Competitive devaluations in commodity‐based economies: Colombia and the Pacific Alliance Group

• DOI: http://doi.org/10.1111/rode.12349
• Published date: 01 May 2018
• Author: Rodrigo Costamagna,Gustavo Rossini,Guglielmo Maria Caporale
• Date: 01 May 2018

REGULAR ARTICLE

Competitive devaluations in commodity-based

economies: Colombia and the Pacific Alliance

Group

Guglielmo Maria Caporale

1

|

Rodrigo Costamagna

2

|

Gustavo Rossini

3

1

Brunel University, London, United

Kingdom

2

INALDE Business School, University

of the Savana, Ch



ıa, Colombia

3

Universidad Nacional del Litoral, Santa

Fe, Argentina

Correspondence

Rodrigo Costamagna, INALDE Business

School, University of the Savana, Km 7,

Autopista Norte, Costado Occidental,

Ch



ıa, Colombia.

Email: Rodrigo.costamagna@

inalde.edu.co

Abstract

This paper investigates whether there is an S-curve in

Colombia using bilateral and disaggregated quarterly data

for the period 1991 to 2014. More precisely, the short-

run effects of a depreciation on the trade balance (TB)

are analyzed in 27 industries covered by the Pacific Alli-

ance Group free trade agreement. The S-curve found in

sectors representing 30 percent of total industrial produc-

tion suggests that in these cases competitive devaluations

have a positive effect on the TB in the short run. Our

findings have important policy implications: since only

large competitive devaluations can restore TB equilib-

rium, industrial restructuring would appear to be a more

sensible strategy, though this cannot be achieved in the

short run and is instead a medium- to long-term goal.

1

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INTRODUCTION

At time of writing days sharp decline in oil prices has led to a significant deterioration of the trade

balance (TB) in Colombia. Policy makers have responded by devaluing the currency and signing

up to the Pacific Alliance Group (PAG) free trade agreement (FTA). The aim of this study is to

evaluate the effects on trade flows of this type of competitive devaluation in a commodity-based

economy such as Colombia. The TB in commodity-based economies tends to cyclically deteriorate

when commodity prices tend to fall. In general, policy makers use devaluations to provoke a shift

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This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction

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©2017 The Authors. Review of Development Economics Published by John Wiley & Sons Ltd.

DOI: 10.1111/rode.12349

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wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2018;22:558–572.