This argument rests on the strong belief that a country cannot become rich without getting into manufacturing, because of its “special” spillover or other production-enhancing qualities that are critical for economy-wide productivity growth in the long run.<sup>13</sup> This logic is as follows: since other sectors do not have these special characteristics, even a temporary set-back of manufacturing would permanently lower the entire economy’s future growth by choking off an important source of knowledge accumulation. Given the rapid technological changes that affect the sector, the manufacturing sector, once lost, may not bounce back when the boom is over.<sup>14</sup> However, empirical evidence for the existence of knowledge-spillovers from manufactured exports is, at best, mixed.<sup>15</sup> There is growing evidence that, with the evolution of new technology, such as ICT, the service sector is rapidly replacing the traditional export sector as a new engine of growth and job creation.<sup>16</sup> Exports in ICT-intensive modern services are growing in both poor and rich countries, and are more technologically sophisticated than traditional exports. Likewise, the mining sector is no less linked to advances in knowledge and technological capabilities. Mineral extraction is indeed one of the most knowledge-and technology-intensive industries of the global economy, and a prime source of innovation.<sup>17</sup> Furthermore, transfers of ideas and technology from abroad are not limited to exports. Evidence suggests that the level of imports, rather than exports, exerts more important effect on productivity and economic growth, through the intensification of domestic competition and access to intermediate inputs.<sup>18</sup> There is no reason why positive externalities should be the exclusive preserve of manufactured exports.

# **Myth 7.  Dutch disease undermines growth through real overvaluation of home currency.**

An export boom-induced real appreciation should more properly be seen as an equilibrium phenomenon that reflects changes in underlying fundamentals.<sup>19</sup> Great care is needed before labeling this an exchange rate “overvaluation”.

Concerns over Dutch disease are associated with the view that a real appreciation of the domestic currency hurts economic growth by undermining external competitiveness, but empirical evidence is far from established.<sup>20</sup> Advocates of “competitive” exchange rates, most prominently Rodrik (2008), claim

> 13 For example, see Rodrik (2008).

> 14 As regards concerns about resource depletion, <mark>Wright and Czelusta (2004) contend that natural resource reserves are rarely depleted as rapidly as expected.  New mining technologies are invented (e.g., shale gas), as are processes that make more economical use of lesser grades.</mark>

> 15 See Lederman and Maloney (2012) for further discussions.

> 16 See Ghani, et al. (2012).

> 17 The US achieved rapid industrial development in the early 1990s not simply because it was endowed by plentiful natural resources, but because other industries benefited from the spillover effects of new technologies and education, in which the minerals sector had invested heavily (Wright and Czelusta, 2004).

18 See OECD (2010). Lawrence and Winstein (1999) find evidence that imports, rather than exports, have driven productivity growth in Japan and other East Asian countries.

> 19 This view is closely linked to the Washington Consensus, which argues any real exchange rate misalignment, that is, the real exchange is above or below the fundamental based long-run equilibrium, harms welfare and growth.

> 20 The relationship between real appreciation and growth is mixed.  Trevino (2011) finds real exchange rate

overvaluation is associated with higher rather lower growth in some cases, whereas Magud and Sosa (2010) find no evidence that real appreciation hurts growth. Empirical evidence for the growth effect of undervaluation is even more inconclusive (e.g., Montiel and Serven, 2008).

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