The Myth of Low Currency Equals Strong Exports: Brazil Edition

Low currency equals cheap exports. That’s the mainstream’s resonant “incantation” as if such a claim represents an a priori irrefutable truth.

In reality, such a claim has really been a myth though. They signify nothing more than propaganda to promote anti competition regulations via Mercantilism that works to favor of vested interest groups (politicians and their allies).

This has been debunked even as far back in the 18th century by Scottish philosopher Adam Smith in his classic Wealth of Nations

As a recent example I pointed out that since Japan’s adaption of Abenomics, such so-called boost to exports through destroying the yen has failed to come about meeting their objectives. Instead this has generated record trade deficits via exploding import growth. The update of charts of the Japan’s exports, imports and trade balance here. 

What Japan’s yen debasement program has only achieved has been to inflate a stock market bubble which has benefited the financial system at the expense of the consumers.

We see the same falsehood being exposed in Brazil where the weak real has brought about faltering exports backed by a decline in industrial production.

From Bloomberg’s chart of the day:

The biggest monthly plunge in Brazil’s industrial output since December 2008 shows policy makers’ confidence that a weaker real will stimulate manufacturing is proving misguided.

The CHART OF THE DAY tracks Brazil’s industrial production index, the real on a percentage-change basis and exports on a rolling six-month average. Output fell in December by the most in five years even as the exchange rate weakened 34 percent since the manufacturing index reached a record-high in May 2011. The currency is the biggest decliner against the U.S. dollar in the last three years among 16 major currencies tracked by Bloomberg after the South African rand.

President Dilma Rousseff said on Feb. 3 that a weaker real would help drive exports this year, an affirmation of Finance Minister Guido Mantega’s comments in September that a currency drop would make Brazilian products more competitive and boost manufacturing. Goldman Sachs Group Inc.’s Alberto Ramos said the government’s optimism isn’t warranted, as companies are hampered by rising labor costs and lack of incentives to modernize.

Low currency equals cheap exports represents a heuristic “oversimplified” way in looking at trade data. Such have been assumed to generalize that all trade are about “cheapness”. 

The reality is that trade, which is a largely function of the private sector conducting voluntary exchanges goods or services across geographical boundaries, are driven by manifold complex intertwined factors: such as subjective preferences of buyers (which are hardly about “cheapness” as cheapness usually indicates low quality or commoditized goods), availability and access to markets, availability and access to financing to facilitate trade, relative ease or convenience of conducting trade, security of transactions and or the institutional protection of market activities (sanctity of contracts) and more. 

Unfortunately “a lie that has been told to often to become a truth” doesn’t apply to mercantilist propaganda, that’s because economic forces will expose on them.