Implications for Trade, Incomes and Economic Vulnerability
Edited by Benno Ferrarini and David Hummels
Chapter 7: External rebalancing, structural adjustment, and real exchange rates in developing Asia
The developing Asia region has been the fastest-growing in the world in recent decades. As is common for fast-growing countries, the region’s growth has been export-led, and many of the countries in it have been running trade surpluses. As these countries develop, sustained economic growth will require a rebalancing from reliance on exports and toward greater domestic demand. What will be the consequences of that rebalancing process, for the developing Asia countries themselves and for the rest of the world? A country running a trade surplus is spending less than the value of its output. Rebalancing – an elimination of the trade surplus – then by construction increases the country’s total spending. If the country is small (i.e., does not affect the world goods prices) and all goods are freely traded, rebalancing directly increases nominal spending, but has no effect on the real exchange rate, factor prices, or the sectoral allocation of employment. A small country model with non-tradeable goods, sometimes called the “dependent economy” or the Salter–Swan model (Salter 1959; Swan 1960) predicts that a rise in domestic spending due to the elimination of the trade surplus will increase demand for non-tradeables and their prices, thereby moving factors of production into non-tradeables and appreciating the country’s real exchange rate.
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