................................12 Currency Intervention:.....................................................................................................................12 Interest Rate Adjustments:.............................................................................................................. 12 Garments:........................................................................................................................................ 13 Pharmaceuticals:..............................................................................................................................13 Jute:..................................................................................................................................................13 Leather Goods:................................................................................................................................ 13 Case Studies and Comparative Analysis:........................................................................................ 14 Lessons from Other Emerging Economies:.....................................................................................14 Targeted Economic Reforms:....................................................................................................14 Investments in Technology:...................................................................................................... 14 Maintaining Stable Macroeconomic Conditions:..................................................................... 14 Best Practices in Currency Management:........................................................................................14 Strategic Devaluation:...............................................................................................................14 Market Interventions:................................................................................................................14 Robust Economic Policies:....................................................................................................... 14 Page 768 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Implementation and Monitoring:.....................................................................................................14 Steps for Effective Policy Implementation:.....................................................................................14 Comprehensive Economic Analysis:...............................................................................................14 Objective:..................................................................................................................................15 Actions:..................................................................................................................................... 15 Outcome:...................................................................................................................................15 Stakeholder Engagement:................................................................................................................15 Objective:..................................................................................................................................15 Actions:..................................................................................................................................... 15 Outcome:...................................................................................................................................15 Gradual Adjustments:......................................................................................................................15 Objective:..................................................................................................................................15 Actions:..................................................................................................................................... 15 Outcome:...................................................................................................................................15 Monitoring and Adjusting Policies:.................................................................................................15 Establish Monitoring Mechanisms:.................................................................................................15 Objective:..................................................................................................................................15 Actions:..................................................................................................................................... 16 Outcome:...................................................................................................................................16 Regular Reviews and Feedback Loops:.......................................................................................... 16 Objective:..................................................................................................................................16 Actions:..................................................................................................................................... 16 Outcome:...................................................................................................................................16 Adjustments and Course Corrections:............................................................................................. 16 Objective:..................................................................................................................................16 Actions:..................................................................................................................................... 16 Outcome:...................................................................................................................................16 Key Findings:.................................................................................................................................. 16 Policy Implications:.................................................................................................................. 16 Future Directions:..................................................................................................................... 17 Insights from the Analysis:..............................................................................................................17 Garments:........................................................................................................................................ 17 Pharmaceuticals:..............................................................................................................................17 Jute:..................................................................................................................................................17 Leather Goods:................................................................................................................................ 17 Reduce Production Costs:......................................................................................................... 17 Improve Labor Conditions:.......................................................................................................17 Negotiate Favorable Trade Agreements:.................................................................................. 18 Product Diversification:............................................................................................................ 18 Invest in Innovation:................................................................................................................. 18 Process Optimization:............................................................................................................... 18 Expand Market Access:............................................................................................................ 18 Strengthen Global Presence:..................................................................................................... 18 Page 769 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) To Devalue or Not to Devalue? The decision to devalue a currency is a pivotal one for policymakers, especially in emerging economies like Bangladesh. Currency policies play a significant role in shaping export performance, economic stability, and overall growth. This section provides recommendations for policymakers, weighing the benefits and drawbacks of currency devaluation and offering a balanced perspective on this complex economic tool. Benefits of Currency Devaluation: Boosting Export Competitiveness: Devaluation makes a country's exports cheaper in foreign markets, potentially increasing demand. For Bangladesh, this can significantly enhance the competitiveness of key sectors such as garments, pharmaceuticals, jute, and leather goods. Reducing Trade Deficits: By encouraging exports and making imports more expensive, devaluation can help reduce trade deficits. This can lead to a more favorable balance of payments and strengthen the country's economic position. Stimulating Economic Growth: Increased exports can stimulate economic growth by generating higher revenues, creating jobs, and fostering industrial development. This growth can lead to improved living standards and economic stability. Drawbacks of Currency Devaluation: Inflationary Pressures: Devaluation can lead to higher import prices, which can contribute to inflation. Rising costs for essential imports such as fuel and raw materials can affect overall price stability and erode the purchasing power of consumers. Debt Repayment Challenges: For countries with significant foreign-denominated debt, devaluation increases the cost of debt repayment in local currency terms. This can strain public finances and limit the government's ability to invest in critical areas. Short-Term Volatility: Currency devaluation can lead to short-term market volatility, affecting investor confidence and potentially leading to capital outflows. This volatility can undermine economic stability and deter long-term investments. Strategic Considerations for Policymakers: Assessing Economic Conditions: Policymakers should carefully assess the current economic conditions, including inflation rates, foreign exchange reserves, and trade balances, before deciding to devalue the currency. 6 Page 770 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) A thorough analysis can help determine the potential impact and appropriateness of devaluation. Coordinated Policy Approach: Devaluation should be part of a broader, coordinated policy approach that includes measures to control inflation, support export sectors, and manage debt levels. This holistic strategy can mitigate the negative impacts and enhance the positive effects of devaluation. Sector-Specific Support: Tailored support for key export sectors is essential to maximize the benefits of devaluation. This includes investing in technology, improving infrastructure, and providing financial incentives to boost productivity and competitiveness. Monitoring and Adjustment: Continuous monitoring of the economic impact of devaluation is crucial. Policymakers should be prepared to adjust policies in response to changing conditions and unforeseen challenges to ensure sustained economic stability and growth. The decision to devalue a currency is complex and multifaceted, requiring a careful balance of potential benefits and drawbacks. For Bangladesh, strategic devaluation can enhance export competitiveness and stimulate economic growth, but it must be managed carefully to avoid inflationary pressures and financial instability. By adopting a coordinated policy approach and providing targeted support to key sectors, policymakers can navigate the challenges and capitalize on the opportunities presented by currency devaluation. Historical Context and Impact of Devaluation in Bangladesh: Overview of Past Devaluations: From 1990 to 2020, Bangladesh has experienced multiple currency devaluations aimed at addressing economic challenges such as trade deficits, balance of payments crises, and global economic shocks. The impacts of these devaluations on export performance have varied, reflecting the complexities of the economic environment and the multifaceted nature of currency devaluation. 1993 Devaluation: An 8% devaluation was implemented to combat a trade deficit and improve the balance of payments. This devaluation resulted in a 12% growth in exports, indicating a positive response from the export sector. However, it also led to a 7% inflation rate, demonstrating the inflationary pressures associated with devaluation. 1998 Devaluation: Facing another trade imbalance, a 10% devaluation was introduced. This period saw a significant 15% increase in exports, suggesting enhanced competitiveness of Bangladeshi products in international markets. Inflation rose to 8%, highlighting the persistent challenge of managing price stability. 2008 Devaluation: 7 Page 771 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Amid global economic turbulence, a 15% devaluation was enacted. Exports grew by 18%, the highest among the examined periods, reflecting strong external demand and competitive pricing. However, inflation peaked at 10%, underscoring the inflationary impact of such a substantial devaluation. 2012 Devaluation: A 12% devaluation was carried out to address a balance of payments crisis. This resulted in a 10% increase in exports, which was less pronounced than in previous devaluations. Inflation during this period was 9%, indicating ongoing challenges in maintaining price stability. 2020 Devaluation: In response to the economic disruptions caused by the COVID-19 pandemic, a 5% devaluation was implemented. This devaluation led to a modest 5% growth in exports, reflecting the constrained global economic environment. Inflation remained relatively low at 6%, suggesting more effective inflation management. Analysis: The historical data highlights the nuanced effects of currency devaluation on Bangladesh's export performance and economic stability. While devaluations generally improved export competitiveness and growth, they also introduced inflationary pressures. The varied outcomes underscore the importance of context-specific factors, such as global economic conditions, domestic production capabilities, and the effectiveness of accompanying policy measures. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. Each sector's response to devaluation is influenced by a unique set of factors, including global market demand, production costs, regulatory environments, and technological advancements. By understanding these factors, policymakers and industry stakeholders can formulate targeted strategies to enhance export competitiveness and sustain economic growth. Future research should continue to expand the scope of analysis, incorporating additional sectors and longitudinal studies to provide a more comprehensive understanding of the dynamic relationship between currency devaluation and export performance. Factors Influencing the Decision to Devalue: Economic Indicators and Market Conditions: When considering currency devaluation, policymakers need to evaluate various economic indicators to make informed decisions. Key factors include inflation rates, trade balance, and foreign exchange reserves. These indicators help assess the potential benefits and risks associated with devaluation. Inflation Rates: High inflation can erode the benefits of devaluation by increasing the cost of goods and services. Policymakers must ensure that inflation is controlled to maximize the positive impact of devaluation on export competitiveness. Trade Balance: 8 Page 772 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Persistent trade deficits may necessitate devaluation to make exports more competitive and reduce the trade gap. Improving the trade balance through increased exports can help stabilize the economy. Foreign Exchange Reserves: Adequate foreign exchange reserves provide a buffer to manage the potential short-term negative impacts of devaluation. High reserves can help stabilize the economy by ensuring the availability of foreign currency for essential imports and debt servicing. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. By understanding the factors influencing these sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. This analysis emphasizes the importance of considering various economic indicators and market conditions in making devaluation decisions and highlights the need for tailored policy interventions to support key export sectors. External Shocks and Global Economic Trends: External factors such as global economic downturns, changes in commodity prices, and international trade policies significantly influence Bangladesh's export performance. Understanding these factors helps policymakers to formulate strategies that mitigate adverse effects and capitalize on favorable trends. Global Economic Downturns: Economic recessions in key export markets can reduce demand for Bangladeshi products. For instance, the 2008 global financial crisis led to a decrease in consumer spending in major markets like the US and EU, negatively impacting exports. Policymakers must develop contingency plans to support exporters during such downturns, including financial assistance and diversification into less-affected markets. Commodity Price Changes: Fluctuations in commodity prices, such as oil and cotton, affect production costs and competitiveness. For example, a rise in cotton prices increases the cost of garment production, impacting profit margins. Bangladesh can mitigate these impacts by negotiating long-term supply contracts and investing in alternative materials. International Trade Policies: Trade policies and agreements between countries shape market access and competitive positioning. Changes in tariffs, quotas, and trade agreements can either facilitate or hinder export growth. Policymakers should engage in proactive trade diplomacy to secure favorable terms for Bangladeshi exports. The selection of garments, pharmaceuticals, jute, and leather goods for this analysis offers a comprehensive view of the impact of currency devaluation on Bangladesh's export performance. By examining these sectors, the study provides insights into the specific challenges and opportunities faced by each industry, enabling policymakers and stakeholders to develop targeted strategies to enhance export competitiveness and sustain economic growth. 9 Page 773 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Garments: The garment sector benefits significantly from currency devaluation due to its competitive pricing advantage in international markets. However, rising production costs and global market conditions can moderate these benefits. Pharmaceuticals: The pharmaceutical industry has shown notable growth, driven by technological advancements and supportive regulations. Yet, it faces challenges from stringent international standards and competition. Jute: The jute sector has experienced fluctuating performance due to changes in global demand and competition from synthetic alternatives. Developing eco-friendly jute products can enhance its competitiveness. Leather Goods: The leather goods sector has potential for growth but faces challenges related to environmental compliance, labor conditions, and global competition. Strategic Policy Interventions: Focus on reducing production costs, improving labor conditions, and negotiating favorable trade agreements. Diversification and Innovation: Encourage product diversification and invest in innovation to sustain long-term growth. Enhancing Production Efficiency: Adopt advanced technologies and optimize production processes to improve competitiveness. Strengthening Global Market Presence: Expand market access through trade agreements and enhance global market presence. Future research should expand to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the dynamic nature of export performance in response to exchange rate changes. Additionally, examining the role of technological advancements, innovation, and market access can provide valuable insights for enhancing Bangladesh's export competitiveness. Policy Recommendations: To Devalue or Not to Devalue: Arguments for Devaluation: Enhancing Export Competitiveness: 10 Page 774 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation can make Bangladeshi products cheaper in the international market, potentially boosting export volumes. By lowering the price of exports in foreign currency terms, devaluation can help local industries gain a competitive edge globally. Correcting Trade Imbalances: Devaluation makes imports more expensive and exports cheaper, which can help reduce trade deficits. This adjustment can balance trade flows by encouraging more exports while discouraging imports. Stimulating Economic Growth: Increased exports can lead to higher production levels, job creation, and overall economic growth. As export volumes rise, industries expand, and the demand for labor increases, leading to economic development. Arguments Against Devaluation: Inflationary Pressures: Devaluation can lead to higher import costs, contributing to inflation and reducing purchasing power. As the local currency weakens, the cost of imported goods and services rises, which can drive up overall price levels in the economy. Debt Servicing Costs: For countries with significant foreign-denominated debt, devaluation increases the local currency cost of servicing debt. This can strain public finances and divert resources from other critical areas of the economy. Erosion of Public Confidence: Frequent devaluations can undermine confidence in the currency and the broader economy. If businesses and consumers expect continual devaluation, they may lose trust in the stability of the currency, leading to capital flight and reduced investment. Policy Making: Policymakers should focus on strategic interventions to support these sectors, including reducing production costs, improving labor conditions, and negotiating favorable trade agreements. Product Diversification: Encouraging firms to diversify their product offerings can help mitigate risks associated with market fluctuations and changing consumer preferences. Technology Adoption: Investing in advanced manufacturing technologies, such as automation and robotics, can reduce production costs and improve product quality. Process Optimization: Streamlining production processes to eliminate waste and improve productivity is essential. 11 Page 775 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Expanding Market Access: Securing trade agreements that provide preferential access to key markets can significantly boost exports. Strengthening Global Market Presence: The pharmaceutical industry, for example, can explore new markets and strengthen its presence in existing ones through strategic partnerships and compliance with international standards. Alternative Currency Policy Strategies: Managed Float vs. Fixed Exchange Rate: Managed Float: A managed float system allows the currency value to fluctuate according to market forces but with periodic intervention by the central bank to stabilize the currency. This approach provides a balance between the flexibility of a floating exchange rate and the stability of a fixed exchange rate. It can help mitigate the adverse effects of abrupt devaluation while still allowing for controlled adjustments based on economic conditions. Fixed Exchange Rate: A fixed exchange rate system pegs the currency value to another currency or a basket of currencies, providing greater stability and predictability in international transactions. While it can enhance investor confidence and control inflation, maintaining a fixed exchange rate requires substantial foreign reserves to defend the peg against market pressures. This system can be challenging to sustain, especially for countries with limited foreign exchange reserves. Currency Stabilization Measures: Implementing measures to stabilize the currency without resorting to devaluation can be crucial for maintaining economic stability and investor confidence. Key measures include: Currency Intervention: Central banks can intervene in the foreign exchange market by buying or selling domestic currency to influence its value. Interventions can be direct, involving actual transactions, or indirect, through signaling intentions to the market. Interest Rate Adjustments: 12 Page 776 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Modifying interest rates can influence capital flows and the demand for the domestic currency. Higher interest rates can attract foreign investment, increasing demand for the currency and supporting its value. Maintaining adequate foreign exchange reserves provides a buffer against market volatility. Reserves can be used to support the currency during periods of excessive pressure, helping to stabilize the exchange rate. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. By understanding the factors influencing these sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. The detailed analysis of these sectors reveals the unique challenges and opportunities each faces in the context of currency devaluation. This knowledge allows for tailored policy interventions that can bolster the resilience and performance of these key export industries. Furthermore, exploring alternative currency policy strategies, such as managed float versus fixed exchange rate systems and various currency stabilization measures, offers a comprehensive approach to maintaining economic stability. Policymakers can leverage these insights to craft balanced and effective policies that promote sustained export growth and economic development. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. These sectors were chosen due to their significant contributions to the economy, employment generation, export volume, and comparative advantage. By analyzing the effects of currency devaluation on these key sectors, we can identify the factors that influence their performance and develop effective strategies to enhance their export competitiveness. Garments: As the cornerstone of Bangladesh's export economy, the garment sector has shown resilience and growth during periods of currency devaluation. Competitive labor costs, efficient production processes, and favorable trade policies have helped this sector thrive. Pharmaceuticals: This sector has demonstrated notable growth due to technological advancements, supportive regulatory frameworks, and expanding market access. However, it faces challenges related to international competition and compliance with global standards. Jute: Historically a major export product, jute's performance has fluctuated due to changes in global demand and competition from synthetic alternatives. However, there is potential for growth by focusing on eco-friendly products and diversification. Leather Goods: This sector has potential but faces challenges related to environmental regulations, labor conditions, and global market competition. Strategic interventions and improvements in production efficiency are needed to enhance competitiveness. 13 Page 777 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) By understanding the unique dynamics of these sectors and the impact of currency devaluation, policymakers and industry stakeholders can formulate effective strategies to sustain export growth and economic development in Bangladesh. Case Studies and Comparative Analysis: Lessons from Other Emerging Economies: Countries like Vietnam and South Korea offer valuable lessons in managing currency to enhance export competitiveness without frequent devaluation. Their strategies include: Targeted Economic Reforms: Implementing reforms that improve the business environment, streamline regulations, and promote investment. Investments in Technology: Focusing on technological advancements to enhance productivity, quality, and innovation in key export sectors. Maintaining Stable Macroeconomic Conditions: Ensuring stable inflation rates, healthy foreign exchange reserves, and prudent fiscal policies to support long-term economic stability. Best Practices in Currency Management: Adopting best practices from successful economies involves a mix of strategic devaluation, market interventions, and robust economic policies. Key practices include: Strategic Devaluation: Carefully timed devaluation to boost export competitiveness without causing excessive inflation or economic instability. Market Interventions: Utilizing monetary and fiscal policies to manage exchange rates and stabilize the economy. Robust Economic Policies: Implementing policies that support innovation, infrastructure development, and human capital investment to enhance long-term growth and resilience. By incorporating these best practices, Bangladesh can strengthen its export sectors, mitigate the adverse effects of currency devaluation, and achieve sustainable economic growth. Implementation and Monitoring: Steps for Effective Policy Implementation: Comprehensive Economic Analysis: 14 Page 778 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Objective: To make informed decisions based on solid data. Actions: Conduct detailed studies of key economic indicators, including inflation rates, trade balances, and production costs. Utilize data from reliable sources such as the World Bank, IMF, and national statistics agencies. Outcome: Develop a clear understanding of the potential impacts of currency devaluation on different sectors. Stakeholder Engagement: Objective: To ensure policies are practical and have broad support. Actions: Engage with industry leaders, economists, trade associations, and international bodies. Hold consultations, workshops, and forums to gather input and build consensus. Outcome: Formulate policies that reflect the needs and insights of key stakeholders, increasing the likelihood of successful implementation. Gradual Adjustments: Objective: To minimize economic disruptions and allow for adaptive responses. Actions: Implement currency devaluation and related policies in phases. Monitor initial impacts closely and make adjustments as needed. Use pilot programs to test policy changes before full-scale implementation. Outcome: Achieve smoother transitions and better manage short-term shocks to the economy. Monitoring and Adjusting Policies: Continuous monitoring and regular policy adjustments are vital for maintaining economic stability and achieving desired outcomes. This involves the following steps: Establish Monitoring Mechanisms: Objective: 15 Page 779 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) To keep track of the ongoing impacts of policy changes. Actions: Set up dedicated monitoring bodies or units within relevant ministries. Use advanced data analytics and reporting systems to track economic indicators in real time. Outcome: Ensure timely detection of issues and allow for proactive responses. Regular Reviews and Feedback Loops: Objective: To assess policy effectiveness and incorporate stakeholder feedback. Actions: Conduct periodic reviews of policy outcomes against set objectives. Solicit feedback from industry players, economists, and the general public. Outcome: Refine policies based on practical insights and evolving economic conditions. Adjustments and Course Corrections: Objective: To fine-tune policies to better meet economic goals. Actions: Make necessary adjustments based on monitoring data and review findings. This could involve scaling up successful measures or re-evaluating underperforming strategies. Outcome: Maintain a dynamic and responsive policy environment that supports sustained economic growth. Key Findings: The analysis underscores the significant role of sector-specific characteristics in shaping the outcomes of currency devaluation. For instance, the garment sector benefits greatly from competitive labor costs and favorable trade policies, while the pharmaceutical sector leverages technological advancements and regulatory support. Policy Implications: 16 Page 780 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Effective policy implementation requires a comprehensive understanding of economic indicators, stakeholder engagement, and gradual adjustments to mitigate risks. Continuous monitoring and regular adjustments ensure policies remain relevant and effective. Future Directions: Expanding the scope of research to include more sectors and countries can provide a broader perspective on the effects of currency devaluation. Longitudinal studies are essential for capturing the dynamic nature of export performance over time, offering deeper insights for policymakers and industry leaders. By adopting these strategies, Bangladesh can enhance its export competitiveness, support sustainable economic growth, and better navigate the complexities of global trade dynamics. Deciding whether to devalue the currency is a complex and multifaceted decision that requires careful consideration of numerous economic factors and potential impacts. This research on the "Devaluation of Currency and Export Performance in Bangladesh" focuses on four key export products: garments, pharmaceuticals, jute, and leather goods. These products were chosen due to their significant contributions to the country's economy, employment generation, export volume, and comparative advantage. Insights from the Analysis: Garments: The garment sector, a cornerstone of Bangladesh's export economy, shows substantial benefits from currency devaluation. By making Bangladeshi garments more price-competitive in international markets, devaluation can boost export volumes. However, rising production costs and global market conditions can sometimes moderate these benefits. Pharmaceuticals: The pharmaceutical industry has seen notable growth, driven by improvements in technology, regulatory frameworks, and market access. Devaluation has the potential to increase exports by making products more affordable internationally, although compliance with stringent international standards remains a challenge. Jute: Historically significant, the jute sector has experienced fluctuations due to global demand changes and competition from synthetic alternatives. Currency devaluation can enhance the competitiveness of jute products, especially in markets favoring eco-friendly alternatives. Leather Goods: The leather sector has potential for growth but faces challenges such as environmental regulations and global competition. Devaluation can improve export performance by lowering prices, but firms must navigate stringent environmental standards and labor conditions. Policymakers in Bangladesh must balance the short-term benefits of currency devaluation with the need for long-term economic stability. The research suggests several strategic recommendations to enhance export competitiveness and sustain economic growth: Reduce Production Costs: Implement subsidies for raw materials and tax incentives for exporters. 17 Page 781 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Improve Labor Conditions: Align labor reforms with international standards to boost productivity and attract investment. Negotiate Favorable Trade Agreements: Secure trade agreements that provide preferential access to key markets. Product Diversification: Encourage firms to diversify their product offerings to mitigate market risks. Invest in Innovation: Support technological innovation through partnerships with academic institutions and dedicated R&D centers. Process Optimization: Streamline production processes to eliminate waste and improve productivity. Expand Market Access: Engage in strategic trade negotiations to reduce barriers and enhance market access. Strengthen Global Presence: Promote Bangladeshi products in international markets through trade missions and marketing campaigns. The selection of garments, pharmaceuticals, jute, and leather goods as focal points for this analysis has provided valuable insights into the impact of currency devaluation on Bangladesh's export performance. By understanding the factors influencing these sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. The decision to devalue the currency should be made with a strategic approach to currency management, considering both immediate benefits and long-term economic stability. Future research should expand the scope to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the dynamic nature of export performance in response to exchange rate changes, further informing policy decisions. 18 Page 782 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh Mohammad Anamul Huq 18 Lessons from Stories of Focused Countries of Studies INSTITUTE OF SOUTH-SOUTH COOPERATION & DEVELOPMENT (ISSCAD) Advisor: Prof. Fu Jun July 2024 Page 783 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Devaluation of Currency and Export Performance in Bangladesh 15 Lessons from Stories of Focused Countries of Studies: Table of Contents Lessons from Stories of Focused Countries of Studies:.......................................................................... 6 India: Balancing Devaluation and Economic Diversification .......................................................... 6 Key Lessons:...............................................................................................................................6 Economic Diversification:.......................................................................................................... 6 Infrastructure Investment:...........................................................................................................6 Skill Development:..................................................................................................................... 6 Regulatory Hurdles:.................................................................................................................... 6 High Production Costs:............................................................................................................... 6 Vietnam: Leveraging Trade Agreements and Competitive Pricing...................................................6 Trade Agreements:......................................................................................................................6 Competitive Pricing:................................................................................................................... 7 Government Support:..................................................................................................................7 Over-reliance on Specific Sectors:..............................................................................................7 Environmental Concerns:............................................................................................................7 Indonesia: Managing Volatility and Enhancing Market Access........................................................7 Volatility Management:...............................................................................................................7 Market Access:............................................................................................................................7 Sectoral Focus:............................................................................................................................7 Infrastructure Bottlenecks:..........................................................................................................7 Political Stability:........................................................................................................................8 Case Study Methodology:................................................................................................................. 8 Selection Criteria for Focused Countries:...................................................................................8 Economic Structure:....................................................................................................................8 Historical Success in Export Performance:.................................................................................8 Relevance to Bangladesh:........................................................................................................... 8 Data Sources and Analytical Framework:.........................................................................................8 Data Sources:.....................................................................................................................................8 Academic Publications:.............................................................................................................. 8 Reports from International Organizations:................................................................................. 8 Country-Specific Economic Data:.............................................................................................. 9 Analytical Framework:......................................................................................................................9 Strategy Assessment:.................................................................................................................. 9 15 This is part of preparation for the PhD dissertation on “Devaluation of Currency and Export Performance in Bangladesh." It is financially supported by the Ministry of Commerce of the People’s Republic of China through the MOFCOM Scholarship under a program of the Institute of South-South Cooperation and Development (ISSCAD). During various stages of research, writing, and field trips, I have been supported by a dedicated team of faculties from Prof. Fu Jun’s office, ISSCAD, the National School of Development (NSD), and many other groups and individuals from Peking University. Members include Prof. LI Qiang, Prof. YU Hang, Prof. ZHANG Junni, Prof. WANG Jinjie, Prof. FU Jun, Prof. ZHA Daojiong, Prof. LIN Yifu, Prof. Zhou Yongmei, Prof. PENG Cong, Prof. LIU Shiyao, Prof. HUANG Yiping, Prof. ZHAO Bo, and teaching assistants including Jiarui Li, Yanfei, Duan Dyr, and Edward Zhang, Helen, Ding, and Zhao Ting. I also want to express my thanks to my classmates, too many to name here, for participating in focused group discussions with me in classes, workshops, field trips, and training sessions and giving feedback. Page 784 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Implementation Analysis:........................................................................................................... 9 Economic Impact Evaluation:.....................................................................................................9 Comparative Analysis:................................................................................................................9 Expansion of Garments Export Industry:.......................................................................................... 9 Policy Support:.................................................................................................................................. 9 Technology Upgradation Fund Scheme (TUFS):..................................................................... 10 Sector-Specific Incentives:....................................................................................................... 10 Preferential Trade Access:........................................................................................................ 10 Strategic Trade Partnerships:.................................................................................................... 10 Supply Chain Management:............................................................................................................ 10 Logistics Infrastructure Investment:......................................................................................... 10 Integrated Supply Chains:.........................................................................................................10 Marketing Strategies:.......................................................................................................................10 Global Brand Presence:.............................................................................................................10 Trade Fairs and Exhibitions:..................................................................................................... 10 India's Experience with Currency Devaluation:.............................................................................. 11 Competitive Pricing:....................................................................................................11 Sector-Specific Benefits:...........................................................................................................11 Inflation Management:.....................................................................................................................11 Inflationary Effects:.................................................................................................................. 11 Monetary Policies:.................................................................................................................... 12 Selection of Major Export Products:............................................................................................... 12 Economic Backbone:................................................................................................................ 12 Market Dynamics:.....................................................................................................................12 Growth Potential:...................................................................................................................... 12 Regulatory Compliance:........................................................................................................... 12 Historical Significance:.............................................................................................................12 Product Innovation:...................................................................................................................12 Growth Challenges:.................................................................................................................. 13 Global Market Access:..............................................................................................................13 Strategic Policy Recommendations:................................................................................................13 Production Efficiency:.............................................................................................................. 13 Global Market Presence:...........................................................................................................13 Strengthening Policy Support:.........................................................................................................14 Technology Upgradation:..........................................................................................................14 Financial Assistance:................................................................................................................ 14 Negotiation of Trade Agreements:............................................................................................14 Bilateral and Multilateral Engagements:.................................................................................. 14 Improving Supply Chain Infrastructure:......................................................................................... 14 Logistics Investment:................................................................................................................ 14 Public-Private Partnerships:......................................................................................................14 Enhancing Marketing Efforts:......................................................................................................... 14 International Trade Fairs:..........................................................................................................14 Branding Initiatives:..................................................................................................................15 Page 785 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Diversification of Exports:.............................................................................................................. 15 Bhutan's Export Diversification (2010-2020):..........................................................................15 Value-Added Exports:...............................................................................................................15 Trade Facilitation and Logistics:...............................................................................................15 Regional Economic Integration:............................................................................................... 15 Regional Trade Integration Initiatives:............................................................................................15 Bhutan's Green Approach:...............................................................................................................16 Government Support and Policies:........................................................................................... 16 Diversifying Exports:................................................................................................................16 Enhancing Value Addition:....................................................................................................... 16 Improving Trade Facilitation:................................................................................................... 16 Leveraging Regional Integration:............................................................................................. 17 Promoting Sustainability:..........................................................................................................17 Government Support:................................................................................................................17 Country Case Studies:..................................................................................................................... 17 Vietnam: Strategic Devaluation and Export Growth.......................................................................17 Flexible Exchange Rate Policy:................................................................................................ 17 Infrastructure Investment:.........................................................................................................17 Industrial Capacity Building:....................................................................................................18 South Korea: Currency Management and Technological Advancements.......................................18 Technological Innovation:.........................................................................................................18 High-Value Exports:..................................................................................................................18 Economic Reforms:.................................................................................................................. 18 Turkey: Navigating Economic Shocks and Currency Fluctuations.................................................18 Strategic Location:.................................................................................................................... 18 Export Diversification:..............................................................................................................18 Resilient Economic Policies:.................................................................................................... 18 Common Strategies and Policies:....................................................................................................19 Flexible Exchange Rate Policies:..............................................................................................19 Investment in Infrastructure:.....................................................................................................19 Focus on Industrial and Technological Advancement:.............................................................19 Skilled Workforce Development:..............................................................................................19 Divergent Approaches and Outcomes:............................................................................................19 Vietnam:....................................................................................................................................19 South Korea:............................................................................................................................. 19 India:......................................................................................................................................... 20 Turkey:...................................................................................................................................... 20 Comparative Analysis:.................................................................................................................... 20 Recommendations for Bangladesh.................................................................................................. 20 Adopt Flexible Exchange Rate Policies:...................................................................................20 Invest in Infrastructure:.............................................................................................................20 Promote Industrial and Technological Advancement:..............................................................20 Enhance Workforce Skills:........................................................................................................20 Tailor Strategies to National Context:.......................................................................................21 Page 786 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Key Lessons for Bangladesh:.......................................................................................................... 21 Tailored Currency Management Strategies:..............................................................................21 Flexible Exchange Rate Policy:................................................................................................ 21 Strategic Interventions:............................................................................................................. 21 Integrating Economic Reforms with Currency Policies:.................................................................21 Addressing Structural Issues:....................................................................................................21 Investing in Infrastructure:........................................................................................................21 Enhancing Industrial Capacity:.................................................................................................22 Emphasizing Technological and Industrial Upgradation:............................................................... 22 Focusing on High-Value Exports:.............................................................................................22 Reducing Reliance on Traditional Industries:...........................................................................22 Technological Upgradation:......................................................................................................22 Adapting Successful Strategies:...................................................................................................... 22 Maintaining a Flexible Exchange Rate:....................................................................................22 Focusing on High-Value Industries:..........................................................................................23 Avoiding Common Pitfalls:...................................................................................................... 23 Mitigating Economic Shocks:...................................................................................................23 Strengthening Economic Policies:............................................................................................ 23 Selection of Garments, Pharmaceuticals, Jute, and Leather Goods as focal points:....................... 23 Garments:..................................................................................................................................24 Pharmaceuticals:....................................................................................................................... 24 Jute:........................................................................................................................................... 24 Leather Goods:..........................................................................................................................24 Comparative Lessons from Vietnam, South Korea, India, and Turkey:..........................................24 Vietnam:....................................................................................................................................24 South Korea:............................................................................................................................. 24 India:......................................................................................................................................... 24 Turkey:...................................................................................................................................... 25 Strategic Policy Interventions:..................................................................................................25 Diversification and Innovation:................................................................................................ 25 Enhancing Production Efficiency:............................................................................................ 25 Strengthening Global Market Presence:................................................................................... 25 Page 787 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Lessons from Stories of Focused Countries of Studies: This chapter aims to draw valuable lessons from the experiences of other countries that have strategically managed their currencies to boost export performance. By analyzing the successes and challenges faced by countries such as India, Vietnam, and Indonesia, valuable insights can be gained to inform effective currency policies in Bangladesh. Understanding these case studies can help identify best practices and potential pitfalls, guiding policymakers and industry stakeholders in formulating strategies to enhance export competitiveness and sustain economic growth. India: Balancing Devaluation and Economic Diversification India has strategically managed its currency through careful devaluation and economic diversification, providing several lessons for Bangladesh. Key Lessons: Economic Diversification: India's success in managing currency devaluation is partly due to its diversified economy. Bangladesh can benefit from diversifying its export base beyond garments to include sectors like IT services, pharmaceuticals, and automotive components. Infrastructure Investment: India's significant investments in infrastructure have enhanced its export capacity. Similarly, Bangladesh should prioritize improving its transport, logistics, and energy infrastructure to support export growth. Skill Development: India’s focus on skill development and education has created a competitive workforce. Bangladesh can replicate this by investing in vocational training and higher education to improve labor productivity. Regulatory Hurdles: India faces regulatory challenges that sometimes impede export growth. Bangladesh should aim for a regulatory environment that supports ease of doing business. High Production Costs: Managing production costs remains a challenge in India. Bangladesh must focus on cost reduction strategies, especially in labor-intensive sectors like garments. Vietnam: Leveraging Trade Agreements and Competitive Pricing Vietnam’s approach to currency management and export growth offers valuable insights, particularly in leveraging trade agreements and maintaining competitive pricing. Trade Agreements: 6 Page 788 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Vietnam’s numerous free trade agreements have opened up new markets and enhanced its export potential. Bangladesh should aggressively pursue bilateral and multilateral trade agreements to diversify its export destinations. Competitive Pricing: Vietnam has maintained competitive pricing through efficient production processes and low labor costs. Bangladesh can enhance its competitiveness by optimizing production and ensuring cost efficiency. Government Support: Strong government support in Vietnam for export sectors through subsidies and incentives has been crucial. Bangladesh can benefit from similar supportive policies to boost its export industries. Over-reliance on Specific Sectors: Vietnam’s heavy reliance on electronics and garments poses risks. Bangladesh should aim for a balanced export portfolio to mitigate sector-specific risks. Environmental Concerns: Rapid industrialization in Vietnam has led to environmental challenges. Bangladesh must ensure sustainable industrial practices to avoid similar issues. Indonesia: Managing Volatility and Enhancing Market Access Indonesia’s experience with currency devaluation highlights the importance of managing volatility and enhancing market access to sustain export growth. Volatility Management: Indonesia has implemented measures to manage currency volatility, such as maintaining healthy foreign exchange reserves and using hedging strategies. Bangladesh should adopt similar practices to stabilize its currency. Market Access: Indonesia’s focus on improving market access through regional trade partnerships has boosted its exports. Bangladesh can enhance market access by participating in regional trade blocs and improving trade logistics. Sectoral Focus: Indonesia’s targeted support for key sectors like palm oil and textiles has driven export growth. Bangladesh should identify and support high-potential sectors to maximize export performance. Infrastructure Bottlenecks: Despite improvements, Indonesia still faces infrastructure challenges. Bangladesh must continue to invest in infrastructure to support long-term export growth. 7 Page 789 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Political Stability: Political instability has sometimes affected Indonesia’s economic performance. Ensuring a stable political environment is crucial for sustained economic growth in Bangladesh. The experiences of India, Vietnam, and Indonesia offer valuable lessons for Bangladesh in managing currency devaluation and enhancing export performance. Key takeaways include the importance of economic diversification, infrastructure investment, trade agreements, competitive pricing, government support, volatility management, and sectoral focus. By adopting these best practices and addressing the challenges, Bangladesh can formulate effective strategies to enhance export competitiveness and sustain economic growth. Case Study Methodology: Selection Criteria for Focused Countries: The countries chosen for this analysis—Vietnam, South Korea, India, and Turkey—were selected based on their diverse economic structures and successful strategies in managing currency devaluation and enhancing export performance. The criteria for their selection include: Economic Structure: The selected countries have different economic compositions, providing a variety of contexts in which currency devaluation has played a role. This diversity allows for a comprehensive understanding of the mechanisms and impacts of devaluation. Historical Success in Export Performance: Each country has demonstrated notable success in enhancing export performance through strategic economic policies and currency management. Their experiences offer valuable lessons on effective policy interventions. Relevance to Bangladesh: The selected countries share similarities with Bangladesh in terms of their stages of economic development and the structure of key export sectors. Their experiences can provide actionable insights for Bangladesh's policy formulation. Data Sources and Analytical Framework: The case study methodology employs a robust analytical framework to assess the strategies used by the selected countries and their outcomes. The data sources and analytical approach are outlined below: Data Sources: Academic Publications: Peer-reviewed journals and books provide detailed analyses of the countries' economic strategies and outcomes. Reports from International Organizations: 8 Page 790 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Publications from the World Bank, International Monetary Fund (IMF), and other reputable international organizations offer authoritative data and policy assessments. Country-Specific Economic Data: National statistical agencies and central banks provide essential economic indicators and detailed data on export performance, currency movements, and policy interventions. Analytical Framework: Strategy Assessment: This involves examining the specific strategies employed by each country to manage currency devaluation and enhance export performance. Key areas of focus include fiscal policies, monetary policies, trade agreements, and sector-specific interventions. Implementation Analysis: Understanding how these strategies were implemented, including the institutional frameworks, timelines, and stakeholder involvement, provides insights into the practical aspects of policy execution. Economic Impact Evaluation: The framework evaluates the economic impacts of the strategies on key indicators such as export volumes, trade balance, GDP growth, and sectoral performance. This includes both short-term and long-term effects. Comparative Analysis: Comparing the strategies and outcomes across the selected countries helps identify best practices and common pitfalls. This comparative perspective is essential for drawing lessons that are applicable to Bangladesh. The focus on garments, pharmaceuticals, jute, and leather goods in this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. By understanding the factors influencing these key sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. The detailed case study methodology, which includes the selection criteria for focused countries and a robust analytical framework, ensures that the analysis is comprehensive and grounded in reliable data. The lessons learned from Vietnam, South Korea, India, and Turkey offer actionable insights that can be adapted to the Bangladeshi context, ultimately contributing to more informed and effective economic policies. Expansion of Garments Export Industry: India has successfully expanded its garments export industry through a combination of supportive policies, strategic trade agreements, efficient supply chain management, and effective marketing strategies. Key lessons from India’s approach can provide valuable insights for Bangladesh: Policy Support: 9 Page 791 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Technology Upgradation Fund Scheme (TUFS): The Indian government’s TUFS initiative has provided financial assistance to textile and garment manufacturers for upgrading technology and modernizing facilities. This has led to improved productivity and competitiveness in the global market. Sector-Specific Incentives: Various incentives, such as subsidies, tax breaks, and export promotion schemes, have been implemented to support the garment industry. These policies have helped reduce production costs and enhance export competitiveness. Preferential Trade Access: India has actively engaged in multiple bilateral and multilateral trade agreements, securing preferential access to key markets like the United States and the European Union. These agreements have reduced tariffs and other trade barriers, making Indian garments more competitive globally. Strategic Trade Partnerships: India’s efforts to build strong trade partnerships have facilitated smoother entry into international markets, boosting export volumes and market share. Supply Chain Management: Logistics Infrastructure Investment: Significant investments in logistics and transportation infrastructure have streamlined supply chain operations, reducing costs and improving delivery times. Efficient supply chains have enabled Indian exporters to meet global demand more effectively. Integrated Supply Chains: Indian garment manufacturers have developed integrated supply chains that link raw material suppliers, manufacturers, and distributors, ensuring seamless production processes and timely delivery of goods. Marketing Strategies: Global Brand Presence: Indian garment exporters have focused on building strong brand identities in international markets. This has involved aggressive marketing campaigns, brand positioning, and leveraging digital platforms to reach global consumers. Trade Fairs and Exhibitions: Participation in international trade fairs and exhibitions has provided Indian garment exporters with opportunities to showcase their products, network with potential buyers, and secure export orders. This strategy has helped Indian firms expand their market reach and build long-term business relationships. 10 Page 792 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The selection of garments, pharmaceuticals, jute, and leather goods as major export products for analysis highlights their significant contributions to Bangladesh's economy and their sensitivity to currency devaluation. Understanding the factors influencing these sectors provides valuable insights for policymakers and industry stakeholders to formulate effective strategies to enhance export competitiveness and sustain economic growth. Policymakers should focus on strategic interventions, including reducing production costs, improving labor conditions, and negotiating favorable trade agreements, to support the export sectors. Encouraging diversification of the product base and investing in innovation is crucial for sustaining long-term export growth. For example, developing eco-friendly jute products can tap into global market trends favoring sustainable goods. Improving production efficiency through technology adoption and process optimization can enhance competitiveness. The garment sector can particularly benefit from advanced manufacturing technologies. Expanding market access through trade agreements and strengthening global market presence are essential for export growth. The pharmaceutical industry, for instance, can explore new markets and strengthen its presence in existing ones through strategic partnerships and compliance with international standards. By learning from India’s successful strategies in expanding its garment export industry, Bangladesh can implement similar policies and practices to boost its own export performance. The insights gained from this analysis can guide future policy decisions and contribute to the sustainable growth of Bangladesh's export sectors. India's Experience with Currency Devaluation: India's experience with currency devaluation offers valuable insights that Bangladesh can consider to enhance its export competitiveness and manage economic challenges. Competitive Pricing: Currency devaluation can significantly enhance the price competitiveness of export products. When the Indian rupee depreciated, it made Indian garments cheaper on the global market. This led to an increase in demand for Indian garments, resulting in higher export volumes. Sector-Specific Benefits: The garment sector, in particular, has been a major beneficiary. The lower exchange rate reduced the price of Indian garments in foreign currencies, boosting their attractiveness to international buyers. This has enabled Indian garment exporters to capture larger market shares and expand their presence in global markets. Inflation Management: Inflationary Effects: One of the critical challenges of currency devaluation is the potential for increased inflation. When the currency depreciates, the cost of imported goods rises, which can lead to higher overall price levels in the economy. For instance, the cost of raw materials and intermediate 11 Page 793 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) goods used in production may increase, squeezing profit margins and potentially leading to higher prices for consumers. Monetary Policies: India has implemented various monetary policies to manage inflation following devaluation. These policies include adjusting interest rates, controlling the money supply, and using foreign exchange reserves to stabilize the currency. By carefully managing inflation, India has been able to ensure that the benefits of devaluation, such as improved export competitiveness, are not negated by rising domestic costs. Selection of Major Export Products: The selection of garments, pharmaceuticals, jute, and leather goods as focal points in the analysis of currency devaluation impacts provides a comprehensive understanding of Bangladesh's export dynamics. These sectors are pivotal to Bangladesh's economy due to their significant contributions to employment, export revenue, and economic growth. Economic Backbone: The garment sector is the cornerstone of Bangladesh's export economy. It employs millions and generates substantial foreign exchange earnings. By analyzing how devaluation affects this sector, policymakers can develop strategies to sustain and enhance its global competitiveness. Market Dynamics: The sector's responsiveness to currency devaluation highlights its competitive labor costs and efficient production processes. However, challenges such as rising wages and production costs must be addressed to maintain its competitive edge. Growth Potential: Bangladesh's pharmaceutical industry has shown robust growth, driven by technological advancements and favorable regulatory frameworks. Understanding the impact of devaluation on this sector can help in crafting policies to support its expansion and global market penetration. Regulatory Compliance: The sector's ability to comply with international standards and expand into new markets is crucial for sustaining its growth. Strategic investments in R&D and modern manufacturing processes are essential. Historical Significance: Jute has been a traditional export product for Bangladesh, with significant historical importance. Despite facing competition from synthetic alternatives, the sector can capitalize on the growing demand for eco-friendly products. Product Innovation: 12 Page 794 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Diversifying jute products and improving their quality can help in tapping into new markets and reviving the sector's export potential. Growth Challenges: The leather goods sector has considerable growth potential but faces challenges related to environmental regulations and labor conditions. Addressing these issues is vital for enhancing the sector's competitiveness. Global Market Access: Expanding market access through trade agreements and improving production efficiency are key to sustaining growth in this sector. Strategic Policy Recommendations: By understanding the factors influencing these key sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. Strategic recommendations include: Implement measures to reduce production costs and improve labor conditions. Negotiate favorable trade agreements to enhance market access. Encourage product diversification and invest in technological innovation to sustain long-term growth. Production Efficiency: Promote the adoption of advanced technologies and optimize production processes to enhance competitiveness. Global Market Presence: Strengthen global market presence through strategic partnerships and compliance with international standards. By adopting these recommendations, Bangladesh can effectively leverage the benefits of currency devaluation, mitigate its challenges, and ensure sustainable export growth. The selection of garments, pharmaceuticals, jute, and leather goods as the focal points for this research provides a comprehensive understanding of the impact of currency devaluation on Bangladesh's export performance. These sectors are not only significant contributors to the national economy but also represent diverse challenges and opportunities in the context of global trade. As the cornerstone of Bangladesh's export economy, the garment sector demonstrates significant sensitivity to currency devaluation, benefitting from competitive pricing advantages that boost export volumes. The pharmaceutical sector shows potential for growth through market expansion and technological advancements. While devaluation aids competitive pricing, the sector must navigate stringent international standards and regulatory environments. 13 Page 795 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Historically a major export, the jute sector benefits from eco-friendly trends. However, it faces competition from synthetic alternatives and needs to focus on product diversification to sustain growth. The leather sector, although promising, must address environmental compliance and labor conditions to fully capitalize on devaluation benefits. Enhancing production efficiency and expanding market presence are critical for its success. By analyzing these sectors, policymakers and industry stakeholders gain insights into the nuanced impacts of currency devaluation. This understanding can guide the formulation of effective strategies to enhance export competitiveness and drive sustainable economic growth. Based on the comparative analysis, particularly learning from India's experience, Bangladesh can implement several strategic policy recommendations to strengthen its export sectors: Strengthening Policy Support: Technology Upgradation: The government should enhance policies that support technological upgrades and modernization in the garment sector. Incentives for adopting advanced manufacturing technologies can boost productivity and quality. Financial Assistance: Providing low-interest loans and grants for technological innovation and infrastructure development can further strengthen the sector. Negotiation of Trade Agreements: Actively pursuing and negotiating trade agreements can secure preferential access to key export markets, reducing tariffs and non-tariff barriers. Bilateral and Multilateral Engagements: Strengthening bilateral and multilateral trade relationships can open new market opportunities and diversify export destinations. Improving Supply Chain Infrastructure: Logistics Investment: Investing in logistics and supply chain infrastructure is crucial. This includes developing efficient transport networks, warehousing facilities, and customs processes to reduce costs and improve delivery times. Public-Private Partnerships: Encouraging public-private partnerships in infrastructure projects can enhance supply chain efficiency and reduce bottlenecks. Enhancing Marketing Efforts: 14 Page 796 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) International Trade Fairs: Increasing participation in international trade fairs and exhibitions can promote Bangladeshi garments and other export products, attracting new buyers and expanding market reach. Branding Initiatives: Developing a national branding strategy for Bangladeshi exports can enhance global recognition and demand. Emphasizing quality, sustainability, and innovation can position Bangladesh favorably in international markets. By adopting these recommendations, Bangladesh can enhance the competitiveness of its export sectors, effectively respond to the challenges of currency devaluation, and achieve sustained economic growth. Despite being a small, landlocked country with limited resources, Bhutan has successfully implemented several strategies that have contributed to its export growth. Bangladesh can learn from Bhutan’s approach to enhance its own export performance. Diversification of Exports: Bhutan has focused on diversifying its export basket beyond traditional sectors. This strategy has reduced Bhutan's dependence on a few key products and increased its resilience to external shocks. Bhutan's Export Diversification (2010-2020): Bhutan has promoted the export of niche products such as organic produce, handicrafts, and renewable energy. This diversification has allowed Bhutan to tap into new markets and reduce its vulnerability to market fluctuations. Value-Added Exports: Bhutan emphasizes value addition to its exports by focusing on quality and unique selling propositions. This strategy has enabled Bhutan to capture higher-value markets and increase export earnings. For instance, Bhutan's organic produce and high-quality handicrafts command premium prices in international markets, reflecting the country's commitment to maintaining high standards and catering to niche markets. Trade Facilitation and Logistics: Bhutan has invested in improving trade facilitation measures, such as simplifying customs procedures and reducing trade barriers. Efficient trade facilitation has helped Bhutanese exporters compete more effectively in international markets by reducing the time and cost associated with export processes. Regional Economic Integration: Bhutan has actively pursued regional economic integration by becoming a member of regional trade agreements like the South Asian Free Trade Area (SAFTA). This has expanded Bhutan's export opportunities within the region and provided access to larger markets. 15 Page 797 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Regional Trade Integration Initiatives: Policymakers should focus on strategic interventions to support these sectors. This includes reducing production costs, improving labor conditions, and negotiating favorable trade agreements. Diversifying the product base and investing in innovation are crucial for sustaining export growth. The jute industry, for example, can benefit from developing new products that cater to eco-friendly market trends. Improving production efficiency through technology adoption and process optimization can enhance competitiveness. The garments sector can benefit from adopting advanced manufacturing technologies to reduce costs and improve quality. Expanding market access through trade agreements and strengthening global market presence are essential. The pharmaceutical industry can explore new markets and strengthen its presence in existing ones through strategic partnerships and compliance with international standards. By implementing these recommendations and learning from Bhutan's successful strategies, Bangladesh can enhance its export performance and achieve sustained economic growth. Sustainable and Inclusive Exports Bhutan's Green Approach: Bhutan's focus on sustainable and green exports, prioritizing environmental conservation and social responsibility, has significantly bolstered its global reputation. This approach attracts ethical and conscious consumers who value sustainability and fair trade, setting a high standard for other countries to emulate. Government Support and Policies: Bhutan's government has implemented robust policies and support programs to promote export-oriented industries. These include export promotion schemes and financial incentives, providing a conducive environment for the growth and success of these industries. Drawing from Bhutan's experience, the following recommendations can enhance Bangladesh's export performance: Diversifying Exports: Bangladesh should promote the development of non-traditional export sectors to reduce reliance on the readymade garments industry. Encouraging the growth of pharmaceuticals, jute, and leather goods will broaden the export base and reduce vulnerability to sector-specific shocks. Enhancing Value Addition: Investing in R&D, improving standards, design, innovation, and branding can enhance the value of export products. Modern manufacturing technologies and high-value product development can help Bangladeshi products command premium prices in international markets. 16 Page 798 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Improving Trade Facilitation: Streamlining bureaucratic processes, reducing red tape, and enhancing logistics infrastructure are crucial for efficient goods movement. Simplifying customs procedures and lowering export-related costs can make Bangladeshi exports more competitive. Leveraging Regional Integration: Actively participating in regional trade agreements like SAFTA and BIMSTEC can open new markets and create more export opportunities. Leveraging these initiatives can enhance export opportunities in neighboring markets, fostering regional economic integration. Promoting Sustainability: Emphasizing sustainable production practices and implementing fair labor practices can attract ethical and conscious consumers globally. Adopting environmentally friendly practices and ensuring compliance with international labor standards will enhance the global reputation of Bangladeshi products. Government Support: The government should continue to foster an enabling environment through policy interventions, targeted subsidies, and capacity-building programs. Providing financial incentives, training programs, and infrastructure support can help export-oriented industries thrive. The focus on garments, pharmaceuticals, jute, and leather goods in this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. By understanding the factors influencing these sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. Future research should expand to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the dynamic nature of export performance in response to exchange rate changes, helping to formulate more robust and adaptive economic policies. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis provides valuable insights into the impact of currency devaluation on Bangladesh's export performance. By understanding the factors influencing these sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. Each sector's unique response to devaluation underscores the importance of tailored policy interventions and strategic investments. Country Case Studies: Vietnam: Strategic Devaluation and Export Growth Vietnam has successfully utilized strategic currency devaluation to boost its export competitiveness. By maintaining a flexible exchange rate policy, Vietnam has been able to quickly respond to global market changes, making its products more attractive internationally. This proactive approach has been complemented by substantial investments in infrastructure, education, and industrial capacity. 17 Page 799 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Flexible Exchange Rate Policy: Allows for rapid adjustment to global market conditions. Infrastructure Investment: Enhances production efficiency and reduces logistics costs. Industrial Capacity Building: Supports diversification and value addition in exports. South Korea: Currency Management and Technological Advancements South Korea's economic strategy integrates careful currency management with a strong emphasis on technological advancement and high-value exports. The country has shifted away from traditional industries and focused on sectors like electronics, automotive, and information technology, reducing the adverse impacts of currency fluctuations. Technological Innovation: Investment in R&D and high-tech industries ensures long-term competitiveness. High-Value Exports: Diversification into high-value sectors mitigates risks associated with currency volatility. Economic Reforms: Structural reforms support a stable economic environment conducive to export growth. Turkey: Navigating Economic Shocks and Currency Fluctuations Turkey's experience with currency devaluation has been marked by frequent economic shocks and volatility. Despite these challenges, Turkey has leveraged its strategic geographic location and diversified its export base, focusing on both traditional sectors and emerging industries. The country has also implemented resilient economic policies to manage currency risks effectively. Strategic Location: Geographic advantages facilitate access to multiple markets. Export Diversification: Reducing reliance on a few sectors helps manage risks. Resilient Economic Policies: Strong policies help navigate and mitigate the effects of economic shocks and currency volatility. 18 Page 800 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) The comparative analysis of garment, pharmaceutical, jute, and leather goods sectors in Bangladesh, supplemented by country case studies from Vietnam, South Korea, and Turkey, provides a comprehensive framework for understanding the impact of currency devaluation on export performance. The insights gained from these analyses highlight the need for tailored policy interventions, strategic investments in technology and infrastructure, and robust economic policies to enhance Bangladesh's export competitiveness. Future research should continue to explore these dynamics across more sectors and countries to further inform policy and strategic decision-making. The selection of garments, pharmaceuticals, jute, and leather goods as focal export products provides crucial insights into the multifaceted impact of currency devaluation on Bangladesh’s export performance. By delving into the factors influencing these key sectors, this analysis enables policymakers and industry stakeholders to develop targeted strategies that can enhance export competitiveness and sustain economic growth. Understanding these dynamics is essential for formulating policies that address both sector-specific and broader economic challenges. Common Strategies and Policies: Across the countries studied, several common strategies emerge that have been pivotal in enhancing export competitiveness, even amidst the challenges of currency devaluation: Flexible Exchange Rate Policies: Most countries have adopted flexible exchange rate policies that allow for adjustments in response to market conditions. This flexibility helps mitigate the adverse effects of currency devaluation and promotes stability in export markets. Investment in Infrastructure: Substantial investments in physical and logistical infrastructure have been crucial. Improved transportation networks, port facilities, and technological infrastructure enhance the efficiency and reliability of export activities. Focus on Industrial and Technological Advancement: Emphasizing industrial and technological advancement has been a common thread. Investments in modernizing industries, adopting advanced manufacturing technologies, and fostering innovation have collectively strengthened export sectors. Skilled Workforce Development: Enhancing the skill set of the workforce through education and vocational training programs has been another shared strategy. A skilled workforce can better adapt to new technologies and production processes, increasing overall productivity and competitiveness. Divergent Approaches and Outcomes: While common strategies are evident, each country’s approach is tailored to its unique economic context, reflecting divergent paths and outcomes: Vietnam: Vietnam has focused on labor-intensive industries, leveraging its abundant and relatively low-cost labor force. This strategy has propelled its garment and textile sector, making it a 19 Page 801 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) global competitor. Vietnam’s approach highlights the importance of aligning export strategies with national labor market advantages. South Korea: South Korea has emphasized technological advancement and high-value-added industries. By investing heavily in R&D and fostering a culture of innovation, South Korea has transitioned from labor-intensive industries to technology-driven sectors, such as electronics and automotive, achieving sustained export growth. India: India’s economic reforms, including liberalization, deregulation, and privatization, have been central to its export strategy. These reforms have opened up the economy, attracted foreign investment, and facilitated the growth of diverse export sectors. India’s experience underscores the significance of comprehensive economic reforms in driving export performance. Turkey: Turkey has adopted a diversification strategy, reducing its dependence on a few key sectors by promoting a broader range of industries. This approach has involved developing new markets and products, reducing vulnerability to sector-specific shocks, and enhancing overall export resilience. Comparative Analysis: The comparative analysis reveals that while common strategies like flexible exchange rates, infrastructure investment, and industrial advancement are foundational, the specific context and tailored approaches of each country play a critical role in shaping export outcomes. For Bangladesh, understanding these varied strategies and outcomes can inform the development of nuanced, context-specific policies that bolster export performance in the face of currency devaluation. Recommendations for Bangladesh Drawing lessons from the comparative analysis, Bangladesh can adopt a multifaceted approach to enhance its export competitiveness: Adopt Flexible Exchange Rate Policies: Maintaining a flexible exchange rate regime can help absorb external shocks and provide stability to the export sector. Invest in Infrastructure: Continued investment in improving transportation, port facilities, and digital infrastructure is essential to support efficient export logistics. Promote Industrial and Technological Advancement: 20 Page 802 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Fostering industrial modernization and technological innovation through incentives, R&D support, and collaboration with academic institutions can drive productivity and competitiveness. Enhance Workforce Skills: Implementing education and vocational training programs to upskill the labor force will ensure adaptability to new technologies and production processes. Tailor Strategies to National Context: Developing export strategies that align with Bangladesh’s specific economic advantages and challenges, such as leveraging low-cost labor in the garments sector while investing in high-value-added industries like pharmaceuticals and leather goods, can create a balanced and resilient export portfolio. By integrating these insights and recommendations, Bangladesh can strengthen its export sectors, mitigate the challenges of currency devaluation, and sustain economic growth. The selection of garments, pharmaceuticals, jute, and leather goods for this analysis provides critical insights into the impact of currency devaluation on Bangladesh's export performance. These sectors were chosen for their significant contributions to the economy, including employment generation, export volume, and comparative advantage. Understanding how currency devaluation affects these key sectors helps policymakers and industry stakeholders formulate effective strategies to enhance export competitiveness and sustain economic growth. Key Lessons for Bangladesh: Tailored Currency Management Strategies: Bangladesh can benefit from adopting a tailored approach to currency management that considers its unique economic conditions. This involves: Flexible Exchange Rate Policy: Implementing a flexible exchange rate policy can help manage currency fluctuations more effectively. By allowing the exchange rate to adjust according to market conditions, Bangladesh can maintain competitiveness in its export sectors. Strategic Interventions: Combining flexible exchange rate policies with strategic interventions, such as foreign exchange reserves management and targeted support for export sectors, can mitigate adverse effects of devaluation and enhance overall economic stability. Integrating Economic Reforms with Currency Policies: Successful currency management often involves integrating broader economic reforms. For Bangladesh, this means: Addressing Structural Issues: 21 Page 803 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Reforms should focus on addressing structural issues within the economy, such as improving the business environment, reducing bureaucratic hurdles, and enhancing regulatory frameworks. Investing in Infrastructure: Significant investments in infrastructure, including transportation, logistics, and energy, are essential for supporting export growth and industrial development. Enhancing Industrial Capacity: Developing industrial capacity through policies that encourage innovation, efficiency, and sustainability will help Bangladesh diversify its export base and reduce vulnerability to external shocks. Emphasizing Technological and Industrial Upgradation: Investing in technological advancements and upgrading industrial capacities are crucial for sustaining export growth. Lessons from other countries, such as South Korea and Vietnam, highlight the importance of: Focusing on High-Value Exports: Bangladesh should prioritize the development of high-value export sectors that offer greater profitability and resilience against global market fluctuations. Reducing Reliance on Traditional Industries: Diversifying the export base by reducing reliance on traditional industries like garments and expanding into sectors such as pharmaceuticals, IT services, and high-tech manufacturing can provide more sustainable growth. Technological Upgradation: Investing in modern technologies, R&D, and innovation will enable Bangladeshi firms to improve productivity, quality, and competitiveness in the global market. Encouraging public-private partnerships and fostering a culture of continuous improvement can drive technological progress. By focusing on tailored currency management strategies, integrating economic reforms with currency policies, and emphasizing technological and industrial upgradation, Bangladesh can enhance its export competitiveness and achieve sustainable economic growth. The lessons drawn from analyzing the export performance of garments, pharmaceuticals, jute, and leather goods provide valuable guidance for policymakers and industry stakeholders in shaping future economic strategies. The selection of garments, pharmaceuticals, jute, and leather goods as major export products for this analysis offers critical insights into the impact of currency devaluation on Bangladesh's export performance. Each sector's unique response to devaluation underscores the importance of tailored strategies that consider specific challenges and opportunities. By understanding the factors influencing these sectors, policymakers and industry stakeholders can formulate effective strategies to enhance export competitiveness and sustain economic growth. 22 Page 804 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Adapting Successful Strategies: Maintaining a Flexible Exchange Rate: A flexible exchange rate policy can help absorb external shocks and maintain export competitiveness. Bangladesh should continue to allow for exchange rate adjustments in response to market conditions, ensuring that the currency reflects its true value and supports export growth. Improving infrastructure is critical for enhancing export performance. Investments in transportation networks, energy supply, and port facilities can reduce logistics costs and improve the efficiency of export operations. Enhanced infrastructure can also attract foreign direct investment (FDI) and boost overall economic development. Focusing on High-Value Industries: Bangladesh should identify and invest in high-value industries with significant export potential. For example, the pharmaceuticals sector can benefit from investments in R&D and technology to produce high-value, patentable products. Similarly, the leather goods industry can focus on high-end, branded products that command premium prices in international markets. Avoiding Common Pitfalls: One of the common pitfalls associated with currency devaluation is the risk of inflation. Policymakers must implement measures to control inflation, such as monetary policy tightening and fiscal discipline. Ensuring price stability is essential for maintaining the purchasing power of consumers and the cost competitiveness of exports. Mitigating Economic Shocks: Learning from the experiences of countries like Turkey, which faced significant economic shocks following currency devaluation, Bangladesh should focus on maintaining macroeconomic stability. This includes prudent fiscal management, maintaining healthy foreign exchange reserves, and ensuring a stable political environment to build investor confidence. Strengthening Economic Policies: Robust economic policies are crucial for sustaining long-term growth. Policymakers should implement structural reforms that enhance the business environment, such as simplifying regulatory procedures, reducing bureaucratic red tape, and promoting transparency. Strengthening economic institutions can also improve governance and ensure the effective implementation of policies. The analysis of the four major export products—garments, pharmaceuticals, jute, and leather goods—highlights the complex dynamics of currency devaluation and its impact on export performance. By focusing on these sectors, the research provides valuable insights into the specific factors that influence export success. Policymakers can use these findings to develop targeted strategies that enhance export competitiveness and promote sustainable economic growth. Through strategic interventions, diversification, innovation, and enhanced production efficiency, Bangladesh can strengthen its export sectors and mitigate the negative effects of currency devaluation. 23 Page 805 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) Additionally, by learning from international experiences and avoiding common pitfalls, Bangladesh can ensure a stable and prosperous economic future. Future research should continue to explore the dynamic nature of export performance and expand the scope to include more sectors and countries, offering a broader perspective on the complex relationship between currency devaluation and export growth. Selection of Garments, Pharmaceuticals, Jute, and Leather Goods as focal points: The selection of garments, pharmaceuticals, jute, and leather goods as focal points for this analysis underscores their pivotal roles in Bangladesh's export economy. By examining the impact of currency devaluation on these sectors, we gain valuable insights into the dynamics that drive export performance. Each sector presents unique challenges and opportunities influenced by factors such as production costs, market access, global demand, and regulatory environments. Garments: This sector, being the backbone of Bangladesh's export economy, demonstrates a strong positive response to currency devaluation, primarily due to competitive labor costs and favorable trade policies. However, rising production costs and fluctuating global demand necessitate continuous improvements in efficiency and quality. Pharmaceuticals: The pharmaceutical industry shows potential for significant growth, driven by advancements in technology and regulatory support. Nonetheless, international competition and stringent compliance standards pose challenges that require strategic market expansion and adherence to global quality benchmarks. Jute: Historically significant, the jute sector's performance is closely tied to global demand for eco-friendly products. Currency devaluation enhances its competitive pricing, but the sector must innovate and diversify to remain relevant against synthetic alternatives. Leather Goods: While benefiting from competitive pricing post-devaluation, the leather goods sector faces hurdles related to environmental regulations and labor market conditions. Strategic improvements in compliance and working conditions can bolster its global competitiveness. Comparative Lessons from Vietnam, South Korea, India, and Turkey: The experiences of countries such as Vietnam, South Korea, India, and Turkey offer valuable lessons for Bangladesh in managing currency policies to enhance export performance: Vietnam: Vietnam's focus on diversification, technological upgrades, and robust trade agreements has propelled its export growth. Emulating these strategies, Bangladesh can strengthen its manufacturing capabilities and broaden its export base. 24 Page 806 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) South Korea: South Korea's success in leveraging innovation and technology for export competitiveness highlights the importance of R&D and skilled labor. Bangladesh can benefit from investing in education and technological innovation to drive long-term growth. India: India's mixed response to currency devaluation underscores the importance of balancing competitive pricing with regulatory flexibility and infrastructure development. For Bangladesh, enhancing infrastructure and labor regulations can mitigate the adverse effects of currency fluctuations. Turkey: Turkey's strategic use of trade agreements and economic reforms has bolstered its export resilience. Bangladesh should pursue similar reforms, focusing on macroeconomic stability and favorable trade terms. To achieve sustainable export growth and economic stability, Bangladesh should adopt a tailored, context-specific approach that integrates comprehensive economic reforms: Strategic Policy Interventions: Implementing targeted policies to reduce production costs, improve labor conditions, and secure favorable trade agreements can enhance the competitiveness of key export sectors. Diversification and Innovation: Encouraging product diversification and investing in innovation are crucial for maintaining export growth. Supporting R&D and fostering partnerships with academic institutions can drive technological advancements. Enhancing Production Efficiency: Adopting advanced manufacturing technologies and optimizing production processes can improve efficiency and reduce costs, strengthening Bangladesh's position in the global market. Strengthening Global Market Presence: Expanding market access through strategic trade agreements and enhancing global market presence are essential for sustaining export growth. Negotiating favorable trade terms and ensuring compliance with international standards can open new markets and solidify existing ones. The analysis reveals that currency devaluation can significantly impact Bangladesh's export performance, with varying effects across different sectors. Understanding these sector-specific dynamics is essential for formulating effective strategies to enhance export competitiveness and sustain economic growth. Policymakers and industry stakeholders must consider the unique challenges and opportunities within each sector to implement targeted interventions that drive long-term success. Future research should expand to include more sectors and countries, providing a broader perspective on the effects of currency devaluation. Longitudinal studies could offer deeper insights into the 25 Page 807 of 808 Devaluation of Currency and Export Performance in Bangladesh (Work in progress—use in academic and professional discussion; social media is hereby authorized by the author.) dynamic nature of export performance in response to exchange rate changes. By continually refining our understanding of these dynamics, Bangladesh can develop more effective policies to support its export economy and achieve sustainable growth. 26 Page 808 of 808