The political economy of exchange rate policy in South Korea and Brazil

Jeffrey Sachs suggests that the inferior external debt performance of Latin American nations compared to their East Asian counterparts lies in the import-substitution development adopted in this region and the flexible exchange rate policy arising from that. According to Sachs, the adoptation of export-led growth by the Latin American nations will inherently lead to a more flexible exchange rate policy and a reallocation of resources in favor of these nations to keep up with their debt service payments. The barrier to such conversion of the Latin American economies is political. The "urban" interest groups, who are "anti-export", tend to resist the export-led growth and a flexible exchange rate policy. The triumph of the "rural" forces who are "pro-export" in East Asia guaranteed the success of these economies.; A study of the economic history of Brazil and South Korea disproves Sachs' concept of a "rural-urban" dichotomy. Observation of the exchange rate policies of these two countries shows that they have both avoided devaluations as long as possible, mostly due to the inflationary pressures generated by devaluations. The export-led growth tends to increase the demand for imports in the long run. The estimated import demand functions for South Korea indicate that during the 1974-1985 period, the overall marginal propensity to import and the marginal propensity of wage earners increased with respect to the 1965-1985 period. These results show that the long run capability of export expansion in improving the external balance and the debt performance of Latin American nations is more limited than that expressed by Sachs. The estimated change in the marginal propensity to import for Brazil turns out to be ambiguous. However, the exchange rate devaluations in Brazil were followed by an increase in imports, as in South Korea.