Mineral prices and the exchange rate: what does the literature say

Abstract

This report reviews the literature in an attempt to find whether there exists evidence of an empirical relationship between commodity prices and the exchange rate and whether the presence of such a link has any implications on the level of labour intensive manufacturing employment. More importantly it supposed to provide a platform from which further research is going to be carried out. The main concern with respect to the latter is the extent to which capital-intensive mineral exports have an impact on the exchange rate much to the detriment of labour intensive export manufacturing. In other words can commodity prices drive the exchange rate to levels that reduce the competitiveness of export manufacturing leading to adverse consequences on employment in this sector? The subsequent volatility in the exchange rate from fluctuating mineral prices has a direct impact on the level of competitiveness and hence the potential de-industrialization of the manufacturing sector. The review finds evidence that in South Africa mineral prices are a significant determinant of the real exchange rate. It also finds evidence that alludes to the existence of co-movements between the exchange rate and mineral prices. Furthermore, there is evidence that point to the conclusion that the exchange rate has an impact on manufacturing output and employment as suggested by the Dutch disease literature. The report also finds evidence that shows a link between the exchange rate and export performance, with appreciations negatively impacting on the latter. Finally, the review then looks at studies that have focused on the exchange rate and manufacturing employment as a way of assessing the nature of the relationship, it finds that and more importantly for future research considerations, that there exists a gap in the literature with respect to the treatment of the aforementioned relationship. There are very few studies on developing countries that specifically look at the impact of exchange rate movements on the manufacturing sectors output, employment and profitability at both the national level and the industry level. The existing studies have concentrated on the United States and Japan. Those on developing countries have restricted they attention to the relationship between the exchange rate and export performance in general without explicitly animating its impact on employment.