Prague, December 2019
Dr Zdenek Drabek
In several of his commentaries in Fleetsheet, Eric Best has been on a “crusade” against the exchange policy of Czech National Bank. He objected to the bank pushing the value of currency down in the past, more recently, for reevaluating the currency. He sees the currency manipulations as an instrument of promoting the interests of oligarchs. While I understand his point it is also important to note that managed exchange rates may sometimes bring economy – wide benefits and, in fact, that most currencies’ exchange rates are managed. No small open economy could protect itself these days against massive capital movements and even IMF recognizes limits of fully open capital accounts. Only OECD countries are free of capital restrictions – more or less. (Try to transfer huge amount of money to Switzerland today). Most other countries, including the success stories like Chile, NICs and other SE Asian countries are far more prudent. Similarly, isn’t Chinese Remimbi managed considering their continued restrictions on capital flows? Pari passu, every level of exchange rates has implications for domestic income distribution. The devaluation of CZK was meant to promote the interests of export and import competing industries. Is that wrong? The current revaluation goes against their interests and in favor of spenders. Is that right? At the end of the day, what exchange rate policy one adopts depends on weighing the interests of the firms producing tradeable relative to those that produces non-tradeable. In addition, the effectiveness of exchange rate policies also depend on the performance of product and factor markets, especially, on the flexibility of labor market. Like many other critics, Eric forgets that exchange rate does what labor market could do instead – once you decide on the strategy. A devaluation means lower real incomes and vice versa for revaluation. Alternatively, you decrease or increase nominal wages respectively to achieve the same results. At the end of the day, it is one or the other – devaluation or lower nominal wages. Consider Greece, for example.
Dr. Zdenek Drabek is an expert in trade policy and foreign investment. His primary professional aim is to help governments, private sector companies, consumers and civic society at large to understand appraise and decide about the value of trade and investment rules and trade and investment governance. His expertise is driven by his unique background skills, and experience which combine practical experience in top policy advice with deep economic analysis and strong academic origin.