EXCHANGE RATE POLICIES: FACT OR FICTION IN THE RISE OF HIGH PERFORMANCE ASIAN ECONOMIES

Turan SUBASAT (The University of Bath)

Many economists believe that the nature of exchange rate management was an important reason for rapid economic growth in East Asia. In this view, Asian countries avoided extreme exchange rate appreciations and kept their nominal exchange rates close to market clearing levels. In contrast, the inappropriate exchange rate policies pursued by many Latin American and African countries in the late 1970s and 1980s contributed a great deal towards their poor economic performance. This paper challenges the above views on the type of exchange rate policies adopted by the East Asian, Latin American and African countries. Empirical evidence suggests that the exchange rate policies of the East Asian economies were no different from those of other developing countries and one needs to look elsewhere to find an explanation for success in stimulating exports. Moreover, this paper discusses the issue of the direction of causality between exchange rates and trade, and concludes that causality seems to run from exports to exchange rates and not vice versa as is typically modelled in the literature.