Abstract
The main purpose of this study is to test whether there is a relationship between real exchange rate (RER) misalignment and growth in the Southern African Development Community (SADC) region over the period 1970 to 2019. The analysis uses the latest RER data from the Penn World Table (PWT) 10.0 database to construct the purchasing power parity (PPP)-based RER misalignment index and test its effects on GDP per capita growth. Existing literature on the RER misalignment-growth relationship suggests that the growth-enhancing effects of RER undervaluation are stronger in developing countries. Therefore, the study considers the full sample of 16 SADC countries and a sub-sample of 11 lower-middle-income and low-income SADC countries. The empirical analysis uses the two-way fixed effects (FE) estimator to examine the direct (overall) relationship between RER misalignment and growth, as well as the two-stage least squares (2SLS) procedure, to test for indirect transmission mechanisms. The findings reveal that the direct effect of RER misalignment on growth is insignificant in the full-sample and sub-sample of SADC countries, and that this result is robust to additional control variables. To examine potential indirect effects, the analysis considers the role of industrialisation in the RER misalignment-growth nexus. Specifically, the study identifies two economic sectors, namely manufacturing to proxy the tradable sector and agriculture to proxy the non-tradable sector. The 2SLS estimates reveal that the effect of RER undervaluation on growth in the least developed countries of the SADC region operates through the positive effect of RER undervaluation on industrialisation. These estimates also show that the manufacturing sector is the engine of growth in the SADC region rather than the agricultural sector. Finally, the study outlines several policy measures to keep the RER at a competitive level in the SADC region.
Keywords: SADC; real exchange rate misalignment; undervaluation; growth; industrialisation; manufacturing; agriculture.