Exchange Rate Parity for Trade and Development: Theory, Tests, and Case Studies

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Overview

Exchange Rate Parity for Trade and Development: Theory, Tests, and Case Studies extends recent theories of incomplete markets to investigate empirically the appropriate balance between market and state in trade relations between developed and developing countries. Yotopoulos concludes that government intervention in foreign exchange and trade is necessary in developing countries in the early stages of development and inevitably decreases as development progresses. More specifically, free currency markets are shown to have an inherent distortion that leads under-developed countries to misallocate resources systematically. Rationing of foreign exchange prevents a "soft-currency distortion" that commonly afflicts developing countries and can turn comparative-advantage trade into competitive-devaluation trade, with severe losses of income and welfare. It is found that the level of under-development narrowly circumscribes and conditions the extent to which free-market, free-trade, laissez-faire policies can be beneficial to developing countries, which is contrary to the mainstream policy paradigm as currently applied. The analysis and tests draw on empirical research in 70 countries to confirm the usefulness and validity of the theoretical framework. The book concludes with extended case studies of Japan, Taiwan, the Philippines, and Uruguay and with relevant policy recommendations.
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Editorial Reviews

From the Publisher
"I thoroughly enjoyed reading this book and found it most stimulating. What a pleasure it is to read careful empirical work by an author who worries about what his data mean....I find the basic analysis interesting and quite convincing in positive terms." L. Alan Winters, International Trade Division, The World Bank

"This important work makes a major and very timely contribution to the current debate about development strategy for less developed countries, as well as to the debate on restructuring the former Soviet Bloc economies.... Yotopoulos also helps shift the debate from economic theory to institutional and political economy issues, a worthwhile shift." David Felix, Washington University in St. Louis

"This is a tightly written book on trade and development, firmly based in the real world, which cannot be said about a great deal of economic theory today." Maxwell J. Fry, University of Birmingham

"The hallmark of a good book is not that it answers all questions, but that it changes the way we think. Professor Yotopoulos has given us an original and important idea, and enough evidence to cause us to take it seriously. For these contributions, we owe him a debt of gratitude..." Adrian Wood, The Journal of Development Studies

"...the strength of this book is the empirical analyses of the relation between exchange rates and growth. The results are quite novel (and provocative) and should instigate further empirical analyses on this subject....the empirical results are interesting..." Bo Sandemann Rasmussen, Journal of Economic Literature

"...its insightful observations, emanating from its empirical analysis and an impressively exhaustive literature review, are borne out by African and East European Experience..." Perry S. Mistry, Development Policy Review

"Exchange Rate Parity for Trade and Development by Pan Yotopoulos represents a valuable contribution...." David Felix, Latin American Research Review

"He has written an ambitious book...Exchange Rate Parity for Trade and Development is a provocative, interesting book" Review of Radical Political Economics

Yotopoulos wants to show that recent theories of incomplete markets justify a reformulation of optimal exchange-rate policy in developing countries." Review of Radical Political Economics

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Product Details

  • ISBN-13: 9780521022620
  • Publisher: Cambridge University Press
  • Publication date: 9/28/2005
  • Pages: 344
  • Product dimensions: 5.98 (w) x 8.98 (h) x 0.79 (d)

Table of Contents

List of Tables and Figures
Preface
1 Introduction 3
2 Trade and development: The contours of the landscape 12
3 Incomplete markets and the "new development economics" 38
4 Market incompleteness in an open-economy LDC 63
5 The relationship between real and nominal exchange rates 85
6 Empirical investigation of real exchange rates: Tradability and relative prices 103
7 An endogenous growth model of incomplete markets in foreign exchange 120
8 Are devaluations possibly contractionary? A quasi-Australian model with tradables and nontradables 158
9 Japan: Overvaluation without rent-seeking 191
10 The Philippines: Failure in policy and politics 224
11 Financial integration and the refractory role of intervention: Uruguay and Taiwan 249
12 Summary, conclusions, and policy recommendations 282
Bibliography 293
Index 311
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