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«EXCHANGE-RATE MANAGEMENT AND MANUFACTURED EXPORTS IN SUB-SAHARAN AFRICA by Khalid Sekkat and Aristomène Varoudakis Research programme on: Economic ...»

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Working Paper No. 134

(Formerly Technical Paper No. 134)





Khalid Sekkat and Aristomène Varoudakis

Research programme on:

Economic Policy and Growth: Factors of Manufacturing Competitiveness

March 1998

























The authors would like to thank Jean-Claude Berthélemy, André Cartapanis, Catherine Fuss, Patrick and Sylviane Guillaumont, Ulrich Hiemenz, André Sapir, Alexander Sarris, and Marie-Ange Véganzonès for their helpful comments. Valuable research assistance by Marie Le Duff, Thierry Latreille, and Ludvig Soderling is acknowledged. We have also benefited from comments of participants in seminars at Free University of Brussels, University of Aix-Marseille II and University of Clermont-Ferrand.


L’évolution des régimes de change en Afrique entre 1970 et 1992 est examinée dans ce document. Les effets de la politique de change sur les exportations de produits manufacturés de l’Afrique sub-saharienne sont également examinés de manière empirique. Trois indicateurs de la politique de change sont plus particulièrement étudiés: les variations du taux de change réel effectif, la volatilité du taux de change réel et son défaut d’alignement (mesuré à partir d’un modèle). Des fonctions d’exportation ont été estimées pour trois branches de l’industrie manufacturière (textile, chimie, métallurgie), ainsi que deux régimes de change: un régime de taux de change fixes, représenté par six pays de la zone CFA, et un second, plus flexible, représenté par cinq pays n’appartenant pas à cette zone. Il en ressort que la politique de change influe largement sur les performances à l’exportation du fait des conséquences importantes des variations du taux de change réel effectif et de l’incidence négative de ses distorsions. Ces résultats permettent de proposer des estimations des pertes d’opportunités d’exportation dues au défaut d’alignement des taux de change. Ainsi, les économies africaines qui ont réussi à promouvoir leurs exportations de produits manufacturés sont celles qui ont mis en place des politiques de change prudentes ayant conduit à une diminution progressive de la surévaluation de leurs monnaies.


This paper presents an overview of the evolution of exchange-rate regimes in Africa and then attempts to assess empirically the impact of exchange-rate policy on manufactured export performance on a panel of major Sub-Saharan Africa countries over the 1970-92 period. We examine the impact of three exchange-rate policy indicators: real effective exchangerate changes, real exchange-rate volatility, and (model-based measures of) real exchange-rate misalignment. Export supply functions are estimated for three manufacturing industries (textile, chemicals, and metals) and two exchange-rate regimes: a fixed rates regime including six CFA Franc countries, and a more flexible regime represented by five non-CFA countries.

Our findings show that exchange-rate management matters for export performance. This is evidenced both by the significant impact of changes in the real effective exchange rate and by the negative influence exerted independently by real exchange-rate misalignment. On the basis of this evidence we provide estimates of the losses in export shares induced by exchange-rate misalignment. It is shown that African countries that have been successful in promoting manufactured exports have implemented cautious exchange-rate policies, leading to steadily declining real exchange-rate overvaluation.


Achieving a better integration of Africa into the global economy to spur economic growth is a major development policy challenge facing the international community. The experience of successful industrialising countries shows that export diversification through the promotion of manufactured exports helps to expand ties to the international economy and is conducive to sustained economic growth. If they are to strengthen current trends of economic recovery, sub-Saharan African countries need to make further progress in promoting core manufacturing activities, according to their comparative advantage. This would involve a substantial improvement in international competitiveness, especially since the steady progress in export manufacturing of the “Big Five” is expected to put considerable competitive pressure on the markets for unskilled labour-intensive goods.

Export performance depends on appropriate exchange rate management, which in turn affects relative costs and therefore international competitiveness. During the past decades, most sub-Saharan African countries have experienced substantial real exchange rate misalignment due to misconceived macroeconomic and trade policies. This has reduced competitiveness and has weakened the incentives for exporters to increase their penetration of foreign markets. The present study confirms the harmful incidence of exchange rate mismanagement on the export performance of three key manufacturing industries in Sub Saharan Africa. It also provides an assessment of the magnitude of real exchange rate overvaluation and of the export share losses that have resulted from it. The study shows that those African countries that have been successful in promoting manufactured exports have implemented cautious exchange rate policies that have prevented serious real exchange rate overvaluation.

This paper is the result of work carried out under the Development

Centre’s 1996-98 research programme on “Economic Policy and Growth:

Factors of Manufacturing Competitiveness”. This analysis of the effectiveness of recent exchange rate policy reform in Africa will contribute to a better assessment of the expected benefits of further policy reform in this area.

–  –  –

Over the last two decades manufactured exports have become a major factor of economic growth in developing countries. Initially most of the developing world’s manufactured exports originated in a small number of countries in East Asia, namely South Korea, Hong Kong, Singapore, and Chinese Taipei. Subsequently, however, more developing countries have successfully entered world markets for manufactured goods. Malaysia, Mexico, Indonesia, Thailand, and Turkey are examples of countries which experienced a sustained increase in their manufactured exports since the beginning of the 1980s. For these five “latecomers”, the share of manufactured exports in total exports in 1993 was respectively 70, 75, 53, 73, and 72 per cent, against 19, 12, 2, 28, and 27 per cent in 1980. The only Northern African and Sub-Saharan Africa (SSA) countries that showed a similar rising trend in manufactured exports were Mauritius and Tunisia. In the case of these two countries the share of manufactured exports in total exports had reached 90 and 75 per cent respectively in 1993, starting from 27 and 36 per cent in 19801.

Export diversification through promotion of manufactured exports is generally viewed as an important factor of sustained economic growth. This is

so for at least three reasons:

— income elasticity of demand is higher for manufactured goods than for primary products. This means that growth prospects for a country’s exports along with growth in foreign income can be expected to improve by specialising in manufacturing;

— both price elasticity of demand and price elasticity of supply are presumed to be higher for manufactured goods than for primary commodities. As a consequence, expected variability in the price of manufactured goods following changes in demand is comparatively lower than for primary products. This involves a stabilising effect on the terms of trade and, therefore, a more stable growth of export earnings over time;

— there are substantial prospects for dynamic productivity gains, linked to the development of the manufacturing sector, which are important for stimulating growth. These gains potentially arise from economies of scale, learning effects, and externalities among firms and industries2.

Moreover, manufacturing for export provides a unique opportunity to realise such dynamic gains in the case of relatively small economies which lack a domestic market of sufficiently large size; and — in addition, in most developing countries, expanding manufactured exports made a valuable contribution in the 1980s to providing foreign exchange to service external debt. This was all the more welcome in a period of depressed world markets for many primary commodities  on which most of those countries exports mainly rely.

Exchange-rate policy plays a crucial role in providing increased incentives for exporting. All countries which have been successful in promoting manufactured exports experienced real exchange-rate (RER) depreciation, leading to a significant increase in the domestic relative price of tradeable to non tradeable. The responsiveness of exports of goods and services to real-exchange-rate-related price incentives has been demonstrated in a panel of 16 Sub-Saharan African countries by Balassa (1990)3.

However, an export-promoting exchange-rate policy cannot be sustained unless monetary and fiscal policies are fully consistent with it. In many developing countries mismanagement of macroeconomic and trade policies led to real exchange-rate misalignment  that is to a substantially overvalued RER with respect to its market clearing level. Real exchange-rate misalignment is damaging to economic performance  and especially to manufactured exports, as it decreases the profitability of production of tradeable. All successful East and Southeast Asian countries have kept the RER close to its market clearing level, while Sub-Saharan Africa and Latin American countries experienced serious RER overvaluation4. The damaging influence of RER misalignment has been shown by Edwards (1988), as well as by Cottani, Cavallo, and Khan (1990) for various groups of developing countries. Ghura and Grennes (1993) showed a negative influence of RER misalignment on total exports for a panel of 33 SSA countries.

Moreover, inconsistent macroeconomic, trade, and exchange-rate policies increase the variability of the real exchange rate. In turn, higher RER volatility sends conflicting signals to economic agents and increases uncertainty of long-term investments as well as of the profitability of producing tradable goods. The negative influence of RER variability on economic performance of SSA countries has been demonstrated by Ghura and Grennes (1993). Its negative impact on manufactured exports has been also established by Grobar (1993) on a panel of ten developing countries excluding Sub-Saharan Africa.

In this paper we present evidence on the impact of exchange-rate policy on manufactured exports of Sub-Saharan African countries. Our analysis of the link between exchange-rate policy and manufactured export distinguishes between three different impacts: the impact of effective real exchange rate changes, the impact of volatility and the impact of misalignment. Among existing studies, Balassa (1990) focused only on the first impact. Moreover, previous empirical studies (Froot and Klemperer, 1989; Sapir and Sekkat,

1995) documented that the impact of exchange-rate policy varies across sectors and exchange-rate regimes and that aggregation over sectors or regimes may lead to wrong inferences. Hence our investigation is conducted at a sectoral level and distinguishes between CFA countries (fixed rates) and non-CFA countries (more flexible rates). In contrast, previous studies, such as Cottani et al. (1990) or Ghura and Grennes (1993), did not adopt such distinctions.

Our panel includes eleven SSA countries observed over the 1970-92 period: six in the CFA zone and five in the non CFA zone. We undertake a comprehensive examination of: the responsiveness of manufactured exports to real exchange rate changes; the effect of RER misalignment (using various measures); and the influence of RER volatility. We decompose manufactured exports, focusing in particular on three SITC categories: Textile products, Chemicals, and Metal products. Our findings show a significant responsiveness of SSA manufactured exports to RER-induced incentives.

Moreover, RER misalignment exerts a significantly negative influence on export performance. However, real exchange rate volatility does not seem to exert a systematic negative influence on manufactured export performance.

The rest of the paper is organised as follows: In Section II we present an overview of the way exchange rate regimes have evolved in Africa over the past 20 years and provide some evidence on RER misalignment and variability. Section III is devoted to the construction of a reliable measure of misalignment, because the quality of the measure of misalignment is crucial to the analysis of the link between exchange-rate management and export performance. Our measure is based on a model of exchange-rate determination which distinguishes between equilibrium movements in the RER and misalignment induced by misconceived macroeconomic policies.

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