Apart from being a prerequisite for the Dutch disease, exchange rate overvaluation can have additional negative effects on productivity growth. Exchange rate effects come from the effect on relative prices of tradables (see below). Rodrik (2007) has argued that real exchange rate overvaluation may exacerbate market failures that hinder firms from innovating and entering new lines of production. This is important because of evidence that there is a strong association between a country’s long-run growth rate and its ability to master new export products and to export a diversified basket of products
(Hausmann et al., 2007 and Lederman and Maloney, 2007b).