Article

Export-Import Responses to Devaluation: Experience of the Nonindustrial Countries in the 1960s

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1974
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A number of nonindustrial countries experienced balance of payments difficulties in the 1960s, resulting from overvalued currencies. To cope with these difficulties, they devalued their currencies and adopted policies to support the exchange rate changes by, inter alia, restraining demand so as to facilitate the transfer of resources to the external sector. Also other nonindustrial countries devalued their currencies following the devaluations of the United Kingdom in 1967 and France in 1969, mainly to avoid an appreciation of their currencies against their major trade partner’s currency. Many of these countries had historical, economic, and financial ties with the United Kingdom and France.

This paper limits its scope to the responses of exports and imports of goods to devaluations in nonindustrial countries during the 1960s. It attempts to assess these responses with the help of selected quantitative indicators which are designed to be applicable to a broad and varied cross section of countries.1 In all, the experience of 46 countries (50 devaluations) is examined. Sections I and II discuss briefly the analytical framework, the methodology of measurement, and the diversity of economic circumstances in the countries studied. Section III covers discrete and independent devaluations in 19 countries; Section IV covers 14 countries that devalued in 1967 following the devaluation of the pound sterling; and Section V covers 14 countries that followed the French franc devaluation in 1969. Section VI summarizes the trade impact of devaluations in nonindustrial countries and attempts some general conclusions.

I. Analytical Framework and Methodology of Measurement

The primary effect of currency devaluation is to increase the price in domestic currency of exports and imports, although these prices may remain unchanged in terms of foreign currencies. Higher domestic prices enable exporters to offer higher prices to producers and encourage importers to shift to domestic goods. Thus, these price changes are expected to shift the internal terms of trade in favor of currently traded goods (exports and import substitutes) and to redirect resources from other sectors to the traded goods sectors. Facilitated by stabilization policies in support of the devaluation, this resource reallocation is expected to have a favorable effect on the supply of exports and import substitutes as well as on output in general.2

exports

The short-run effect of devaluation on exports is particularly large if there is unutilized capacity in that sector. Also, the easier it is to shift resources into the export sector, the greater would be the initial effects of devaluation. However, to sustain the export expansion, the relative price of exports has to be maintained at a higher level than before the devaluation, so that resources and products continue to move into the export sector. The domestic rate of inflation, particularly the domestic price of home goods, has to be restrained.

The supply response of exports to the change in their domestic price resulting from a devaluation is significantly different from the price stimulus of normal fluctuations in external prices. Under normal conditions, external prices may fluctuate every year, so that an expected increase in export prices may be substantially discounted by producers in view of the possible fall in prices in the near future. Devaluation, however, gives certainty to the direction of change, and this change is usually significant. This implies that an increase in the domestic price of exports as the result of devaluation can be expected to have a greater effect on production than the same price increase under normal price fluctuations. In other words, the absolute and relative domestic price of exports, relevant for supply response, is an “expected” price which takes into account the possibility of fluctuations, and devaluation is likely to affect this expected price. If, in addition, government takes supporting measures for export expansion, these reinforce the favorable expectations and producers are even more convinced that expansion of output will be profitable.

The measurement of the effects of devaluation on exports can in theory be approached by estimating the price elasticity of the supply curve. However, the common method of estimating the supply elasticity of exports by using data of the predevaluation period may not be accurate for the reasons mentioned above. Scarcity of appropriate data makes the task additionally difficult. For these reasons, three types of analyses have been combined in this paper to measure the effect of devaluation on exports.

Comparison of average growth rates of exports

The first step in the analysis is to compare the growth of exports before and after the devaluation by estimating the ten-year3 trend growth rate of exports and comparing it with the three-year average annual growth rate after the devaluation. Since such a comparison may underestimate the effects of devaluation on exports if their growth rate started declining prior to devaluation, especially on account of currency overvaluation, the three-year average annual growth rate before the devaluation is also compared with the three-year average after the devaluation.

Also, the comparison of growth rates of exports (value) may not be an accurate indicator, since export receipts of the devaluing country can be influenced not only by supply factors but also by such factors as world demand for the major exports of the devaluing country. For example, if world demand for exports had increased, export receipts of the devaluing country could have increased even without the devaluation. Likewise, if world demand for exports had decreased, export receipts could decline in spite of the devaluation, although the fall in export receipts could have been greater without the devaluation.

Import demand analysis

To take into account the effect of world demand on export receipts of the devaluing country, the import demand functions were estimated for 14 industrial countries on the basis of ten yearly observations before devaluation. For each industrial trading partner, the gain in export earnings after devaluation was measured as the difference between actual export earnings for the three-year period after the devaluation and the estimated value of exports based on these import equations. This approach recognized the possible effects of changes in the level of economic activity of the importing countries on the exports of the devaluing country.

Because no appropriate import price index was available for the industrial countries, an assumption was made that the ratio of prices of their imported goods to the gross national product (GNP) deflator remains constant. When this assumption does not hold, the import demand analysis will not give the expected results. In such cases, two types of market share analyses were used.

Market share analysis

For a ten-year and a five-year period before the devaluation, the share of the devaluing country’s exports in the import market in each industrial country was analyzed to determine whether the exporting country experienced an increasing or decreasing trend for its exports. When the trend values were statistically significant, the theoretical values of market shares for the three-year period after the devaluation were estimated by extrapolation and used to estimate the theoretical values for exports, which were then compared with the actual values during the same period. When a trend could not be identified, the three-year average market share before devaluation was used to project the theoretical values for exports after devaluation. The advantage of market share analysis is that it takes into account the effects of both prices and income changes in the importing countries. Its shortcoming is that the market shares need not remain constant when the level of economic activity of the importing countries changes from year to year. The underlying assumption for the market share analysis is that the various impacts from the sides of demand and supply that cannot be measured directly would have continued to affect the market share in the absence of devaluation in the same way as they did during the predevaluation period.

imports

Imports of the devaluing country are affected by devaluation in several ways. Higher domestic prices of imports affect demand adversely and encourage substitution of domestic for imported goods, both in production and consumption. On the other hand, the higher income from the expansion of export and import substituting industries stimulates the growth of imports. A third aspect closely related to the second (and often important for developing countries) is the increase in imports of capital goods. An upsurge in investment activity because of higher profitability in external sectors after devaluation would lead to an upsurge in imports of capital goods. While the price effect tends to reduce imports, the other two effects tend to increase them; the net effect depends on their relative magnitudes. However, in most of the developing countries the price elasticity of the demand for imports may be small, and import substitution may be limited in the short run; therefore, devaluation may lead to an increase in imports rather than to a decrease. The behavior of imports after the devaluation also depends on the monetary-fiscal and wage policies in that period.

Another relevant factor is that a significant portion of imports may be subject to restrictions. The changes in prices and incomes may not have the expected effects upon imports, if devaluation is accompanied by an exchange and trade reform involving relaxation of existing restrictions. For all these reasons no attempt was made to estimate the predevaluation import function and to measure the effect of devaluation on imports. Instead, a comparison is made of the average growth rates of imports before and after devaluation. The trend of imports over the ten-year period before devaluation is estimated, and the movement in imports after devaluation is analyzed, by studying deviations from this trend. Also, imports might have started to increase at a lower rate than the ten-year annual average rate a few years before devaluation due to declining or slowly growing foreign exchange receipts from exports and restrictive measures to reduce balance of payments deficits. Therefore, the three-year average growth rates of imports in the pre-devaluation period are also compared with the predevaluation ten-year average and the three-year average of the postdevaluation period.

II. The Diversity of Experience

In selecting devaluations for analysis, the goal was to include the experience of as many nonindustrial countries as possible during the 1960s.4 The degree of economic development therefore varies all the way from the developed nonindustrial countries (such as Finland, New Zealand, and Spain) through developing countries with a significant industrial base (such as India, Peru, and Tunisia) to the least-developed countries in early stages of development (such as Afghanistan and Burundi). Accordingly, the commodity structure of trade, particularly exports, shows great variation. The more-developed countries export a greater proportion and range of manufactures, for which world demand is growing rapidly, prices and product competition are good, and production can be quickly expanded, particularly when financial policies assist in transfer of resources to the external sector. On the other hand, small countries relying primarily on exports of agricultural commodities have no influence on the world market price and cannot escape the instability in their export earnings caused by price fluctuations and by variations in domestic output caused by weather conditions.

Moreover, the possibility of increasing the supply of agricultural commodities is often limited in the short run, except when large stocks exist. Thus in the case of tree crops such as coffee, cocoa, and tea, it takes a few years between planting and increased production. Even when the gestation period is shorter (for example, cereals and fibers), additional output through substitution of acreage for some other product is often limited, especially in the short run. It is true that supply may be expanded by increasing productivity through improved techniques, but to realize this potential, market incentives need to be supported by development policies to facilitate the adoption by farmers of more efficient techniques. And, even then, the supply response is likely to be realized over the medium-term rather than soon after the devaluation. Consequently, in the short term, changing weather conditions and fluctuations in world market prices tend to be more identifiable influences on export earnings from primary agricultural commodities. For minerals, the demand in importing countries tends to be the important determinant of export volume in the shorter term, since supply is elastic up to a certain point. Moreover, the price elasticity of demand also varies considerably among the primary commodities, thus influencing the degree of price fluctuation. Finally, the proportion of traditional primary products in total exports varies widely among the countries studied—in over two thirds it exceeded one half, and in a few it was over 80 per cent. Thus, one would anticipate considerable variation among countries in the degree and speed of the response of export receipts to exchange rate adjustments.

There is also a great deal of diversity in the circumstances surrounding the devaluation. The cases dealt with in this paper are divided into three groups: (A) independent and discrete devaluations, covering 19 countries and 22 devaluations; (B) 14 countries that devalued with the United Kingdom in 1967 and by the same proportion;5 and (C) 14 countries that devalued with France in 1969 and by the same proportion. Group A countries devalued to correct an existing fundamental disequilibrium, whereas many countries in Groups B and C devalued to forestall an unwanted appreciation of their currency. Moreover, within Group A there is great variation in (1) the causes of the fundamental disequilibrium and its duration before devaluation, and (2) adaptations in the exchange and trade system accompanying the devaluation, as well as the supporting financial policies after devaluation. Finally, the impact of a devaluation on trade flows of the devaluing country is also governed by the size of the devaluation and by exogenous developments in the rest of the world—for example, level of economic activity in importing countries, exchange and trade policies of competitors and customers, and so on.

In nearly all Group A countries, devaluation was accompanied by reform and simplification of the exchange and trade system, including measures to liberalize imports. Several devaluations in the early 1960s, especially those connected with establishment of an initial par value, were concerned as much with rationalizing the exchange and trade system to improve resource allocation and economic growth in the longer term, as with raising immediately the prices and profitability of exportables and import substitutes in order to strengthen the balance of payments in the shorter term—for example, Costa Rica, Ecuador (1961), Iceland (1961), and Israel (1962). In other cases, in the late 1960s, devaluation was preceded by a prolonged period when the currency was overvalued and balance of payments problems had required, in the absence of exchange rate adjustment, intensification of import restrictions and special supports for exports (for example, India, Sri Lanka, and Turkey). Here, too, devaluation was accompanied by a major reform of the exchange and trade system. In several other cases, devaluation was preceded by two or three years of large fiscal imbalances leading to monetary expansion, price increases, and balance of payments difficulties—for example, Burundi, Ecuador (1970), Peru, and Rwanda; therefore, success of the devaluation could be assured only by correcting the underlying fiscal and financial causes through an effective stabilization program. Finally, in a few cases, all among the nonindustrial developed countries, devaluation was relatively uncomplicated—for example, Finland and Iceland (1968). After some years of excessive wage-price increases had weakened the international competitiveness of the economy, a fundamental disequilibrium had clearly emerged and the currency was devalued to correct it.

In most of the Group A countries the predevaluation exchange and trade system included such features as explicit dual or multiple exchange rates for a limited range of transactions, exchange premiums and taxes, various ad hoc special credit and fiscal incentives to exports, temporary import levies such as a stamp tax or an across-the-board tariff surcharge, and administrative restriction of imports. Such measures have the same economic effect as a partial devaluation of the currency, since they result in higher domestic currency prices for exported and imported commodities. Thus realignment of the domestic prices of tradables (that is, exports, exportables, imports, and import substitutes) and nontradables was already set into motion before the formal devaluation itself;6 moreover, devaluation was often accompanied by measures to spread over time its impact on prices, such as either temporary subsidization of essential imported goods to avoid hardship to consumers or temporary taxation of traditional exports to absorb part of the incremental profits (as in Finland and India). Such transitional measures spread the domestic currency price effect of the devaluation into the period following the devaluation. Furthermore, when export earnings are primarily from one or two agricultural commodities, the producer price is frequently set by the authorities either through market intervention or through direct monopoly of procurement for exportation (for example, coffee in Burundi and Rwanda, cotton in Egypt, and cocoa in Ghana). This producer price did not necessarily change in proportion to the devaluation of the currency and often changed at other times, both before and after devaluation. Thus, for all these reasons, the timing and the size of the price effect on exports could be different from the timing and the size of the devaluation; and consequently, the impact on exports and imports would also be spread over time both before and after the devaluation. However, much of the relative price alignment does take place around the time of formal devaluation, and this is why the quantitative analysis below of trade flows, centered on the devaluation year, can be expected to indicate the general effectiveness of the price mechanism in influencing exports and imports.

Another influence on price effects that may cause the “effective” devaluation to differ from “nominal” devaluation is exchange rate action by trading partners and competitors. If important trading partners and competitors also devalue at about the same time,7 the impact on the domestic currency prices of tradables is diluted and the impact on exports and imports is also less. Moreover, after the devaluation, if domestic costs and prices are permitted to rise faster than those of trading partners and competitors, the price effects of the devaluation are eroded—the potential competitive edge in export markets and the price incentive for reallocation of resources from home goods toward tradable goods are reduced. Hence, maintenance of price stability in support of a devaluation is important in determining its effective impact; in the cases examined, there was varying success from such supporting policies. Even when the devaluation does bring about the anticipated change in relative prices of traded and home goods, the market incentives may not result in a major reallocation of resources unless they are supported by development policy—including, for instance, an investment strategy with emphasis on expansion of exports.

Other institutional constraints can substantially neutralize or reduce the expected impact of an exchange rate change on relative prices of traded and home goods before it reaches those economic units whose behavior it is intended to influence; and even after having reached them, the effect on trade flows may be small. When both volume of trade and prices are governed by international commodity agreements (for example, coffee and tin, until recently), an exporting country is not free to expand its share of the market through price competition. Devaluation could lead to an increase in export volume and value over what it would have been only if the country would otherwise have been unable to fulfill its full export quota under the international agreement. Petroleum is a somewhat similar example of this, since the market share of each producing country and the export price have been, as recently, negotiated collectively between the producing countries on the one hand and international petroleum companies on the other, or prior to that, between individual countries and one or more international petroleum companies. A similar situation is mining by subsidiaries of large, multinational corporations, where the ore or semiprocessed product (such as bauxite or aluminum) is sold at a “transfer price” negotiated between the companies and the governments. Also, expansion of exports of certain commodities may be adversely affected by import restraints of one sort or another, including international agreements, “voluntary” limitations by exporting countries, and import quotas. Important instances of this are the international arrangement governing trade in cotton textiles and import restrictions on agricultural products in many countries.

In assessing the quantitative evidence presented below, it is important to bear in mind this great diversity of circumstances surrounding the individual devaluations. Such a broad survey of a cross section of devaluations gives a general view of how exports and imports have fared in the aftermath of devaluations amid diverse settings of economic structures, policies, and exogenous developments, and it leaves an overall impression of the effectiveness of exchange rate policy in the past in influencing trade flows of nonindustrial countries.

III. Group A Countries: Independent and Discrete Devaluations

This section deals with 22 devaluations in 19 countries (Table 1), ranging in nominal devaluation from 15.3 per cent8 for Costa Rica to 67 per cent for Zaïre. These were all “independent” devaluations in the sense that they were not implemented in response to exchange rate action by an important trading partner or competitor. They were also “discrete” devaluations in the sense that they were neither immediately preceded nor followed by another exchange rate change;9 and even with the smallest devaluation the potential increase in the domestic currency prices of traded goods would be no less than 18 per cent. The comparative analysis of trade flows before and after devaluation deals with exports and imports but gives more attention to exports, partly because in many nonindustrial countries, merchandise export earnings are a major determinant of imports (since the liberality with which the import regime is administered by the authorities is governed by their foreign exchange availabilities). In the rest of this section, first some quantitative indicators of the comparative behavior of trade flows before and after devaluation are presented and discussed. This is followed by a brief discussion of the experience in a few individual cases of devaluation.

Table 1.Group A: Selected Discrete Devaluations in the Nonindustrial Countries, 1960-70
Country

and

Devaluation
Date of

Devaluation
Nominal

Devaluation 1
Change in

Domestic

Currency

per Dollar
(per cent)
Afghanistan 2March 22, 196355.6125.0
Burundi 2January 26, 196542.975.0
Costa Rica 2September 3, 196115.318.0
Ecuador (1961)July 14, 196116.720.0
Ecuador (1970)August 17, 197028.038.9
EgyptMay 7, 196219.323.9
FinlandOctober 12, 196723.831.3
GhanaJuly 8, 196730.042.9
Iceland (1961)3August 4, 196162.1164.0
Iceland (1968)4November 12, 196851.1104.7
IndiaJune 6, 196636.557.5
Israel (1962)February 9, 196240.066.7
Korea 5February 2, 196161.5160.0
MaliMay 5, 196750.0100.0
Peru 6October 5, 196730.744.3
Philippines (1962)January 22, 196248.594.1
Philippines (1970)February 21, 197038.763.2
Rwanda 2April 7, 196650.0100.0
Sri LankaNovember 21, 196720.025.0
Tunisia 2September 28, 196419.223.8
TurkeyAugust 9, 197040.066.7
Zaïre 7June 23, 196767.0203.0
Sources: International Monetary Fund, International Financial Statistics and International Financial Statistics Annual Supplements; and data provided by the national authorities.

Changes in par value, except as otherwise stated. It should be noted that in many instances the “effective” devaluation in the economic sense was substantially less than the nominal devaluation shown here.

Establishment of initial par value.

Combined effect of 1960 and 1961 devaluations.

Combined effect of 1967 and 1968 devaluations.

Change in the official rate from February 23, 1960 to February 2, 1961.

Change in the principal rate.

Compared with the average of predevaluation buying and selling rates.

Sources: International Monetary Fund, International Financial Statistics and International Financial Statistics Annual Supplements; and data provided by the national authorities.

Changes in par value, except as otherwise stated. It should be noted that in many instances the “effective” devaluation in the economic sense was substantially less than the nominal devaluation shown here.

Establishment of initial par value.

Combined effect of 1960 and 1961 devaluations.

Combined effect of 1967 and 1968 devaluations.

Change in the official rate from February 23, 1960 to February 2, 1961.

Change in the principal rate.

Compared with the average of predevaluation buying and selling rates.

quantitative evidence

Exports

Three major quantitative indicators of export performance by devaluing countries are discussed: (1) the average annual growth rate of exports during three postdevaluation years,10 compared with their growth rate during the three preceding years and also with the predevaluation medium-term trend growth rate (Table 2); (2) the average annual growth rate during three years before and after devaluation of the export volume of major export commodities in various countries (Table 3); and (3) adjustment of the postdevaluation exports to 14 industrial countries for the growth rate of the import markets in those countries (Table 4). The examination of import performance is limited to a comparison of growth rates before and after devaluation (Table 5).

Table 2.Group A: Comparative Growth Rate of Exports Before and After Devaluation(In per cent per year)
Before DevaluationAfter Devaluation
CountryTen-year

trend 1
Three-year

average 2
Three-year

average
First

year
Second

year
Third

year
Afghanistan5.96.116.92.4−1.0
Burundi7.71.613.3
Costa Rica−2.310.910.52.219.9
Ecuador (1961)5.2−1.37.612.50.59.8
Ecuador (1970)6.15.719.1 34.633.7
Egypt2.3−2.514.628.13.312.4
Finland7.86.414.35.321.416.1
Ghana0.116.88.4−1.743.6
Iceland (1962)6.54.415.818.011.418.1
Iceland (1968)4.8−12.623.231.136.22.4
India3.3−0.95.22.39.14.2
Israel (1962)16.720.015.213.825.95.9
Korea20.139.024.434.358.4
Mali−13.637.4−11.399.524.0
Peru11.45.410.711.7−0.220.7
Philippines (1962)4.30.814.711.330.82.0
Philippines (1970)6.01.19.524.26.2−2.0
Rwanda6.819.65.9−5.2
Sri Lanka−5.1−0.5−1.9−5.96.2
Tunisia5.65.3−7.617.16.3
Turkey5.74.222.7315.030.3
Zaïre8.419.520.625.712.1
Sources: International Monetary Fund, International Financial Statistics and International Financial Statistics Annual Supplements; and data provided by the national authorities.

Compound growth rate computed by regressing on time; data for years before 1953 not used.

Arithmetic mean of annual percentage changes.

Two-year average.

Sources: International Monetary Fund, International Financial Statistics and International Financial Statistics Annual Supplements; and data provided by the national authorities.

Compound growth rate computed by regressing on time; data for years before 1953 not used.

Arithmetic mean of annual percentage changes.

Two-year average.

Table 3.Group A: Comparative Growth of Export Volume for Selected Commodities Before and After Devaluation(In per cent per year)
Before

Devaluation
After

Devaluation
CountryCommodityPercentage

Share 1
Three-year

average
Three-year

average
BurundiCoffee82.8−6.5216.8
Costa RicaCoffee53.24.1−0.4
Ecuador (1961)Bananas63.07.310.1
Ecuador (1970)Bananas51.55.52.7
EgyptCotton61.6−6.210.5
GhanaCocoa65.5−2.63.3
Iceland (1962)Exports100.09.45.8
Iceland (1968)Exports100.0−6.87.3
IndiaJute fabrics19.5−6.1−4.9
IndiaBlack tea13.9−6.9−1.3
IsraelCitrus fruits22.83.016.7
PeruCopper23.53.43.0
PeruFishmeal22.84.27.9
Philippines (1962)Coconut products30.4−5.619.2
Philippines (1970)Coconut products24.2−17.423.9
Philippines (1970)Wood25.70.4−3.4
RwandaCoffee53.22.3
Sri LankaTea65.52.1−1.3
Sri LankaRubber17.34.97.1
TunisiaPhosphates20.26.314.0
TunisiaOlive oil21.85.5−22.5
TurkeyCotton26.314.911.6
TurkeyTobacco15.7−4.15.9
ZaïreCopper66.70.97.7
Source: International Monetary Fund, International Financial Statistics.

Proportion of earnings from the commodity to total export earnings of the country; in most cases, average for the three predevaluation years.

Comparison of the 1962-64 average with 1961.

Source: International Monetary Fund, International Financial Statistics.

Proportion of earnings from the commodity to total export earnings of the country; in most cases, average for the three predevaluation years.

Comparison of the 1962-64 average with 1961.

Table 4.Group A: Postdevaluation Exports to Industrial Countries, Contrasting Actual and Projected Values
Exports to

Industrial

Countries as

Percentage of

Total Exports 2
Difference as Percentage of Projected Value of

Exports
Three-year average
Country 1First

year
Second

year
Third

year
(per cent)(million

U.S. dollars)
Afghanistan50.110.2−28.2−29.6−17.3(−18.4)
Costa Rica92.4−6.4−10.7−2.7−6.5(−6.3)
Ecuador (1961)89.7−3.411.015.48.2(13.3)
Egypt28.3−9.8−14.1−23.6−16.2(−36.6)
Finland67.91.310.011.38.0(152.7)
Ghana73.621.933.628.528.1(75.3)
Iceland (1962)59.613.330.235.226.9(15.1)
Iceland (1968)68.4−19.612.56.30.7(0.8)
India55.8−6.4−9.4−13.4−9.9(-131.6)
Israel (1962)71.60.216.25.77.6(17.3)
Korea89.315.040.264.241.6(13.6)
Peru81.2−7.9−16.8−20.5−15.6(−167.4)
Philippines (1962)93.7−8.00.7−0.5−4.1(−31.2)
Philippines (1970)88.2−6.5−5.8−10.2−10.2(−143.5)
Sri Lanka48.6−8.1−17.0−13.8−13.0(−27.9)
Tunisia76.1−39.7−37.2−42.9−40.0(−84.5)
Turkey68.71.012.67.13(39.6)3
Zaïre96.45.29.65.56.8(47.1)
Source: International Monetary Fund, Direction of Trade.

Burundi, Ecuador (1970), Rwanda, and Mali are not included for lack of adequate data.

Exports to industrial countries expressed as percentage of total exports of the country concerned; average for the three predevaluation years in most cases.

Two-year average.

Source: International Monetary Fund, Direction of Trade.

Burundi, Ecuador (1970), Rwanda, and Mali are not included for lack of adequate data.

Exports to industrial countries expressed as percentage of total exports of the country concerned; average for the three predevaluation years in most cases.

Two-year average.

Table 5.Group A: Comparative Growth Rates of Imports Before and After Devaluation(In per cent a year)
Before DevaluationAfter Devaluation
CountryTen-year trend 1Three-year average 2Three-year averageFirst yearSecond yearThird year
Afghanistan7.012.84.58.611.9−7.1
Burundi0.336.7−24.1−11.6
Costa Rica4.74.19.05.89.311.9
Ecuador (1961)0.913.6−9.132.417.6
Ecuador (1970)11.19.922.7322.7
Egypt5.15.97.621.04.0−2.1
Finland9.54.516.6−6.926.730.1
Ghana0.39.2−3.512.918.2
Iceland (1961)3.51.620.418.723.119.4
Iceland (1968)6.91.016.8−10.727.533.7
India5.76.0−8.8−5.3−7.3−13.8
Israel (1962)8.812.112.67.25.924.6
Korea−6.119.4−8.033.432.8
Mali14.212.127.2−20.929.9
Peru10.812.4−8.9−25.0−1.6−0.1
Philippines (1962)3.03.09.3−3.44.926.4
Philippines (1970)8.69.93.0−3.59.63.0
Rwanda11.817.316.61.4
Sri Lanka−1.1−2.2−14.517.0−9.1
Tunisia3.75.61.8−0.71.74.5
Turkey5.311.328.3423.533.1
Zaïre−0.631.025.241.026.9
Sources: International Monetary Fund, International Financial Statistics and International Financial Statistics Annual Supplements; and data provided by the national authorities.

Compound growth rate computed by regressing on time; data for years before 1953 not used.

Arithmetic mean of annual percentage changes.

One-year data.

Two-year average.

Sources: International Monetary Fund, International Financial Statistics and International Financial Statistics Annual Supplements; and data provided by the national authorities.

Compound growth rate computed by regressing on time; data for years before 1953 not used.

Arithmetic mean of annual percentage changes.

One-year data.

Two-year average.

The diversity of economic conditions and the weak data base dictated the choice of quantitative indicators. A simple framework can rationalize the comparison of rates of growth before and after devaluation. The observed trend growth rate of, say, exports in the predevaluation period can be regarded as the final outcome of a variety of factors influencing the demand for and supply of exports. If all these factors, with the exception of currency devaluation and the associated policies, were simplistically assumed to continue to operate unchanged in the post-devaluation period, then the difference between the actual growth rate of exports in the postdevaluation period and the predevaluation trend growth rate could be attributed to the devaluation and associated policies. The assumption is, of course, a heroic one and renders any conclusions highly tentative; the main difficulty is that in practically each devaluation a number of special factors are in operation11 before or after the devaluation and tend to influence export behavior. However, it is hoped that since a large number of cases are being examined, these special factors would tend to cancel each other, and so the general conclusion from the comparison should be of interest.

However, one obvious special factor can be expected to be present on a systematic basis. Especially in large, discrete exchange rate changes, the currency is apt to have been overvalued in the immediate predevaluation period, with some impact on exports and imports. Since the implication is that, in the absence of devaluation, exports would have grown at a rate lower than the predevaluation medium-term trend, the predevaluation three-year average growth rate was also calculated. To test this, the medium-term trend growth rate was compared with the growth rate during the three predevaluation years; in about two thirds of the cases, exports had slowed down to a below-trend rate of growth before devaluation (Table 2). This reflected in a large measure the emerging overvaluation of the currency and its adverse effects on export performance, but in some cases it was compounded by an adverse, exogenous, and reversible development—such as, for example, a poor crop of the main export commodity or a decline in its world market price. Not infrequently a fundamental disequilibrium is identified, and devaluation of the currency precipitated, when a turn of events adverse to the balance of payments is superimposed on a weakening basic balance of payments position. For instance, export earnings of Costa Rica and Ecuador were adversely affected during 1958-61 by a decline in the prices of bananas and coffee; Egypt’s exports fell by nearly 30 per cent from 1960 to 1962, because of smaller cotton crops and a fall in world market prices; and the years immediately preceding Iceland’s 1967-68 devaluations and Ghana’s devaluation were periods of sharply declining export prices for fish12 and cocoa, respectively.

Turning to export performance in the postdevaluation period, in almost all cases export earnings grew at higher rates than before. Thus, of the 20 instances in which it was possible to estimate a medium-term trend, exports grew at a rate faster than the trend in 17 cases and the postdevalaution growth rate of exports was approximately equal to the trend rate in the 3 others (Israel, Peru, and Sri Lanka).13 Moreover, in Peru and Sri Lanka, export performance immediately before the devalution was significantly worse than the trend and so in comparison, reversion to trend signified improved performance. In Israel, the slower postdevaluation growth rate is a reflection of the fact that after rapid growth in the 1950s from a small base, Israel’s exports, though continuing to grow rapidly, decelerated somewhat in the 1960s.

If postdevaluation export performance is compared with that in the immediate three predevaluation years, the above overall impression from comparison with predevaluation trend growth rate is reinforced. In 19 out of 21 cases, there was significant improvement; in Tunisia the performance was approximately the same, and only in Israel, as discussed above, was it worse. However, although this result agrees with a priori expectation, it would not be appropriate to attribute all of the improvement to the exchange rate change. For, as mentioned above, part of the improvement would in some cases be simply a recovery, which would in any case have occurred, from the predevaluation trough in export earnings.

The growth rates of the export volume of selected primary commodity exports during three-year predevaluation and postdevaluation periods are presented in Table 3. In each case, the commodity selected accounted for at least about 15 per cent of total exports of the country and about half of the commodities accounted for more than 50 per cent of the country’s total exports. The evidence of supply response is less unequivocal here but still fairly persuasive. Of the 24 selected commodities, 13 showed a faster rate of growth after devaluation but 7 experienced a slowdown, caused in many instances by special factors.14 The volume of India’s two main primary commodity exports (jute fabrics and black tea) continued to decline but at a significantly slower rate. In considering the relationship between devaluation and the supply of primary commodities for export, it is necessary to note that in many cases the domestic currency prices received by producers did not increase immediately by as much as the percentage of the devaluation because export taxes were imposed—for example, Burundi, Ecuador (1961), India, the Philippines (1970), and Sri Lanka. But, after allowing for this and for annual fluctuations in production caused by the weather and other factors, the evidence from this broad cross section suggests the prevalence of supply response. The response is strengthened if better price incentives are supported by extension and development policies, but this aspect cannot be adequately captured from the experience of three years summarized in the quantitative indicators presented here.

The next step of the analysis was to identify the role of demand from importing countries in influencing the postdevaluation export performance, since the actual growth in realized export earnings would be a combination of supply response to devaluation and to the growth of demand in the importing countries. Hence, the postdevaluation export performance was adjusted for the growth of import demand in 14 industrial countries,15 which account for a large proportion of the total exports of most of the countries examined. Projected postdevaluation exports16 to each of 14 industrial countries were sought to be estimated by three alternative methods: (1) by estimating a linear propensity to import by regressing the industrial country’s imports from the devaluing country on the industrial country’s GNP and then extrapolating; (2) by fitting a linear trend to the ratio of imports from the devaluing country to the total imports of the industrial country (trend in market share) and then extrapolating; (3) by calculating the average share of the imports from the devaluing country in the total imports of the industrial country during the three predevaluation years (predevaluation average market share) and applying this to the postdevaluation period. Method (3) was used only if (1) and (2) did not yield a good fit; if both (1) and (2) were statistically significant, the method that made greater a priori economic sense was selected. In practice, in many cases, though with important exceptions, approach (3), that is, simple extrapolation of predevaluation market share, had to be used. Some countries were excluded for lack of usable data.

The results of this adjustment for the growth of import demand (Table 4) show the difference between actual exports of each devaluing country in the three postdevaluation years to the group of 14 industrial countries and its projected exports, expressed as a percentage of projected exports. Thus, a positive difference shows that export performance improved after devaluation even when adjustment is made for the growth of demand in the industrial countries; and a negative difference implies that, when the growth of import demand is taken into account, exports failed to keep pace with it even though they might have done better in relation to the predevaluation period. The last two columns in Table 4 show that in 9 out of 18 cases there was an improvement by this criterion and that in the other 9, there was a worsening. However, an important qualification needs to be borne in mind in interpreting these results. Generally speaking, the exports of nonindustrial countries as a group grew at a slower rate in the 1960s than the imports of the industrial countries as a group and, as a consequence, the share of nonindustrial countries in world trade declined. The major reason is that trade in primary commodities has been growing at a slower rate than trade in industrial products, the discrepancy being even more pronounced if petroleum exports are excluded. It would therefore be “normal” for a typical nonindustrial country to experience some loss of market share in the import market in industrial countries. However, since in many cases in Table 4 “projected” exports are estimated by extrapolating the average predevaluation market share, such a loss of market share can show up as a negative difference even though the export performance of the devaluing country has improved in relation to its own past experience. Thus, when an allowance is made for this element of bias in the import demand adjustment, the evidence becomes more favorable to the existence of positive response of export earnings to devaluation.

Some of the seemingly large discrepancies between the average post-devaluation growth rate of exports in Table 2 and the average deviations between projected and actual exports in Table 4 arise either from special circumstances or from a change in the proportion of the devaluing country’s exports going to the industrial countries. Thus, Table 4 shows a large decline (a negative difference) for some countries—such as Afghanistan, Egypt, and Tunisia—and a large increase for some other countries—such as Ghana and Iceland (1962)—because these countries’ exports to the industrial countries performed somewhat worse or better, respectively, in comparison with their global exports, after the devaluation. Sometimes there were special reasons. Iceland’s successful performance (1962) was based on a rapid expansion of the exports of the fishing industry after the devaluation and a sharp increase in the share of herring in the fishing catch; in fact about half the adjusted export gains were in the U.K. market alone from higher herring meal exports. The exceptionally large decline in Tunisia (-40 per cent) was due mainly to the expiration in September 1964 of a trade agreement with France granting preferential entry to Tunisian exports, particularly wines. Tunisian wine exports to France, which had increased rapidly until then, suffered a sharp decline thereafter. This was further compounded by a drought that affected the olive crop and olive oil exports in 1967.

Imports

Turning to the response of imports, about half the cases had about the same growth rate of imports in the three-year period before devaluation as the predevaluation medium-term trend growth rate; the other cases are divided about evenly between increases and decreases (Table 5). This suggests that (1) in nonindustrial countries devaluations are not usually brought about by large increases in imports, and (2) in the face of sluggishness of export earnings due to the overvaluation of currency or other reasons, the import “norm” tends to be maintained either through reliance on external credits or by running down reserves, or both. Moreover, excess demand for imports created by the growing overvaluation of the currency is held in check through intensification of import restrictions or through a slower rate of economic growth.

In the postdevaluation period, in more than half the cases (12 out of 20) the growth rate of imports actually exceeded the predevaluation growth rate because of an interaction of several influences. Higher export earnings and larger capital inflows from abroad due to greater confidence in the currency at its more realistic exchange rate raise foreign exchange availability and permit a larger volume of imports. At the same time, import liberalization measures associated with devaluation, the higher rate of real economic growth made possible by the better allocation of resources, and the growth of exports and import substitutes combine to produce a higher demand for imports. These influences tend to outweigh the restraining effect on imports of their higher domestic currency prices.

country experience

If the devaluations are arranged according to the average growth rate of exports in the three-year postdevaluation period (see Table 2), in 4 cases it exceeds 20 per cent, in 5 cases it is 15-20 per cent, in another 5 cases it is 10-15 per cent, in 7 cases it is 5-10 per cent, and in 1 case it is negative. A brief survey is made here of the experience of a few of the cross section of countries examined. This draws attention, inter alia, to the particular exogenous developments that played a role in several instances.

Countries with the highest postdevaluation growth rate (over 20 per cent) are Iceland (1968), Korea, Mali, and Turkey. In Korea the major reform of the exchange system early in 1961 marked the beginning of a period during which exports grew from $41 million in 1961 to $1,676 million by 1972. During this decade, there was another large devaluation in 1964 and subsequent depreciation of the currency in smaller steps.17 The export performance was made possible through an export-centered development strategy, which provided the main guideline for economic policies. Of great importance also was a large and increasing inflow of capital from abroad, supplementing domestic resources and facilitating implementation of the development program. Iceland’s very high export growth rate after the 1968 devaluation was largely attributable to the sharp decline of exports in the preceding two years. This decline was a consequence of a temporary fall in the world market price for fish, which made up about 90 per cent of Iceland’s exports, and a severe drop in Iceland’s fish catch, caused by unpredictable variations in the natural cycle of the stock and by exceptionally harsh weather in 1967. A recovery was to be expected in any case. After 1968, with the faster than expected recovery in the fish catch (facilitated by the switch from herring to whitefish) and also in fish export prices, Iceland’s export earnings grew rapidly and in 1971 rose 7 per cent above their previous peak in 1966. In Table 4, Iceland’s actual postdevaluation exports are only marginally greater than projected exports, but this does not indicate a poor postdevaluation performance, because projected exports are derived from past trends which, besides being based on the unfavorable years 1967-68, also reflect the extremely favorable years of the herring boom ending in 1966. The 1967 and 1968 devaluations in Iceland were a necessary condition for the recovery, since rising costs had impaired the profitability of the fishing industry so that in 1968 it had to be given subsidies amounting to over 11 per cent of total government revenue in that year. The devaluations, by restoring profitability to export industries, permitted the elimination of this strain on the budget and created incentives to bring about new investment and needed structural changes in the export sector. The increased income helped to stimulate import demand. The substantial import decline in 1969 (see Table 5) was largely due to the effect of the 1967-68 devaluations on real, personal, disposable income.

Turkey’s excellent postdevaluation export performance was influenced by favorable factors, such as vigorous import demand in industrial countries in 1971–72 and higher prices for cotton. Nevertheless, the devaluation encouraged increased supply of the main primary export commodities (cotton, tobacco, and hazelnuts) and made possible the accelerated growth of manufactured exports by raising their profitability. The greatest impact of the devaluation was on remittances from Turkish workers in Western Europe, which rose sharply to a high level. The resulting increase in foreign exchange availability, together with the liberalization of the import system after the devaluation, facilitated the sharp growth of imports required by the acceleration of domestic economic activity. In Mali’s case, inadequacies in the data indicate caution in interpretation. Part of the increase seems to be due to the incidence of unreported exports in the predevaluation period, which tended to go through official channels after the devaluation, and the increases in producer prices.

Countries in the 15-20 per cent range are Ghana, Ecuador (1970), Iceland (1962), Israel (1962), and Zaïre. In Ghana a major factor contributing to higher export earnings was a 68 per cent increase in export unit value from 1967 to 1970; the volume of cocoa exports in 1970 was only slightly greater than in 1963. There was also a significant increase, compared with the predevaluation years, in export earnings from noncocoa exports, particularly nontraditional products, and the more realistic exchange rate contributed to this. Imports declined sharply from the peak in 1965, because of intensified restrictions, to reach a low level in 1967; they declined further in 1968 despite liberalization measures, as investment expenditures were reduced (imports of consumer and intermediate goods increased). But from 1969, imports began to rise in response to greater foreign exchange availability, accelerated economic activity, and liberalization measures. There were two factors in Ecuador’s good export performance after 1970: (1) growth of nontraditional exports, particularly seafood products, which were encouraged by the more realistic exchange rate, and (2) the beginning of petroleum production in 1972 and a rapid increase in export earnings from this source. As regards the export volume of traditional export commodities (bananas, coffee, and cocoa), the most important (bananas) showed only a small increase, while coffee and cocoa fluctuations were mainly due to weather conditions, The devaluation in Zaïre (1967) was preceded by financial imbalance and large price increases, compounded by uncertainties and by disruption of transport facilities and trade services. This situation had led to a considerable loss of export earnings from agricultural goods, because of both supply problems and smuggling. The devaluation in June 1967 was accompanied by a reform of the exchange system and a comprehensive stabilization program designed to restore conditions necessary for the recovery of production, investment, and exports. The post-devaluation years were marked by a steady increase in the volume of both mining and agricultural exports. In addition to these favorable domestic developments, export earnings rose even more, due to a 48 per cent increase in the price of the principal export product (copper), from 1967 to 1970.

In Costa Rica, Egypt, Finland, Peru, and the Philippines (1962), the postdevaluation growth rate of exports was in the 10-15 per cent range. Finland’s devaluation in 1967 was an uncomplicated case of a successful exchange rate action. It was precipitated by substantial current account deficits, leading to loss of reserves, and was preceded by a profit squeeze in the export sector. Exports responded quickly and were aided by an acceleration in economic activity in the industrial countries and in their imports. The postdevaluation stabilization policies kept domestic price increases within bounds and facilitated the transfer of resources to the external sector, ensuring success for the devaluation. In the Philippines (1962), the devaluation was preceded by a period of low export earnings accompanied by reform and simplification of the exchange system and followed by rapid growth of exports. Traditional exports (lumber and coconut products) responded well to the exchange rate change, but minor and nontraditional products also received an export impetus. Costa Rica’s export performance improved after the devaluation, facilitated by special developments unrelated to the devaluation—the introduction of a new disease-resistant variety of bananas, higher coffee export quotas under the International Coffee Agreement, higher sugar export quotas to the United States, and entry into the Central American Common Market. In Peru, large budget deficits for two years and resulting financial difficulties led to capital flight, a loss of confidence in the currency, and devaluation in 1967. It was followed in March 1968 by prohibition of the importation of many articles and in June 1968 by the imposition of a 15 per cent import surcharge. In the postdevaluation period, export earnings, which had begun to slow down, recovered and reverted to the medium-term trend annual growth rate of around 11 per cent. Consequently the trade balance made a quick and large recovery, though confidence returned only after an effective stabilization program with strong fiscal measures was adopted in mid-1968. In Egypt, the devaluation had a limited impact on the domestic currency prices of the main export products because of countervailing changes in export premiums and little change in the minimum prices paid to the producers of the major export (cotton). The large post-devaluation increase in export earnings was due largely to a recovery in both cotton production and world market cotton prices from abnormally low levels, supplemented by the buoyancy of other exports, such as rice.

Finally, in Afghanistan, Burundi, Ecuador (1960), India, the Philippines (1970), Rwanda, and Tunisia, the growth rate of exports after devaluation was in the 5-10 per cent range, and in Sri Lanka it was negative. Sri Lanka had balance of payments difficulties for nearly ten years before the devaluation in 1967, arising from lack of growth in export earnings and increased imports due to continuous budget deficits. The export volume of tea, the main export product, increased only slowly, while its world market price declined continuously throughout the 1960s; meanwhile, Sri Lanka’s share of the world tea market was also slipping. The 20 per cent devaluation did not lead to significant increases in the domestic prices of the main exports, partly because of the imposition of export taxes but also because the currency of the price setting country (the United Kingdom) for tea had been devalued by 14.3 per cent at about the same time; hence, the effective devaluation was rather small. And immediately after 1967, weather conditions affected production adversely, causing export volume to decrease marginally. Since the world market price continued to move downwards, foreign exchange receipts from tea decreased. The exchange reform of 1968 provided some incentives for nontraditional exports, although the profitability of exports was affected by the increase in wages. There was some increase in earnings from minor exports and from rubber, but not enough to offset the decrease in tea receipts. Since the external resource constraint continued in effect after the devaluation, imports were governed by foreign exchange availability and did not increase.

The devaluation of the Indian rupee also came after persistent balance of payments difficulties and was accompanied by a major simplification of the exchange system. The export stagnation in the predevaluation period was due not only to the overvaluation of the rupee but also to the drought. Since the devaluation occurred when the supply of resources was strained by poor harvests and this in turn caused a slowdown in overall economic activity, the export response to the devaluation even in the nonagricultural sector was delayed. The volume of traditional exports (jute fabrics and tea) had been declining in the medium term before devaluation because domestic consumption was outpacing growth in output. The shift in relative prices after the devaluation was not sufficient (partly because of export taxes) to reverse this trend, although it was slowed down. Nontraditional exports, particularly engineering goods, iron ore, and chemicals, received a substantial impetus from the devaluation and the cash subsidies, and grew quite rapidly after the economy had staged a recovery from the agricultural reverses. In fact, the postdevaluation growth in India’s export earnings was primarily attributable to the buoyancy of nontraditional manufactured items, indicating some diversification of exports. Imports of food, which had increased significantly during the predevaluation drought period, declined in the three post-devaluation years. Other imports showed an increase while the economy was getting out of the recession.

After their independence in 1962, Burundi and Rwanda formed an economic union, which was ruptured in 1964, and this situation resulted in economic policy problems in both countries. The weak fiscal systems led to large financial imbalances, inflation, decline in reported exports, and balance of payments difficulties, the latter being compounded by the curtailment of foreign assistance. In Burundi, the exchange reform in 1965 involved the unification of a complex multiple rate structure. The net domestic currency proceeds received by the producers of the two principal exports (coffee and cotton), were not increased substantially after the devaluation, since most of the additional income from coffee was channeled to the budget and there were countervailing reductions in subsidies for cotton. However, the minimum price paid to coffee producers had already been increased in 1964. The large increase in the volume of coffee exports was due partly to successful financial efforts and a restoration of confidence in the currency but partly also to favorable weather conditions. In Rwanda the financial stabilization program accompanying the devaluation was designed to strengthen the budgetary position, and export and import duties were increased. The producer price of coffee (the principal export commodity), which had been raised by 40 per cent in 1964, was further increased by 35 per cent at the time of the devaluation in 1966; beginning in 1967, a policy of maintaining stable and remunerative producer prices for coffee was put into effect. In the post-devaluation period, the Coffee Stabilization Fund was effectively utilized to absorb fluctuations in world market prices and to improve marketing, transportation, and other facilities so as to foster steady and long-term growth in coffee production. This policy proved successful, although its results are only partly reflected in the three-year postdevaluation period.

IV. Group B: Countries That Followed the 1967 Devaluation of the Pound Sterling

characteristics of the group

This group consists of 14 countries which devalued their currencies following the U.K. devaluation of November 18, 1967, mainly to avoid unfavorable effects on their external trade and other financial relations with the United Kingdom. With the exception of Spain, all countries are members of the sterling area; they maintain close commercial and financial ties and there are almost no trade barriers or exchange restrictions within the area. The trade and financial relations with countries outside the sterling area are subject to controls similar to those of the United Kingdom. In some cases (Cyprus and Guyana), some degree of export control is applied to countries outside the area. Imports from countries outside the area are subject to some quantitative restrictions or tariffs, and payments for invisibles and capital transfers are subject to exchange controls if made to countries outside the area.

The group covers a wide range of countries in terms of economic development and structure of trade. Ireland, Israel, Malta, New Zealand, and Spain are relatively advanced in economic development, exporting industrial as well as agricultural products. Ireland mainly exports cattle, meat, and dairy products, but also has industrial products such as textiles and machinery. Spain exports a wide range of manufactured goods, including machinery and processed agricultural products. The main exports of New Zealand are wool, meat, and dairy products. Israel mainly exports processed diamonds, textiles, and citrus fruits. Malta’s main exports are also semimanufactured and finished manufactured goods, as well as agricultural products. The rest are primary-producing countries: Cyprus (cereals, citrus fruits, and potatoes), The Gambia (groundnuts and groundnut products), Guyana (sugar, rice, aluminum, and bauxite), Jamaica (sugar, bananas, bauxite, and aluminum), Malawi (tea and tobacco), Mauritius (sugar), Sierra Leone (diamonds, coffee, cocoa, and palm kernels); Trinidad and Tobago (fuel and lubricants, chemicals, and sugar), and the People’s Democratic Republic of Yemen (fuel and lubricants).

exports

Nominal and adjusted rates of devaluation

The nominal rates of devaluation, defined as changes in par value, were 14.3 per cent, which was the same as the United Kingdom’s rate (Table 6). The only exception was New Zealand, which already had balance of payments difficulties before the U. K. devaluation and decided to devalue by 19.5 per cent. The nominal rates of devaluation in terms of changes in units of local currency per foreign currency were 16.7 per cent for other countries and 24.1 per cent for New Zealand.

Table 6.Group B: Nominal and Adjusted Rates of Devaluation for Exports(In per cent)
CountryNominal

Rate of

Devaluation
Market Share of

Area Outside

Group B 1
Adjusted Rate

of Devaluation 2
Cyprus14.354.37.8
The Gambia14.339.55.6
Guyana14.368.29.8
Ireland14.328.74.1
Israel14.383.211.9
Jamaica14.372.110.3
Malawi14.347.46.8
Malta14.362.18.9
Mauritius14.421.73.1
New Zealand19.557.811.3
Sierra Leone14.337.15.3
Spain14.388.012.6
Trinidad and Tobago14.384.912.1
Yemen, People’s Democratic Republic of 314.375.510.8
Unweighted group average14.758.68.6
Sources: International Monetary Fund, Direction of Trade; and data provided by the national authorities.

Market share in 1966 of area outside Group B in exports of the countries listed.

Nominal rate of devaluation times market share of area outside Group B.

Quantitative analysis for the People’s Democratic Republic of Yemen is not possible because of lack of data prior to 1966.

Sources: International Monetary Fund, Direction of Trade; and data provided by the national authorities.

Market share in 1966 of area outside Group B in exports of the countries listed.

Nominal rate of devaluation times market share of area outside Group B.

Quantitative analysis for the People’s Democratic Republic of Yemen is not possible because of lack of data prior to 1966.

Of particular importance for the internal effects of devaluation, especially on the internal terms of trade, is the fact that a substantial portion of exports by each of the countries went to the United Kingdom and other countries in the group and they were not directly affected initially by the devaluation. The nominal rates of devaluation were therefore adjusted for the share of other countries in the group in the export market of the particular country (Table 6). These adjusted rates attempt to determine the effect of devaluation on the domestic economy.18 After this adjustment, the average rate of devaluation for the group is reduced from 14.7 to 8.6 per cent. For example, The Gambia, Ireland, and Mauritius had such strong economic ties with the United Kingdom and with the group as a whole that the devaluation affected a limited portion of their exports. On the other hand, a much greater portion of exports of Israel, Jamaica, New Zealand, Trinidad and Tobago, and the People’s Democratic Republic of Yemen were influenced by the devaluation. On average, the market share of exports directly affected by devaluation was about 59 per cent, and the adjusted rates of devaluation ranged from 3.1 to 12.6 per cent.

The effects of devaluation on exports

Comparison of growth rates of exports. A comparison of the growth rates of exports before and after devaluation (Table 7) shows that, with the exception of Ireland, the countries with very low adjusted rates of devaluation (The Gambia, Malawi, and Mauritius) did not show an increase after devaluation. In 6 out of 13 countries (Cyprus, Ireland, Malta, New Zealand, Sierra Leone, and Spain) the three-year average growth rates of exports after devaluation were higher than the eight-year average before devaluation. If, however, these are compared with the predevaluation three-year average growth rates of exports, the picture changes slightly; the number of countries with favorable changes after devaluation increases to 8 (excluding Cyprus and including Guyana, Mauritius, and Trinidad and Tobago). The main factors which accounted for these changes in the growth rates of exports are discussed in the next section. Eight countries experienced a decline in the growth rate of exports during the predevaluation period in the sense that the predevaluation three-year average was lower than the eight-year average (Guyana, Israel, Jamaica, Malta, Mauritius, New Zealand, Sierra Leone, and Trinidad and Tobago). Israel, Malta, and Spain maintained very high rates of growth of exports; the growth rate of Israel showed a tendency to decline over time, while the rates of Malta and Spain increased over time.

Table 7.Group B: Comparative Growth Rates of Exports Before and After Devaluation(In per cent)
Before DevaluationAfter Devaluation
CountryEight-year

average

(1959-67)1
Three-year

average

(1965-67)2
Three-year

average

(1968-70)2
Annual rate of growth
196819691970
Cyprus5.813.09.77.910.710.5
The Gambia8.525.21.0−27.027.92.2
Guyana7.45.46.0−8.214.411.7
Ireland8.38.512.410.611.215.5
Israel14.514.312.115.314.16.8
Jamaica9.39.18.2−8.315.817.0
Malawi12.36.9−2.19.813.0
Malta13.739.418.843.012.80.7
Mauritius8.5−9.58.015.43.25.3
New Zealand4.6−2.37.33.517.51.0
Sierra Leone−10.23−13.421.857.910.8−3.2
Spain10.4313.820.014.819.625.6
Trinidad and Tobago6.82.63.07.20.51.3
Source: International Monetary Fund, International Financial Statistics.

Annual compound rate of growth estimated by regression analysis, unless otherwise indicated.

Arithmetic average of annual rates of growth.

Seven-year arithmetic average.

Source: International Monetary Fund, International Financial Statistics.

Annual compound rate of growth estimated by regression analysis, unless otherwise indicated.

Arithmetic average of annual rates of growth.

Seven-year arithmetic average.

import demand-market share analysis

In the preceding section it was shown that 8 out of 13 countries experienced an increase in the growth rate of exports after devaluation, but this increase cannot be immediately attributed to the devaluation. The level of economic activity in most of the industrial countries declined in 1967, causing exports of developing countries to slacken or fall. In 1968, on the other hand, economic activity recovered strongly, so that the demand for exports of developing countries increased. This tended to raise the average growth rates of exports in the postdevaluation period, thus overstating the effects of devaluation.

To separate the effects of changes in the level of economic activities in the industrial countries, import demand-market share analyses were carried out (Table 8). The effect of devaluation on exports is defined as the difference between actual exports and theoretical values estimated from the import demand-market share analyses. If the effect is significantly large (greater than 8 per cent of actual exports of the predevaluation period), the effects are called “strongly expansionary.” If they are less than 8 per cent, but greater than zero, they are called “expansionary.” Zero is included in the expansionary effect because exports could have declined in the absence of devaluation, since their currency would have appreciated against their important trade partners (the United Kingdom and the countries that followed the devaluation of the pound sterling). In this sense, even small negative numbers could be included in the expansionary effect, if there is strong evidence that exports would have declined further in the absence of devaluation.

Table 8.Group B: Effect of Devaluation on Exports1
First YearSecond YearThird YearThree-Year Cumulative Average
Country(million

U.S.

dollars)
(per cent)2(million

U.S.

dollars)
(per cent)2(million

U.S.

dollars)
(per cent)2(million

U.S.

dollars)
(per cent)2(per cent)3
Cyprus10.0(13.9)4.2(5.1)−2.8(−3.0)11.4(4.6)(0.9)
The Gambia−2.5(−16.9)1.0(6.1)−1.8(−9.5)−3.3(−6.6)(−8.5)
Guyana−7.4(−8.4)−5.7(−5.9)−9.5(−8.8)−22.6(−7.7)(−10.8)
Ireland80.4(10.1)118.4(13.6)168.9(17.4)367.7(14.0)(16.5)
Israel57.9(14.6)36.6(8.0)24.9(5.9)119.4(8.7)(11.8)
Jamaica−69.9(−22.0)−76.1(−22.2)−66.0(−17.3)−212.0(−20.4)(−28.1)
Malawi5.0(13.3)−3.0(−7.3)−6.2(−13.5)−4.2(−3.4)(−4.2)
Malta3.0(17.6)6.5(34.6)6.0(28.4)15.5(27.2)(36.6)
Mauritius−7.5(−10.3)−16.7(−21.6)−24.9(−29.5)−49.1(−20.9)(−25.5)
New Zealand−64.3(−6.4)69.2(6.8)22.6(2.2)27.5(0.9)(1.1)
Sierra Leone12.3(10.0)9.4(7.0)−2.7(−1.5)19.0(8.0)(10.1)
Spain111.1(9.0)128.6(9.2)263.0(16.5)502.7(11.9)(15.9)
Trinidad and Tobago1.6(0.4)−47.8(−11.7)−88.1(−19.5)−134.3(−11.0)(−15.4)
Sources: International Monetary Fund, International Financial Statistics and Direction of Trade.

Difference between actual exports and theoretical values estimated from predevaluation behavior.

Effect of devaluation as percentage of theoretical value of exports.

Effect of devaluation as percentage of actual exports.

Sources: International Monetary Fund, International Financial Statistics and Direction of Trade.

Difference between actual exports and theoretical values estimated from predevaluation behavior.

Effect of devaluation as percentage of theoretical value of exports.

Effect of devaluation as percentage of actual exports.

Table 8 shows that 5 out of 13 countries had a “strongly expansionary” effect and 8 out of 13 countries had “strongly expansionary” or “expansionary” effects. However, the three-year cumulative effects tend to underestimate the effects of devaluation, since a negative number for an individual year does not mean that devaluation caused exports to fall; exports fell for other reasons. Six countries experienced a strongly expansionary effect of at least one year, and 5 of these experienced strongly expansionary effects for more than one year. If this expansionary effect is included, the number increases to 10. However, the expansionary effects on an annual basis must be discounted, because they could be due to statistical errors if only one year showed the positive sign.

Even in cases of strongly expansionary effects, an export expansion could be due to factors other than devaluation. The import demand-market share analysis is based on the assumption that after the devaluation there were no drastic changes in the supply and demand conditions other than devaluation and changes in the level of economic activities in the industrial countries. If this assumption does not hold, the above effects would give overestimations or underestimations of the effect of devaluation. For this reason, other quantitative and qualitative information was utilized to qualify the quantitative results. The circumstances of “strongly expansionary,” “expansionary,” and “contractionary” effects are discussed below, and the distribution of the three types of effects is summarized in Table 9.

Table 9.Group B: Summary of Quantitative Indicators
ExportsImports
Comparison of growth rates 2Import demand-market share analysis 3Comparison of growth rates 2
Adjusted rates of devaluation 1(Eight-year average)(Three-year average)(Eight-year average)(Annual)Adjusted rates of devaluation 1(Eight-year average)(Three-year average)
Country(I)(II)
Cyprus(+)(+)+(+)+(+)+
The Gambia(+)(+)(+)(+)
Guyana(+)(+)+(+)
Ireland++++(+)++
Israel++(+)++++
Jamaica+++++
Malawi(+)(+)(+)(+)
Malta(+)(+)++++(+)++
Mauritius++++
New Zealand++++(+)(+)+++
Sierra Leone(+)(+)++++(+)++
Spain+++++++
Trinidad and Tobago+++(+)+++
Number of countries with positive signs55684(8)46(10)4698
Sources: Tables 6, 7, 8, 10, and 11.

The plus sign indicates an adjusted rate greater than 10 per cent, and the plus sign in parentheses indicates a rate less than 10 per cent but greater than 5 per cent.

The plus sign indicates that the three-year average growth rate in the postdevaluation period is greater than the three-year average and eight-year average growth rates in the predevaluation period.

The plus sign indicates “strongly expansionary’ effects, and the plus sign in parentheses indicates “expansionary” effect.

The numbers in parentheses indicate the number of countries with either “strongly expansionary” effect or “expansionary” effect.

Sources: Tables 6, 7, 8, 10, and 11.

The plus sign indicates an adjusted rate greater than 10 per cent, and the plus sign in parentheses indicates a rate less than 10 per cent but greater than 5 per cent.

The plus sign indicates that the three-year average growth rate in the postdevaluation period is greater than the three-year average and eight-year average growth rates in the predevaluation period.

The plus sign indicates “strongly expansionary’ effects, and the plus sign in parentheses indicates “expansionary” effect.

The numbers in parentheses indicate the number of countries with either “strongly expansionary” effect or “expansionary” effect.

Cases of “strongly expansionary” effects

Table 9 shows “strongly expansionary” effects of devaluation in 5 out of 13 countries (Ireland, Israel, Malta, Sierra Leone, Spain). As noted earlier, these are countries which had high adjusted rates of devaluation. The five countries can be further divided into two subgroups: (1) Israel, Malta, and Spain, where devaluations were the major factor for expansion, and (2) Ireland and Sierra Leone, where other factors appear to have been equal to or more important than devaluations in bringing about significant export expansion.

In Israel, a combination of circumstances favored exports. There was unutilized capacity prior to devaluation, due to minor recessions in 1965 and 1966. In 1967, the economy responded quickly to the devaluation and the Government’s expansionary policy without causing serious inflationary pressure. Also, the Government’s wage freeze during 1967-68 and tariff reductions contributed to price stability. Labor unions cooperated with the Government by abstaining from claims for higher wages after the expiration of the freeze. The overall high-saving propensity seems to have contributed to the increased availability of resources for exports after devaluation.

In Spain, the devaluation took place when the economy was suffering from inflationary pressure; it was followed by austerity measures, including a freeze on wages and salaries. The Government also carried out disinflationary monetary-fiscal policies, together with price stabilization policies. Partly because of a reduction in import duties and increased import subsidies, price stability was maintained in 1968 and 1969. In 1969 the Government initially followed a permissive monetary policy, with resultant inflationary pressures, but then reverted to restrictive monetary policy and introduced a stabilization policy toward the end of the year.

In Malta, monetary-fiscal restraints were not followed in the post-devaluation period. Control measures on import prices were introduced after the devaluation, and there was an increase in wages. Significantly positive effects of devaluation were felt in spite of the temporary setback caused by the closure of the Suez Canal.

In Sierra Leone a remarkable expansion in exports was brought about by a number of factors, including devaluation. Following the financial deterioration caused by ambitious development efforts, in 1966 the Government introduced stabilization policies, which mainly involved fiscal restraints and a rationalization of the tax system. Export performance was aided by the price increase of the principal export product (diamonds) in pounds sterling by the full extent of the devaluation. Also of importance to exports were the elimination of the increased diamond export taxes and the financial rehabilitation of the Sierra Leone Produce Marketing Board, which purchases agricultural products for export. The policies during this period restored confidence and helped to eliminate the drastic reduction of exports caused by increased smuggling and low output. Devaluation was one of the policy instruments that enabled the Government to increase the purchase prices of diamonds and agricultural exports and to reduce the financial difficulties of the Produce Marketing Board.

Ireland is an example of a country where exports grew at significantly higher rates after devaluation, largely because of increased exports to the United Kingdom. Its adjusted rate of devaluation was only 4.1 percent, due to the strong economic ties with the United Kingdom, indicating that devaluation would have a limited impact on the Irish economy. However, the advanced stage of economic development, aided by the successive relaxations of trade barriers under the 1965 Anglo-Irish Free Trade Area Agreement, enabled Ireland to exploit the increase in its relative competitive position in the U.K. market.

Cases of “expansionary” effects

The countries with “expansionary” effects are Cyprus and New Zealand. Their production for exports suffered from bad weather and adverse price movements in the world markets after devaluation. However, devaluation appears to have more than offset these adverse effects, with the result that their exports showed moderate gains. In Cyprus, agricultural production declined as a result of bad weather conditions, and the world price of its major exports also declined in 1968. In 1969, agricultural production recovered, allowing exports to recover and expand, although monetary-fiscal policies were expansionary and wages increased. In New Zealand, its major export (wool) suffered from unfavorable world demand, mainly owing to competition with synthetics. Drought also cut down the production of dairy products. On the other hand, exports of meat, forestry products, and manufactured goods grew at a high rate, indicating a positive effect of devaluation.

Cases of “contractionary” effects

When devaluation did not fully offset other adverse factors which caused the export shortfalls, “contractionary” effects resulted. This group can be divided into two subgroups. The first consists of The Gambia and Mauritius, which had strong economic ties with the United Kingdom and where the adjusted rate of devaluation was too small for a significant positive effect on exports (Tables 6 and 9). The Gambia depended for its exports upon a single crop (groundnuts), which suffered from bad weather conditions as well as unfavorable changes in export prices. Mauritius also depended heavily upon sugar exports, mostly going to the United Kingdom under the Commonwealth Sugar Agreement, which denominated the sugar price in pounds sterling. Because of this marketing arrangement, the producer price in domestic currency changed, on average, much less than the rate of devaluation. Export earnings measured in U.S. dollars declined.

The second subgroup consists of countries which had relatively high adjusted rates of devaluation but whose exports declined, owing to a special marketing arrangement, bad weather conditions, unfavorable world demand conditions, and other special factors. These are Guyana, Jamaica, Malawi, Trinidad and Tobago, and the People’s Democratic Republic of Yemen. Guyana, Jamaica, and Trinidad and Tobago are sugar exporters and were adversely affected by the Commonwealth Sugar Agreement and the low world demand for sugar. Also, bad weather conditions adversely affected the exports of Guyana, Jamaica, Malawi, and the People’s Democratic Republic of Yemen. In Guyana, heavy rain in 1968 caused damage to rice crops and bauxite ore mines, while Jamaica suffered from severe drought which reduced agricultural production. Malawi’s main exports (tobacco, tea, and groundnuts), suffered a major setback from bad weather. A disease aggravated the situation for groundnut production in Malawi. The export shortfalls of Trinidad and Tobago were mainly caused by a decline in exports of fuel and lubricants. A part of these are imported and exported under processing agreements, and changes in that portion would not have been influenced by the devaluation. The second important export (sugar) was also adversely affected by the Commonwealth Sugar Agreement, and total exports declined in spite of the growth of exports to the neighboring countries following the formation of the Caribbean Free Trade Area in 1968. Exports and re-exports of the People’s Democratic Republic of Yemen in 1968 were 33 per cent below the 1966 level, mainly because of the sharp decline in the number of ships bunkering in the port of Aden after the closure of the Suez Canal in mid-1967.

imports

Although nominal rates of devaluation for imports are the same as those for exports, the effect is not necessarily the same, because the market shares of imports may be different from those of exports. The adjusted rates of devaluation, which take into account the market shares of imports, are shown in Table 10. The market shares of the nongroup countries were, on average, 10 per cent higher than those of exports. This implies that imports were, on average, more affected by devaluation than exports. The countries whose adjusted rates for imports become significantly larger than those of exports were The Gambia, Malawi, and Mauritius.

Table 10.Group B: Adjusted Rates of Devaluation for Imports(In per cent)
CountryMarket Share of Area Outside Group B 1Adjusted Rate of Devaluation 2
Cyprus60.88.7
The Gambia61.48.8
Guyana66.99.6
Ireland43.76.3
Israel79.211.3
Jamaica74.310.6
Malawi68.79.8
Malta57.28.2
Mauritius73.910.6
New Zealand62.312.1
Sierra Leone66.19.5
Spain88.212.6
Trinidad and Tobago79.711.4
Yemen, People’s Democratic Republic of86.612.4
Unweighted group average69.210.2
Sources: International Monetary Fund, International Financial Statistics and Direction of Trade; and Table 6.

Market share in 1966 of area outside Group B in imports of the countries listed.

Nominal rate of devaluation times market share of area outside Group B.

Sources: International Monetary Fund, International Financial Statistics and Direction of Trade; and Table 6.

Market share in 1966 of area outside Group B in imports of the countries listed.

Nominal rate of devaluation times market share of area outside Group B.

Table 11 shows that in countries with “strongly expansionary” or “expansionary” effects of devaluations on exports, imports also increased at a higher rate after devaluation, with the exception of Spain. In particular, imports of Ireland, Israel, and Sierra Leone grew at a substantially higher rate after devaluation. Spain’s imports did not increase at a higher rate mainly because of restrictive import policies (including quantitative control) and the decumulation of predevaluation stocks. Import restrictions were not relaxed after devaluation, and the bilateral payments accounts recorded a creditor position during the postdevaluation period. Half of the countries experiencing export difficulties after devaluation also had a decline in growth rates of imports (The Gambia, Guyana, and Malawi). The other 3 countries (Jamaica, Mauritius, and Trinidad and Tobago) experienced an increase in growth rates of imports in spite of the limited export expansion. Among the 6 countries whose devaluation did not have positive effects, 3 countries adopted restrictive import policies during the post-devaluation period: Guyana required an advance deposit for imports and imposed an import surcharge; Malawi imposed an import surcharge; and Trinidad and Tobago had quantitative restrictions. New Zealand also tightened import restrictions in 1967 for balance of payments reasons.

Table 11.Group B: Comparative Growth Rates of Imports Before and After Devaluation(In per cent)
Before DevaluationAfter Devaluation
CountryEight-year

average

(1959-67)1
Three-year

average

(1965-67)2
Three-year

average

(1968-70)2
Annual rate of growth
196819691970
Cyprus4.116.412.52.321.913.4
The Gambia9.217.4−2.18.9−7.4−7.9
Guyana6.214.21.7−16.27.513.8
Ireland8.83.514.414.118.910.1
Israel9.9−2.424.044.118.79.1
Jamaica7.36.414.610.615.118.1
Malawi23.113.014.45.719.0
Malta2.620.518.626.919.79.1
Mauritius−0.32−6.54.813.5−10.711.7
New Zealand6.60.98.7−9.311.623.8
Sierra Leone6.1−2.89.30.323.34.2
Spain26.3216.511.21.320.112.3
Trinidad and Tobago8.3−0.39.32.413.112.3
Source: International Monetary Fund, International Financial Statistics.

Annual compound rate of growth estimated by regression analysis unless indicated otherwise.

Arithmetic average of the annual rates of growth.

Source: International Monetary Fund, International Financial Statistics.

Annual compound rate of growth estimated by regression analysis unless indicated otherwise.

Arithmetic average of the annual rates of growth.

V. Group C: Countries That Followed the 1969 Devaluation of the French Franc

characteristics of the group

This group consists of 14 countries in the French franc area19 that maintain strong commercial and monetary relations with France and among themselves. They devalued by the same proportion as the French franc to avoid adverse effects of the 1969 French devaluation. Five out of the 14 countries have a monetary and customs union within the area; they have only one central bank (Banque des Etats de l’Afrique Centrale) and trade is free from controls and tariffs (Cameroon, the Central African Republic, Chad,20 the People’s Republic of the Congo, and Gabon). Seven other countries also had a common central bank (Banque Centrale des Etats de l’Afrique de l’Ouest) and a customs union (Dahomey, Ivory Coast, Mauritania, Niger, Senegal, Togo, and Upper Volta).

There are no controls over trade and capital movements within the French franc area. Trade and capital transactions with countries outside the French franc area were traditionally subject to varying degrees of control and restrictions. In 1969, however, the French franc area countries abolished the prevailing exchange controls, following the action by France.21 Also, the French franc area countries extended the preferential trade arrangements, formerly extended only to France, to member countries of the European Economic Community (EEC) on the basis of reciprocity provided for in the agreement of association. Under this arrangement, the French franc area progressively dismantled the restrictions on imports from the EEC and several other countries. Direct investments both inward from and outward to the countries22 outside the area and the EEC were subject to control. A large part of imports from countries outside the area still remained subject to quantitative restriction and licensing.

The countries in this group were primary producing countries at a relatively early stage of economic development. Their main exports were agricultural and mineral products: Cameroon (coffee, cocoa, and aluminum), the Central African Republic (diamonds, cotton, and coffee), Chad (cotton, livestock, and meat), the People’s Republic of the Congo (forestry products and petroleum), Dahomey (palm kernel products), Gabon (petroleum, manganese, wood, and wood products), Ivory Coast (coffee, cocoa, and timber), the Malagasy Republic (coffee, sugar, rice, and vanilla), Mauritania (iron ore), Mali (groundnuts, cotton products, and livestock), Niger (groundnuts and livestock), Senegal (groundnuts and groundnut products), Togo (phosphates, coffee, and cocoa), and Upper Volta (livestock).

Five countries (the Central African Republic, Chad, Mali, Niger, and Upper Volta) are landlocked countries, where lack of transportation facilities is a major barrier to trade and development. Also, a significant portion of the total trade of all of the above countries was unrecorded.

exports

Nominal and adjusted rate of devaluation

The nominal rate of devaluation was 11.1 per cent, and it was 12.5 per cent in terms of local currency per U.S. dollar. The market share of the area outside the group was 52 per cent, on average, ranging from 21 per cent for Niger to 87 per cent for the People’s Republic of the Congo. Table 12 gives the nominal rates of devaluation for exports. There is no country whose adjusted rate exceeded 10 per cent. Nine of the 14 countries had adjusted rates greater than 5 per cent, and only three of these countries had rates greater than 7 per cent.

Table 12.Group C: Nominal and Adjusted Rates of Devaluation for Exports(In per cent)
CountryNominal

Rate of

Devaluation
Market Share of

Area Outside

Group C1
Adjusted Rate

of Devaluation 2
Cameroon11.158.36.5
Central African Republic11.165.67.3
Chad11.136.04.0
Congo, People’s Republic of the11.187.49.7
Dahomey11.142.04.7
Gabon11.161.36.8
Ivory Coast11.160.96.8
Malagasy Republic11.160.66.7
Mauritania11.179.88.9
Mali11.149.65.5
Niger11.120.72.3
Senegal11.123.12.6
Togo11.158.96.5
Upper Volta11.128.73.2
Unweighted group average11.152.45.8
Source: International Monetary Fund, International Financial Statistics.

Market share in 1968 of area outside Group C in export market of the countries listed.

Nominal rates of devaluation times market share of area outside Group C.

Source: International Monetary Fund, International Financial Statistics.

Market share in 1968 of area outside Group C in export market of the countries listed.

Nominal rates of devaluation times market share of area outside Group C.

Effect of devaluation: qualitative and quantitative evidence

To isolate the effect of devaluations for the French franc group is very difficult. First of all, the rates of devaluation were small. Secondly, factors other than price incentives played a dominant role. Among these were government development efforts supported by foreign economic and technical assistance, world demand, and weather conditions. In some cases, the economic and technical assistance provided by France and the EEC, which was important during the 1960s, was curtailed in the early 1970s. The association of the French franc group with EEC countries, which began in the early 1960s and increased in subsequent years, is also a factor, because the French franc group received preferential treatment from the EEC in exchange for similar treatment of the EEC’s exports. This arrangement affected the direction of trade of the French franc group; exports could have expanded more than in the past, even in the absence of devaluation. Thirdly, a significant portion of their trade is not recorded. These factors reduced the reliability of the quantitative analysis, especially the import-demand analysis, which could not produce statistically significant results.

Table 13 compares the growth rates of exports before and after devaluation; 8 out of 14 countries increased their growth rate of exports after devaluation. However, this change may have been largely due to factors other than devaluation, since 3 out of the 8 countries had an adjusted rate of devaluation less than 5 per cent. The market share analysis (Table 14) also reveals a similar picture; 7 out of 14 countries improved their exports after adjustment for the import demands of the industrial countries. In the 5 countries with both relatively high adjusted rates and favorable changes in exports, factors other than devaluation may have played a dominant role. Therefore, the evidence for expansionary effects of devaluations in Group C was very limited and scattered.

Table 13.Group C: Comparative Growth Rates of Exports Before and After Devaluation(In per cent)
Before DevaluationAfter Devaluation
Seven-year

average

(1962-69)1
Three-year

average

(1967-69)2
Two-year

average

(1970-71)2
Annual rate of growth
Country19701971
Cameroon8.214.02.58.4−3.4
Central African Republic12.16.0−1.2−14.712.3
Chad9.427.42.72.23.1
Congo, People’s Republic of the2.923.217.715.719.6
Dahomey14.3233.237.535.439.6
Gabon11.813.119.2−15.854.1
Ivory Coast12.7211.97.810.15.5
Malagasy Republic4.15.314.527.41.5
Mauritania4.73.311.116.55.7
Mali14.020.550.092.47.6
Niger12.2−11.025.629.921.3
Senegal−0.7−7.410.832.2−10.7
Togo13.38.66.022.1−10.2
Upper Volta19.39.2−12.6−12.4−12.8
Source: International Monetary Fund, International Financial Statistics.

Annual compound rate of growth estimated by the regression analysis.

Arithmetic average of annual rates of growth.

Source: International Monetary Fund, International Financial Statistics.

Annual compound rate of growth estimated by the regression analysis.

Arithmetic average of annual rates of growth.

Table 14.Group C: Gains in Exports to Industrial Countries During Postdevaluation Period1
Exports to

Industrial

Countries as

Percentage of

Total Exports
Gains as Percentage of

Projected Values of Exports
Two-year average
CountryFirst

year
Second

year
(per cent)(million

U.S. dollars)
Cameroon88.5−17.6−34.5−26.7−156.1
Central African Republic81.07.7−2.32.51.8
Chad83.0−9.2−23.5−16.7−10.0
Congo, People’s Republic of the77.2−20.8−24.1−22.5−35.5
Dahomey90.835.449.044.721.8
Gabon72.3−2.723.910.327.8
Ivory Coast83.0−8.0−22.3−15.6−185.9
Malagasy Republic69.610.525.518.236.7
Mauritania95.7−12.7−12.0−12.327.7
Mali34.734.047.441.28.7
Niger83.9−29.0−28.8−28.6−27.2
Senegal82.922.239.529.753.6
Togo93.1−3.4−25.5−15.2−22.1
Upper Volta27.238.0−3.815.83.1
Sources: International Monetary Fund, International Financial Statistics and Direction of Trade.

Difference between actual exports and theoretical values estimated from predevaluation behavior.

Sources: International Monetary Fund, International Financial Statistics and Direction of Trade.

Difference between actual exports and theoretical values estimated from predevaluation behavior.

Cases of export expansion

Countries where some quantitative evidence of an expansionary effect of devaluation was found were the Central African Republic, Gabon, the Malagasy Republic, Togo, and Mali. In the Central African Republic, the major export product (diamonds) declined, due to the low producer price offered to diggers. The producer price of cotton, another important export, was raised by 7 per cent after devaluation, and subsidization, necessary in the past, soon became unnecessary, partly due to the devaluation and partly due to the improved world price. During 1970-71 cotton production declined because of bad weather, departure of foreign agricultural advisors, and reorganization of the agricultural sector. However, without devaluation and higher external prices, the decline could have been greater. Togo’s cocoa exports declined during 1970-71 as a result of adverse world demand conditions. However, the producer price was raised by 10 per cent during 1969-70 and by 6 per cent during 1970-71, significantly cushioning the impact of a fall in the world price on production. This can be in part attributed to the devaluation. Price supports for other exports before 1969 resulted in deficits for the government-sponsored purchasing agents in view of the adverse world price movement. However, the deficit disappeared after the devaluation; the price support policy would have been difficult to maintain in the absence of devaluation. After devaluation, the Malagasy Republic increased the producer price for coffee and cloves, contributing to the recovery of production after violent cyclones in 1969; however, the recovery was also due to favorable weather and an exceptionally good crop in 1970. Although these increases in producer prices were largely due to the improved world market conditions, they were also due to the devaluation; the degree of the price increase to the producers would have been smaller in the absence of devaluation.

Mali is an exception in the sense that it had devalued its currency two years earlier (May 1967) by 50 per cent, and the second devaluation in 1969 cannot be analyzed without taking into account the first devaluation. The adjusted rate of devaluation indicates that the second devaluation had a very limited impact on Mali’s economy. However, toward the end of 1968, the Government carried out a number of measures designed to promote the production of exports. Among these were selective increases in producer prices and new investment incentives. The effect was to raise the relative price of exports. While exports expanded substantially, there was a reduction in the production of home goods, particularly food crops, and this resulted in a substantial increase in foodstuff imports.

Cases of export contraction

Four out of 9 countries which had adjusted rates of devaluation greater than 5 per cent did not experience an expansionary effect of devaluation on exports: Cameroon, the People’s Republic of the Congo, Ivory Coast, and Mauritania. Cameroon suffered from drought in the north and heavy rain in the south, causing severe damage to agricultural production. The People’s Republic of the Congo had a decline in export volume of forestry products, partly owing to near depletion of certain species in concession areas and partly owing to a lack of adequate transportation infrastructure. Also, an export tax was imposed in 1971 on exports of logs in order to encourage the domestic wood-processing industry. Ivory Coast’s two major exports (cocoa and timber) fell substantially because of low external demand. The increased receipts from exports of coffee, another major export of the Ivory Coast, could not fully offset the setback from the cocoa and timber exports because of the quota imposed under the coffee agreement.

The remaining 5 countries whose adjusted rates of devaluations were too small to expect an expansionary effect on exports were Chad, Dahomey, Niger, Senegal, and Upper Volta. Of these, 3 countries improved their export performance due to improvement in world demand (Dahomey), the recovery from bad weather conditions (Niger), and successful development efforts (Dahomey, Senegal). The remaining two countries (Chad and Upper Volta) suffered from export shortfalls, mainly on account of bad weather conditions (Chad) and animal diseases (Upper Volta).

A summary of export performances before and after devaluation appears in Table 15.

Table 15.Group C: Summary of Quantitative Indicators
ExportsImports
Adjusted rate

of devaluation 1
Comparison of

growth rates 2
Market

share

analysis 3
Adjusted

rate of

devaluation 1
Comparison of

growth rates 2
Country(I)(II)Seven-year

average
Three-year

average
Seven-year

average
Three-year

average
Cameroon(+)(+)++
Central African Republic+(+)+
Chad+
Congo, People’s Republic of the+(+)
Dahomey++++
Gabon(+)(+)+++++
Ivory Coast(+)(+)++
Malagasy Republic(+)(+)++++
Mauritania+(+)+++
Mali(+)(+)+++++
Niger++
Senegal++++
Togo(+)(+)+++
Upper Volta+
Number of countries with positive signs307771105
Sources: Tables 12, 13, and 14.

The plus sign indicates an adjusted rate greater than 7 per cent. The plus sign in parentheses indicates a rate greater than 5 per cent.

The plus sign indicates that the three-year average growth rate in the postdevaluation period exceeds the seven-year average and three-year average growth rates in the predevaluation period.

The plus sign indicates that the difference between the acutal and theoretical value is positive.

Sources: Tables 12, 13, and 14.

The plus sign indicates an adjusted rate greater than 7 per cent. The plus sign in parentheses indicates a rate greater than 5 per cent.

The plus sign indicates that the three-year average growth rate in the postdevaluation period exceeds the seven-year average and three-year average growth rates in the predevaluation period.

The plus sign indicates that the difference between the acutal and theoretical value is positive.

imports

Adjusted and nominal rate of devaluation

While the nominal rate of devaluation was the same for exports and imports, adjusted rates of devaluation for imports were less than those of exports, because of stronger dependence on imports from the French franc area (Table 16). The market share of the area outside the French franc area was on average 43 per cent before the devaluation, so that the adjusted average rate of devaluation was only 4.8 per cent.

Table 16.Group C: Adjusted Rates of Devaluation for Imports(In per cent)
CountryMarket Share of Area Outside Group C 1Adjusted Rate of Devaluation 2
Cameroon41.04.6
Central African Republic44.24.9
Chad56.16.2
Congo, People’s Republic of the36.44.0
Dahomey43.14.8
Gabon42.84.8
Ivory Coast45.65.1
Malagasy Republic33.83.8
Mauritania41.64.6
Mali48.65.4
Niger28.13.1
Senegal45.95.1
Togo64.97.2
Upper Volta30.33.4
Unweighted group average43.04.8
Sources: International Monetary Fund, International Financial Statistics and Direction of Trade.

Market share in 1968 of area outside Group C in import market of the countries listed.

Nominal rates of devaluation times market share of area outside Group C.

Sources: International Monetary Fund, International Financial Statistics and Direction of Trade.

Market share in 1968 of area outside Group C in import market of the countries listed.

Nominal rates of devaluation times market share of area outside Group C.

Comparison of the growth rates of imports

The effect of devaluations on imports is also difficult to isolate. In particular, a significant portion of total imports was unrecorded; also, imports were made for re-export to neighboring countries. The fact that government development efforts and aid-financed imports played an important role in determining the pattern of imports in the 1960s indicates that import performances were significantly influenced by factors other than price and income during the postdevaluation period. Another difficulty is that at the time of devaluation there were changes in the import regimes, reflecting association with the EEC. In examining the growth rates of imports presented in Table 17, all these difficulties need to be kept in mind. Of the 5 countries which had some positive effects of devaluation on exports—the Central African Republic, Dahomey, Gabon, the Malagasy Republic, and Mali—only Gabon and Mali experienced an increase in the growth rate of imports after devaluation. It has to be noted, however, that imports measured in U.S. dollars would have declined without any real change in the volume of imports from the French franc area due to the devaluation of the French franc. If an adjustment is made for this decline in imports arising from the accounting unit problem, then the Malagasy Republic also experienced an increase in imports and Dahomey’s growth rate of imports did not change after devaluation.

Table 17.Group C: Comparative Growth Rates of Imports Before and After Devaluation(In per cent)
Before DevaluationAfter Devaluation
CountrySeven-year

average

(1963-69)1
Three-year

average

(1967-69)2
Two-year

average

(1970-71)2
Annual rate of growth
19701971
Cameroon7.710.015.526.94.1
Central African Republic9.24.1−3.8−10.32.7
Chad9.0216.816.223.98.5
Congo, People’s Republic of the0.92−0.9−23.7
Dahomey9.419.311.115.420.0
Gabon8.06.411.21.820.6
Ivory Coast11.126.918.224.811.6
Malagasy Republic4.79.28.9−7.425.2
Mauritania8.8225.821.730.612.8
Mali3.62−8.118.420.616.1
Niger10.13.55.819.1−7.6
Senegal1.67.25.6−1.913.1
Togo9.56.811.113.68.5
Upper Volta5.8210.60.7−7.08.4
Source: International Monetary Fund, International Financial Statistics.

Annual compound rate of growth estimated by the regression analysis.

Arithmetic average of annual rates of growth.

Source: International Monetary Fund, International Financial Statistics.

Annual compound rate of growth estimated by the regression analysis.

Arithmetic average of annual rates of growth.

These performances of imports before and after devaluation are summarized in Table 17.

VI. Conclusions

The discussion above is limited to the export-import response in a cross section of nonindustrial countries that devalued their currencies during the 1960s. The devaluations can be divided into two main groups: (1) Group A, consisting of independent and discrete devaluations, and (2) two subgroups of countries which devalued in the wake of devaluations of the pound sterling in 1967 (Group B) and the French franc in 1969 (Group C). As a rule, the devaluations in Group A were substantially larger in magnitude and in several cases occurred after a prolonged period of balance of payments difficulties, when the currency became increasingly overvalued. Meanwhile, the weak external payments position necessitated resort to various types of restrictions on imports and ad hoc supports to maintain the competitiveness of exports. The devaluation was usually the occasion to simplify and rationalize the exchange and trade system. In contrast, most of the devaluations in Groups B and C became necessary because of the close commercial and financial relations of these countries with the United Kingdom and France. They occurred not so much to correct an existing fundamental disequilibrium as to avoid unfavorable repercussions on external commercial and financial relationships. Accordingly, there are some differences in the trade response to devaluation among the two main groups of countries, particularly in the responsiveness of exports. The main conclusions are summarized below, but they can only be regarded as tentative, both because of the weak data base and because this is only a synoptic view of the experience of devaluations in nonindustrial countries.

(1) In many cases, particularly in the “independent” group of devaluations, the “effective” devaluation in terms of the impact on domestic currency prices of traded goods was substantially less than the magnitude of the “nominal” devaluation. This is in contrast to the experience of industrial countries as well as to the simplified theoretical analysis of exchange rate policy. The divergence between effective and nominal rates occurred because formal devaluation of the currency was generally preceded by ad hoc measures to encourage exports and restrain imports. Since devaluation was usually accompanied by either outright elimination or by reduction in these ad hoc measures, the net increase in the domestic currency prices received by producers of exportables and paid by the end-users of imports was substantially smaller than the nominal devaluation of the currency.

(2) The “effective” devaluation was smaller than the nominal devaluation in the countries of Groups B and C because there was a simultaneous and equivalent devaluation by their important trading partners. The potential impact on domestic currency prices of traded goods, particularly imports, would therefore be dampened, since the exchange rates connecting the devaluing currencies with each other would remain unchanged.

(3) In a substantial number of countries in Group A, export growth had slowed down in the immediate predevaluation period because the increasing overvaluation of the currency was not adequately offset by ad hoc export supports. Another reason for the slowdown was that devaluation was often precipitated by an adverse development in the predevaluation period, such as a poor crop of the export commodity or a decline in the world market price superimposed on an already weak balance of payments position.

(4) In almost all cases in Group A, export performance was significantly better in the postdevaluation three-year period, compared with both the predevaluation medium-term trend and the three-year period preceding devaluation. A major element in the postdevaluation export performance was the effectiveness of the supporting financial policies in controlling domestic demand and of the accompanying development policies in transferring resources to the export sector. These were particularly important for the growth of nontraditional exports, an important element in the export performance of many countries. Another important contributory factor in some cases was that since the devaluation was precipitated by a reversible adverse development, such as poor crops or a fall in international prices of exports, a part of the improved performance was a natural increase from the predevaluation trough. This general impression regarding postdevaluation performance of exports was confirmed when an adjustment was made for the growth of demand for imports in industrial countries.

(5) The evidence was somewhat more equivocal with respect to the supply response as measured by the growth rate in the export volume of the major primary commodities. This may be partly due to the fact that in many instances the domestic currency price received by producers of major primary product exports is set by the government and was often not changed by the same proportion as the exchange rate or was changed over time by small amounts. Also, the supply response of certain primary commodities may involve time lags.

(6) There was no tendency for imports to either accelerate or decelerate immediately prior to the devaluation, in contrast to the observable deceleration in exports. Thus, in the face of slower growth in export earnings, imports were maintained by running down reserves and relying on external borrowing. The overvaluation of the currency did not result in acceleration of imports, because of cost restrictions and administrative restrictions.

(7) In most cases, imports continued to grow after devaluation and, in a majority of cases, the growth rate exceeded the predevaluation growth rate. Thus, the increase in demand for imports stemming from the export-led higher level of domestic economic activity and from import liberalization measures was stronger than the price effect of devaluation in the opposite direction. Furthermore, the greater foreign exchange availability from higher exports and from easier access to foreign capital made it possible to translate the increase in demand into actual imports.

(8) In the group of countries that followed the 1967 devaluation of the pound sterling, nearly half experienced a significant expansionary effect of devaluation on exports. These were the countries that experienced a high “effective” rate of devaluation because their trade with other devaluing countries was relatively small. Also, these countries were relatively more advanced, and the supply of exportables was more responsive to price changes. Finally, their supporting policies were more effective and contributed to the better export performances. Approximately half of this group of countries did not experience a significant expansionary effect of devaluation on exports. The reasons were that the effective rate of devaluation was in fact small, producer prices were not increased, and in certain cases, unfavorable exogenous factors such as adverse weather conditions affected the supply of exports or there was a decline in the world market price for export products. Imports grew at a higher rate after devaluation than before in the case of Group B countries where devaluation had a positive effect on exports, indicating that the expansionary income effect was stronger than the contractionary price effect of imports.

(9) In the group of countries that followed the 1967 devaluation of the French franc, only five experienced some expansionary effects of devaluation on exports because of the low effective rates of devaluation and dominance of factors other than price incentives in the external trade. The effective rates of devaluation were low due to the low nominal rates of devaluation and the group’s strong commercial ties with France. Also these countries were at an early stage of economic development, and exports of primary products were affected by weather conditions and world demand. In this group, imports also had a tendency to increase after devaluation in countries which had positive effects on exports. The same tendency was also observed in countries whose exports grew at a higher rate, largely because of factors other than devaluation.

Mr. Bhagwat is Assistant to the Director of the Asian Department. At the time this paper was prepared, he was Assistant Chief, Stabilization Policies Division, Exchange and Trade Relations Department. Mr. Bhagwat is a graduate of the University of Bombay, India, and Yale University.

Mr. Onitsuka, an economist in the Stabilization Policies Division, Exchange and Trade Relations Department, when this paper was prepared, is now Associate Professor at Osaka University, Japan. He holds degrees from the University of Tokyo, as well as a doctorate in economics from the University of Chicago, and has contributed numerous articles to economic journals.

The authors wish to acknowledge the contribution of Miss Christine Sutton, a research assistant in the Stabilization Policies Division in the summer of 1973, to the quantitative analysis.

See R. N. Cooper, “Currency Devaluation in Developing Countries,” in Gustav Ranis, editor, Government and Economic Development (Yale University Press, 1971), pp. 472-513, for an assessment of 24 devaluations in 19 developing countries during the period 1959-66.

If the immediate response of output to devaluation is small, then the main short-run effect may be to redistribute incomes.

Or a shorter period, depending on the availability of data.

Actually 1960-70 inclusive. Situations where several devaluations occurred at short intervals and where countries followed a flexible exchange rate policy involving frequent devaluations are generally omitted.

New Zealand is included in Group B, although its devaluation was somewhat larger.

For example, the “true” depreciation of the Icelandic krona from 1959 to 1962 was probably about 30 per cent, when one considers earlier extensive de facto devaluations through export subsidies and import taxes, in contrast to the nominal devaluation of 164 per cent shown in Table 1.

This was particularly true in the case of Groups B and C countries and of some Group A countries (for example, Finland and Sri Lanka).

Percentage reduction in external value of currency. However, the reciprocal (percentage increase in rate of devalued currency per U. S. dollar or SDR, as shown in Table 1) is appropriate as an indicator of the potential percentage increase in the domestic currency prices of tradable goods.

In Iceland, where the devaluations came in two pairs (1960-61 and 1967-68), each pair is treated as a single devaluation.

Since trade flows immediately before and after devaluation are frequently affected by their anticipation and occurrence, the quantitative indicators are based on a three-year experience. Export and import data are in U. S. dollars.

As illustrated by the discussion below of individual country cases.

A severe decline in the stock and hence the catch of herring further exacerbated Iceland’s problem.

Let g1 and g2 be the predevaluation and postdevaluation growth rates. Then the rule of thumb used here is that, if g1 (0.8) < g2 < g1 (1.2), g1 and g2 are not significantly apart.

For example, Costa Rican coffee production was affected by the eruption of the Irazu Volcano. Wood exports from the Philippines decreased as a result of a policy of conserving forestry resources and promoting exports of plywood. The decrease in Sri Lanka’s tea production was due partly to adverse weather conditions and partly to a policy of reducing output and improving quality by finer plucking of leaves. A severe drought in 1966 sharply curtailed olive production in Tunisia.

Austria, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Luxembourg, Netherlands, Norway, Sweden, the United Kingdom, and the United States.

Actually, import data of the industrial countries were used.

However, the quantitative indicators in this paper refer only to the 1961 devaluation.

This is of course an imperfect measure of the devaluation effect; for example, weighting by exports to countries outside the area is inappropriate if the export price in, say, dollars is uniform in all markets, nor does it capture the increased competitiveness in countries within the area for those products for which competitors are from outside the area.

France and its overseas departments and territories (except the French territories of the Afars and Issas) and Monaco, and all other countries whose bank of issue is linked with the French Treasury by an operations account.

Chad is no longer a member of the customs union.

Ivory Coast had already done this in 1967.

In particular, the People’s Republic of the Congo reduced considerably the restriction on current transactions, including elimination of the 10 per cent surcharge on imports and the advance deposit scheme. Also, Chad, the Malagasy Republic, and Mauritania reduced their quantitative restrictions in 1968.

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