Mineral Prices and the Exchange Rate: What Does the Literature Say?

by NGANDU, S., 2005
Research Report, Employment Growth & Development Initiative, Human Sciences Research Council

This paper forms part of the Human Sciences Research Council’s project on exchange rates and employment (MACRO006), which seeks to understand the impact of exchange rate fluctuations on employment in South Africa. It reviews the literature on the relationship between commodity prices and the exchange rate, and its implications for labour-intensive export manufacturing. It focuses on the extent to which capital-intensive mineral exports can affect the exchange rate to the detriment of labour-intensive export manufacturing. The volatility of the exchange rate induced by fluctuating mineral prices has a direct impact on the competitiveness and hence the potential deindustrialisation of the manufacturing sector. Ngandu finds that mineral prices are a significant determinant of the real exchange rate in South Africa, and that the exchange rate affects manufacturing output and employment, as suggested by the literature on Dutch disease. Thus there is a negative link between exchange rate appreciation and export performance. The paper also highlights the shortage of studies on the link between the exchange rate and manufacturing employment in developing countries, with most existing studies concentrating on the United States and Japan.