Article

Real Responses Associated with Exchange Rate Action in Selected Upper Credit Tranche Stabilization Programs

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1981
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In formulating an economic stabilization program, the use of the exchange rate as a policy instrument is frequently a source of considerable controversy and debate. It has been argued that, in certain circumstances, depreciating the currency can be a direct and powerful method of reducing real domestic expenditure and relative prices so as to divert economic resources toward the external sector, thereby improving the balance of payments, reducing inflationary pressures over the longer run, and laying the ground for sustained economic growth. It has also been suggested, however, that the behavioral responses to relative price changes may be slow and uncertain in many countries. At the same time, the potentially disruptive effects of abrupt changes in relative prices may be significant; in particular, the once-and-for-all rise in the cost of living resulting from a depreciation, and the consequent implications for the distribution of income, may have serious social and political repercussions.

By now, a considerable body of literature exists dealing with various theoretical and empirical considerations underlying these issues. This paper is not intended to add to this general body of knowledge, but rather to focus specifically on evidence provided by a selected set of stabilization programs supported by upper credit tranche stand-by arrangements in which exchange rate action played a major role. In designing these programs, it was felt that the positive results expected from a depreciation outweighed some of the potential shortcomings mentioned above. The paper’s purpose is to examine, for the programs in question, the actual outcome in relation to the intended effects for certain key variables, namely, real growth in exports and imports, growth in gross domestic product (GDP), and the rate of domestic inflation.

The experience with Fund-supported programs of balance of payments adjustment has been reviewed by Fund staff on a number of occasions. (See Reichmann and Stillson (1978) and Johnson and Reichmann (1978).) These reviews generally assessed the overall objectives, design, and outcome of a group of Fund-supported programs within different historical periods. The approach in the present paper is similar to that of Bhagwat and Onitsuka (1974), who examined actual ex post movements in exports and imports for three groups of countries that adopted different exchange rate policies. Their results indicated that significant differences in outcome were present between countries that carried out independent devaluations and those that did not. The present investigation follows the Bhagwat and Onitsuka approach by focusing on specific effects associated with exchange rate action. However, it differs in that, first, the analysis is confined to the experience of a selected set of Fund-supported programs and, second, the empirical analysis is extended to consider, in addition to movements in exports and imports, trends in real GDP growth and inflation.

It should be recognized that the analysis undertaken here needs to be interpreted with caution because “special factors” (such as adverse weather, to cite one example) may influence actual outcomes in ways unrelated to exchange rate policy or the other policy measures contemplated in the programs. To reduce the possible biases emanating from this source, first, a reasonably large group of programs (12) was chosen, so that the average outcomes measured for the entire group would reflect a mix of special factors working in different (and to some extent offsetting) directions. Second, to control for the effects of exogenous events, such as the world recession and the oil crisis of the 1970s, countries’ performances in respect of key variables were assessed not only in relation to their own past performance but also vis-à-vis average trends in those same variables for similar groups of countries during the corresponding periods. Finally, to allow for the effect of short-run distorting shocks, comparisons were undertaken both for the program period itself in relation to the immediately preceding period and for three-year periods preceding and following the program period. Longer-run comparisons of the latter type are also of particular relevance in assessing the lag with which any effects resulting from exchange rate action may become felt.

The paper is organized as follows. Section I provides a brief overview of the theoretical and empirical considerations underlying the use of exchange rate policy. Section II discusses the choice of the programs to be investigated and the main characteristics of the exchange rate action involved. Also, the principal features of the design of the various programs are summarized, including the nature of the economic problem and the evidence indicating that the exchange rate was “out of line,” the intended effects of the exchange rate action, and the principal supporting policy measures contemplated. Section III analyzes the actual outcome for the volume of exports and imports, inflation, and real growth in GDP. The comparisons in this section are undertaken both for short-run and longer-run periods and in relation to average “world” performance. Also, in some instances, the performance of certain subgroups of program countries is analyzed separately. Section IV contains a summary of the principal conclusions.

I. Role of Exchange Rate Action

By now, a considerable literature exists dealing with the theoretical underpinnings of exchange rate policy; this section only summarizes briefly some of the principal issues involved.1 Essentially, a currency depreciation brings about a reduction in the ratio of the stock of money to the domestic-currency value of goods2 and simultaneously a change in the relative prices of traded and nontraded goods. The former is expected, via the real cash balance effect, to lead to a decline in domestic expenditure on all goods, including imported goods (the “expenditure reducing” mechanism). In turn, the shift in relative prices brought about by the depreciation will tend to shift domestic demand away from traded toward nontraded goods (the “expenditure switching” effect), while the domestic producers of traded goods (exports and import substitutes) will experience increased supply incentives.

For an exchange rate action to be successful, it is essential that supporting demand management and pricing and wage policies be implemented so as to ensure that the immediate reductions in real balances and the changes in relative prices resulting from the depreciation are not subsequently offset. As Lanyi ((1980), pp. 8–9) has put it, “Such real effects [from a depreciation], however, can only take place so long as at least one nominal variable (such as money supply, prices, wage rates) has not adjusted to its predevaluation real value.”

The desired effects of a depreciation described above could in principle be obtained by reducing the nominal money supply, which would also serve to decrease real money balances and to bring about changes in the relative prices of traded and nontraded goods. However, in some circumstances, exchange rate policy, together with supporting monetary policies, may be easier to implement successfully than would be true for monetary measures alone. For instance, in situations where the external imbalances are relatively large, a reduction in the nominal money supply, and hence in nominal expenditure, may be both technically and politically difficult to implement to the extent required. On the other hand, a policy mix consisting of a depreciation and monetary policy measures that do not reduce nominal demand (or even that permit it to increase) but that succeed in lowering real demand may represent a less costly and more feasible alternative. In this regard, the choice would depend largely on the degree of rigidity present in nominal variables, such as wages and prices. Moreover, exchange rate action involves an immediate signal, as a result of a large once-and-for-all change in relative prices, that encourages a switch of resources toward the external sector. Such a shift, if it could be accomplished rapidly, would help to minimize the extent and duration of the potential loss in real output that might occur during the adjustment process. On the other hand, by its very nature, such an outcome often implies a significant change in income distribution, which may also have considerable political and social implications.3 Finally, much of the discussion regarding the effects of exchange rate policy centers around the effects on the current account (especially for developing countries). However, in certain instances, the “announcement effect” of a depreciation may help to promote a rapid revival of external confidence in the economy and may contribute to increased availability of financing and a rise in capital flows. In particular, the development of import substitution and export-oriented industries may lead to an inflow of direct investment, especially over the medium term. From this viewpoint, the role of the exchange rate in promoting an adjustment of the overall balance of payments may be of central importance.

From an empirical perspective, much of the discussion of the efficacy of exchange rate policy has been concerned with an important part of the transmission mechanism, namely, the size of the supply and demand responses of both imports and exports, respectively, to changes in relative prices. For developed countries, there is by now a substantial body of evidence indicating that the behavioral responses (for both imports and exports) can be quite significant.4 For developing countries, almost all the 15 countries examined by Khan (1974) exhibited price elasticities of import demand close to or greater than one. However, in situations where quantitative import restrictions were extensive, Brillembourg (1975) showed, as one would expect, that observed price elasticities were somewhat less. Regarding the supply elasticities for exports by developing countries, the work of Teigeiro and Elson (1973), for example, suggests that the rapid growth in nontraditional exports in Colombia was influenced largely by exchange rate movements. The high export growth rates experienced by those Asian countries that pursued an active exchange rate policy designed to promote exports also indicates some support for this hypothesis. For primary commodities, available evidence indicates that significant volume responses also are likely to be forthcoming as a result of increased domestic producer prices, although, depending on the commodity in question, the supply elasticity may be significantly greater in the long run. (See, for example, the evidence referred to in the papers by Elson (1973), Singh (1975), and Okonkwo (1978), which deal, respectively, with traditional exports in Argentina, rice production in Asia, and cocoa production in West Africa.) In this context, the responsiveness of producers to increased domestic producer prices is not reduced by the fact that most developing countries are price takers in world markets for primary commodities. Rather, being a price taker in world markets would normally facilitate the sale, at an unchanged market price, of additional domestic production stemming from increased financial incentives.

In sum, a priori theoretical considerations as well as available empirical evidence suggest that, although its use may have significant social and political consequences, exchange rate policy, in conjunction with other policy measures, can in some circumstances contribute significantly to the adjustment process. The evidence presented in the remainder of the paper seeks to shed some light on the actual experience in terms of movements in the volume of exports and imports as well as trends in real growth in GDP and inflation for a selected group of Fund-supported stabilization programs involving a choice of policy mix of this nature.

II. Design and Content of Programs Examined5

choice of programs

The programs to be analyzed were chosen with a number of considerations in mind. First, it was desired to analyze a sufficiently large number of programs so as to avoid biases inherent in the choice of a very small group. On the other hand, too large a group would make meaningful analysis of the characteristics of individual programs (or groups of programs) too unwieldy a task. Second, the desire to analyze the experience of recent programs needed to be balanced against the objective of investigating both short-run and long-run responses. This condition required that sufficient time had elapsed since the exchange rate action contained in the program had been undertaken. Third, many programs contained a commitment (often monitored via a balance of payments test) to adhere to an appropriate flexible exchange rate policy during the period of the program. It was felt that for these programs (which involved, in effect, unspecified exchange rate action to be taken during the program period if necessary) it was more difficult to compare the intended consequences of a specified exchange rate action with the actual outcome. Moreover, in many of these instances, the role of short-term capital flows in conjunction with exchange rate policy and interest rate policy was of considerable importance. Since, as indicated earlier, the purpose here is to focus on the outcome for real exports and imports (as well as GDP and inflation), it was felt that such programs involved issues going somewhat beyond the scope of this paper.

With these considerations in mind, it was decided to examine the experience of those upper credit tranche stand-by arrangements implemented during the period 1970–76 in which a once-and-for-all exchange rate devaluation played a major role. Thus, programs in which there were commitments to adopt a flexible exchange rate policy and/or which had balance of payments tests were not considered. These criteria provided a group of 12 programs for 12 separate countries, after excluding an additional 3 programs undertaken by Indonesia during this period.6

main characteristics of exchange rate action

Summary characteristics of the exchange rate action contained in the 12 programs reviewed are given in Table 1. All the programs considered were supported by second or third credit tranche arrangements except the program with Bangladesh, which involved a marginal use of the fourth credit tranche. Six programs involved devaluations of unified fixed rates that, measured in terms of the number of units of local currency per unit of foreign currency, ranged in size from 18.9 per cent (Zambia) to 68.4 per cent (Bolivia). The other six programs were more complex and included instances of the devaluation/introduction of multiple exchange rates, devaluation accompanied by unification, and devaluation accompanied by a change in the exchange system, such as switching from a floating to a fixed regime, or changing from a unitary currency peg to a basket peg. In many of these latter cases, the exchange rate action implied different effective devaluations for exports and imports. Finally, with one exception (Burma, where exchange rate action was a performance criterion), the devaluation was undertaken prior to approval of the stand-by arrangement by the Fund’s Executive Board.

Table 1.Twelve Stabilization Programs: Summary Characteristics of Exchange Rate Action, 1970–76
YearCountryProjected Fund Holdings of Country’s Currency at Expiration of Stand-By Arrangement

(As percentage of quota)
Nature of ActionSize of Depreciation1(In terms of units of local currency per unit of foreign currency)Timing
1970Ecuador168.2Depreciation/

Unification
16.0 per cent (exports)

28.0 per cent (imports)
Prior action
1971Yugoslavia142.8Depreciation20.0 per centPrior action
1972Pakistan153.9Depreciation/

Unification
20.0 per cent (exports)

40.0 per cent (imports)
Prior action
Sudan146.0Depreciation/

Multiple rates
15.0 per cent (exports)

5.0 per cent (imports)
Prior action
1973Afghanistan126.0Depreciation/

Multiple rates
Prior action
Bolivia2150.0Depreciation68.4 per centPrior action
Jamaica150.0Depreciation/

System change3
18.5 per centPrior action
1974Burma150.0Depreciation/

System change4
33.0 per centDuring program
1975Bangladesh175.4Depreciation58.2 per centPrior action
Israel150.0Depreciation42.8 per centPrior action
1976South Africa172.55Depreciation28.1 per centPrior action
Zambia206.56Depreciation18.9 per centPrior action
Sources: Individual country data.

Where relevant and available, the effective depreciation (i.e., the actual depreciation adjusted for accompanying changes in exchange taxes/subsidies) is given. Also, where a number of exchange rate actions took place in the one-year period prior to the commencement of the program, the figure shown refers to the cumulative effect of such actions. Finally, exchange rate actions taken during the period of the program (but not envisaged at the time that the stand-by arrangement was approved) are not shown.

While the arrangement was approved in early 1973, the depreciation occurred in late 1972.

Involved simultaneously a switch from a floating to a fixed system.

Involved simultaneously a linkage of the kyat to the special drawing right.

Corresponded to use of the enlarged second credit tranche policy then in existence.

Corresponded to just under full use of the enlarged third credit tranche, which was equal to 208.75 per cent of quota at the time.

Sources: Individual country data.

Where relevant and available, the effective depreciation (i.e., the actual depreciation adjusted for accompanying changes in exchange taxes/subsidies) is given. Also, where a number of exchange rate actions took place in the one-year period prior to the commencement of the program, the figure shown refers to the cumulative effect of such actions. Finally, exchange rate actions taken during the period of the program (but not envisaged at the time that the stand-by arrangement was approved) are not shown.

While the arrangement was approved in early 1973, the depreciation occurred in late 1972.

Involved simultaneously a switch from a floating to a fixed system.

Involved simultaneously a linkage of the kyat to the special drawing right.

Corresponded to use of the enlarged second credit tranche policy then in existence.

Corresponded to just under full use of the enlarged third credit tranche, which was equal to 208.75 per cent of quota at the time.

nature of economic problem and evidence that exchange rate was “out of line”

In all the cases under consideration, a marked deterioration in the balance of payments had taken place in the period immediately preceding the adoption of the program. The deterioration reflected a combination of inappropriate domestic policies as well as (in many instances) adverse developments in world markets. Generally, the growth rate of exports had been considerably below expectations, while simultaneously the growth of imports increased markedly, causing the emergence of serious trade balance and current account pressures. Depending on the degree of openness of the economy, in about half of the group, increased demand for foreign exchange led to rapid loss of reserves and, to varying extents, to the onset of an “exchange crisis.” These difficulties tended to be compounded for most of these countries by speculative capital outflows. For the other half of the group, trade and/or exchange restrictions were intensified to protect the external reserve position, thereby tending to exacerbate domestic inflationary pressures, causing further strain on the current account position.

In all cases, the major reason for undertaking exchange rate action was the emergence of significant balance of payments pressures reflected in many instances in increased restrictions on trade and payments. In some countries, owing largely to restrictions, the impact of excessively expansionary demand management policies had tended to be reflected more in intensified domestic inflationary pressures than in increased absorption through the balance of payments. Programs in those countries referred to domestic costs rising at a faster rate than foreign prices as an indicator of overvaluation. In this regard, the recent behavior of domestic inflation vis-à-vis foreign rates was described quantitatively in 5 of the 12 programs investigated. Also, in 5 programs, reference was made to specific industries or sectors that, it was suggested, had become uncompetitive; with one exception (namely, Bangladesh, where specific figures were cited), the discussion involved a qualitative assessment. Finally, in 2 programs (Afghanistan and Pakistan) that involved a depreciation cum unification exercise, in addition to emphasis on the generally weak balance of payments position, stress was laid on the allocative distortions inherent in the maintenance of the multiple exchange rate system.

In general, the quantitative analysis presented in Fund staff papers (mentioned in footnote 5) concerning the overvaluation of the exchange rate did not explicitly discuss the behavior of real effective exchange rates (i.e., movements in nominal exchange rates weighted by trading partners and adjusted for relative inflation rates). The use of these indicators involves many well-known conceptual and empirical difficulties. For example, in addition to the choice of an appropriate base period, there are often serious problems of measurement in a situation of administered prices. More fundamentally, the adequacy of any level of the exchange rate should be viewed not so much in the context of a “backward-looking” approach (i.e., whether the exchange rate is “out of line” relative to some base period) as from a forward-looking perspective, in the sense of the potential contribution that altering the rate might make to the adjustment process. Notwithstanding the above qualifications, since analyses of exchange rate policy often present this type of evidence as one of a number of approaches to assessing the appropriateness of the level of the exchange rate, it is of some interest to examine the actual behavior of real effective exchange rates for the sample countries in the period prior to the depreciation (Table 2).7

Table 2.Twelve Stabilization Programs: Behavior of Real Effective Exchange Rates, 1970–761
YearCountryRate Three Years Prior to DepreciationRate Immediately Prior to DepreciationRate Immediately Following DepreciationRate Three Years Following Depreciation
(1)(2)(3)(4)
1970Ecuador75.576.1100.0101.0
1971Yugoslavia93.983.5100.0102.9
1972Pakistan41.243.2100.074.7
Sudan81.394.3100.083.6
1973Afghanistan
Bolivia64.571.0100.073.4
Jamaica96.794.2100.086.6
1974Burma99.472.3100.076.1
1975Bangladesh115.660.5100.0117.8
Israel106.980.0100.096.5
1976South Africa88.083.6100.0105.4
Zambia94.382.0100.099.1
Sources: International Monetary Fund, International Financial Statistics; individual country data.

Average of real import-weighted and export-weighted exchange rates, expressed in units of local currency per unit of foreign currency, that is, a higher value indicates a real depreciation. Series indexed at date immediately following the depreciation = 100.

Sources: International Monetary Fund, International Financial Statistics; individual country data.

Average of real import-weighted and export-weighted exchange rates, expressed in units of local currency per unit of foreign currency, that is, a higher value indicates a real depreciation. Series indexed at date immediately following the depreciation = 100.

During the three-year period before the depreciation (columns 1 and 2), the real effective exchange rate had appreciated in 7 of the 11 programs for which a series could be constructed; in most cases, the appreciation had been of a significant amount and reflected the domestic inflationary impact of excess demand pressures. The 4 remaining programs were instances where the imbalance between the supply of and demand for resources had tended to be reflected to a relatively larger extent in balance of payments deficits than in extremely high domestic inflation rates.8 In a majority of cases, however, the evidence from effective exchange rate calculations would have been consistent with the view that the exchange rate was overvalued to some extent.

It is also interesting to observe that in five of the seven programs in which the depreciation action could be viewed partly as seeking to counteract a prior real appreciation of the currency, the immediate result of the exchange rate action was a somewhat more depreciated value for the real exchange rate than the value prevailing at a point three years previously. (Compare columns (1) and (3) of Table 2.) However, it is recognized that these types of calculation are not intended to produce precise conclusions, especially considering the difficulties in assessing an appropriate ”equilibrium” base period. Also, it should be borne in mind that there is a likely need to aim for a slight “overshoot” initially, in view of the partial offset to the initial gain in competitiveness even with appropriate supporting policies that would occur, as a result of the effect of the depreciation on domestic costs and prices.

intended effects of exchange rate action

All the programs viewed exchange rate action as facilitating a reallocation of resources into the sector producing traded goods. Most emphasized the trade balance effects, although in some cases other effects were considered to be of sufficient importance to be mentioned specifically, for example, the positive budgetary impact (Burma and Ecuador), the effect on remittances (Pakistan and Yugoslavia), the stimulus afforded to capital flows and direct investment (Bolivia and Jamaica), and the overall allocative improvements that were expected to result (Afghanistan and Pakistan).

As regards the trade account, all programs anticipated a significant improvement in export performance, measured in real terms, as a result of the increased incentives and profitability provided to the external sector. In roughly half the cases, however, the programs expected that the improvement would take some time and cautioned against expecting early results; this was particularly true for Afghanistan, Burma, and Zambia, where an important objective was to encourage the production and export of nontraditional exports. In the remaining countries, however, a more immediate turnaround was hoped for, in some instances reflecting such factors as a previous buildup of speculative stocks and a slowdown of export deliveries.

As regards imports, the expected outcome varied widely between the programs, reflecting the different structural and institutional characteristics of the economy. In six countries (Bolivia, Ecuador, Israel, Jamaica, South Africa, and Yugoslavia), the programs tended to stress the “expenditure reducing” effect of the depreciation causing a reduction in real incomes and real import demand. Also, in these cases, an important short-run aspect involved the anticipated running down of speculative stocks of imported goods accumulated in the period prior to the depreciation. For another group of developing countries (Bangladesh, Burma, Pakistan, and Sudan), the depreciation was to be accompanied by a major liberalization of imports; thus, the net intended effect of the depreciation cum liberalization measures was to raise the level of actual imports in the immediate postdepreciation period. These programs, however, stressed the longer-run benefits in terms of improved allocation of import demand that would result. Finally, two programs (for Afghanistan and Zambia) contained characteristics present in both of the preceding two subgroups and could not be said to belong predominantly to either category.

It is interesting to note, in view of the discussion in Section I concerning the channels through which exchange rate action might work, that the programs generally did not appear to place large emphasis explicitly on the possible import-substituting effects of the depreciation. In two countries, the likelihood of increased import substitution was dealt with specifically, namely, South Africa (where reference was made to the overall effects on the import-substituting sector) and Zambia (where the domestic production of import-competing agricultural commodities was analyzed). This relative lack of explicit emphasis could reflect, first, the continuation of high levels of import protectionism in many of the countries under consideration and, second, the major data difficulties involved in analyzing explicitly in a quantitative way the timing and extent of the possible response of import-competing firms.

All the programs, noting that the purpose of the exchange rate action was to facilitate the redeployment of domestic resources into the external sector, stressed the crucial importance of implementing suitable supporting measures so as not to vitiate the initial impact of the depreciation. Accordingly, all programs contained detailed supporting demand management measures, including (in most cases) pricing and wages policy measures. Also, as noted above, a commitment to liberalize imports was an important feature of many programs and was viewed as a further measure to improve resource allocation in the domestic economy.

Concerning demand management policies, attention focused largely on the rate of expansion of credit and money, and in most instances, a sharp reduction in the growth rates of these variables was envisaged. Major emphasis was given to the implementation of fiscal measures (in addition to those instances in which the depreciation per se would exercise a net favorable impact on the budget). Typically, a reduction in real budgetary expenditure was contemplated (most notably in the area of current expenditure) so as not to allow the cost-increasing effect of the depreciation to be offset by corresponding higher nominal expenditure, especially on wages, salaries, and subsidies. Many programs also contained additional discretionary revenue measures, as well as, in relevant cases, commitments to significant improvements in tax administration.

In the area of pricing and wages policy, most programs intended the higher export prices to be reflected in increased incentives in the export sector and also the higher import costs to be passed through to retail prices. In the majority of cases, the intention to implement this policy was specified in a general way. Regarding wages policy, four programs (for Bolivia, Israel, South Africa, and Yugoslavia) discussed explicitly the policy intentions of the authorities and their consistency with the achievement of the program’s objectives. However, even in these latter instances, there was generally some uncertainty as to how firmly (and for how long) the wage guidelines intended by the authorities could be adhered to.

III. Outcome

In this section, the outcome of the programs is examined from the perspective of the actual performance of certain specific variables, namely, the volume of exports and imports, real GDP, and inflation. In examining these issues, the analysis is conducted on both a short-run and a long-run basis and in relation to the “average world performance” for the variables in question.9

exports10

Table 3 presents summary information on the extent to which program countries experienced an improvement in their real export growth, a major objective of all the programs investigated. Comparing the one-year periods immediately prior to and following the depreciation, one finds that the results are mixed. In both absolute and relative terms, an improvement occurred under only half the programs.11 However, when comparisons over the three-year predepreciation and postdepreciation periods are undertaken, of 11 programs in the sample, 128 experienced an absolute improvement in real export growth. Of the 11 programs, 8 also experienced a relative improvement, adjusting for the “world average” growth rate. This evidence thus would be consistent with the view, explicitly expressed in many programs, that the beneficial effects on exports resulting from a depreciation would tend to be more significant in the longer run.

Table 3.Twelve Stabilization Programs: Comparative Export Performance
Absolute Comparison1Relative Comparison2
Total ProgramsPrograms experiencing improvementPrograms not experiencing improvementPrograms experiencing improvementPrograms not experiencing improvement
One-year comparison126666
Three-year comparison3118383
Sources: International Financial Statistics, individual country data.

That is, comparison of annual average growth rate of real exports during predepreciation and postdepreciation periods.

That is, comparison of difference between annual average growth of real exports of program country and “world” average during predepreciation and postdepreciation periods.

Excludes Pakistan, owing to unavailability of sufficient data for the predepreciation period.

Sources: International Financial Statistics, individual country data.

That is, comparison of annual average growth rate of real exports during predepreciation and postdepreciation periods.

That is, comparison of difference between annual average growth of real exports of program country and “world” average during predepreciation and postdepreciation periods.

Excludes Pakistan, owing to unavailability of sufficient data for the predepreciation period.

On the question of the magnitude of the changes in trend, Table 4 presents quantitative information on the actual average growth rate of the volume of exports experienced by the program countries. Based on a simple unweighted arithmetic average of individual growth rates, and considering all programs together, the data indicate that a very significant improvement occurred on average. For example, the average real growth rate rose from -1.3 per cent in the year prior to the depreciation to 9.2 per cent in the first postdepreciation year. Relative to world performance, a similarly marked improvement was registered; in the postdepreciation year, average real export growth for program countries rose by almost 11 percentage points and exceeded by a considerable margin the real growth in “world” exports, which rose only slightly. This performance was sustained during a three-year period, where a substantial absolute and relative improvement also was recorded.

Table 4.Twelve Stabilization Programs: Comparative Export Performance—Annual Average Change in Export Volume(In per cent)
Before AdjustmentAfter Adjustment
Program countries’ averageWorld average1Program countries’ averageWorld average1
one-year comparison
All programs−1.37.29.27.6
Bolivia, Jamaica, and Zambia2.38.77.09.3
Others−2.56.69.97.0
Of which,
Import-liberalization programs2−2.77.615.38.6
three-year comparison3
All programs0.37.66.56.1
Bolivia, Jamaica, and Zambia2.07.7−2.15.5
Others−0.37.610.16.3
Of which,
Import-liberalization programs4−8.98.16.35.6
Sources: International Financial Statistics; individual country data.

Average non-oil developing countries’ export growth for the corresponding period(s), except for Israel and South Africa, where the comparator is the real export growth of industrial nations. Averages differ, owing to varying periods associated with different program groupings.

Bangladesh, Burma, Pakistan, and Sudan.

Excludes Pakistan, owing to unavailability of sufficient data for the predepreciation period.

Bangladesh, Burma, and Sudan.

Sources: International Financial Statistics; individual country data.

Average non-oil developing countries’ export growth for the corresponding period(s), except for Israel and South Africa, where the comparator is the real export growth of industrial nations. Averages differ, owing to varying periods associated with different program groupings.

Bangladesh, Burma, Pakistan, and Sudan.

Excludes Pakistan, owing to unavailability of sufficient data for the predepreciation period.

Bangladesh, Burma, and Sudan.

These averages conceal important differences between individual countries. When the countries are examined separately, it is apparent that three countries in particular failed to exhibit any significant export improvement. In Bolivia, Jamaica, and Zambia, the volume of exports declined on average during the three-year postdepreciation period.13 Accordingly, Table 4 contains adjusted calculations for the subgroup of what might be described, in terms of achieving the export objective, “more successful” programs, at least in a relative sense. In both the one-year and three-year comparisons, as one would expect, the improvement for this subgroup is more marked than for the group as a whole. For instance, on a three-year comparative basis, export performance increased from a roughly stagnant situation of zero growth on average to an annual growth of more than 10 per cent, while world export growth actually declined over the same comparative periods. Finally, it is of interest that for the group of programs identified in the preceding section as “import-liberalization” programs, 14 the extent of the real export improvement was noticeably higher than the average for the group of more successful programs. Thus, for this group, the growth of export volume rose by 18 and 15 percentage points, respectively, on a one-year and a three-year comparative basis. These trends should also be viewed against the actual outcome for import growth in these programs, which is discussed in the following subsection. However, such an outcome is not a priori surprising, as the input shortages resulting from the prior restrictiveness of the import system in all probability had hitherto exercised a major restraining effect on exports.

It is worth remarking, in view of the discussion in Section I regarding the response of primary commodities to price incentives, that for most of the countries in the sample, primary commodities comprised a very large proportion of their total exports. For example, considering 9 of the 12 countries for which data are readily available 15 and including only those commodities that can be identified separately, one sees that the share of primary commodities in total exports in the year prior to the depreciation averaged more than 85 per cent. Thus, it appears most likely that primary commodities contributed significantly to the overall average improvement that took place.

The preceding comparisons are subject to many distortions, and, in particular, the numbers cited should be treated only as qualitative indicators. Nevertheless, the results are quite striking. The evidence presented would be consistent with the conclusion, first, that on average, exchange rate devaluations were associated with a significantly improved export performance for the programs under consideration and, second, that this improvement, to the extent that it occurred, was more in evidence over a longer period.

imports16

As discussed in the subsection, intended effects of exchange rate action, the intended effects of the depreciation on imports varied widely between programs. In some, the depreciation was expected to lower import demand directly, mainly via the “expenditure reducing” effect; in others, although that effect was also expected to exert some influence, there was a possibility that it might be outweighed by the impact of the intended import liberalization. Thus, generalizations are difficult to draw for the program group as a whole.

In Table 5, data on the behavior of real imports are presented. The behavior of imports alone, however, is less interesting than their behavior in relation to other variables. Accordingly, Table 5 also contains data on the differential growth rates between imports and exports, so as to examine the significance of one important factor, namely, an increase in imports related directly to higher exports.17

Table 5.Twelve Stabilization Programs: Annual Average Change in Real Imports(M)and Exports(X)(In per cent)
Before AdjustmentAfter Adjustment
MM − XMM − X
one-year comparison
All programs1.12.43.5−5.1
Of which,
Import-liberalization programs1−0.91.817.32.0
Import-restraint programs21.40.41.5−2.8
Excluding Bolivia and Jamaica0.31.83.0−4.8
three-year comparison
All programs33.22.14.0−2.5
Of which,
Import-liberalization programs1−7.81.611.34.9
Import-restraint programs28.43.82.5−5.0
Excluding Bolivia and Jamaica10.45.9−0.4−12.3
Sources: International Financial Statistics, individual country data.

Bangladesh, Burma, Pakistan, and Sudan.

Bolivia, Ecuador, Israel, Jamaica, South Africa, and Yugoslavia.

Excludes Bangladesh and Pakistan, owing to unavailability of data.

Sources: International Financial Statistics, individual country data.

Bangladesh, Burma, Pakistan, and Sudan.

Bolivia, Ecuador, Israel, Jamaica, South Africa, and Yugoslavia.

Excludes Bangladesh and Pakistan, owing to unavailability of data.

Ignoring first the question of program heterogeneity, when the entire group is considered, one finds that average real import growth was somewhat higher in both the short-run and long-run postdepreciation periods than in the corresponding predepreciation period. This is not an unexpected outcome, given the import-liberalization elements contained in many programs and the easing of the foreign exchange constraint. However, when differential export and import growth rates are considered, a significant reversal of trend appears to have occurred. That is (again for both short-run and long-run comparisons), prior to the depreciation, the growth of real imports exceeded that of exports, while in the postdepreciation periods, the reverse was true. Thus, over all, it would appear that the real component of the trade balance moved in the intended direction.

Of more interest, however, is the behavior of the two subgroups of programs, which can be identified separately. For the so-called import-liberalization programs, not surprisingly, imports grew sharply following the depreciation. When the outcome is standardized for the simultaneous behavior of exports, much of this higher growth was offset by an improvement in export performance, which as noted above was considerably better for this subgroup than for all programs. However, when both the short run and long run are considered, the growth of imports adjusted for that of exports was still somewhat higher following the depreciation. A net turnaround in the real trade account might not necessarily have been aimed for, however, depending on other factors affecting the current account, such as the terms of trade and, perhaps most important, expected movements in the capital account.18

For the second group of countries identified separately, namely, those in which a sharp reduction in import demand was expected (termed, for convenience, import-restraint programs)19 in the short run, import growth remained roughly the same. However, over a three-year period, a sharp reduction occurred, with average growth being reduced from 8 per cent to 3 per cent. Adjusting for export growth produces some net improvement in the short run, with a more marked change occurring when a longer period is analyzed. Finally, since this group of programs includes two countries where, in terms of export performance, there is reason to believe that the programs were relatively unsuccessful (namely, Bolivia and Jamaica), the results were recalculated excluding these countries. For this adjusted subgroup (namely, Ecuador, Israel, South Africa, and Yugoslavia), a noticeable reversal of trend took place. While import growth was somewhat higher in the short run, when adjusted for export growth, a reversal occurred. In the longer run, import growth declined sharply from an annual rate of 10 per cent to near zero, while the percentage point differential between real import and export growth changed from +6 (reflecting higher import growth) to −12.

Over all, therefore, while the outcome for imports is more difficult to analyze, it would appear that at least for a subgroup of import-restraint programs, a significant reduction in imports can be identified as having occurred. For another group, namely, liberalization programs, both real imports and exports rose sharply. While the predepreciation trend in relative growth rates of imports and exports was not reversed, it did not worsen significantly, notwithstanding the liberalization itself. Also, for the entire group of programs, the trend in exports and imports was noticeably reversed.20

Finally, Section I stressed the importance of implementing adequate supporting policy measures to ensure that the changes in relative prices induced by the depreciation are not subsequently offset. In view of the reasonably satisfactory outcome regarding trends in the volume of exports and imports indicated by the evidence just described, it is of some interest to assess to what extent the intended accompanying measures were implemented in the program countries. The implementation of financial policy measures and the postdepreciation trends in inflation and competitiveness are discussed in the following subsection. As regards measures to ensure that the exchange rate change was felt in the domestic-currency prices (for both producers and consumers) of traded goods, clear-cut judgments are difficult, owing to the lack of specific data in many instances. However, based on available descriptive evidence, it appears that for almost all increases in producer prices, the effects of the depreciation were generally reflected in higher incentives for domestic suppliers. On the other hand, the pass-through of higher import costs to retail prices was less complete in several instances. Finally, as regards the intention to prevent nominal wages and incomes from rising to offset the reduction in real income associated with the depreciation, significant slippages appear to have occurred in a number of cases.

inflation

In view of the effects of a depreciation on domestic prices noted in Section I, it is of some interest to examine the actual outcome for inflation rates in the countries concerned. The data in Table 6 indicate that in the first year of the program, most countries (9 out of 12) experienced an increase in their inflation rates. Although in the majority of programs some reduction in inflation rates had been sought, it appears that this objective was not generally achieved. Inflation performance was not improved over a longer period either; on a three-year basis, the inflation rate was reduced in only 4 out of 12 countries. Standardizing for the “world” average inflation rates does not alter this result.

Table 6.Twelve Stabilization Programs: Comparative Inflation Performance
Absolute Comparison1Relative Comparison2
Total ProgramsPrograms experiencing improvementPrograms not experiencing improvementPrograms experiencing improvementPrograms not experiencing improvement
One-year comparison123948
Three-year comparison124848
Sources: International Financial Statistics; individual country data.

That is, comparison of annual average inflation rates during predepreciation and postdepreciation periods.

That is, comparison of difference between annual average inflation rates of program country and “world” average during predepreciation and postdepreciation periods.

Sources: International Financial Statistics; individual country data.

That is, comparison of annual average inflation rates during predepreciation and postdepreciation periods.

That is, comparison of difference between annual average inflation rates of program country and “world” average during predepreciation and postdepreciation periods.

Turning to quantitative measures, in the immediate postdepreciation period, one sees that the average inflation rate for all countries (measured by changes in the consumer price index) was about 1 percentage point higher than before (Table 7). In considering this outcome, it should be borne in mind that the use of the consumer price index, rather than (for example) the GDP deflator or movements in costs (for which sufficient data are not available), tends to bias the postdepreciation inflation performance unfavorably, at least from the perspective of assessing changes in relative competitiveness. Thus, for the group in question, the direct effect on prices of the depreciation itself averaged almost 9 percentage points.21 The foregoing overall comparison also is somewhat distorted by the presence in the group of three especially high-inflation rate countries (Bangladesh, Bolivia, and Israel) with inflation rates of between 30 per cent and 60 per cent. When the data were adjusted to exclude the above-mentioned countries, the postdepreciation inflation rate on average was almost twice the predepreciation rate. For this subgroup, after allowing for the direct effect of the depreciation, which was estimated to be on average about 5 percentage points, it is apparent that the “underlying” inflation rate, net of the initial price rise induced by the depreciation, increased significantly. Over the three-year period, program countries’ annual inflation rates also rose markedly, by about 5–7 percentage points on average, depending on whether the three high-inflation countries are included or not; the direct inflationary contribution of the depreciation on an annual basis was about 2–3 percentage points.

Table 7.Twelve Stabilization Programs: Comparative Inflation Performance—Annual Average Change in Consumer Prices(In per cent)
Before AdjustmentAfter Adjustment
Program countries’ averageWorld average1Program countries’ averageWorld average1
one-year comparison
All programs14.314.915.717.7
Excluding Bangladesh, Bolivia, and Israel7.114.113.817.2
three-year comparison
All programs12.812.817.319.8
Excluding Bangladesh, Bolivia, and Israel8.412.515.319.8
Sources: International Financial Statistics; individual country data.

Average non-oil developing countries’ inflation, except for Israel and South Africa, where the comparator is the inflation performance of industrial nations. Averages differ, owing to varying periods associated with different program groupings.

Sources: International Financial Statistics; individual country data.

Average non-oil developing countries’ inflation, except for Israel and South Africa, where the comparator is the inflation performance of industrial nations. Averages differ, owing to varying periods associated with different program groupings.

In addition to the reservations already expressed concerning the use of the consumer price index, the above-mentioned outcome should also be viewed in the light of world inflation rates. During the same comparative periods, world inflation rates also rose by 4 percentage points on a one-year comparative basis, and by 7 percentage points when the three-year periods are examined. These increases are roughly in line with those experienced by program countries. Thus, although inflation was not reduced on average, a deterioration of individual country positions vis-à-vis the “world average” was prevented, despite the significant inflationary bias on consumer prices caused by the depreciation itself.22

Finally, in view of the continuation of relatively high inflation rates in many program countries, the postdepreciation behavior of real effective exchange rates is of some interest (Table 2). In 6 of 11 programs23 comparing the level three years after the depreciation with the level immediately following the exchange rate action, the real effective exchange rate did not indicate any significant appreciation (and, in some instances, the currency concerned depreciated further). However, in 3 of those instances (Israel, Yugoslavia, and Zambia), the maintenance of relative competitiveness occurred despite high rates of domestic inflation and was the result of the authorities’ decision to depreciate the currency further on a number of occasions during the three-year period.24 In the remaining 5 programs, high domestic inflation rates (at any rate, according to this indicator) caused a significant erosion of the gain in competitiveness resulting from the original depreciation.

real GDP

As suggested in Section I, the effect of exchange rate action on real GDP depends on the speed and extent to which resources move into the traded goods sector. While direct empirical analysis of these channels is difficult to undertake, examination of the actual outcome for rates of growth in GDP is a useful way of determining whether any systematic effects may be present. Indicators of comparative economic growth performance are presented in Table 8. First considering all programs, one finds no evidence of the programs on average being associated with a noticeable downward bias in the growth in economic activity, either in the immediate postdepreciation period or in the context of a longer period. In the short run, a majority of program countries experienced higher growth rates.

Table 8.Twelve Stabilization Programs: Comparative Economic Growth Performance
Postdepreciation Growth Compared with Predepreciation Growth
Total ProgramsPrograms experiencing improvementPrograms not experiencing improvement
one-year comparison
All programs11183
Import-restraint programs2633
Excluding Bolivia and Jamaica422
Other programs550
three-year comparison
All programs10355
Import-restraint programs2615
Excluding Bolivia and Jamaica413
Other programs440
Sources: International Financial Statistics; individual country data.

Excludes Afghanistan, owing to unavailability of data.

Bolivia, Ecuador, Israel, Jamaica, South Africa, and Yugoslavia.

Excludes Afghanistan and Bangladesh, owing to unavailability of data.

Sources: International Financial Statistics; individual country data.

Excludes Afghanistan, owing to unavailability of data.

Bolivia, Ecuador, Israel, Jamaica, South Africa, and Yugoslavia.

Excludes Afghanistan and Bangladesh, owing to unavailability of data.

In subgroups of programs, however, some trends are discernible. Previously, a subgroup of programs was distinguished, termed import-restraint programs (Bolivia, Ecuador, Israel, Jamaica, South Africa, and Yugoslavia). As has been indicated, this group of programs generally tended to place relatively more stress on the strategy of a sharp reduction in real expenditure as leading to the projected reduction in import demand. In these cases, it is of interest to examine whether the reduction in expenditure might have been associated with some downturn in economic growth rates.25 In the short run, over all, this outcome does not appear to have occurred, as GDP growth rates rose during the immediate postdepreciation period for half of the cases in this subgroup. On the other hand, within a longer period, five of the six program countries in this category registered a comparatively lower growth performance following the depreciation. Excluding Bolivia and Jamaica, economic growth declined in three of the four remaining programs. By contrast, economic growth increased sharply in all the other programs (of which the “liberalization programs” form the largest component) both from a short-run and a long-run perspective.

Quantitative data provided in Table 9 (which includes data on trends in average world growth rates) provide a roughly similar picture. For all programs, economic growth rates were on average either higher (in the short run) or about the same (over a three-year period). Irrespective of the period of comparison, economic growth in the import-restraint programs declined, while in the remaining group, the reverse was true and economic growth rose markedly. The patterns indicated by these data are by and large unaltered when performance is measured against average “world” performance.

Table 9.Twelve Stabilization Programs: Comparative Growth Performance—Annual Average Change in Real GDP(In per cent)
Before AdjustmentAfter Adjustment
Program countries’ averageWorld average1Program countries’ averageWorld average1
one-year comparison
All programs23.54.45.65.1
Import-restraint programs35.53.74.05.0
Excluding Bolivia and Jamaica4.83.05.04.2
Other programs1.15.27.64.2
three-year comparison
All programs44.55.23.95.1
Import-restraint programs36.54.83.45.0
Excluding Bolivia and Jamaica6.44.33.94.7
Other programs1.45.94.85.3
Sources: International Financial Statistics; individual country data.

Average non-oil developing countries’ export growth for the corresponding period(s), except for Israel and South Africa, where the comparator is the real export growth of industrial nations. Averages differ, owing to varying periods associated with different program groupings.

Excludes Afghanistan, owing to unavailability of data.

Bolivia, Ecuador, Israel, Jamaica, South Africa, and Yugoslavia.

Excludes Afghanistan and Bangladesh, owing to unavailability of data.

Sources: International Financial Statistics; individual country data.

Average non-oil developing countries’ export growth for the corresponding period(s), except for Israel and South Africa, where the comparator is the real export growth of industrial nations. Averages differ, owing to varying periods associated with different program groupings.

Excludes Afghanistan, owing to unavailability of data.

Bolivia, Ecuador, Israel, Jamaica, South Africa, and Yugoslavia.

Excludes Afghanistan and Bangladesh, owing to unavailability of data.

Thus, since a particularly noticeable improvement in the trade account of the import-restraint subgroup occurred (as shown in the subsection, IMPORTS), it can be suggested that to secure improvements in the trade balance, these programs applied a relatively strong dose of contractionary demand policies. Those policies may have contributed indirectly to some initial reduction in the rate of economic growth;26 indeed, this outcome would be consistent with the intentions stated explicitly in most of these programs. Also, in a number of these cases, it appears that somewhat contractionary policies continued to be pursued beyond the first year of the program. By contrast, in the remaining programs where a link between the implementation of the stabilization program and economic growth was not so explicitly envisaged, economic growth on average improved in both the short run and the longer run. On average, these latter countries also experienced some turnaround in their external position, although the improvement was less marked than for the import-restraint subgroup.

IV. Conclusions

The empirical evidence presented in this paper should be interpreted with some important qualifications in mind. First, the use of aggregative comparisons may conceal important variations in the experiences of individual countries, although, where appropriate, the analysis tried to distinguish between country subgroups that displayed broadly similar characteristics. Second, in some instances, undoubtedly, special factors that had little to do with either the programs’ design in general or the impact of the exchange rate action in particular may have played an important role in determining the outcome for certain variables. However, here also the analysis attempted to allow for the impact of these special “shocks” both by looking at the outcome in a long-run as well as a short-run perspective and by comparing results with the “world average,” thereby attempting to control for one major shock—the recession and oil crisis of the 1970s.

Notwithstanding the preceding reservations, the investigation provides some useful analysis of the design and outcome of a group of stabilization programs in which exchange rate action played a major role, from the viewpoint of what actually happened to economic performance in the countries under review. Among the more interesting conclusions that emerged are the following:

1. In all cases, the major reason for undertaking exchange rate action was the emergence of significant balance of payments pressures, reflected in many instances in increases in restrictions on trade and payments. Specific sectoral evidence was referred to in a smaller number of cases, and then usually in a qualitative way. In about half the instances, relatively high domestic rates of inflation were cited specifically as suggesting an overall loss of competitiveness leading to a situation of currency overvaluation. Ex post analysis of real effective exchange rates indicates that in about half the programs, the real effective exchange rate had appreciated significantly in the period prior to the taking of exchange rate action.

2. The intended effects of the exchange rate action were focused to a considerable extent on an expected improvement in export performance. In some instances, programs explicitly recognized that the intended response of exports might take some time to materialize. As regards imports, two subgroups among the programs examined could be identified: first, those programs that expected a significant reduction in real import demand to occur as a result of the “expenditure reducing” effect of the depreciation (termed, for convenience, the import-restraint subgroup); and second, a subgroup where the depreciation was to be accompanied by a substantial liberalization of imports, thereby suggesting that real imports might be intended to rise in the postdepreciation period.

3. On average, actual export performance (in real terms) in the postdepreciation period exhibited a striking improvement. There is some evidence that the improvement was more marked when performance over a longer-run (i.e., three-year) period is examined. The improvement is especially striking in relation to the average behavior of “world” export growth (in most cases taken to be that of non-oil developing countries). It was also most marked for the “liberalization” subgroup. However, the improvement was not universal, and three programs in particular experienced export declines during the postdepreciation period.

4. The outcome for the volume of imports was more mixed. On average, real import growth tended to rise somewhat. However, a noticeable decline was registered for the import-restraint subgroup. Moreover, for these latter countries, while imports grew more rapidly than exports in the predepreciation period, this trend was reversed sharply following the depreciation, especially when a longer-run comparison is made. For the liberalization subgroup, on the other hand, import growth accelerated sharply in the postdepreciation period, partly reflecting the expansionary effect of the liberalization policy measures. However, a large part (but not all) of this trend was offset by an accompanying faster rate of export growth.

5. Somewhat less progress was achieved on average in reducing inflation rates as measured by changes in consumer prices, in an absolute sense. After taking into account the once-and-for-all inflationary effect of the depreciation, however, some improvement occurred in a relative sense (i.e., compared with world inflation rates). Excluding a small number of extreme high-inflation countries, the average inflation rate almost doubled in the first postdepreciation year and increased by about 7 percentage points in a three-year comparison. However, during the corresponding periods, world inflation rates rose by roughly the same amount, while the once-and-for-all inflation effect of the depreciation contributed about 2 percentage points per annum on average for this latter subgroup.

6. Over all, there is no evidence that the programs on average were associated with any systematic bias in economic growth as measured by changes in real GDP. For the import-restraint subgroup, however, average growth declined sharply, not only in the short run but also in a longer-run perspective. For the remainder of the programs, however, the reverse held, with average real growth in GDP being markedly higher, irrespective of the period of comparison. These conclusions are unaltered if one analyzes growth performance in relation to the “world” average.

REFERENCES

    BhagwatAvinash and YusukeOnitsuka“Export-Import Response to Devaluation—Experience in the 1960s of the Nonindustrial Countries,”Staff PapersVol. 21 (July1974) pp. 41462.

    BrillembourgArturo“Specification Bias in the Demand for Imports: The Case of the Grancolombian Countries” (unpublishedInternational Monetary FundApril141975).

    ElsonR. Anthony“Exchange Rate Policy and the Performance of Traditional Experts in Argentina (1946–70)” (unpublishedInternational Monetary FundDecember71973).

    GoldsteinMorris“Have Flexible Exchange Rates Made Macroeconomic Policy More Difficult: A Survey of the Issues and the Evidence” (unpublishedInternational Monetary FundFebruary141980).

    JohnsonG. G. and Thomas M.Reichmann“Experience with Stabilization Programs Supported by Stand-By Arrangements in the Upper Credit Tranches, 1973–75” (unpublishedInternational Monetary FundFebruary281978).

    KhanMohsin S.“Import and Export Demand in Developing Countries,”Staff PapersVol. 21 (November1974) pp. 67893.

    LanyiAnthony“External Economic Problems of Developing Countries: Recent Research by the Fund Staff” (unpublishedInternational Monetary FundFebruary211980).

    OkonkwoUbadigbo“Export Taxes on Primary Products in Developing Countries: The Taxation of Cocoa Exports in West Africa” (unpublishedInternational Monetary FundNovember291978).

    ReichmannThomas M. and Richard T.Stillson“Experience with Programs of Balance of Payments Adjustment: Stand-By Arrangements in the Higher Tranches, 1963–72,”Staff PapersVol. 25 (June1978) pp. 293309.

    SinghAnoop“Sri Lanka: The Response of Paddy Producers to Price Stimuli” (unpublishedInternational Monetary FundSeptember21975).

    TeigeiroJosé D. and R. AnthonyElson“The Export Promotion System and the Growth of Minor Exports in Colombia,”Staff PapersVol. 20 (July1973) pp. 41970.

Mr. Donovan, economist in the Stand-By Programs Division of the Exchange and Trade Relations Department, is a graduate of Trinity College, Dublin. He received his doctorate from the University of British Columbia.

For a thorough treatment, see, for example, the survey by Lanyi (1980).

“Goods” in this discussion also includes services.

For example, in many non-oil developing countries, a “successful” devaluation may well have an income-redistributive effect away from the politically sensitive urban population to the rural areas.

See, for example, the references in Goldstein (1980), pp. 51–58.

The discussion in Sections II and III relies on information contained in papers prepared by the Fund staff for the Executive Board and in published Fund documents.

During the period 1970–76, of 62 upper credit tranche stand-by arrangements approved by the Fund, 29 involved exchange rate action. Among the latter group, 13 programs involved a commitment to flexible exchange rate policy. Among the remaining 16, the program for Korea contained a balance of payments test, while it was decided to exclude the 3 programs undertaken by Indonesia (in 1970, 1971, and 1973) on the grounds (a) that a rapid succession of programs made it extremely difficult to analyze coherently preprogram and postprogram performance and (b) that the oil boom in 1973 significantly distorted the postdepreciation outcomes for that country. The extended arrangement approved for Mexico (in 1976) also contained exchange rate action; however, this case was not considered, owing to the large impact of additional oil revenues on the program’s outcome.

The series for real effective exchange rates were calculated in a uniform manner for all countries using an average of end-period monthly import-weighted and export-weighted nominal exchange rates deflated by relative consumer price indices; the trade weights were based on data referring to the eight largest trading partners in each case for the year immediately prior to the depreciation.

This group also included at least one country (Bolivia) where, although relative competitiveness had not deteriorated in the three-year period immediately prior to the depreciation, during earlier periods the economy had experienced inflation rates in excess of those of its trading partners without any exchange rate adjustment taking place.

“Average world performance” was taken to be that of the average non-oil developing countries, except for Israel and South Africa, where the comparator is the average performance of industrial countries.

For most countries, export volume changes were calculated on the basis of data for export value and average export unit value given in International Financial Statistics (IFS). For countries for which such data were not available, volume indices were constructed directly from disaggregated export data contained in papers prepared by the Fund staff.

The “relative” comparison was undertaken by comparing, for each program, performance in the postdepreciation period with average world performance during that same period.

Pakistan is excluded, owing to the unavailability of sufficient data for the predepreciation period.

For Bolivia, real exports also declined in the first postdepreciation year, while for Jamaica, a decline in the growth rate was recorded (although it still remained positive). Exports rose sharply in Zambia, however, during the first year, before declining thereafter.

Bangladesh, Burma, Pakistan, and Sudan.

Afghanistan, Bangladesh, Bolivia, Burma, Ecuador, Jamaica, Pakistan, Sudan, and Zambia.

As with exports, for most countries, import volume data were based on IFS data. However, in some instances, where an import unit-value index was not available, the average import unit-value index of all non-oil developing countries was used to deflate the import value series.

Use of another possible measure of behavioral trends in imports, namely, the import/GDP ratio, suffers from the drawback that it includes the price effect of higher import costs, particularly of oil.

One indication of this aspect of the program might be obtained by examining the outcome for the overall balance of payments for the countries in this group. For Bangladesh, Burma, and Sudan (comparable data for Pakistan are not available), the overall balance deteriorated in each instance comparing three-year predepreciation and postdepreciation periods. However, it should be borne in mind that for each of these countries, data for the postdepreciation period include any adverse impact of the oil price rise.

Bolivia, Ecuador, Israel, Jamaica, South Africa, and Yugoslavia.

The preceding results are similar to those cited by Bhagwat and Onitsuka (1974), who found that nonindustrial countries that carried out independent devaluations during the 1960s exhibited a higher export growth rate than those that did not. For many of these countries, import growth also increased at the same time.

This figure is a rough estimate calculated by multiplying, for each program country, the size of the depreciation (in local-currency terms) by the share of imports in GDP during the year immediately preceding the depreciation.

In assessing the outcome for program countries’ inflation rates, note that the growth in the money supply rose sharply on average for those countries in the first year of the program (from 14 per cent to 21 per cent). At the same time, the rate of net domestic credit expansion slowed down on average (from 30 per cent to 24 per cent). Thus, it would appear that on average the reduction in credit expansion was insufficient to sterilize the liquidity impact of the balance of payments outcome during the program period. In this regard, the overall balance of payments (measured in foreign-currency terms) registered an improvement in the first year of the program in 5 of the 11 countries for which data are available. Further interpretation of these figures, however, would require a detailed analysis of the behavior of net domestic assets, net foreign assets, and the money supply in the program countries, which goes beyond the scope of the present study.

No data are available for Afghanistan.

In Zambia, however, the real effective exchange rate appreciated during most of the postdepreciation period and was reversed only after a further (delayed) exchange rate action.

Unfortunately, data are not available for most of the programs reviewed to permit a separate analysis of movements in real domestic expenditure (as opposed to real GDP).

However, within the import-restraint subgroup, the examples of Bolivia and Jamaica need to be distinguished separately, since in those countries economic growth declined (especially in Jamaica) and there was no improvement in the trade balance variables.

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