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Export growth in the global economy is stagnant. China’s exports increased by 8.6% last year, yet for a decade it had produced export growth rates around 20%. Similarly, Germany’s export growth has slowed significantly, increasing by only 0.9% in 2013. Sluggish trade is a result of a slow global economic recovery that has consistently failed to meet target projections. Financial officials in some countries are contemplating currency devaluation as a measure to make exports more appealing abroad.
A weak currency can spur export growth for a nation because it makes goods cheaper to international buyers. This practice, however, is not without faults. Currency devaluations can potentially lead to a global currency war, where countries compete to achieve a relatively low exchange rate for their own currency. Additionally, currency devaluations generally create short-term growth for one country at the expense of another and often have a negative impact on international business and trade. China and South Korea are two countries that have been criticized in the past for keeping their currencies at levels below fair market value.
Currency devaluation is not an effective way to spur long-term export growth, but it can produce results more quickly than large economic reforms. In the long run, reforms such as improving infrastructure and reducing trade barriers will be far more beneficial to a country, but some long-term reforms can be politically unpopular and many government officials are seeking immediate results. Brazil is one country that has decided to pursue a long-term economic strategy that it hopes will create sustainable export growth. Its proposed strategy includes investing in new infrastructure, simplifying complicated tax and legal systems, and eliminating excessive bureaucracy.
I advocate that countries follow Brazil’s proposed model and choose infrastructure development and the elimination of trade barriers instead of currency devaluation. It will not only benefit the global economy and international trade, but long-term export growth prospects for that country as well.
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