Real Exchange Rate and Manufacturing Export Competitiveness in Eastern Africa

Abstract

This paper investigates the effects of real exchange rates on manufacturing exports in 10 East African countries. The study uses pooled mean group and mean group estimators with an Autoregressive Distributed Lag procedure to analyze disaggregated manufacturing exports, unlike past studies that often examined aggregate exports by adopting traditional empirical methods subject to various shortcomings. The estimation results suggest that in long-run depreciation of the Real Effective Exchange Rate improves all classification of manufactruing exports. Our results are more or less consistent with the standard theory. The elasticity is relatively low, except for low-skill manufacturing exports. In the short run, real exchange rate depreciation improves exports of labor-intensive, low-skill, and medium-skill technology-intensive manufacturing. In contrast, depreciation of the real effective exchange rate worsens high-skill technology-intensive exports. Another findings suggest that exchange rate devaluation matters for export performance in Eastern Africa. Nevertheless, the magnitude of this elasticity is low and remains below the findings for Sub-Saharan African and other developing countries. Positive and elastic manufacturing exports with respect to domestic real GDP shows the importance of economic growth to the performance of manufacturing exports. Therefore, policies aimed at boosting exports in the long term should aim to provide a conducive environment for economic growth rather than continuous devaluation of a domestic currency.