THE MIRAGE OF A WEAK CURRENCY
THE MIRAGE OF A WEAK CURRENCY

Summary/Abstract: One of the most common misunderstandings among those studying economic development theory has been the idea that a weak currency is beneficial for economic development. This old fallacy has regularly been resurrected by practitioners, who are usually found in ailing industries or unions, or among policy makers in search of a quick fix. The underlying idea is quite simple. If we take the basic economic model and presuppose a lack of interdependence across economic actors of the globe, the exchange rate seems to be a powerful and efficient instrument. By manipulating it authorities may influence macroeconomic processes. Output produced at a given cost level can become competitive relative to similar products in other countries at the mere stroke of a pen. Prudent central bankers can therefore exert leverage over the real economy, allowing domestic producers to become more vigorous and successful on external markets than they would be if left to a laissez-faire arrangement. In a more sophisticated version, planners can pick winners, and those happy recipients of largesse receive indirect subsidies or pushes from the far-sighted planner, who knows already in advance which horse will win the race.

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