Having one national currency acts like a hidden trade barrier for a country's own poorest regions.
March 19, 2026
Original Paper
Regional Currency Overvaluation and Labor Market Rigidity
SSRN · 6435573
The Takeaway
In large countries like China, the uniform exchange rate is effectively 'too strong' for underdeveloped provinces with weak fundamentals. Because these regions cannot devalue their own local currency and rising minimum wage laws prevent them from lowering labor costs, they suffer massive export contractions that wealthy regions avoid.
From the abstract
We examine the issue of regional currency overvaluation within a large sovereign country marked by uneven economic growth across its regions. Regions with weaker economic fundamentals require a weaker currency, but a uniform exchange rate in a sovereign country prevents this adjustment, negatively impacting exports. While a more flexible labor market could help reduce costs, rising minimum wage standards contribute to labor market rigidity, hindering necessary changes. This combination of a unif