The Exchange Rate

Rapid growth takes place in economies which are competitive in world markets and start with the advantage of costs at least as low as their competitors’ (preferably lower). This advantage, by enabling them to expand exports without suffering excessive import penetration, provides them with opportunities to increase their share of world trade and to grow without the constraint of balance of payments problems. Internal demand can then be kept at a high and rising level, without undue inflationary pressures developing. These conditions were established and maintained for the USA during the nineteenth century and some of the first half of the twentieth, albeit behind high tariff barriers which had other disadvantages. They applied to most of the rest of western Europe — excluding Britain, which grew much more slowly — during the quarter of a century after World War II ended. The same conditions are to be found now in the fast-growing economies in the Far East. The reason why such sustained growth has been achieved, why living standards much more than doubled in the course of less than two decades, why inflation has in nearly all cases been relatively low and stable, is that the macroeconomic conditions have been right.