[Business] Recovery from cataclysms and exchange rate regime: any dependence?
Very recently global markets were in upheaval over speculations that the Chinese forex rate would be allowed to move freely against the dollar. In a previous post I had looked at the Zen relationship between China and the rest of the world. Indian markets went into a tizzy recently over rumors of Chinese revaluation. This was primarily due to bets that the Indian govt. would also allow a higher freedom for the rupee as well as excess supply of dollars - which led businesses to hedge the rupee against rises. Which led me to think - just how important are exchange rate regimes?
There is a recent working paper by Rodney Ramcharan of the IMF where he explores the effect of exchange rates on the ability of a country to recover from natural disasters, like earthquakes and the like. I especially liked the figure on page 13 which showed that in developed economies, disasters had no impact on investment as a percentage of GDP. I think this in itself is flawed. Rather than base it on percentage points, I wonder what actual dollar figures are. Any investment in a post-disaster economy (the author cites Bangladesh investing in farm equipment, for e.g.), involves a static cost which would be more or less fixed in terms of cost of living. If we take the Big Mac Exchange Rate, a certain number of burgers would be required in each country to help with food supplies, rebuild roads , etc (That no one in India would eat burgers after an earthquake is moot). This cost measured as a percentage of GDP would figure significant in developing rather than developed economies. This the author himself puts forward in the beginning (page 4) as
In advanced economies, there is no significant investment response regardless of the regime type. These results are robust to various modifications, and underscore the importance of the exchange rate in managing real shocks.
This to me sounds like growth, investment , etc. rate depends on the money remaining in your coffers , above everything else. Consider Philippines for example - it is an flexible exchange rate economy. Now, in case of a natural disaster striking, its growth is expected to rebound much faster than fixed rate regimes (page 31). While the IMF guy says that this is due to higher exchange rates, he fails to say why. Allow me to propose one - full capital account convertibility. That’s right, let the brickbats come. Insurance payments and claims, post-disaster, will be made from international coffers to a larger extent. Therefore exchange rates rise. So either I’m wrong (which is very possible), or the data is just a-priori (which is also entirely possible…anyone give me odds?).