Deindustrialization, Economic Complexity and Exchange Rate Overvaluation: the case of Brazil (1998-2017) by José Luis Oreiro, Luciano Luiz Manarin D´Agostini and Paulo Gala (2020).
“The aim of this article is to analyze the determinants of the deindustrialization of the Brazilian economy in the period 1998-2017. We shall argue that the Brazilian case is a typical example of Premature Deindustrialization in the sense that a large share of the fall in the manufacturing share is not due to the increase in the per-capita income over some threshold value, as the case of advanced economies in the 1970´s; but the consequence of real exchange rate overvaluation occurred in Brazil since the beginning of the 2000´s. In the Brazilian case, however, real exchange rate overvaluation results both from an appreciation of real effective exchange rate, as well as an increase in the equilibrium value of real exchange rate, the so-called industrial equilibrium exchange rate of the New-Developmentalism literature. The rise of the equilibrium level of real exchange rate is due, mainly, to the huge reduction of the economic complexity, measured by the IEC, of the Brazilian economy. In order to do that we will present a new methodology for calculation of industrial equilibrium exchange rate, since the existing methodology, developed by Marconi (2012), clearly underestimates the level of overvaluation of real exchange rate in the Brazilian economy. The policy implication of our results is that the elimination of real exchange rate overvaluation in Brazil requires not only the adoption of a macroeconomic policy regime in which some kind of real exchange rate targeting is adopted; but also industrial policies designed for increase the economic complexity of Brazilian economy and, hence, to reduce the equilibrium value of real exchange rate, making the required adjustment in real exchange rate socially and politically viable.”
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