Real Exchange Rates and Competitiveness: The Political Economy of Skill Formation, Wage Compression, and Electoral Systems

A major puzzle in the open economy literature is why some countries have persistently higher real exchange rates than others. Even more puzzling is the fact that countries with high real exchange rates are strong export performers. We solve both puzzles with a model that integrates two central debat...

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Bibliographic Details
Published in:	The American political science review Vol. 104; no. 3; pp. 601 - 623
Main Authors:	IVERSEN, TORBEN, SOSKICE, DAVID
Format:	Journal Article
Language:	English
Published:	New York, USA Cambridge University Press 01-08-2010
Subjects:	American dollar Bargaining Central Government Competition Competitiveness Consumer Price Index Developed Nations Economic growth Economic models Economic theory Elections Electoral systems Exchange Rate Exchange rates Export performance Exports Exports and Imports Foreign exchange rates GDP Gross Domestic Product Human capital International economics Political Economy Political science Politics Price levels Productivity Purchasing Purchasing power parity Real exchange rates Real wages Seminars Skilled labor Skills Training Unions Vocational Education Wage rates Wages Wages & salaries
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Summary:	A major puzzle in the open economy literature is why some countries have persistently higher real exchange rates than others. Even more puzzling is the fact that countries with high real exchange rates are strong export performers. We solve both puzzles with a model that integrates two central debates in the comparative political economy of advanced economies: one linking wage bargaining, incomes policy, and competitiveness, and the other linking partisanship, political institutions, and redistribution. We bring the two together by emphasizing the role of skill formation. We argue that union centralization is necessary for wage restraint and training on a large scale, but this in turn requires a political coalition that subsidizes such training. When both are present, wage restraint generates external competitiveness, whereas wage compression pushes up sheltered prices and hence the real exchange rate, and vice versa. We test the argument on data on export performance and real exchange rates.
Bibliography:	istex:A84A748783B02D906EDC2EF5ED30F6E96517A190 ark:/67375/6GQ-M6NXFP0S-J Previous versions of this article were presented in the Political Economy Seminar, Essex University (November 2007); in the Comparative Politics Seminar, Columbia University (April 2008); at Yale University (May 2008); and at the Political Economy of Service Transition Workshop, Trinity College, Dublin (May 2008). We thank the participants of these meetings, and in particular, Tim Hatton, Thomas Pluemper, John Stephens, Vera Troeger, Matt Winters, and three anonymous referees. We are especially grateful to APSR Coeditor Dan Treisman for his editorial role. PII:S0003055410000304 ArticleID:00030 ObjectType-Article-1 SourceType-Scholarly Journals-1 ObjectType-Feature-2 content type line 23 ObjectType-Article-2 ObjectType-Feature-1
ISSN:	0003-0554 1537-5943
DOI:	10.1017/S0003055410000304