Definition of Balassa-Samuelson effect

In 1964, academics Bela Balassa, a Hungarian economist, and Paul Samuelson, a Nobel-Laureate economist, independently observed that countries with higher levels of productivity growth experienced rapidly rising real wages and so appreciating real exchange rates. Academic studies since have suggested the picture is not as simple as Mr Balassa and Mr Samuelson first thought and that many other factors can also influence the model. However, many long term investors in emerging market currencies, for example, have been able to benefit from the appreciation of those currencies which is arguably due to the Balassa-Samuelson effect.

 

Balassa-Samuelson effect in the news

In September 2012, investment managers were revealed to be at odds over how best to benefit from the Balassa-Samuelson effect. Record Currency Management, a fund manager, estimates revealed that between a third and a half of total unhedged return from EM equities was due to currency appreciation. However, the manager recommended a pure-play currency approach because of the risks of investing in either equities or bonds. An Aviva Investors manager thought that investing in bonds and T-bills offered a better way to gain exposure to the Balassa-Samuelson effect.

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