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Exchange Depreciation in Developing Countries

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1968
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A VIGOROUS INTEREST among economists in exchange rates in recent years makes it worthwhile to ascertain the magnitudes of the exchange rate depreciation that has actually occurred for a broad range of countries since World War II. A number of economists have lamented the relatively little change in exchange rates in the past 20 years. These economists have, for the most part, focused their observations primarily on the major industrial and more developed countries. Investigation of the magnitudes of depreciation in the less developed countries has usually been confined to a single country or to a few countries in a given region. Or it has been presumed that most of them have followed major currencies—the U.S. dollar, the pound sterling, or the French franc. The actual magnitudes of exchange depreciation for a wide spectrum of less developed countries for the postwar period have not been presented. Yet, such knowledge is basic to much of the discussion concerning trade policies between the more and the less developed countries.

Elsewhere the author has shown that the great majority of countries, over the past 20 years, have increasingly moved away from flexible exchange rates and from multiple rates to fixed exchange rates, and even to par values institutionally agreed with the International Monetary Fund.1 In this process, many countries, especially among the less developed, have experienced a far greater degree of depreciation of their exchange rates than is commonly realized. This article presents some measurements of the extent of this depreciation.

The focus is on the accumulated magnitudes of several relatively small devaluations. Section I summarizes the percentage changes in the exchange rates of 109 countries for the 19-year period from 1948 to the end of 1967. Measurements of the percentage changes in exchange rates for various countries are more revealing, however, when juxtaposed with corresponding movements in their domestic prices, giving depreciation “in real terms.” Accordingly, Section II sets forth the results of comparisons of actual exchange rates at the end of December 1967 with “purchasing power parity rates,” calculated to show what exchange rates would have barely kept pace with the country’s postwar consumer price advances (until July 1967).

For reasons often stressed in the literature, purchasing power parity rates cannot be considered “equilibrium” exchange rates, and do not provide guides for measuring the degree of “overvaluation” or “undervaluation” of a country’s currency. Nonetheless, they do furnish a basis for comparing the external exchange depreciation of a country’s currency with its internal depreciation; and ratios between purchasing power parity and actual rates provide some insight into the relative realignment of world exchange rates.2

The results here obtained show that (1) exchange depreciation since World War II, especially by the less developed countries, has been more extensive than is often realized, and (2) the exchange rates of the less developed countries, as a whole and by various groupings, over the long run, have been depreciated to a greater extent than their internal prices have risen. Thus, the phenomenon of greater external than internal depreciation, which has been noted from time to time for individual countries, is shown to be not confined to isolated examples but to be rather more generally prevalent among many of the less developed countries.3 This finding is also contrary to the common presumption that, because of their relatively much greater inflation, the exchange rates of less developed countries have not kept up with price movements in comparison with the more developed countries.

I. The Extent of Devaluation

Measuring the magnitudes

The percentage changes in the exchange rates of 109 countries from the end of 1948 to the end of 1967 are summarized in Table 1. The 109 countries—the total members of the International Monetary Fund on December 31, 1967, plus Cuba and Switzerland—are divided into 21 more developed and 88 less developed countries.4 As a starting date, the end of 1948 has been preferred to an earlier postwar date (that is, the end of 1945 or 1946 when the Fund set initial parities for its original members) because the exchange rates of several countries were more settled by that year (or by early 1949) than they were immediately after World War II. Moreover, data for 1948 are readily available.5

Table 1.Magnitudes of Exchange Depreciation, 1948–67: Distribution of 21 More Developed and 88 Less Developed Countries by Degree of Depreciation(Magnitudes in per cent)
Magnitude of

Depreciation
Number of

More

Developed

Countries
Country

Identification 1
Number of

Less

Developed

Countries
Country

Identification 1
Zero, virtually zero,

or appreciation
3A10F
0–296B6G
30–395C17H
40–756D33I
More than 751E22J

The letter symbols stand for the following countries, listed in order of increasing depreciation. (See footnote 4 in text.)

A. Japan, Switzerland, United States.B. Canada, Italy, Belgium, Luxembourg, Germany, Netherlands.C. Australia, Norway, South Africa, Sweden, Denmark.D. Ireland, United Kingdom, New Zealand, France, Austria, Finland.E. Iceland.F. Lebanon, Cuba, Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Liberia, Panama, Ethiopia.G. Costa Rica, Syrian Arab Republic, Saudi Arabia, Portugal, Venezuela, Nicaragua.H. Burma, Iraq, Jordan, Kenya, Kuwait, Libya, Malaysia, Nigeria, Pakistan, Sierra Leone, Singapore, Somalia, Sudan, Tanzania, Uganda, Zambia, Ecuador.I. Cyprus, The Gambia, Jamaica, Malawi, Trinidad and Tobago, Guyana, Burundi, United Arab Republic, Ceylon, Philippines, Thailand, India, Rwanda, Peru, Iran, Mexico, Nepal, Turkey, China, Cameroon, Central African Republic, Chad, Dahomey, Gabon, Guinea, Ivory Coast, Malagasy Republic, Mali, Mauritania, Niger, Senegal, Togo, Upper Volta.J. Ghana, Algeria, Tunisia, Morocco, Congo (Brazzaville), Colombia, Greece, Spain, Laos, Viet-Nam, Israel, Yugoslavia, Paraguay, Argentina, Chile, Congo (Democratic Republic of), Uruguay, Bolivia, Afghanistan, Brazil, Indonesia, Korea.

The letter symbols stand for the following countries, listed in order of increasing depreciation. (See footnote 4 in text.)

A. Japan, Switzerland, United States.B. Canada, Italy, Belgium, Luxembourg, Germany, Netherlands.C. Australia, Norway, South Africa, Sweden, Denmark.D. Ireland, United Kingdom, New Zealand, France, Austria, Finland.E. Iceland.F. Lebanon, Cuba, Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Liberia, Panama, Ethiopia.G. Costa Rica, Syrian Arab Republic, Saudi Arabia, Portugal, Venezuela, Nicaragua.H. Burma, Iraq, Jordan, Kenya, Kuwait, Libya, Malaysia, Nigeria, Pakistan, Sierra Leone, Singapore, Somalia, Sudan, Tanzania, Uganda, Zambia, Ecuador.I. Cyprus, The Gambia, Jamaica, Malawi, Trinidad and Tobago, Guyana, Burundi, United Arab Republic, Ceylon, Philippines, Thailand, India, Rwanda, Peru, Iran, Mexico, Nepal, Turkey, China, Cameroon, Central African Republic, Chad, Dahomey, Gabon, Guinea, Ivory Coast, Malagasy Republic, Mali, Mauritania, Niger, Senegal, Togo, Upper Volta.J. Ghana, Algeria, Tunisia, Morocco, Congo (Brazzaville), Colombia, Greece, Spain, Laos, Viet-Nam, Israel, Yugoslavia, Paraguay, Argentina, Chile, Congo (Democratic Republic of), Uruguay, Bolivia, Afghanistan, Brazil, Indonesia, Korea.

Because the results depend on the particular exchange rates used, and because in some instances (as for countries with multiple exchange rates) a choice of rates existed, an endeavor has been made to select, for these calculations, exchange rates that were currently used for most transactions. This choice of rates is especially important in the calculations of purchasing power parity rates in Section II. Of course, the starting-period exchange rate, which becomes a base by which subsequent price rises are multiplied, determines the purchasing power parity rate. Similarly, the end-period exchange rate selected may also alter considerably the ratio obtained between actual and calculated rates. Wherever more than one rate prevailed in the base year, bias has been in favor of selecting the more depreciated of the rates. This was a deliberate effort to avoid choosing base rates that obviously exaggerated the extent of depreciation.

For most countries par values, or at least fixed official rates, could be used for both initial and end years. In Tables 1 and 2, for 93 out of 109 countries, par values or official rates were used; in Tables 36 par values or official rates were used for only 41 out of 65 countries. For other countries, a free market rate or one of their multiple rates has been used for at least one year or another, and in some instances midpoints among multiple rates were used. Table 7, in the Appendix, specifies the particular rates used for each country.

Table 2.Extent of Exchange Depreciation, 1948–67, Shown in Arithmetic Means 1(In per cent)
Country GroupingUnweighted

Means
Weighted

Means 2
All countries47.822.8
More developed countries30.115.0
Less developed countries
Africa55.649.4
Asia59.446.2
Europe70.677.0
Latin America43.060.9
Middle East40.637.1

Means were calculated from individual country data rather than from grouped data.

Weighted by share in aggregate exports in 1966.

Means were calculated from individual country data rather than from grouped data.

Weighted by share in aggregate exports in 1966.

Table 3.Ratios Between Purchasing Power Parity Rates and Actual Exchange Rates: 1967 on Base 1948, Averaged by Regions
Country GroupingNumber of

Countries

in Group
Country

Identifification 1
Average

Ratio

(× 100)
More developed countries20A96.9
Less developed countries
Africa5B80.9
Asia9C67.9
Europe5D69.0
Latin America20E88.3
Middle East5F45.1

The letter symbols stand for the following countries:

A. Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, South Africa, Sweden, Switzerland, and United Kingdom.B. Ghana, Morocco, Nigeria, Sudan, and Tunisia.C. Ceylon, China, India, Korea, Malaysia, Pakistan, Philippines, Thailand, and Viet-Nam.D. Greece, Portugal, Spain, Turkey, and Yugoslavia.E. Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela.F. Iran, Iraq, Israel, Syrian Arab Republic, and United Arab Republic.

The letter symbols stand for the following countries:

A. Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, South Africa, Sweden, Switzerland, and United Kingdom.B. Ghana, Morocco, Nigeria, Sudan, and Tunisia.C. Ceylon, China, India, Korea, Malaysia, Pakistan, Philippines, Thailand, and Viet-Nam.D. Greece, Portugal, Spain, Turkey, and Yugoslavia.E. Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela.F. Iran, Iraq, Israel, Syrian Arab Republic, and United Arab Republic.
Table 4.Ratios Between Purchasing Power Parity Rates and Actual Exchange Rates: 1967 Mon Base 1948, Averaged by Degree of Inflation
Country GroupingNumber of

Countries

in Group
Country

Identification 1
Average

Ratio

(X 100)
More developed countries moderate inflation9A93.1
relatively strong inflation11B100.0
Less developed countries little inflation12C74.3
moderate inflation10D88.0
relatively strong inflation8E78.6
chronic inflation14F73.3

The letter symbols stand for the following countries:

A. Cost of living in July 1967 was between 1.4 and 2.0 times the level in 1948: Belgium, Canada, Germany, Ireland, Italy, Luxembourg, South Africa, Switzerland, and United Kingdom.B. Cost of living in July 1967 was between 2.0 and 3.0 times the level in 1948: Australia, Austria, Denmark, Finland, France, Iceland, Japan, Netherlands, New Zealand, Norway, and Sweden.C. Cost of living in July 1967 was less than 1.4 times the level in 1948 (that is, less price rise than in the United States): Ceylon, Dominican Republic, Guatemala, Haiti, Iran, Iraq, Malaysia, Panama, Portugal, Syrian Arab Republic, United Arab Republic, and Venezuela.D. Cost of living in July 1967 was between 1.4 and 2.0 times the level in 1948: Costa Rica, Ecuador, El Salvador, Honduras, Jamaica, Nigeria, Pakistan, Philippines, Sudan, and Thailand.E. Cost of living in July 1967 was between 2.0 and 3.0 times the level in 1948: Ghana, Greece, India, Mexico, Morocco, Nicaragua, Tunisia, and Yugo-slavia.F. Cost of living in July 1967 was greater than 3.0 times the level in 1948: Argentina, Bolivia, Brazil, Chile, China, Colombia, Israel, Korea, Paraguay, Peru, Spain, Turkey, Uruguay, and Viet-Nam.

The letter symbols stand for the following countries:

A. Cost of living in July 1967 was between 1.4 and 2.0 times the level in 1948: Belgium, Canada, Germany, Ireland, Italy, Luxembourg, South Africa, Switzerland, and United Kingdom.B. Cost of living in July 1967 was between 2.0 and 3.0 times the level in 1948: Australia, Austria, Denmark, Finland, France, Iceland, Japan, Netherlands, New Zealand, Norway, and Sweden.C. Cost of living in July 1967 was less than 1.4 times the level in 1948 (that is, less price rise than in the United States): Ceylon, Dominican Republic, Guatemala, Haiti, Iran, Iraq, Malaysia, Panama, Portugal, Syrian Arab Republic, United Arab Republic, and Venezuela.D. Cost of living in July 1967 was between 1.4 and 2.0 times the level in 1948: Costa Rica, Ecuador, El Salvador, Honduras, Jamaica, Nigeria, Pakistan, Philippines, Sudan, and Thailand.E. Cost of living in July 1967 was between 2.0 and 3.0 times the level in 1948: Ghana, Greece, India, Mexico, Morocco, Nicaragua, Tunisia, and Yugo-slavia.F. Cost of living in July 1967 was greater than 3.0 times the level in 1948: Argentina, Bolivia, Brazil, Chile, China, Colombia, Israel, Korea, Paraguay, Peru, Spain, Turkey, Uruguay, and Viet-Nam.
Table 5.Ratios Between Purchasing Power Parity Rates and Actual Exchange Rates: 1967 on Base 1955, Averaged by Regions
Country

Grouping 1
Average

Ratio

(× 100)
More developed countries106.8
Less developed countries
Africa97.5
Asia93.2
Europe95.9
Latin America83.3
Middle East95.8

For number of countries and country identification, see Table 3.

For number of countries and country identification, see Table 3.

Table 6.Ratios Between Purchasing Power Parity Rates and Actual Exchange Rates: 1967 on Base 1955, Averaged by Degree of Inflation
Country GroupingNumber of

Countries

in Group
Country

Identification
Average

Ratio

(× 100)
More developed countries 120106.8
Less developed countries little inflation11A84.4
moderate inflation16B100.2
relatively strong inflation8C91.6
chronic inflation9D76.3

All except two—Finland and Iceland—had moderate inflation, that is, the cost of living in July 1967 was between 1.25 (the same as in the United States) and 1.75 (40 per cent more than in the United States) times the level in 1955.

A. Cost of living in July 1967 was less than 1.25 times the level in 1955 (that is, less price rise than in the United States): Ceylon, Costa Rica, Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Malaysia, Nicaragua, Panama, and Venezuela.B. Cost of living in July 1967 was between 1.25 and 1.75 the level in 1955: Ecuador, Greece, Iran, Iraq, Jamaica, Mexico, Morocco, Nigeria, Pakistan, Philippines, Portugal, Sudan, Syrian Arab Republic, Thailand, Tunisia, and United Arab Republic.C. Cost of living in July 1967 was between 1.76 and 2.75 times the level in 1955: Argentina, Chile, China, Ghana, India, Israel, Peru, and Spain.D. Cost of living in July 1967 was greater than 2.75 times the level in 1955: Bolivia, Brazil, Colombia, Korea, Paraguay, Turkey, Uruguay, Viet-Nam, and Yugoslavia.

All except two—Finland and Iceland—had moderate inflation, that is, the cost of living in July 1967 was between 1.25 (the same as in the United States) and 1.75 (40 per cent more than in the United States) times the level in 1955.

A. Cost of living in July 1967 was less than 1.25 times the level in 1955 (that is, less price rise than in the United States): Ceylon, Costa Rica, Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Malaysia, Nicaragua, Panama, and Venezuela.B. Cost of living in July 1967 was between 1.25 and 1.75 the level in 1955: Ecuador, Greece, Iran, Iraq, Jamaica, Mexico, Morocco, Nigeria, Pakistan, Philippines, Portugal, Sudan, Syrian Arab Republic, Thailand, Tunisia, and United Arab Republic.C. Cost of living in July 1967 was between 1.76 and 2.75 times the level in 1955: Argentina, Chile, China, Ghana, India, Israel, Peru, and Spain.D. Cost of living in July 1967 was greater than 2.75 times the level in 1955: Bolivia, Brazil, Colombia, Korea, Paraguay, Turkey, Uruguay, Viet-Nam, and Yugoslavia.

Exchange rate changes have been measured relative to gold, that is, with the initial period as the base, the percentage has been calculated of the change in the exchange rate expressed in terms of grams of fine gold per local currency unit. This is the customary Fund way of measuring exchange rate changes: it produces the familiar results, for example, of devaluations in the pound sterling of 30.5 per cent in September 1949 and of 14.7 per cent in November 1967. Measured in this way, 100 per cent is the maximum that a currency can depreciate. Inasmuch as the gold content of the U.S. dollar has remained unchanged, measurements with respect to gold are, of course, identical with measurements relative to the U.S. dollar.

How much devaluation?

In Table 1 the countries covered, divided into two groups—more developed and less developed countries—are distributed over five categories according to the degree of their exchange depreciation from the end of 1948 to the end of 1967.

It may be noted that even among the more developed countries as many as 7 out of 21 have depreciated their currencies by more than 40 per cent. But well over half of the less developed countries—some 55 in all—have depreciated by more than 40 per cent. One of the more developed countries (namely, Iceland) depreciated by more than 75 per cent, but some 22 less developed countries were also in this category, including Argentina, Brazil, Chile, Ghana, Israel, Korea, Spain, Uruguay, and Yugoslavia.

The difference in degree of depreciation between more and less developed countries is also revealed by the median depreciation of these two groupings and by arithmetic means. The median for the more developed countries in Categories A through E is 30.5 per cent, while that for the less developed countries in Categories F through J is 52.1 per cent. Arithmetic means, both unweighted and weighted by the country’s shares in the aggregate exports (1966) of the 109 countries, are given in Table 2 for five regional groups of less developed countries, compared with the more developed countries as one group.

As would be expected, since the countries which have the largest shares in total exports have devalued the least, the over-all weighted mean for all countries (22.8 per cent) is much below the unweighted mean (47.8 per cent). Moreover, even among the less developed countries, most of the weighted means are lower than the unweighted ones (for Africa, Asia, and the Middle East), again revealing the greater devaluations of the smaller trading countries. Indeed, this inverse relation between the size of a country’s shares in world export markets and the extent of its exchange depreciation may well reflect deliberate export-oriented policies, against policies emphasizing development of the domestic economy, by the smaller trading countries with smaller internal markets. In Latin America, this inverse relation between trading size and magnitudes of depreciation did not hold: to the contrary, several large trading countries, such as Argentina, Brazil, and Chile, have depreciated their currencies by the largest magnitudes.

II. Depreciation in Real Terms

Nature of calculations

Because of the wide differences among countries in their rates of internal inflation, and, in particular, because the majority of less developed countries have had a great deal more inflation than the more developed countries, it is not sufficient merely to compare the size of the external depreciation of various currencies. One should rather compare external with internal depreciation, or depreciation in real terms, for various countries. Accordingly, calculations are given in Tables 3–6 for 65 countries, comparing their actual exchange rates at the end of December 1967 with two purchasing power parity rates— one based on 1948 and one based on 1955.6

It must be emphasized again, however, that such ratios do not imply any causal relations between domestic prices and exchange rates. Adjustments of exchange rates are due to several factors in addition to, and apart from, movements in domestic prices. This is, in effect, another way of stressing that purchasing power parity rates are not tantamount to equilibrium rates. Equilibrium exchange rates are a function not only of changes in the over-all level of domestic prices but also of changes in relative prices, in productivity, and in the structure of output and of exports and imports, and of variations in capital flows. In fact, even the nature of the policies pursued—including not only trade and tariff policies but also domestic monetary, fiscal, and employment policies—are now recognized as having crucial bearing on the determination of what constitutes an equilibrium exchange rate.

Another reason why purchasing power parity rates cannot be considered guides to overvaluation or undervaluation of any currency at the end of 1967 is that neither of the base years used here can be regarded as an initial equilibrium. Since this is especially true of 1948, chosen to provide an assessment for the total postwar period, an additional set of calculations has been made based on 1955, selected as the first year after the abnormalities of the Korean boom and its immediate aftermath. Since the initial periods are not ones of equilibrium, comparisons are, in effect, made only of changes over time in relative prices and exchange rates.7

The statistical vicissitudes that beset purchasing power parity calculations must also be given explicit recognition. There is, of course, the problem as to the best indicators of general price movements. Although cost of living indices, such as are used here, are probably the most common, they are subject to several weaknesses that have often been spelled out.8 The difficulties of using a uniform price index are compounded in intercountry comparisons: The composition of cost of living indices, and even the extent to which they reflect freely determined prices, varies greatly among countries. Even more, cost of living indices are often little guide to developments in prices for exportable goods and for domestically produced import-competing goods, which are, after all, the most significant ones for exchange rates.

In the purchasing power parity calculations that follow, changes in a country’s cost of living index have been taken relative to that of the United States. Considering the United States to be a bench mark for such comparison is, admittedly, not equally relevant for all countries, but the United States is a commonly used frame of reference. Moreover, in Tables 3–6 the countries are grouped according to their degree of price rise, and the United States, according to the data used here, was among those with the least rise in postwar consumer prices. Hence, it is not an unsuitable point of reference for measuring the relative price advances of other countries.

Letting Pa0 represent the cost of living index for each country in the base period, Pa1 the index at the end of July 1967, and Pb0 and Pb1 the corresponding indices in the United States, Pa1Pa0Pb1Pb0 was calculated as the relative price rise for each of 65 countries.9 Each country’s exchange rate (expressed in local currency units per U.S. dollar or the equivalent in gold) for the base period was then multiplied by the relative price ratio to obtain the purchasing power parity rate at the end of 1967. The ratio between the calculated rate and the actual exchange rate (purchasing power parity rateactual rate×100) at the end of December 1967 was then determined for each country. A resulting final ratio of 100 represents the equivalence of the external depreciation of a country’s currency with its internal depreciation, relative to that of the U.S. dollar; ratios below 100 reflect external depreciation in excess of internal depreciation—that is, depreciation in real terms.

Empirical findings—base 1948

The 64 countries (the United States has been excluded) have been grouped in two different ways, and arithmetic averages for each group have been obtained to show the ratios between their purchasing power parity rates and their actual exchange rates. Table 3 represents the average when the countries are grouped into more developed and less developed, and the latter divided into regions, and Table 4 presents the averages when the countries are grouped by the degree of inflation that they have experienced since 1948.

It is evident that the less developed countries in all regions (although not all of them individually) had considerably greater exchange depreciation in real terms than the more developed countries. This was especially true for the less developed countries in the Middle East, in Asia, in Europe, and in Africa. Even in Latin America, where the rate of internal inflation has been higher than in other less developed countries, it was also true, although not to such a marked extent.

When countries are grouped according to the degree of their internal inflation since 1948, it is still apparent that the less developed countries have experienced greater external than internal depreciation. Moreover, those with the greatest inflation have also had the largest depreciation in real terms. In contrast, depreciation in the more developed countries has kept pace roughly with their degree of relative inflation, compared with that in the United States.

Table 4 presents ratios similar to those in Table 3 for six country groupings, based on the rate of their inflation. Again, the price rise in the United States was used as a reference point—the level of consumer prices in the United States in July 1967 being 1.4 times the level in 1948. Countries that experienced less price rise than that of the United States are referred to as those with “little inflation.” Countries with about the same degree of price rise as the United States—that is, where prices in mid-1967 were from 1.4 to 2.0 times the level in 1948—are labeled those with “moderate inflation.” “Relatively strong inflation” refers to those countries where price levels rose from 2 to 3 times from 1948 to 1957, and “chronic inflation” to those where consumer price levels went up more than 3 times.

Thus, among the less developed countries even those with relatively strong inflation and chronic inflation had ratios of 78.6 and 73.3, respectively, compared with ratios of 93.1 and 100.0 for more developed countries. This represents substantial depreciation by the less developed countries in real terms and relative to that of the more developed countries.10

Empirical Findings—base 1955

Similar results, although somewhat less marked, were also obtained from calculations on a 1955 base, and are presented in Tables 5 and 6.

Although the relatively greater real depreciation of the less developed countries was not so large from 1955 to 1967 as from 1948 to 1967, it was nonetheless still evident. Moreover, for Latin America and the less developed countries with chronic inflation it was even larger in the more recent period.

This is all the more noteworthy because among the countries in the last two categories in Table 6 several had rates of inflation that were greater in 1955-67 than in the early postwar period: Argentina, Brazil, Chile, Colombia, Ghana, India, Spain, and Uruguay; their exchange depreciation, as a group but not for each country, was greater than their inflation.

Interpretations of findings

The findings observed here must be considered provisional rather than definitive. Additional calculations would be required before conclusions could be firmed. Limitations on cost of living indices reveal the need for testing alternative price series. Adapting the years selected as bases to different countries, or country groupings, would also remove the difficulties of using a uniform base year for all countries.11 Most importantly, careful reconciliation is required between the results obtained here and the oft-cited, and probably statistically verifiable, thesis that prolonged inflation produces overvaluation of existing exchange rates. The two theses that inflation produces overvaluation and that less developed countries have, over the long run, depreciated their exchange rates in excess of their rates of internal inflation need not be diametrically opposed. Reconciliation would require experimentation with shorter time intervals and tracing through the interrelated dynamics of price movements and exchange rate changes for a wide sample of the less developed countries.12

There are several explanations for the findings of this study. First, the less developed countries have, to a greater extent than the more developed countries, used exchange rate adjustments as a policy tool. The more developed countries have tended to rely heavily on monetary and fiscal policies, and on other domestic measures; while these non-exchange policies may not have slowed down over-all price advances (according to the statistics presented here), the balance of payments may have been affected.

Second, demand for the exports of the more developed countries has, on the whole, been subject to much more rapid growth than that for the exports of the less developed countries. Productivity advances in the more developed countries could often run ahead of their exchange rates, preventing damage to their export positions. Because of productivity advances in export production, prices of export goods in the more developed countries may well have gone down despite advances in the cost of living index. This has probably occurred much less frequently in the less developed countries.

Third, the mechanism by which exchange rates have been adjusted also seems to have been a factor in the extent of total depreciation. Countries that have used multiple or fluctuating rates—mainly the less developed countries—have depreciated their currencies much more in relation to their general domestic prices than have countries with fixed exchange rates. As countries have eliminated multiple exchange rates, their currencies have usually been depreciated down to the prevailing free market rate; the free market rate, at least at the time of depreciation, has usually been below that indicated by general prices. A phenomenon of more rapid depreciation than price increase under regimes of fluctuating rates has also been noted elsewhere.13 And it has also been suggested by some that inflation itself, because of its price-distorting effects, may induce a degree of exchange depreciation in excess of the rise in domestic prices.14

It is also possible, of course, that the exchange rates of the less developed countries in 1948 may have been more out of line with prices in the rest of the world than were the exchange rates of the more developed countries. It is difficult to judge this possibility, but it is discounted by the fact that similar results, although to a lesser extent, are also obtained for the shorter and more recent period, 1955–67.

Whatever the explanation, the statistics given above seem sufficient to suggest that important alterations have occurred in the postwar structure of international exchange rates: a substantial realignment of the exchange rates of the less developed countries in general vis-à-vis the more developed countries has taken place. This restructuring of the relative rates between the less developed and the more developed countries has occurred despite the fact that at least some of the more developed countries have undergone impressive depreciation of their own exchange rates, and despite the fact that many of the less developed countries have had considerably greater inflation than the more developed countries.

The foregoing findings are also useful for interpreting the results of other studies. A study by the Economic Commission for Latin America, for example, has also obtained purchasing power parity rates for several Latin-American currencies that were, in 1960 and 1962, less depreciated than prevailing exchange rates;15 similar results were obtained earlier for Asia and Africa.16 For the reasons noted above, it cannot, however, be concluded from such purchasing power parity rates that actual exchange rates are, therefore, undervalued. More exploration of the causes of the relations observed between the magnitudes of depreciation and the degrees of price rise—especially for the less developed countries with chronic inflation—is required.17

The findings obtained by the author also suggest that complications in the results relating the export performances of the less developed countries to developments in their price levels and/or to their exchange rate policies should be anticipated. Quantitative studies of the responsiveness of exports to relative prices, for example, may well tend considerably to understate the influence on exports of prices.18

APPENDIX
Table 7.Specification of Exchange Rates Used
No.CountryTables 1 and 2Tables 3-61
1948 2December

1967
1948 21955December

1967
1.AfghanistanFreeFree____________
2.AlgeriaOfficialOfficial____________
3.ArgentinaFreeFreeMost de

preciated
MidpointFree
4.AustraliaPar valuePar valuePar valuePar valuePar value
5.AustriaOfficialPar valueOfficialPar valuePar value
6.BelgiumPar valuePar valuePar valuePar valuePar value
7.BoliviaPar valueFreeMidpointMidpointFree
8.BrazilFreeFreeGeneral

auction
AuctionFree
9.BurmaPar valuePar value____________
10.BurundiOfficialPar value____________
11.CameroonOfficialOfficial____________
12.CanadaPar valuePar valuePar valueFreePar value
13.Central African RepublicOfficialOfficial____________
14.CeylonOfficialPar valueOfficialPar valuePar value
15.ChadOfficialOfficial____________
16.ChileFreeFreeMidpointExportFree

nontrade
17.ChinaOfficialOfficialPrincipal

rate in

1950
MidpointOfficial
18.ColombiaFreeFreePrincipal

selling
MidpointPrincipal

selling
19.Congo (Brazzaville)OfficialOfficial____________
20.Congo, Democratic Republic ofPar valueOfficial____________
21.Costa RicaPar valuePar valuePar valueExportPar value
22.CubaPar valueOfficial____________
23.CyprusPar valuePar value____________
24.DahomeyOfficialOfficial____________
25.DenmarkPar valuePar valuePar valuePar valuePar value
26.Dominican RepublicPar valuePar valuePar valuePar valuePar value
27.EcuadorOfficial

selling
Official

selling
Official

selling
sellingOfficial

selling
28.El SalvadorPar valuePar valuePar valuePar valuePar value
29.EthiopiaPar valuePar value____________
30.FinlandOfficialPar valueOfficialSellingPar value
31.FranceOfficialPar valueOfficialFreePar value
32.GabonOfficialOfficial____________
33.Gambia, ThePar valueOfficial____________
34.GermanyOfficialPar valueOfficialPar valuePar value
35.GhanaPar valuePar valuePar valuePar valuePar value
36.GreeceOfficialPar valueOfficialOfficialPar value
37.GuatemalaPar valuePar valuePar valuePar valuePar value
38.GuineaOfficialOfficial____________
39.GuyanaPar valuePar value____________
40.HaitiOfficialPar valueOfficialPar valuePar value
41.HondurasPar valuePar valuePar valuePar valuePar value
42.IcelandPar valuePar valuePar valuePar valuePar value
43.IndiaPar valuePar valuePar valuePar valuePar value
44.IndonesiaFreeFree____________
45.IranPar valuePar valuePar valueBuyingPar value
46.IraqPar valuePar valuePar valuePar valuePar value
47.IrelandOfficialPar valueOfficialOfficialPar value
48.IsraelOfficialPar valueOfficialOfficialPar value
49.ItalyOfficialPar valueOfficialOfficialPar value
50.Ivory CoastOfficialOfficial____________
51.JamaicaPar valuePar valuePar valuePar valuePar value
52.JapanOfficial (1949)Par valueOfficial (1949)Par valuePar value
53.JordanOfficialPar value____________
54.KenyaPar valuePar value____________
55.KoreaOfficialOfficialOfficialMost depreciatedOfficial
56.KuwaitOfficialPar value____________
57.LaosOfficialFree____________
58.LebanonFreeFree____________
59.LiberiaOfficialPar value____________
60.LibyaOfficialPar value____________
61.LuxembourgPar valuePar valuePar valuePar valuePar value
62.Malagasy RepublicOfficialOfficial____________
63.MalawiPar valuePar value____________
64.MalaysiaPar valuePar valuePar valuePar valuePar value
65.MaliOfficialOfficial____________
66.MauritaniaOfficialOfficial____________
67.MexicoPar valuePar valueFreePar valuePar value
68.MoroccoOfficialPar valueOfficialOfficialPar value
69.NepalOfficialPar value____________
70.NetherlandsPar valuePar valuePar valuePar valuePar value
71.New ZealandOfficialPar valueOfficialOfficialPar value
72.NicaraguaPar valuePar valuePar valueBuyingPar value
73.NigerOfficialOfficial____________
74.NigeriaPar valuePar valuePar valuePar valuePar value
75.NorwayPar valuePar valuePar valuePar valuePar value
76.PakistanOfficialPar valueOfficialPar valuePar value
77.PanamaPar valuePar valuePar valuePar valuePar value
78.ParaguayFreeFreeFreeMidpointFree
79.PeruPrincipalFreePrincipalFreeFree
80.PhilippinesPar valuePar valuePar valuePar valuePar value
81.PortugalOfficialPar valueOfficialOfficialPar value
82.RwandaOfficialPar value____________
83.Saudi ArabiaOfficialPar value____________
84.SenegalOfficialOfficial____________
85.Sierra LeonePar valuePar value____________
86.SingaporePar valuePar value____________
87.SomaliaOfficialPar value____________
88.South AfricaPar valuePar valuePar valuePar valuePar value
89.SpainOfficialPar valueOfficialMidpointPar value
90.SudanOfficialPar valueOfficialOfficialPar value
91.SwedenOfficialPar valueOfficialPar valuePar value
92.SwitzerlandOfficialOfficialOfficialOfficialOfficial
93.Syrian Arab RepublicFreeFreeFreeFreeFree
94.TanzaniaPar valuePar value____________
95.ThailandOfficialPar valueOfficialFreePar value
96.TogoOfficialOfficial____________
97.Trinidad and TobagoPar valuePar value____________
98.TunisiaOfficialPar valueOfficialOfficialPar value
99.TurkeyPar valuePar valuePar valuePar valuePar value
100.UgandaPar valuePar value____________
101.United Arab RepublicPar valueOfficialPar valuePar valueSelling
102.United KingdomPar valuePar valuePar valuePar valuePar value
103.United StatesPar valuePar valuePar valuePar valuePar value
104.Upper VoltaOfficialOfficial____________
105.UruguayFreeFreeMidpointMidpointFree
106.VenezuelaNonoil exportsNonoil exportsNonoil exportsExportsNonoil exports
107.Viet-NamPrincipalFreePrincipalTradeFree
108.YugoslaviaOfficialPar valueOfficialPar valuePar value
109.ZambiaPar valuePar value____________
Sources: International Monetary Fund, International Financial Statistics, January 1967, and Supplement to 1966/67 Issues; and Annual Report on Exchange Restrictions, various issues.

Forty-four countries used in Table 1 were not included in Tables 3 and 4.

For some present members of the Fund the par values used here were those that had been established for them while they were nonmetropolitan areas.

Sources: International Monetary Fund, International Financial Statistics, January 1967, and Supplement to 1966/67 Issues; and Annual Report on Exchange Restrictions, various issues.

Forty-four countries used in Table 1 were not included in Tables 3 and 4.

For some present members of the Fund the par values used here were those that had been established for them while they were nonmetropolitan areas.

La depreciation cambiaire dans les pays en voie de développement

Résumé

Les divergences d’opinion qui se sont fait jour depuis quelques années au sujet de la politique des taux de change ont eu tendance à donner l’impression que les fluctuations des changes ont été assez limitées depuis la fin de la Seconde Guerre mondiale. En outre, bien que de nombreux pays moins développés aient pu déprécier leurs taux de change dans de très fortes proportions, il est généralement admis que ces dépréciations n’ont pas été suffisantes pour compenser les augmentations considérables des prix internes qui ont accompagné leur inflation relativement plus prononcée.

Le présent article présente, pour une large gamme de pays, des statistiques qui infirment ces suppositions. Bien que quelques-uns des pays moins développés aient eu tendance à s’aligner sur les principales monnaies — le dollar E.U., la livre sterling et le franc français — la plupart d’entre eux ont déprecié leurs monnaies indépendamment et dans de plus fortes proportions que les pays plus développés. De plus, ce qui est encore plus significatif, les taux de change des pays moins développés — considéres dans leur ensemble et selon divers groupements — se sont déprecies, au cours de longues périodes, dans de plus fortes proportions que leurs prix internes n’ont augmenté. On voit ainsi que ce phénomène — dépréciation externe plus prononcée que la depreciation interne — constaté de temps à autre pour certains pays, ne se limite pas à des exemples isolés, mais qu’il est plutôt plus généralement répandu parmi de nombreux pays moins développés. Au surplus, cette dépréciation a entrainé un réalignement des taux de change des pays moins développés par rapport à ceux des pays plus développés.

La depreciación cambiaria en los países en desarrollo

Resumen

Los debates de los últimos años con respecto a la política cambiaria han tendido a dar la impresión de que, desde el final de la Segunda Guerra Mundial, apenas ha habido modificaciones cambiarías. También se suele dar por sentado que, aunque muchos de los países menos desarrollados hayan efectuado extensas depreciaciones de sus tipos de cambio, la medida de las depreciaciones ha sido muy inferior a las alzas substanciales de precios internos que han acompañado a su relativamente más elevada inflación.

En este artículo se presentan, para una amplia gama de países, las estadísticas que controvierten esas suposiciones. Aunque varios de los países menos desarrollados han tendido a seguir a las principales monedas—el dólar de los EE.UU., la libra esterlina, y el franco francés—la mayoría de ellos han depreciado sus monedas independientemente y en mayor cuantía que los países más desarrollados. Y lo que es aún más significativo, los tipos de cambio de los países menos desarrollados, tomados en conjunto y en diversos grupos, se han depreciado a largo plazo en medida mayor que las subidas de sus precios internos. Así es que el fenómeno de una mayor depreciación externa que interna, que se ha venido notando de cuando en cuando en países determinados, no parece haberse confinado a ejemplos aislados sino que tiene mayor preponderancia entre muchos de los países menos desarrollados. Más aún, esa depreciación ha implicado una reordenación de los tipos de cambio de los países menos desarrollados, en relación con los de los países más desarrollados.

In statistical matter (except in the resumes and resúmenes) throughout this issue,

Dots (…) indicate that data are not available;

A dash (—) indicates that the figure is zero or less than half the final digit shown, or that the item does not exist;

A single dot (.) indicates decimals;

A comma (,) separates thousands and millions;

“Billion” means a thousand million;

A short dash (-) is used between years or months (e.g., 1955–58 or January-October) to indicate a total of the years or months inclusive of the beginning and ending years or months;

A stroke (/) is used between years (e.g., 1962/63) to indicate a fiscal year or a crop year;

Components of tables may not add to totals shown because of rounding.

Announcing the publication of: SURVEYS OF AFRICAN ECONOMIES

Volume 1: Cameroon, Central African Republic, Chad, Congo (Brazzaville), and Gabon

Pp. xxiv + 365 Maps, Index, Statistical Tables

This volume is the first of a series of surveys to be published by the Fund on the economies of African countries. Each volume will provide, for a selected group of countries, detailed surveys of the national economies, together with descriptions of the various institutional and other arrangements for regional cooperation. The country surveys are adapted from material gathered by the Fund in the course of its regular consultations with member countries, and the data, although drawn largely from published sources, have been supplemented by information supplied by the national authorities concerned.

Volume 1 covers five French-speaking countries that are linked by a common central bank, the Central Bank of Equatorial African States and Cameroon. The first five chapters of the volume describe the institutional framework of the Bank and other features that the five countries have in common, including their fiscal systems, treatment of foreign investments, trade and payments relations, and exchange and trade control systems.

The country surveys, contained in Chapters 6 through 10, set out the structures of the economies, emphasizing their financial aspects. They outline the progress of, and the various plans for, economic development; review the course of production, prices, wages, and employment; analyze national budgets and fiscal policies; describe the monetary and banking arrangements; and provide details of foreign trade, aid, and payments for each country.

The volume contains 137 statistical tables covering all aspects of each economy. For the most part the data cover the period 1960–66, although some later figures have been added. A map for each country illustrates features referred to in the text, and a map of the five countries combined shows the principal transport routes for the region. A detailed index, using both a subject and a country approach, is also provided.

Volume 1, in English, is available now. A French edition will appear shortly.

Price: $5.00 a volume; $2.50 to university libraries, faculty members, and students. Payment will also be accepted in the currencies of most member countries.

Address correspondence to

The Secretary

INTERNATIONAL MONETARY FUND

19th and H Streets, N.W.

Washington, D.C. 20431, U.S.A.

Mrs. de Vries, Consultant to the Fund, was formerly Chief of the Far Eastern Division of the Fund and Lecturer in Economics at the George Washington University. She is a graduate of the University of Michigan and of the Massachusetts Institute of Technology and author of various articles in professional journals.

Margaret G. de Vries, “Multiple Exchange Rates: Expectations and Experiences,” Staff Papers, Vol. XII (1965), pp. 282–313, and “Fund Members’ Adherence to the Par Value Regime: Empirical Evidence,” Staff Papers, Vol. XIII (1966), pp. 504–32.

The resurgence of interest in purchasing power parity relationships of recent years is, indeed, noteworthy. The Federal Republic of Germany’s Statistisches Bundesamt, in its Statistisches Jahrbuch für die Bundesrepublik Deutschland, regularly publishes, for example, estimates of purchasing power parities for about 15 countries. See also Milton Gilbert and Irving B. Kravis, An International Comparison of National Products and the Purchasing Power of Currencies (Organization for European Economic Cooperation, Paris, 1954); Milton Gilbert and Associates, Comparative National Products and Price Levels (Organization for European Economic Cooperation, Paris, 1958); and Economic Commission for Latin America (ECLA), “A Measurement of Price Levels and the Purchasing Power of Currencies in Latin America, 1960–62,” Economic Bulletin for Latin America, Vol. VIII (1963), pp. 195–236. On the theoretical side, there have been Leland B. Yeager, “A Rehabilitation of Purchasing-Power Parity,” The Journal of Political Economy, Vol. LXVI (1958), pp. 516–30; Bela Balassa, “The Purchasing-Power Parity Doctrine: A Reappraisal,” The Journal of Political Economy, Vol. LXXII (1964), pp. 584–96; and James M. Holmes, “The Purchasing-Power-Parity Theory: In Defense of Gustav Cassel as a Modern Theorist,” The Journal of Political Economy, Vol. LXXV (1967), pp. 686–95.

For example, this depreciation in real terms has been noted most recently for the Brazilian cruzeiro. (See Nathaniel H. Leff, “Import Constraints and Development: Causes of the Recent Decline of Brazilian Economic Growth,” The Review of Economics and Statistics, Vol. XLLX, 1967, pp. 494ȓ501.)

This division is approximately the same as that in the International Monetary Fund’s Annual Report, 1967, pages 55 and 101. The term “more developed countries,” as used here, includes 15 industrial countries (Austria, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Luxembourg, Netherlands, Norway, Sweden, Switzerland, United Kingdom, and United States) and 6 of the primary producing countries considered as more developed in the Annual Report (Australia, Finland, Iceland, Ireland, New Zealand, and South Africa). Five countries (Greece, Portugal, Spain, Turkey, and Yugoslavia) that were treated in the Annual Report as more developed primary producers for some purposes and as less developed for other purposes, are here grouped with the latter.

The annual supplement to the International Monetary Fund’s International Financial Statistics regularly presents series beginning with 1948.

Those 65 countries have been selected for which price data are available from 1948. Of the 44 countries included in Tables 1 and 2 but not covered by Tables 3–6, 30 are African countries, for which early data are especially scarce.

In other words, the relative, rather than the absolute, version of the purchasing power parity doctrine is used. The difficulties of finding a so-called equilibrium year as a base, as well as other problems, have brought the absolute version of the purchasing power parity doctrine under attack more often than the relative version. See, for example, Bela Balassa, op cit., pp. 584–86.

Attempts to overcome some of the weighting and related problems have been discussed by R. C. Geary, “A Note on the Comparison of Exchange Rates and Purchasing Power Between Countries,” Journal of the Royal Statistical Society, Series A (General), Part 1 (1958), pp. 97–99, and J. van Yzeren, “Three Methods of Comparing the Purchasing Power of Currencies,” Statistical Studies (Netherlands Central Bureau of Statistics, No. 7, December 1956).

The denominator Pb1Pb0 (the U.S. price rise), constant for all countries, was 1.40 from 1948 to July 1967, and 1.25 for 1955 to July 1967.

This cannot, however, necessarily be construed as a deterioration in the terms of trade for the less developed countries.

It is unlikely that an alternative uniform base year would yield vastly different results. The author was first led to these investigations by similar results obtained for the period 1950–66. The longer period 1948–67 used above, however, provides a stricter test because it incorporates the 1949 and 1967 series of devaluations.

See, for example, the study of Argentina by Carlos F. Diaz Alejandro, Exchange-Rate Devaluation in a Semi-Industrialized Country: The Experience of Argentina 1955–1961 (Cambridge, Massachusetts), 1965.

International Monetary Fund, Annual Report, 1962, p. 66.

See Graeme S. Dorrance, “The Effect of Inflation on Economic Development,” Staff Papers, Vol. X (1963), pp. 1–47.

ECLA, op. cit.

Max F. Millikan cited very low ratios in 1950 between purchasing power parity rates and actual exchange rates for Southeast Asia (0.29) and Africa (0.27) in comparison with the U.S. dollar. Statement by Dr. Millikan in Hearings Before the Subcommittee on Foreign Economic Policy of the Joint Committee on the Economic Report, Congress of the United States (84th Congress, 1st Session, November 9–17, 1955), pp. 23–29.

Bela Balassa, op. cit., has obtained a statistically significant correlation between purchasing power parity rates and the level of per capita income for 11 industrial countries. In order to rule out this explanation for the results obtained above, the author has undertaken a similar regression analysis for the much wider range of countries included here. The results obtained were not statistically significant. With per capita income from UN data for 1958 as the independent variable and the ratio between purchasing power parity rates and actual rates, calculated for the period from 1955 to mid-1966, as the dependent variable, a linear regression was fitted for 62 country observations. The regression coefficient was only 0.047 with a t value of 1.716 and a Durbin-Watson statistic of 1.553.

Relatively low correlations and even reverse signs have, for example, been obtained for some of these relations. See, for example, Gertrud Lovasy, “Inflation and Exports in Primary Producing Countries,” Staff Papers, Vol. IX (1962), pp. 37–69, and Barend A. de Vries, Export Experiences of Developing Countries (World Bank Staff Occasional Papers Number Three, Baltimore, Maryland, 1967). The World Bank study, recognizing the possibility of such results, also determined that, for nearly half of the countries examined, exchange rate devaluations between 1950–53 and 1960–63 were in excess of, or nearly equivalent to, the increases in their domestic price levels.

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