António Rebelo de Sousa

Concerning «Incrementalism»

António Rebelo de Sousa

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Development factor

António Rebelo de Sousa


António Rebelo de Sousa
For a long time, it was understood that exchange rate policy was no more than a mere cyclical economic policy instrument, linked to the problem of rebalancing the External Balance. However, authors such as Arthur Lewis, Branson and Katseli drew attention to the importance of exchange rate stability and of what they called «pegging practices» for the development of economies in «transition».
In actual fact, underdeveloped or developing economies suffer from what is called the «vicious cycle of poverty», which consists of the lack of capacity to generate domestic savings (necessary for investment) and, at the same time, the absence of a strong domestic consumer market (which is also necessary for there to be an incentive to invest).
Now, in order to break the «vicious cycle of poverty» you have to resort to FDI - Foreign Direct Investment -, which largely involves the psychological component of investment. And you just can’t resort to FDI in a sustained and lasting manner if the economy in question has a weak currency, experiencing successive devaluations and no net foreign exchange reserves to ensure currency convertibility.
The potential investor will not want to invest hard currency in an economy that has no guarantee of remunerating him in the currency of the country of origin or, if he wants to sell his existing assets in the «peripheral» economy, of being compensated in a currency of guaranteed convertibility.
That’s why, any developing country stands to gain from seeking to implement a policy oriented towards exchange rate stability. Because this will positively influence FDI in its economy, given the importance of the psychological component of investment.
Put in another way, the policy of exchange rate stability can turn from a cyclical economic policy to a real factor of economic development.
Nothing more, nothing less...
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