Comprehensive Review of the Impact of Real Effective Exchange Rate (Reer) On Agricultural exports, GDP and FDI of Pakistan, India and China

In this chapter, a comparative and rigorous analysis of how changes in the Real Effective Exchange Rate (REER) affect three macroeconomic variables which include Gross Domestic Product (GDP) growth, agricultural exports, and Foreign Direct Investment (FDI) in Pakistan, India, and China is made. The states mentioned above, although geographically close to each other and of importance to the global economy as a block, are quite different in terms of institutional frameworks, exchange-hate regimes, structural composition and policy autonomy, thus, creating quite different transmission mechanisms of REER. The country is typified by endemic structural weaknesses in its three main forms, a small export base, overdependence on imported energy as well as insufficient fiscal cushions, that increase its susceptibility to REER misalignments. Empirical studies show that REER overvaluation reduces long-term growth in GDP by reducing the competitiveness of exports but gains on depreciation are often immediately offset by imported inflation that often exceeds 20 per cent in crisis. Agricultural exports which make up close to a quarter of GDP and half of the labour force are acutely sensitive to real appreciation; a 1 per cent appreciation of the REER will reduce the volumes of exports by 0.6-0.9 per cent with the effect lasting more than two years due to asymmetric adjustment processes. Moreover, REER volatility discourages FDI inflows that stand at a modest US$ 23 billion a year on average because investors face increased macroeconomic uncertainty especially in capital intensive industries, thus putting at risk strategic programmes like the China-Pakistan Economic Corridor (CPEC). By contrast, China takes advantage of its institutional strength, vast foreign -exchange holdings (above US 3 trillion), and a state -based economic system to transform the REER into a policy instrument. The people bank of China plays a crucial role in the changes of the exchange rates to maintain the export-led growth without destabilizing inflation and moderate depreciation to help boost the industrial production in the coastal provinces and protect the agricultural sector with subsidies and strategic reserves. The shift of China towards high-value agricultural exports and the use of currency swap agreements as a part of the Belt and Road Initiative is an additional step of China to shelter its external sector against REER volatility. As a result, China becomes the leading destination of FDI in the developing economies where it receives more than US180 billion every year as it takes the exchange-rate policy and integrates it with infrastructure construction and technology modernization to create a virtuous cycle of competitiveness and integration. India holds an intermediate position, which is typified by an exchange rate regime that is market driven. Dominating regime structure, democratic form of governance and dualistic economy. Although, the Balassa-Samuelson effect has led to the loss of cost competitiveness in labor-intensive production, and hampered the program of Make in India, the moderate depreciation has a positive effect on agriculture output by increasing rural incomes. Exporting agricultural products, however, is vulnerable to the fluctuations of the currency (Increasing by 0.7 per cent of exports of rice with a single per cent appreciation of the REER), and farmers who are not hedged are especially vulnerable; value-added processing is slowly making agricultural products more resilient in that regard. The inflows of foreign direct investment (FDI) of about US 60-80 billion a year are bifurcated market seeking investment in services is relatively insensitive to the fluctuations in exchange rate, and export-platform FDI is deterred by exchange-rate volatility. The larger domestic marketplace as well as the diversification of energy inherent in India gives it some cushion against imported inflation.