Tuesday, 30 March 2010

Very open low-tech economy

   Manufacturing employment has steadily declined in industrialized countries since the 1970s. The Portuguese economy has followed this trend: in 2006, manufacturing employment represented 18% of total employment against 24% in 1988. Jobs lost in low technology industries account for almost 100% of the total jobs net loss (160000).
   Technological change and competition from emerging countries, namely from Eastern Europe and China, have been pointed as the culprit of that job loss. However, economic theory suggests that we explore another explanation: exchange rate movements. Exchange rate changes have an immediate impact on the competitiveness of domestic goods. Between 1988-2006, Portugal abandoned the ‘crawling peg strategy’ (announced devaluations), joined the European Monetary System and was at the launch of the Euro. During that period, the Portuguese real effective exchange rate appreciated more than 20%.
   The Portuguese economy is very open and, at the same time, specialized in low technology industries. In a joint work with Pedro Bação, João Cerejeira and Miguel Portela, we showed that these two characteristics have made manufacturing employment very sensitive to exchange rate movements. Moreover, we also show that competition from emerging countries has affected manufacturing employment severely.
   The implication of these results is quite obvious: unless the Portuguese economy becomes a high technology economy, its competitive conditions will have to converge to those of emerging countries.

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