From the questions (4-10)
The exchange rate is often said to be the most important price in any economy, for it affects all other prices. Americans are not used to thinking in these terms, in part because the US economy is relatively closed, and in part because the dollar is the world's principal reserve currency. Nonetheless, a country's exchange rate has a powerful impact on its economic activity, and this is especially true for developing countries. Because currency policy structures a country's economic relations with the rest of the world, it can be crucial in determining a poor country's developmental prospects.
For developing countries, exchange rate policy is both crucial and daunting. It is crucial because it affects how the national economy interacts with the rest of the world economy. It is daunting because currency policy involves a series of difficult tradeoffs, which force governments to make difficult choices.
A country's exchange rate determines how international prices are translated into local and domestic prices, and vice-versa. A strong or appreciated currency is one whose value is high relative to foreign currencies. So if the Mexican peso or Chinese renminbi is appreciated, Mexican and Chinese citizens find the rest of the world's goods more affordable. This is, of course, a good thing; it means that nationals have greater purchasing power.
However, a strong national currency means that domestic goods are expensive to foreigners. If the peso or renmimbi are strong. Mexican and Chinese goods cost more in dollars and other foreign currency. This harms domestic producers of goods that enter into international trade, for they will find it harder to compete with foreign producers. By the same token, a relatively weak currency makes national goods relatively inexpensive to foreigners and foreign goods more costly at home. This helps domestic producers by giving them a competitive edge against foreign products. The tradeoff here, then, is between competitiveness and purchasing power. A weak currency makes domestic manufacturers more competitive in both foreign and domestic markets. But it makes domestic consumers poorer, less able to buy goods. There is no way for a government to avoid this difficult choice: strengthening the currency helps consumers but hurts producers, and vice-versa. Most analysts of development think that, keeping a poor country's currency relatively weak is a good idea. In today's environment, most poor countries need to encourage domestic production of goods that can be sold abroad. Access to the world's markets has in fact been crucial to such earlier developmental successes as South Korea and Taiwan, and to such contemporary successes as China. In all these cases, the push to produce for export was crucially assisted by government policies that kept the national currency weak. Certainly this favours exporters at the expense of domestic consumers, but it seems to have generally positive effects on the prospects for economic development.
What does the author mean when he says, 'keeping a poor country's currency relatively weak is a good idea'?
