<mark>(Argentina, Brazil, Mexico, and Peru), and two African (Uganda and Tanzania) countries covering the period 1950-2011. The Asian countries have seen large undervaluation during their respective catchingup periods. Since the early 1990s, China has had significant undervaluation, which coincided with a period of rapid export growth. Similarly, the 1960s and 1970s in Korea were periods of persistent undervaluation while at the same time the country saw its exports grew at unprecedented rates. Thailand has similarly experienced both large real undervaluation and fast export growth for most of the periods since the early 1970s.</mark> <mark>The anecdotal observations on the undervaluation-export growth nexus are borne out by econometric evidence. Overall, the empirical results in Nguyen (2014) support the proposition that an increase in undervaluation is significantly positively associated with higher export growth. Specifically, for every 10 percent undervaluation of a country’s RER its export growth increases by 0.59 percentage points a year. This main result holds true both for high-income and low-income countries (defined as those having real GDP per capita below the cut-off line of USD 6,000 in the year</mark> 2000).

# **<mark>4.5     Latin American economies adopted overvaluation with far less success</mark>**

<mark>Unlike their Asian counterparts, Latin American countries generally maintained overvalued currencies for most of the past decades, which were associated with poor growth and export performance.</mark> In the 1980s and 1990s, overvaluations were commonplace in many of the countries in Latin America, which often led to severe balance of payments crises and necessitated dramatic devaluations. Latin American countries generally exhibited disappointing economic growth as well as slower and more erratic export growth. Figure 13 unveils that Argentina’s currency was markedly overvalued prior to the year 2000, with RER misalignment exceeding 100 percent for most of the periods. During this period, the country saw meager levels of exports and GDP growth. Similarly, Brazil’s exchange rate has been increasingly overvalued (from somewhat undervalued starting point in the 1960s) since the early 1970s, which was accompanied by sharp growth slowdown and smaller export growth. In Latin America, Mexico represented a somewhat anomalous case in that the country substantially undervalued its currency until the late-1980s. Undervaluation moved in sync with growth for most of the years before the early 1990s, when the comovement turned negative. Peru typically experienced considerable overvaluation for most of the 1980s and 1990s, which was generally associated with poor economic performance.

# **5.     The Macroeconomic Effects of Devaluation in Ethiopia**

# **5.1     The impact of devaluation on exports and growth**

In Ethiopia, empirical analysis using the RER shows that a 10 percent lower exchange rate is associated with an increase in export and real GDP growth rates of 0.52 and 0.23 percentage points, respectively (Nguyen, 2014). These upper-bound estimates suggest that an exchange rate adjustment that at least partially corrects the currency misalignment would significantly increase export and income growth. This does not come as much of a surprise considering that the country’s exports are predominantly low value-added primary commodities which compete more on price than on quality. Moreover, the decline in imports due to real depreciation is less likely to have significant negative repercussion given that the import-content of agricultural exports, which are the mainstay of Ethiopia’s exports, is relatively small compared to the industrial sector. The results in Nguyen (2014) are generally consistent with Moller and Walker (2015), who find that an overvalued real exchange rate held back some economic growth in Ethiopia over the period 2000-13.

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