Multiple Exchange Rates: Expectations and Experiences
  • 1 0000000404811396 Monetary Fund

There are several reasons why countries, especially countries whose economies have come to be known as “developing economies,” have adopted multiple exchange rate systems. Essentially, such a system is an instrument of balance of payments policy as well as a method of subsidization and taxation. In other words, multiple exchange rates perform both exchange and monetary functions. The major alternative form of exchange control—quantitative restrictions—does not provide fiscal or monetary benefits unless it is combined with an export tax. Tariffs might also serve both balance of payments and taxation purposes, but changes in tariffs involve a slow, cumbersome process; multiple rates can be introduced and altered more easily.


There are several reasons why countries, especially countries whose economies have come to be known as “developing economies,” have adopted multiple exchange rate systems. Essentially, such a system is an instrument of balance of payments policy as well as a method of subsidization and taxation. In other words, multiple exchange rates perform both exchange and monetary functions. The major alternative form of exchange control—quantitative restrictions—does not provide fiscal or monetary benefits unless it is combined with an export tax. Tariffs might also serve both balance of payments and taxation purposes, but changes in tariffs involve a slow, cumbersome process; multiple rates can be introduced and altered more easily.

There are several reasons why countries, especially countries whose economies have come to be known as “developing economies,” have adopted multiple exchange rate systems. Essentially, such a system is an instrument of balance of payments policy as well as a method of subsidization and taxation. In other words, multiple exchange rates perform both exchange and monetary functions. The major alternative form of exchange control—quantitative restrictions—does not provide fiscal or monetary benefits unless it is combined with an export tax. Tariffs might also serve both balance of payments and taxation purposes, but changes in tariffs involve a slow, cumbersome process; multiple rates can be introduced and altered more easily.

In contrast to the original stigma attached to multiple exchange rates following their use by prewar Germany, multiple rates in the two postwar decades have had a particular appeal to many economists and policy-makers. In the economic and institutional environment of developing countries, multiple rates are often believed by economists to be preferable to quantitative restrictions or to a single exchange rate.1 Countries introducing such rates expect to attain certain unique objectives. Over the last 20 years, the experiences of some countries have indeed shown how useful such exchange rates can be. But over the same period the experiences of other countries have been anything but satisfactory: multiple exchange rates have been found in practice to have many drawbacks that are not widely recognized but that may far outweigh their usefulness.

Although multiple exchange rates have been abandoned by several countries in recent years, they have been maintained by many others, including Afghanistan, Brazil, Chile, Colombia, Ecuador, Indonesia, Laos, Pakistan, the Philippines, Uruguay, Venezuela, and Viet-Nam. Even more important, several countries which have gradually become dissatisfied with the results of other controls have switched to multiple rates: Pakistan and the Philippines have introduced them only within the last 5 years. Moreover, when payments or fiscal difficulties recur, countries which had eliminated multiple exchange rates are inclined to reintroduce them or to adopt devices which are substantially similar. For example, Chile unified its rate in 1956, but shortly thereafter established a dual market which still continues. The United Arab Republic, over the last 15 years, used some form of multiple rates on several occasions, then unified its rate, and later introduced another multiple rate device.

The problem of multiple rates seems never ended, although its locale shifts. It may therefore be useful as a guide for future policy in developing countries to review first some of the results of the experiences which countries in similar circumstances have had during the last 15 or 20 years.2 This review seeks to define the characteristics of situations which make for successful use of multiple rates, and of those which make for comparative failure. Also, the nature of the problems that arise with multiple rates are set forth in detail, and the underlying assumptions on which economists have in the past argued, and still continue to argue, in favor of multiple rates are made explicit.

Although many of the countries discussed in this paper have, under the Fund Agreement, commitments in respect of multiple rates, neither Fund policy nor the international repercussions of multiple rates are considered here. The focus is rather on the self-interest of the developing countries themselves in choosing among alternative exchange policies. Since the experiences detailed have often been at considerable variance with original expectations, the reasons for adopting the rates are described first.

Reasons for Adopting Multiple Rates

Less arbitrary than quantitative restrictions

Multiple exchange rates seem to have the advantage of restricting the use of exchange for imports and other expenditures by relying on price and cost incentives. Demand for, and supply of, exchange are equilibrated by the price of foreign exchange rather than by administrative action. Multiple exchange rates are thus regarded as a way of distributing exchange on the basis of willingness to pay the price rather than on the basis of ability to obtain a license. They constitute a mechanism by which the arbitrary decisions of exchange control authorities, inherent in quantitative restrictions, can be avoided. The pressure on the authorities to issue licenses for specific imports is considered to be less than in a quantitative system. Therefore, since multiple rates impose less interference on consumer choice and are considered less arbitrary than licensing, they often are favored over quantitative restrictions.3

Countries, especially those in Latin America, have sometimes preferred multiple exchange rates to supply-type restrictions as better suited to free market economies. Generally, however, multiple currency systems lend themselves to only a limited number of rates, so that if a country undertakes to determine in considerable detail the nature and type of investment and the types of imports and exports that are to be permitted, a multiple currency system is not practicable. Quantitative restrictions are more adaptable to situations where there is considerable over-all government economic planning. If a country with an extensively planned economy uses multiple rates, it may require a whole complex of rates and, in addition, quantitative restrictions. This was true, for example, of Yugoslavia, which until the last few years maintained a large number of exchange rates in an effort to combine some use of the price system and some degree of planning. On the other hand, India has been able to have a considerable degree of economic planning with a unitary rate of exchange but fairly comprehensive quantitative controls.

Ease of administration and of taxation

Multiple rate systems have also been used because they are easier to administer than are exchange systems based on quantitative controls. Over-all quantitative exchange control requires a comprehensive system of licensing, exchange budgeting, and exchange allocation, whereas a multiple rate system can be handled by a small group of trained bankers who buy and sell exchange.

The relative ease of administration of multiple rate systems was of considerable importance in several less developed countries for a few years immediately after World War II. These considerations have become of less importance during the last decade as administrative procedures have advanced in many of those countries, especially in Latin America. Principles and techniques of exchange budgeting have, for example, become better known, and it has been administratively possible to prohibit specific imports and exports. Nonetheless, the need for systems that are readily administered is still great in a few Asian countries (such as Indonesia, Laos, and Viet-Nam), in Afghanistan, and in some new African nations.

In countries where taxes on commodity exports or duties on commodity imports cannot be applied for political reasons, or where income taxes either do not exist or are inadequate, multiple exchange rates are often believed to be a convenient means of taxation. Payment of a tax when exchange is sold to exchange control authorities, or of surcharges when exchange is purchased, is more readily enforceable than payment of other types of taxes.

A surcharge on imports and an exchange tax on all sales of foreign exchange have frequently been fruitful sources of revenue. The amounts collected have often been large, compared with receipts from other individual tax sources, and have been equivalent to a substantial portion of the government budget. Only customs duties have, in many countries, been a more important single source of revenue. Revenue yields from any individual excise tax (such as a tax on tobacco, liquor, and gasoline), license fees, and motor vehicle fees have tended to be smaller than those from exchange profits.

A study of the revenues from multiple exchange systems of four countries (Cuba, Nicaragua, the Philippines, and Venezuela) in the early 1950's ascertained that the contribution of multiple rates to the national government's total budget revenue ranged from about 5 per cent in Cuba to about 25 per cent in the Philippines.4 In Cuba, a 2 per cent tax on all sales of exchange, which constituted only about 4 per cent of total budget receipts, was a more important revenue earner than the income tax until 1953–54 and provided more revenue than numerous small taxes. In the Philippines, the 17 per cent exchange tax then prevalent, but subsequently abolished, was the largest single revenue earner in 1952 and 1954. In Venezuela, the revenue produced by the penalty export rate, which applied to the sales of exchange by foreign petroleum companies to meet their local currency requirements, amounted to some 5 per cent of total revenue in 1953–54.

The principal reason for relying on multiple rates rather than on other devices for revenue is that the fiscal system is usually overburdened with a number of small indirect taxes which produce little revenue. General import and export taxation, or greater use of direct taxes, such as the income tax, would be preferable, but these usually encounter political obstacles. In any event, it takes some years to work out the necessary legislation for increased direct taxation. Meanwhile, pending comprehensive fiscal reform, multiple rates are used to cope with balance of payments deficits as well as to meet fiscal needs.

Although several countries, especially in Latin America, have undertaken extensive fiscal reforms since the mid-1950's, introducing or raising income taxes and revising their tariff structures, many countries still rely to some extent on multiple rates for revenue. Continuously rising expenditures—not only for development but also for a variety of social programs—have in many countries vastly outrun available tax sources. For example, Colombia's total expenditures doubled from 1959 to 1963. The need for using multiple rates for fiscal purposes still continues in countries with weak fiscal systems, such as some in Africa and Southeast Asia. In November 1963, for example, the Democratic Republic of Congo introduced a multiple rate in part as a revenue-raising measure.

Isolating speculative transactions

In one of the first general economic arguments for multiple exchange rates, Professor Robert Triffin proposed using the price mechanism in order to avoid administrative decisions.5 He was seeking a solution to the problem of a primary producing country facing cyclical balance of payments disequilibrium caused by a generally depressed world market for raw materials or for its own particular exports. This situation, in which over-all exchange depreciation is regarded as ineffective, was to be distinguished from that of fundamental disequilibrium, where over-all exchange rate adjustment is necessary.

For the cyclical problem, Triffin advocated two markets—a normal market and an “auction” market. Exchange proceeds from exports or other easily controllable sources would be channeled into the normal market; such exchange would be freely available for essential imports and current transactions in invisibles. Exchange proceeds from more or less uncontrollable transactions, such as capital movements, could be sold in a free market for payments for nonessential imports or outgoing capital transactions. Triffin's “auction” market would in effect be a partial free market.

There is considerable logic in this dual exchange market approach. Such a system might prevent a black market and the need for administrative allocations of exchange. It might also provide the authorities with a so-called escape valve. Capital movements could take place without upsetting the market, or the rates, for normal trade and for transactions in invisibles. The system can be viewed, in fact, as a way to stabilize exchange rates by isolating in a separate market the speculative and volatile capital movements, which would otherwise disrupt the rate for normal trade and service transactions. Because of the existence of a separate capital market, with a free rate equilibrating the demand and supply for capital transactions, such transactions can be freely permitted without the hampering effects of exchange controls.

These arguments for partial free markets are not only of a theoretical nature; they have underlain the objectives of actual country policy. For example, they lay behind the dual market of Costa Rica, which prevailed for several years until 1962, and a similar mechanism which continues in Ecuador. They account for the emergence in Chile of the present dual market system after a unitary fluctuating rate had been established in 1956, following a long period of extensive use of multiple rates.

Alleviation of inflation

Another rationale of multiple rates is that they may have monetary effects which alleviate inflation. If the revenues or exchange profits arising from a multiple rate system are sterilized, there can be an important anti-inflationary effect. The multiple rate device thus has a twofold effect on the balance of payments: not only is there a devaluation effect, but some of the monetary expansion occasioned by devaluation is captured in the form of exchange profits. Both the exchange and the monetary effects serve to restrain import demand.

Furthermore, if an exchange spread is used—that is, if the exchange rate for exports is maintained while the effective rate for imports is devalued—some of the inflationary aftermath of devaluation may be prevented. The country may produce its exports under inelastic supply conditions, at least in the short run. Foreign prices may be high enough relative to domestic costs to move exports. In this situation, over-all exchange depreciation will add to the money incomes of exporters, while little expansion in the volume of exports may occur. At the same time, exchange rate adjustment may be required to reduce the demand for imports prevailing at the existing exchange rate and the existing level of money incomes. Use of an exchange spread is preferred to the depreciation of a single rate.

Maintenance of an existing rate for exports while the rate for imports is devalued serves the same goal as over-all currency depreciation combined with increased taxation of exporters, through either income taxes or export commodity taxes. In defense of multiple rates for this purpose, it has often been argued that it is easier to withhold income from exporters by not devaluing than first to enlarge their income through devaluation and then to decrease it by taxation. With an exchange spread, it is a moot point whether the tax which is implied by the less devalued rate for exports than for imports is on exporters, who are denied the benefits of devaluation, or on importers, who must pay the more depreciated exchange rate.

At times, especially where two exchange markets coexist, the size of the spread is reduced, as some of the benefits of devaluation are given to the exporters by a “mixing rate,” i.e., a specified proportion of exchange proceeds is sold at the official rate and the remainder is sold in the free market. This results in an effective rate of exchange which is a weighted average of the two rates at which the specified proportions of exchange are sold.

The type of situation suitable for an exchange spread is typical of many developing countries, whose exports consist of a few traditional items and whose import demand is continually fed by rising expenditures. It was virtually universal among primary exporting countries during the Korean war boom of 1950–51, when the countries had to find methods of taxing export earnings as foreign prices for their export products soared. In the absence of the political and legislative conditions necessary to introduce or to raise the rates of export taxes or of income taxes, exchange rate spreads were common. At the end of 1952 they prevailed in Argentina, Bolivia, Chile, the Republic of China, Costa Rica, Ecuador, Indonesia, Iran, Israel, Nicaragua, Paraguay, Thailand, Uruguay, and Venezuela, although many of these countries had additional rate devices along with the spread. Only a relatively few countries, such as Ceylon and India, were able to use export taxes.

Similar conditions have prompted similar action by several countries whose major traditional export has been in strong demand in external markets. Thailand used an exchange spread as long as the world price of rice was relatively high. The major exports of the Philippines are effected at a mixing rate: 20 per cent of the proceeds from all exports must be surrendered at the official rate of

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2.00 per US$1, and 80 per cent may be sold in the free market, which applies to all imports. The rate in the free market was
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3.91 per US$1 in December 1964.

The coffee-producing countries—like Brazil and Colombia and, to a lesser extent, Costa Rica and Nicaragua—in the recent past sought devices to withhold the benefits of devaluation from coffee exporters. In some of these countries, this was done while coffee prices in world markets were relatively high. In Brazil, the foreign exchange operations related to coffee exports resulted in a sizable monetary contraction in recent years.

Differentiation of exports

A related problem is also illustrated by the coffee-producing countries, especially Brazil and Colombia. The resources of a country may be particularly suited to produce a major export commodity. But the rate of exchange that is adequate for this product may not be satisfactory for other exports, or as a means of restraining import demand or of spurring the growth of new exports or import substitutes. However, diversification of production becomes necessary because a country with an excessive concentration of output in one export product runs the risk of encountering declining terms of trade in world markets.

Because of different circumstances of production for various export commodities, many of the less developed countries have sought not only to differentiate the export rate from the import rate but also to apply a series of exchange rates to various commodity exports or to commodity imports. The raison d'être of differentiated export rates is to overcome the fact that the official exchange rate may be too high (that is, overvalued) when it is applied to a country's minor exports. Where the competitive position in foreign markets of these lesser exports has been weakened because rising domestic prices of the commodities have made the domestic market more profitable, preferential exchange rates may aim at maintaining an export industry which is not expected to expand significantly but which does support a segment of the population. In this way, employment is supported. Alternatively, export rates may aim at encouraging diversification of export production by giving a more depreciated rate to new export commodities. In either case, the balance of payments position of the country is expected to be strengthened.

Special rates for minor exports have tended to disappear in recent years; but in the past, several countries used differentiated export rates. Some of the resulting rate structures became very complex. Some attempts were made even to devise a host of exchange rates for exports in accordance with special economic criteria, such as presumed elasticities of demand or of supply, or other conditions of production. In Israel, for example, from 1954 to 1960 exports were differentiated on the basis of the contribution of domestic processing to the total export product. A concept of “net value added” was set up which was the value of the export after deducting the direct and indirect foreign exchange cost. As an inducement to achieve greater domestic processing, premiums were established for exports in accordance with the “net value added.” By early 1962, just before the system was abolished, premiums had been established for all exports (and even for receipts from certain invisibles) so that the effective exchange rate varied with each export.

At the end of 1964, special rates for minor exports were not nearly so prevalent as in earlier years, but they still existed in some countries, including Afghanistan, Colombia, and Viet-Nam.

Differentiation of imports

For some import commodities, a partial devaluation through multiple rates is sometimes favored over a general devaluation. Countries have used multiple import rates to reduce or to prevent an increase in aggregate imports and at the same time to limit to certain import categories the price rise consequent upon devaluation. Imported items important in the cost of living, for instance, have been made subject to less devalued rates of exchange than have imports of semiessential and luxury goods. This rate structure is designed to help to hold in check increases in the cost of living index and hence a price-wage spiral, especially where there are price-wage links in contractual agreements. In the same context, less devalued rates of exchange have been applied to raw materials or intermediate products required for domestic production so as to minimize price increases all along the cost structure. In countries where the government is a large importer, multiple import rates have served to hold down increases in budgetary expenditure resulting from a rise in the local currency cost of imports. Countries that continued to have multiple import rates at the end of 1964 for some of these reasons include Afghanistan, Brazil, and Indonesia.

Multiple import rates also aim at altering the commodity composition of imports in much the same manner as do selective quantitative restrictions. For this purpose, multiple rates are often believed to be preferable to quantitative restrictions on several grounds.6 Because higher prices for exchange reduce some of the demand for imported goods, at least of nonessential and luxury commodities, there is thought to be less pressure on the authorities to change licensing policies or to make exceptions to the general policies in particular instances. This, in fact, is considered by many to be one of the great merits of multiple exchange rates. To let the price system perform a larger role in allocating exchange, so as to reduce the constant pressure on exchange control authorities by commercial and political interest groups, was one of the major reasons why Pakistan in 1959, and the Philippines in 1961, turned from quantitative restrictions to multiple exchange rates. Such changes have seemed especially attractive when the unitary exchange rate, bolstered by quantitative restrictions, has become increasingly overvalued. In these conditions, quantitative restrictions tend no longer to restrain imports satisfactorily, or exports begin to need some special inducement. Exchange taxes or some export promotion devices that are tantamount to multiple rates have to be introduced. The disadvantages of quantitative restrictions are not discussed here, but one of their important inadequacies may be pointed out, i.e., when they fail to function properly, they have to be supplemented, or supplanted, by multiple exchange rates.

Another reason for preferring multiple import rates to quantitative restrictions on imports is that, through such rates, the windfall profits to importers are siphoned off by the government. Through the device of multiple rates, importers pay in advance to the government the additional local currency implicit in the shortage of exchange. Otherwise, the premium prices prevailing for imported goods in domestic markets are captured by those fortunate importers who obtain import licenses, and black markets for the transfer of import licenses have been known to spring up.

Successful Experiences with Multiple Rates

Some of these proclaimed advantages of multiple rates have been realized in practice, especially where they have been used temporarily. The rates have at times been effective as an anti-inflationary tool. In many instances, they have helped to offset the price and income effects accompanying inflation. They have often served to hold down a rise in exporters' incomes in periods of export booms and to check increases in key prices in the domestic economy, which are important either in the cost of living or in the cost of production. Accordingly, they have reduced the cumulative effects of inflation. Where exchange profits have been used to retire government debt held by the central bank, multiple rates have even helped to disinflate the economy.

Therefore, if a depreciation of the average rate is required, efforts to unify an exchange system which is producing a monetary contraction must usually be preceded by other adequate anti-inflationary measures. Otherwise, the removal of multiple rates can worsen rather than solve the problem of inflation.

Multiple rates have also been used successfully during a transition from one exchange system to another. Where exchange devaluation is necessary but is difficult to effect in one step, multiple rates have sometimes been introduced as a prelude to comprehensive devaluation. The use of a series of steps rather than a single step toward devaluation has enabled the economy to adjust to exchange depreciation in stages. Temporary use of multiple rates has also allowed some experimentation in finding the optimum level for a new fixed rate of exchange.

Experience of Thailand

Thailand's use from 1947 to 1955 of multiple exchange rates for the foregoing purposes was particularly successful. Following World War II, Thailand's problem of keeping its balance of payments under control was serious: its foreign exchange reserves were negligible. It was necessary to build up reserves, if at all possible, while good export prices prevailed. Moreover, a new and satisfactory exchange rate was essential, since the existing rate was completely out of date. On the internal side, it was imperative to insulate the domestic economy from the high external prices for rice. Rice was not only Thailand's chief export commodity but also its most widely consumed domestic commodity. To allow the high prices for rice in foreign markets to inflate the domestic economy would cause hardship at home and might soon accelerate import demand, weaken the balance of payments, and make the accumulation of reserves impossible.

To cope with these problems, Thailand had few policy weapons available. Quantitative trade and exchange controls from 1945 to 1947 had not been effective. The fiscal system was especially weak: only 4–7 per cent of the gross national product was absorbed by the Government as revenue, considerably less than in most of the less developed countries. Thailand was also behind several other Far Eastern countries in imposing and collecting direct income taxes; such taxes provided only about 7 per cent of total government revenue. Consequently, neither a commodity tax on exports nor direct taxation of income would be effective for taxing exporters' profits.

The system used

Thailand, therefore, introduced a multiple rate scheme: a fixed official rate of B 12.50 to the U.S. dollar and a fluctuating free market rate, which was usually about B 20–21 to the U.S. dollar. On the export side, the official rate applied to proceeds from exports of rice and to part of those from exports of rubber and tin. Usually, 20 per cent of the proceeds from rubber and tin exports had to be sold at the official rate, and the rest could be sold in the free market. Rice exports were a government monopoly. A Rice Marketing Board purchased rice from private dealers at fixed prices well below world market levels. This Board distributed rice to domestic users at fixed prices and made arrangements for international sales in bulk.

On the payments side, the official rate applied only to government transactions, certain educational expenses, and some essential imports; all other transactions were effected at the free market rate. Little use was made of quantitative restrictions.

Changes in the system were made frequently. Exporters of rubber and tin were gradually required to sell less and less of their exchange at the official rate and were permitted to sell more and more at the free rate. This constituted an effective devaluation of the exchange rate for these exporters, helping them to adjust to rising costs. The official rate of exchange continued, however, to be applied to proceeds from rice exports. An effective depreciation for imports was achieved by a gradual reduction over a period of years in the list of preferred imports subject to the official rate. At times, quantitative restrictions were reintroduced; but since they led to administrative abuses and domestic price increases, they lasted for only very short periods.

Traditional export surpluses were quickly restored. Also, the free rate meant that there was never any excessive overvaluation. When multiple rates were changed, there was no predevaluation atmosphere, with anticipation of price increases and speculation. The domestic price level was successfully insulated from inflated export incomes; thus the cost of living was kept low, and a sharp price-wage spiral was prevented.

A continued realistic rate of exchange for imports prevented over-importation and permitted a substantial accumulation of exchange reserves. By the end of 1955, gold and foreign exchange holdings had risen to $300 million. The Government could thus capture some of the gains from the favorable terms of trade. The currency was virtually convertible as early as 1947, which helped to encourage foreign investment.

The spread between the official and free market rates of exchange also yielded exchange profits. The Government sold local currency to exporters at the official rate but sold exchange to importers in the free market. These exchange profits provided the Government with revenue with which to offset the monetary effects of reserve accumulation. From 1949 to 1952, the exchange system accounted for 10–18 per cent of total government revenue—more than the revenue from export duties. At the same time, there does not appear to have been much shifting into or out of rice production as a result of the unfavorable rate of exchange; although output has increased only slightly in the last 15 years, this has not been due to the price situation or to the exchange rate so much as to the difficulties of cultivating additional lands.

Elimination of multiple rates

By 1955, the external prices for rice were nearly 30 per cent lower than they had been in 1949, and the volume of rice exports from Thailand was beginning to decline. The time had come for a shift of policy. Rice trade could again be placed in private hands and the penalty export rate eliminated, although some taxation of rice was continued.

At the beginning of 1956, the multiple rates were abolished, and a fluctuating unitary rate was established. This system continued in effect until October 1963, with the rate remaining stable at about B 21 to the U.S. dollar. In October 1963, Thailand established with the International Monetary Fund a par value for its currency, at the rate of B 20.8 to the U.S. dollar. Thailand thus achieved the initial goals of its postwar exchange policy—i.e., finding a new stable rate of exchange for the baht and accumulating reserves. In fact, reserves totaled $600 million by the beginning of 1964. Commodities can now be imported freely except for certain items, the domestic output of which is protected by a virtual prohibition on imports. Approval is needed to transmit capital, but once it has been given, capital can be transmitted through the free market.

Several factors were important in the successful functioning of the multiple rate system in Thailand. The country enjoyed high external prices for rice for several years; production of other agricultural products expanded readily; foreign demand for rubber was heavy. Hence, taxation of major exports produced the desired results. Furthermore, the internal monetary and fiscal policies that were pursued led to comparatively stable domestic prices: the wholesale price index rose by only 25 per cent in the 16 years 1948–63. This absence of inflation meant that a realistic exchange rate could be maintained without excessive depreciation.7

Other successful cases

Thailand is by no means the only country in which multiple rates have performed well their intended functions. Costa Rica, where the dual market prevailed from the early 1950's until 1961–62, and Nicaragua, with its exchange spread from 1950 to 1962, are other examples. Being dependent on coffee as a major export, both these Central American Republics had the taxing of coffee exporters as an important objective of exchange policy, while a more depreciated exchange rate was applied to imports in the interest of restraining them. A second objective, especially in Costa Rica, was the separation of the exchange rate for capital transactions from that for trade. The systems of both countries fulfilled their objectives for several years without adverse consequences on trade or domestic production. Foreign exchange reserves were accumulated. Exports continued to expand, and there was an impressive growth of new export products, especially in Nicaragua. Exchange rates were maintained at realistic levels. Proliferation of rates was avoided, and eventually a fixed unitary exchange rate was achieved in each country.

As in Thailand, so in Costa Rica and Nicaragua, an important reason for the success of the multiple rate system lay in the comparatively conservative domestic monetary policies and relative price stability. The cost of living in Costa Rica rose by about 40 per cent from 1948 to 1963, and that in Nicaragua by about 80 per cent. Moreover, coffee has on the whole been a “growth” commodity among primary product exports. In addition, however, in the three countries there were several aspects of exchange policy which made for satisfactory results with multiple rates. Realistic exchange rates were maintained. There was no attempt to make the system serve a variety of objectives simultaneously. (The problems of doing this are discussed later.) The exchange rate system was kept simple, with only relatively few rates.

Less Satisfactory Experiences

In many countries, multiple exchange rates have not served as well as in Thailand, Costa Rica, and Nicaragua to hold inflation in check. Much, of course, depends on the nature of the monetary and fiscal policies pursued. If such policies are expansionary and protracted inflation ensues, multiple rate devices usually prove to be unsatisfactory. Although an exchange spread provides an additional measure of monetary control, multiple rates alone cannot offset serious inflation from other sources. In such situations the adoption of multiple rates is merely a symptom, not an underlying cause, of the basic economic difficulties. Clearly, multiple exchange rates cannot be—and usually have not been—expected to counteract deep-seated economic maladjustments.

However, the types of problems which arise with multiple rates under circumstances of inflation need to be stressed. These problems have been so frequent as to be more the rule than the exception. They reflect the operational circumstances of a number of countries that have in the past used multiple exchange rates. Also, they reveal what constitutes a successful, and an unsuccessful, use of multiple exchange rates. At times, multiple rates have failed completely to meet the objectives for which they were intended. Such failure, however, under circumstances of inflation as described below, is not necessarily inevitable. Failure is often attributed to poor administration and management or to the excessive succumbing of policymakers to political considerations. The implication is that, with better administration, poor results from the use of multiple rates can be avoided. Examination of country experiences may suggest some of the ingredients of a successful multiple rate policy or administration, as well as some of the reasons why, under conditions of chronic inflation, alternative exchange rate policies—for example, a unitary fluctuating rate—may be more satisfactory.

Dissipation of initial objectives

In circumstances of inflation, ad hoc adaptations and amendments of the original multiple rate system become necessary. As exports are produced under conditions of increasing costs, balance of payments considerations dictate the need to set more depreciated rates for export commodities. On the other hand, the increases in the domestic prices make the authorities reluctant to depreciate import rates, since this would bring about still further price increases.

As the exchange system becomes increasingly complex, with a series of export rates and a series of import rates, it becomes difficult to gauge the size of an effective exchange spread. Weighted average exchange rates for exports and for imports have to be calculated, which is not always easily done. If the rates for exports are depreciated while rates for imports are maintained, the exchange spread tends to become smaller.

Instances have arisen where the effective rate for exports has been depreciated more than the effective rate for imports. Exchange losses have then ensued for at least short periods of time.

It is difficult to estimate the magnitude (sometimes even the direction) of monetary consequences of a multiple exchange system. Some portions of a given rate structure may produce gains while others give rise to losses. Furthermore, in many multiple exchange systems the monetary proceeds are specifically designated for a related use; for example, proceeds from the penalty rate on coffee exports in Brazil and Colombia have been partially used to purchase coffee stocks or to finance other price support operations. Hence, the total monetary effect derives from the net result of several operations. Furthermore, it is virtually impossible to distinguish the monetary effects of multiple exchange rates from those of the trade deficit. For all these reasons, losses may ensue and may continue for some time before being checked. The monetary function of the exchange system is thus reversed.

Especially when the monetary function of an exchange system is reversed, the whole exchange system has to be overhauled eventually, and the attempt to design an exchange system to suit several objectives simultaneously begun all over again. Colombia, with a history of multiple rates since 1947, undertook at the end of 1962 one of a series of exchange reforms. At that time, the spread between its coffee export rate and its basic import rate was enlarged. This was partly a monetary measure. However, even after this reform, some portions of the exchange system were still giving rise to local currency losses: foreign exchange from minor exporters was being purchased at a more depreciated rate than the one at which foreign exchange was being resold to importers. This loss, however, is reported to have been recouped totally or partially by sales in the free market.

Experience of Bolivia

There have even been cases where the inflationary spiral has been aggravated, instead of being helped, by a multiple rate system. A particularly notorious example of the adverse effects of an exchange system on inflation is afforded by the Bolivian experience before the exchange reform of 1956. During that period, local currency losses arising from the exchange system were generated by an excess of imports at official rates. The weighted average effective rate for imports was depreciated less than the weighted average effective rate for exports. In other words, the spread was the reverse of what it should have been for the exchange system to have had a positive monetary effect. To make matters worse, the losses were financed by the Central Bank. In time, these losses became so great as to constitute the principal cause of inflation in the prestabilization period in Bolivia.

The fact that the official rates constituted subsidies to imports was also a disincentive to domestic production. Because of the reverse exchange spread, and the consequent possibility of exchange profit, imports were re-exported. Even goods imported by the Bolivian Government and imports received under aid programs from the United States were reportedly re-exported. These exports reduced the domestic supplies available for mitigating the inflation.

The situation was further aggravated by internal speculation prompted by uncertainty as to exchange rates for imports. In anticipation of depreciation, speculative importing and an accumulation of inventories took place. This heightened the balance of payments deficit, and, because the commodities were withheld from the market, domestic prices soared even higher. The export rate applied to the output of the nationalized mining operations was only a fraction of that which would have prevailed under any realistic valuation. Accordingly, exports were discouraged, and contraband trade was induced. These problems were ended in December 1956 when Bolivia replaced its multiple rate system by a single fluctuating rate for all transactions.

Reasons for failure to meet objectives

Essentially, as the authorities alter and adapt multiple rates to changing circumstances, they are heavily influenced by balance of payments considerations. Hence, it is the balance of payments function of multiple rates which tends largely to govern the exchange rate structure that emerges in practice. Exchange profits and domestic price effects are incidental consequences of the exchange system. These profits are apt to be reduced or eliminated by changes in the balance of payments position that occur over time. In situations of prolonged inflation, commercial pressures to devalue the prevailing rates for exports become pronounced. This is especially true where several export rates exist and the manipulation of export rates becomes common. Simultaneously, there is increasing reluctance to tamper with the flow of imports and with import rates as more commodities are required to hold down rapidly rising domestic prices. Exchange profits become a secondary consideration. And the monetary restraint function of the multiple rate system is soon lost.

Time and again, multiple exchange rate systems have been instituted to achieve two or three simple objectives. Usually these objectives have to do with the economic functions which multiple rates are believed to perform: to mitigate the rise in domestic prices, to alleviate balance of payments deficits, and to assist the government budget. In the first instance, it is difficult, if not impossible, as discussed below, to devise a rate structure which can fulfill simultaneously several objectives. However, even if it were assumed that an appropriate rate system were instituted, that system could not last long under chronic inflation. Where there is continued inflation, the prevailing rates are quickly overvalued. Then the three objectives cannot be achieved concurrently, and they begin to conflict with each other.

If the rates are maintained as a means of holding down domestic prices, balance of payments pressures become excessive and undue losses of reserves occur or arrears are built up. On the other hand, if the rates are devalued to assist the balance of payments position, domestic prices may rise and/or the contractionary effects of the exchange system disappear.8 On occasion, the illusion that multiple rates were offsetting, at least in part, domestically generated inflation has even reduced resistance to inflationary policies and created an inclination to meet balance of payments difficulties by depreciating the rate structure rather than by appropriate domestic policies.

The anti-inflationary effects of a multiple rate system also depend on the use made of the resulting revenue. One of the best uses is to retire government debt held by the central bank, as was done in Thailand. If the revenue is spent, the multiple rates do not contract the monetary supply; they only redistribute domestic incomes. In the absence of sterilization, the effects on imports result only from the reduction of import demand—or of importers' profits—brought about by the increase in the landed cost of imports caused by multiple rates or by an exchange spread. In several countries, import demand has been less effectively contracted through a rise in import prices than through a reduction in money incomes.

The above analysis, summarizing the experience of several countries in the practical operation of multiple rate systems, refutes many of the arguments that have been cited earlier for multiple rates. Only under special circumstances do multiple rates alleviate inflation. Moreover, the frequent manipulations of the rate structure as a result of commercial pressures indicate that multiple rates are not free market prices equilibrating demand and supply. They involve numerous decisions by the exchange authorities as to what commodities and which transactions are to receive various rates, much in the same way that import and exchange licensing systems require administrative decisions. In fact, the ease with which many rate systems have been altered has often suggested administrative laxity. The very flexibility of multiple exchange rates, which is argued in theory as an advantage, thus in practice becomes one of their drawbacks.

Danger of Overvalued Export Rates

Another crucial problem that arises when multiple export rates are introduced is the danger of maintaining overvalued rates for basic exports. A “penalty” rate for major exports—one that is less depreciated than the rate prevailing for other exports or for imports—runs the grave risk of overtaxing a country's best exports. The problem arises because it is often difficult to detect that export difficulties are in fact ensuing. While exports are being maintained, production may not be expanding and exports may not be increasing as much as they could be, considering that exports of competing commodities from other countries are expanding. This often happens if internal prices and the costs of domestic producers are rising while the exchange rate is maintained.

The issue is not a simple one because very often primary producing countries, in the interest of export diversification, want to shift resources from basic industries. Hence, an exchange rate which discourages the use of additional resources in the traditional export industries may not be considered unsatisfactory. Often, it is only after years of export difficulties that such countries realize the need to alter their policies.

There are, of course, several explanations of low exports, and it is difficult to isolate the adverse effects of multiple export rates. Inflation, in particular, has been an important drawback to export growth in many countries. A study of the relation between inflation and primary exports found that inflation retarded exports most of all in countries of strong inflation, and that for these countries, unlike countries with “mild inflation,” devaluation did not offset to any great extent the effects of inflation on exports.9 Since most of the countries with strong inflation also had multiple export rates—for example, Argentina, Bolivia, Brazil, Chile, and Indonesia—it would appear that, even with multiple export rates and frequent changes therein, overvaluation was a serious problem.

Many countries which had multiple exchange rates for several years and then unified their rates at a realistic level subsequently experienced a considerable improvement in their exports. In several instances, this was true not only of major exports but also of minor exports. These results, of course, were not always consistent throughout the years following the unification of rates. In some countries, even the unitary rate eventually became overvalued—for example, by the pegging of a fluctuating rate—and exports were again adversely affected. A subsequent devaluation once more stimulated exports. Even when realistic rates have prevailed for relatively short periods of time, the importance of such rates in stimulating exports has been noted in several countries. The success of Peru in exporting during many of the last several years may be attributed in part to the maintenance of realistic exchange rates.

Experience has also demonstrated that considerable time may be required before the effects on exports of exchange reform can be demonstrated. This has been indicated by a study of the effects of exchange reform in Greece: exports did not show sizable increases until about 2 years after the elimination of Greece's multiple rates in April 1953.10

Difficulties in determining an adequate rate structure

The problem of overvalued export rates arises largely because in practice it is difficult, if not impossible, to determine an exchange rate structure that will perform the functions which in theory are attributed to multiple rates. This occurs even if allowance is made for the possibility that many rates will be introduced.

Although the economic logic of multiple export rates is (as noted above) that they gear the several exchange rates to the different price-cost, production, or external market conditions of various export commodities, in practice the rate selected for the major export commodity usually dominates the entire rate structure. The rate for imports must be selected with the major export rate in mind. A large difference between the export rate and the import rate encourages exporters to understate exchange earnings or to engage in contraband trade in order to avoid surrendering exchange at an excessively overvalued official rate of exchange. Therefore, even when external market conditions for their major export commodity did not necessarily warrant devaluation, several countries have devalued their basic export rate as a way to devalue the import rate and at the same time avoid too wide a spread between the rates. Some policymakers have come to the belief that 10 per cent is the maximum spread possible between rates if black markets are to be avoided.

Too small a spread in rates, however, may well involve overvaluation or insufficient taxation of exports. The narrower is the spread, the less is the function performed thereby. In some countries, when high prices for the major export prevailed, the penalty rate did not provide sufficient taxation of that export. This was especially likely to happen if there was an upsurge in external prices for the export commodity, since penalty rates were rarely appreciated. In such circumstances, the domestic economy was not insulated from the high export prices prevailing abroad. Increases in export earnings were accompanied by a steady expansion of domestic demand. At the same time, the basic import rate was frequently kept at an overvalued level, so that imports rose sharply. In effect, much of the large export earnings was dissipated in higher consumption, especially of imports. Later, when the export boom collapsed, adjustment to the inevitable balance of payments deficit was all the more difficult. The economy had become accustomed to a large volume of imports. Reserves which had not been adequately built up were soon depleted. Frequently, drastic domestic measures had to be instituted, including curtailment of the very investments which were needed for economic development.

Thus, countries fixing multiple rates have carefully to choose between the Scylla of overtaxing their major exports and the Charybdis of under-taxing them. These difficulties of devising an adequate exchange rate structure also make it unlikely that several purposes can be served simultaneously by any given structure.11

Similarly, an exchange system is not well suited to provide a differential between a rate adequate for traditional exports and a more depreciated rate for minor exports. The rate for minor exports cannot be determined in isolation from the rest of the rate structure. A rate fairly consistent with the basic rate for major exports usually bears little relation to the price-cost structure of minor exports. The better the major export does in world markets, the more difficult it is to provide an adequate rate for minor exports. Authorities are usually reluctant to introduce a large spread in rates mainly to facilitate minor exports. Furthermore, if the major export is doing well, there may not be much pressure for more devalued rates on the import side. Therefore, the entire rate structure may be overvalued insofar as minor exports are concerned. The boom in the major export may even cause increases in domestic prices and in costs for the minor industries, making more inadequate whatever exchange rate is selected for secondary exports. Thus, frequently, the exchange rate for minor exports is not as depreciated as an equilibrium or unitary exchange would be. For this reason, over-all exchange reforms have usually involved devaluation which benefited not only major exports but also minor ones.

It has been determined that, in countries with strong inflation, the effect of inflation has been particularly pronounced on minor exports.12 This again suggests that, although the designated purpose of multiple export rates is to help to offset rises in domestic costs under conditions of inflation, such rates have not in practice proved to be realistic and adequate. This has been especially true in countries with persistent and sizable inflation—and these are the countries that make the most use of multiple export rates.

Special rates for minor exports

Some countries have not achieved significant export diversification despite their prolonged use of special rates for minor exports. Increases in the flow of minor exports have usually resulted from improved external market conditions or from a series of domestic measures designed to enlarge the supply of export goods. The latter include changes in investment policy and tax concessions for exporters. However, when accompanied by these circumstances or measures—in other words, when the economy has had an export orientation—preferential exchange rate treatment has been more satisfactory as a means for expanding minor exports, although the degree of preference required has usually been large—at least 20 per cent, and preferably much higher, even up to 40 per cent.

These points are exemplified by the experiences of Israel, Yugoslavia, and Pakistan, which in the last few years have managed to increase appreciably their secondary exports. In Israel and Yugoslavia, this result followed the unification of complex multiple rate structures, which had included a variety of export rates.13 Following devaluation and exchange reform early in 1962, Israel's total exports in 1963 exceeded those in 1961 by more than 40 per cent. Although this was due mainly to an increase in exports of diamonds and an unusually large increase in citrus exports (Israel's two main exports) in 1963, there were also sizable increases in such secondary exports as processed food, textiles, clothing, chemicals, and mining products.

Yugoslavia—after a long period of complex multiple rates on both the export and import side—established a uniform rate for all exports on January 1, 1961. However, export subsidies of varying magnitudes paid from the budget were instituted for about 200 commodities, covering some 57 per cent of total exports. These subsidies ranged from 10 per cent to 32 per cent. Exports rose by 20 per cent in 1962 and by another 13 per cent in 1963. There was a sharp increase in exports of agricultural products, mainly livestock and livestock products, but there was also some expansion in exports of industrial products, especially textiles, wood products, electrical products, chemicals, and leather and shoes. Some of the largest increases were in those commodities subject to the greatest subsidies. Along with these subsidies were other factors, such as the liberalization of imports (especially raw materials) and suppliers' credits, which also facilitated increased exportation.

Pakistan introduced an export bonus scheme in January 1959. This was intended to stimulate new exports by offering more depreciated exchange rates for manufactured goods and raw materials: manufactured goods were to receive a bonus of 40 per cent, and raw materials (other than raw jute, raw cotton, hides, skins, wool, tea, and rice, Pakistan's principal exports), a bonus of 20 per cent. Since then, many more bonuses have been introduced and many commodities made subject to larger bonuses, which has meant, in effect, applying more depreciated exchange rates. By 1964, there were seven different bonuses ranging from 10 per cent to 40 per cent. Exports of most commodities under the bonus scheme have risen substantially. They were valued at PRs 358 million—about 24 per cent of total exports—in 1958/59, but at PRs 850 million (37 per cent of total exports) in 1962/63. This expansion included exports of jute manufactures, rice, fish, cotton products, leather, sporting goods, carpets and rugs, paper and newsprint, surgical instruments, and boots and shoes.

The experiences of these three countries suggest that the successful stimulation of minor exports requires sizable premiums and price incentives, and also the simultaneous undertaking of other export-promotion measures. However, certain problems may well arise. The experiences of other countries indicate that large premiums for minor exports have frequently been difficult to maintain for the long periods of time necessary to achieve production of new exports. A wide spread between the rate for major and for minor exports is subject to continuous commercial pressures by major exporters to devalue the rate applicable to their commodities. A wide spread runs the risk that a rate may ensue which is too devalued for other exports or for imports, so that eventual unification at that rate is impossible. Since appreciation of the minor export rate is unpopular, unification itself is unduly postponed.

Frequently, the proceeds of minor exports are placed in free markets. Much then depends on developments in respect of the rates on the free market, and the extent of deviation of the free market rate from the official market. If the spread narrows, some of the stimulus of the free market to minor exports is lost. If the rate on the free market appreciates, exporters of minor products are faced with declining profit margins. Free market rates can be very unstable, being determined, among other things, by the vagaries of capital movements, changes in policy concerning items included or excluded from the free market, and shifts in central bank policy on pegging the free rate. Such changes in policy are very important since the expectations of producers and exporters as to the future rate applicable to their commodities are often decisive in their consideration whether to produce or to export minor commodities. The experience of Colombia seems to bear out the vital role of expectations of the level of the future rate. Consequently, for achieving increased exportation of minor products, exchange rate stability at a unified realistic level has often been a more effective method than special rates for minor exports.

Experiences with Multiple Import Rates

Multiple import rates may be important, along with other phenomena, in causing distorting effects on the pattern of investment in developing economies. Where multiple import rates have existed, there have sometimes been shifts of demand away from those imports which have been classified as “luxury” items, and for which depreciated exchange rates prevail, to imports which are classified as “essential” and for which exchange can be obtained at favorable rates. Where an official and a free market coexist, substitutions of official market imports for free market imports have been common.

These effects on the commodities imported have had effects on the economies of developing countries which are detrimental to a viable industrial structure. Production of essential items has failed to expand or has even declined while production of nonessential or luxury items has increased. For example, in Colombia from 1955 to 1957, under inflationary conditions, there was an increased tendency to import parts for assembly industries or to import capital goods, since these items received preferential exchange rate treatment. Thus, multiple import rates can be a factor in inducing an excessive number of assembly industries to be set up or an inordinate amount of manufacturing capacity to be installed. If it is expected that the preferred rate treatment will shortly come to an end, inventories of capital goods may be accumulated. It has even happened that such inventories have become obsolete before being used. At times, there has been a prolonged dependence on imported foodstuffs in some countries where there have been special appreciated import rates for such products.

The distorting effects of multiple rates on imports and domestic production are also exemplified by the experience of Venezuela. Before 1959, the spread between the rate at which foreign-owned oil companies purchased bolívares to cover local costs (Bs 3.09=US$1) and the official rate for other exports and imports (Bs 3.35=US$1) was Bs 0.26 per U.S. dollar; in the period 1959–January 1964, it was Bs 1.41 per U.S. dollar. This substantial widening provided a strong incentive for the oil companies to avoid bolívar expenditures and to make expenditures as much as possible in foreign exchange. These companies, when making local payments, operated on the basis of the Bs 3.09 rate, but they found that the dollars freely available to them were generally valued in the Venezuelan economy at Bs 4.5 per U.S. dollar. Therefore, they increasingly found it cheaper to import supplies rather than to purchase them locally. However, if the oil companies had imported products directly, local production facilities might have been endangered. Hence, several problems arose concerning the source of supply to be used for trucks, steel pipe, plastics, synthetic rubber, and other items. In some instances, special arrangements between the Government and the petroleum companies had to be worked out until the exchange system was revised in January 1964.14

Such developments are not due entirely, or even mainly, to the existence of multiple exchange rates. Many other factors, such as government investment and tax policies, the shape of domestic demand, and the natural resources available, are more decisive in explaining the nature of the specific industries developed in a particular country. However, by influencing the commodity composition of imports, multiple rates often play an added, if hidden, role in the rate at which some industries grow relative to others.

Experiences with Partial Free Markets

Free markets in practice have deviated from what might be expected in theory. They have often failed to perform as a safety valve. When the rate in the free market has diverged sharply from the official rate, the central bank authorities have all too frequently acted to peg the free market, so as to avoid pressure on the official rate. The free market is a poor device for conserving reserves if reserves are used to support the rate in that market. Capital outflow often takes place through the free market, and reserves used to support the rate in that market are in effect used to finance capital outflow. The rule-of-thumb of 10 per cent as the maximum permissible divergence between an official and a free market rate to avoid black markets gives very little scope for a free market to act as a safety valve in actual practice. Two recent illustrations of considerable intervention in such free markets are afforded by the actions of the authorities in Colombia and Afghanistan; Chile has also undertaken some pegging of the rate in its official market.

The reintroduction by several countries of administrative exchange allocations has also tended to abrogate the theoretical function of a free market. When the rate in a free market has depreciated excessively, countries have tried to stem the tide of depreciation by introducing prohibited lists or import licensing in addition to the multiple rates already in effect. It has been feared that the free market rate might become too far out of line with any rate that the country foresaw being able to maintain in the future. Countries which have had to act in this way at one time or another include Argentina, Brazil, Chile, and Colombia. Consequently, free markets in actual operation have, by no means, been a successful solution to the problem of capital flight.

Free markets have frequently discouraged the inflow of foreign capital. This has resulted from the continued presence of government controls, uncertainty occasioned by rate instability, and the effects on profits to be remitted if excessive depreciation should take place in partial free markets. In fact, in order to minimize the adverse effect of free markets on private capital inflows, it has become customary—especially in Latin American countries—to distinguish types of capital. “Registered” capital has usually been long-run steady investment—considered to be in the interest of the receiving country; registration might depend on all sorts of criteria. Such capital could enter, and within limits be remitted abroad, at the official rate. “Unregistered” capital—usually more volatile and speculative than “registered” capital—has been subject to the free market rate. At the end of 1964, Ecuador still continued to have this distinction between registered capital at the official rate and unregistered capital at the free rate. Afghanistan has undertaken that registered capital may be repatriated at the free rate—after 5 years in limited amounts and after 10 years without limitation.

Partial free markets in some countries have shown a tendency to perpetuate themselves beyond the time when they are needed. This has occurred even when adequate domestic policies have been instituted and maintained, so that inflation has abated. For several years, Peru continued to have a dual market even after the spread between the two rates became very small. At times, the movement of private capital may be the reverse of that expected when the free market was established: it may be incoming rather than outgoing. In Colombia, the balance of payments crisis of 1955–57 resulted in the establishment in June 1957 of a dual exchange market as a safety valve for speculative capital movements. (This free market still continues.) However, balance of payments data indicate that in several years thereafter (1959, 1960, and 1961) there was a net inflow of both long-term and short-term private capital; in 1962 there was a net outflow.

In many instances, partial free markets have not encompassed all capital transactions. Over time, a considerable differentiation of exchange rates applicable to capital transactions has frequently developed, just as a similar rate differentiation has occurred for current trade transactions and transactions in invisibles. Some countries have applied favorable rate treatment to what was considered productive or essential investment but not to other capital. In other countries, the capital imported by certain foreign-owned industries—such as petroleum or metal-extracting—has in effect been taxed by the requirement that it be surrendered at the official rate while other capital was admitted at the free rate. Thus, the existence of partial free markets has by no means necessarily meant a simple system in which one uniform rate applied to all capital transactions while another uniform rate applied to all current transactions; in practice, there has been considerably greater differentiation.

Usually, however, it has been under conditions of persistent inflation that partial free markets have tended to last for long periods, or to re-emerge frequently in the exchange structure, or to become very differentiated. Under more stable monetary conditions, partial free markets for capital have gradually been merged with the official market. Thus, the partial free markets of Chile, Colombia, Brazil at several times, and Uruguay have tended to persist or to re-emerge, while those of Costa Rica, Nicaragua, Peru, and Thailand, after having outlived their initial purpose, were eliminated.

Thus, for a variety of reasons, free markets have not in practice performed the simple purposes for which they were initially intended.

Elimination of Multiple Rates

The unfortunate experiences with multiple exchange rates have led to considerable dismantling of these systems in the past 8 years. Prior to 1955, all ten South American Republics, Costa Rica, and Nicaragua had multiple exchange systems of one sort or another—some with extremely complex rate structures. Six of these countries—Argentina, Bolivia, Costa Rica, Nicaragua, Paraguay, and Peru—now have essentially unitary exchange systems. Argentina, Bolivia, and Paraguay put into effect between 1956 and 1959 sweeping exchange reforms in connection with comprehensive stabilization programs. Peru eliminated most of its controls as early as 1949 but retained a dual system until May 1960; it now has a single fluctuating rate. Nicaragua gradually eliminated multiple rates; and Costa Rica, by a series of steps in 1961 and 1962, removed the last vestige of a multiple currency practice from its exchange system.

Even among some countries which have not yet completely eliminated multiple rates, there has been a substantial reduction in the degree and complexity of the multiple rates used. This has been effected, for example, by Venezuela, which in January 1964 simplified its exchange rate system.

Outside Latin America, there have been equally impressive simplifications and unifications of exchange systems. Between 1955 and 1962, seven countries (Republic of China, Israel, Spain, Turkey, Thailand, the United Arab Republic, and Yugoslavia) undertook either comprehensive reforms or gradual steps to a virtual unitary rate. The complex exchange rate structure of Afghanistan was greatly simplified following a devaluation of the official rate in March 1963. Indonesia devalued its system and made it less complex in May 1963. There continue to be multiple rates of some significance in several countries, including Afghanistan, Brazil, Chile, Colombia, Ecuador, Indonesia, Pakistan, the Philippines, the Syrian Arab Republic, Uruguay, Venezuela, and Viet-Nam.

An important feature of the unification of multiple rate systems has been the adoption in several countries, especially in Latin America, of fluctuating rather than fixed rates in place of multiple rates. Costa Rica, Israel, Nicaragua, Turkey, and Yugoslavia are among the countries that have moved to unitary systems during the last 5 years and have maintained fixed rates. Argentina, Bolivia, and Paraguay all unified their systems by the use of fluctuating rates, and Chile based a substantial unification on the use of a fluctuating rate.

Major changes eliminating the use of multiple rates have normally been associated with exchange devaluation and with internal changes designed to remove price distortions and to help to bring inflationary pressure under better control. Tariff changes, usually upward adjustments, have frequently been associated with exchange reform; and in some countries fiscal reforms also have been undertaken. A few countries have eliminated multiple rates at a time when their balances of payments were favorable, as a result of peak production and/or high world prices for important exports. More often, however, an exchange rate structure has been revised as part of an over-all program to meet a balance of payments crisis. At times, when multiple rates were being eliminated, temporary use has been made of taxes on imports and exports, in conjunction with a fluctuating rate. This was done, for example, by Argentina, Paraguay, and Thailand. Chile greatly reduced the scope of its multiple rates in 1956, but made use of import taxes; and in 1962 it introduced a dual market.15


Multiple exchange rates tend to have considerable appeal, especially for developing countries. They are expected to perform certain economic functions which cannot easily be performed by quantitative restrictions or a single exchange rate. In many instances, developing countries cannot (for political or institutional reasons) introduce adequate taxation of exporters, in the form of either commodity taxes or income taxes, or are not pursuing relatively stable domestic monetary policies. The question arises whether, in such circumstances, multiple exchange rates are not likely to have fewer disadvantages than the realistically practicable alternatives of a unitary rate—fixed or fluctuating—or a system of quantitative restrictions. Multiple rates appear both to restrain balance of payments pressures and to serve as tax and subsidy devices.

In actual operation, in some carefully defined situations, multiple exchange rates have indeed had their expected usefulness. Any of the objectives of multiple rates—to tax a major export, to restrain imports of certain commodities, to raise revenue, to alleviate inflationary pressures, to stimulate minor exports, or to isolate capital movements from trade transactions—can be achieved, provided that certain conditions are met. These conditions are the continued maintenance of an exchange system with only a few rates rather than a system with many rates (that is, a simple rather than a complex system); sufficient adjustments in the system or use of fluctuating rates in order to keep at realistic levels the exchange rates applicable to most exports and imports; and a reasonable amount of domestic monetary stability. An exchange spread or a few import surcharges, superimposed on a realistic rate, may serve their intended taxation functions quite adequately for long periods of time. Under these conditions, multiple exchange rates become nearly synonymous with a series of export and import taxes.

However, in the absence of these conditions, multiple exchange rates give rise to many problems. They have rarely achieved several objectives concurrently. Securing a rate structure suitable for such diverse purposes as holding down external deficits, redistributing internal income, and checking inflation seems to have been virtually impossible, even after allowance for the existence of several rates. Making multiple rates perform both balance of payments and taxation functions, especially under conditions of chronic inflation, has led to complex systems of multiple rates. Initial objectives have become perverted as the exchange system has undergone amendment and adaptation. Complex mechanisms have usually been a coverup for an overvalued rate of exchange; and the larger the number of rates and the more intricate the techniques used, the more difficult it has been to ascertain the degree of rate overvaluation.

Under conditions of inflation, even more unfavorable effects of multiple rate systems have been noted. These include discouragement of basic export industries through maintenance of penalty export rates at overvalued levels; insufficient stimulation of new export industries even where there have been special rates for minor exports; distortions in domestic production and investment from multiple import rates; local currency losses, rather than revenue, from the exchange system; and rigidity of the rate structure so that overvalued rates emerge or, alternatively, the country tends to meet balance of payments difficulties by depreciating the rate structure instead of adopting appropriate domestic policies. There is also a tendency to rely on multiple rates and to postpone the adoption of needed institutional reforms, such as in the tariff structure or in the fiscal system.

The purpose of this article is not to compare the relative merits and demerits of multiple exchange rates with those of quantitative restrictions or of a single fluctuating rate. Rather, its intention is to appraise the usefulness of multiple rates in practice, against their a priori appeal. Quantitative restrictions also have many weaknesses. If the conditions for successful use of multiple rates are fulfilled, they may well work out better than quantitative restrictions, especially if multiple rates are accompanied by liberalization of quantitative restrictions and constitute an effective exchange devaluation. The use of multiple rates then becomes a true transition measure. On the other hand, in the absence of the appropriate conditions, a fluctuating rate may well have fewer drawbacks than multiple rates.

Les taux de change multiples : ce qu'on en attend—ce qu'ils ont donné


Divers arguments ont souvent été avancés en faveur du recours aux taux de change multiples dans les pays en voie de développement. Bien qu'il soit possible de maintenir le taux de change de base pour les principales exportations ay ant peu de chances de s'accroître en raison de la dévaluation, on peut dévaluer le taux de change applicable aux importations, afin d'atténuer les pressions exercées sur le système de change. Grâce aux taux plus dépréciés applicables aux importations, c'est l'Etat, et non l'importateur, qui récolte les bénéfices exceptionnels résultant de la hausse considérable des prix auxquels se vendent dans le pays les biens d'importation. Des taux spéciaux peuvent être fixés pour les exportations d'importance secondaire, afin d'aider à diversifier les exportations. Un marché libre partiel permet aux transactions en capital de s'effectuer sans influer sur le taux en vigueur pour les transactions courantes.

L'expérience suggère cependant que certaines conditions sont nécessaires pour que les taux multiples soient utilisés avec succès: maintien continu d'un régime de change ne comportant qu'un petit nombre de taux; ajustements périodiques en vue de maintenir les principaux taux de change à des niveaux réalistes; et absence d'inflation chronique. En l'absence de telles conditions, les taux multiples peuvent être plus néfastes que les mesures pouvant être appliquées à leur place.

En pratique, il semble que même les systèmes comportant plusieurs taux n'aient pas permis d'atteindre des objectifs aussi divers que le maintien des déficits extérieurs à un niveau reduit, la redistribution du revenu intérieur, et l'échec à l'inflation. A mesure que le régime de change subit une adaptation, les objectifs se confondent généralement, et des mécanismes complexes en résultent. Plus les taux sont nombreux et les méthodes utilisées compliquées, plus il sera difficile de déterminer dans quelle mesure un taux est surévalué. Parmi les autres effets défavorables, on peut citer ceux-ci : découragement des industries d'exportation de base par suite du maintien de taux surévalués; incitation insuffisante aux nouvelles industries d'exportation, malgré les taux spéciaux fixés pour les exportations secondaires; des déficits en monnaie nationale, plutôt que des recettes pour les autorités; et distortion de la production et de l'investissement intérieurs en raison des taux d'importation multiples.

Los tipos de cambio múltiples: pretensiones y experiencias


Son varios los argumentos que suelen aducirse en pro del uso de tipos de cambio múltiples en los países en desarrollo. En tanto que el tipo de cambio básico quizá se conserve para las principales exportaciones que sin duda no aumentarán a causa de la devaluación, el de las importaciones puede devaluarse a fin de aliviar las presiones sobre el sistema cambiario. Mediante tipos de cambio más depreciados para las importaciones, no son los importadores individualmente sino el gobierno el que disfruta de las ganancias súbitas provenientes del alza de los precios internos de los productos importados. Para lograr diversificar las exportaciones, quizá se fijen tipos de cambio especiales para las menos importantes. Un mercado libre parcial permite realizar transacciones de capital sin afectar el tipo de cambio para las transacciones corrientes.

No obstante, la experiencia demuestra que deben existir ciertas condiciones para que los tipos de cambio múltiples tengan éxito, a saber: el mantenimiento continuado de un sistema cambiario que no entrañe sino unos pocos tipos de cambio; reajustes ocasionales para que los tipos de cambio principales siempre sean realistas; y la ausencia de inflación crónica. De no ser así, los tipos de cambio múltiples pueden resultar peores que otras medidas.

En la práctica, aun los sistemas con varios tipos de cambio no parecen haber logrado objetivos de diversa índole como el de contener los déficit externos, redistribuir el ingreso interno, y detener la inflación. Por lo general, a medida que el sistema cambiario se readapta, los objetivos se superponen, lo cual da origen a complejos mecanismos cambiarios. Cuanto mayor sea el número de tipos de cambio en uso y más intrincadas sean las técnicas empleadas, más dificil resulta determinar el grado de sobrevaluación de los tipos de cambio. Entre otros efectos adversos se hallan el desaliento que a causa de la sobrevaluación continuada sufren las industrias básicas de exportación; la falta de suficiente incentivo para las nuevas industrias de exportación, aunque se hayan fijado tipos especiales para las exportaciones menos importantes; los déficit de moneda national que, en vez de rentas, tienen que enfrentar las autoridades; y las distorsiones que, de resultas de los tipos de cambio múltiples, se operan en la producción interna y en las inversiones.


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 Massachusetts Institute of Technology and joint author of Postwar U.S. Economic Policy (1948). The present article derives from an extensive study undertaken, with the assistance of a grant from the Ford Foundation, when the author was not on the Fund staff.


See, for example, summary of discussion on Jorge Marshall's paper, “Exchange Controls and Economic Development,” in Howard S. Ellis, Economic Development for Latin America (New York, 1961), pp. 467–68.


The unfortunate experiences with multiple exchange rates stressed here are not to be interpreted as a preference by the author for quantitative restrictions. The latter have their own weaknesses as well as some of the weaknesses of multiple rates.


Several of the economic objectives of multiple rates referred to here are elaborated in Eugene R. Schlesinger, Multiple Exchange Rates and Economic Development (Princeton Studies in International Finance, No. 2, Princeton University, 1952), and in Edward M. Bernstein, “Some Economic Aspects of Multiple Exchange Rates,” Staff Papers, Vol. I (1950–51), pp. 224–37.


Joyce Sherwood, “Revenue Features of Multiple Exchange Rate Systems: Some Case Studies,” Staff Papers, Vol. V (1956–57), pp. 74–107.


Robert Triffin, “National Central Banking and the International Economy,” International Monetary Policies (Postwar Economic Studies, No. 7, Board of Governors of the Federal Reserve System, September 1947), pp. 46–81.


J. Bhagwati, “Indian Balance of Payments Policy and Exchange Auctions,” Oxford Economic Papers, New Series, Vol. 14 (1962), pp. 51–68, considers some of the advantages that India might receive from a policy of exchange auctions rather than from the use of import restrictions.


A detailed evaluation of Thailand's exchange policies from 1946 to 1955, which is in some respects different and in some similar to the above analysis, is that of S. C. Yang, A Multiple Exchange Rate System: An Appraisal of Thailand's Experience, 1946–1955 (Madison, Wisconsin, 1957).


For details on the process by which inflation resulted in overvaluation and subsequent changes in multiple rates in several Latin American countries see Francis H. Schott, The Evolution of Latin American Exchange-Rate Policies Since World War II (Essays in International Finance, No. 32, Princeton University, January 1959).


Gertrud Lovasy, “Inflation and Exports in Primary Producing Countries,” Staff Papers, Vol. IX (1962), pp. 37–69.


Andreas S. Gerakis and Haskell P. Wald, “Economic Stabilization and Progress in Greece, 1953–61: Contribution of Foreign Exchange and Trade Reforms,” Staff Papers, Vol. XI (1964), pp. 125–49.


Not only is it difficult in practice to determine a series of exchange rates that will perform several functions simultaneously but even in theory several conditions are required. The necessary equations for multiple rates, for example, to improve the balance of payments, yield net revenue, and influence the composition of exports and imports in accordance with a development program have been set out by Werner Baer and Michel E.A. Herve in “Multiple Exchange Rates and the Attainment of Multiple Policy Objectives,” Economica, New Series, Vol. XXIX (1962), pp. 176–84.


Gertrud Lovasy, op. cit., pp. 49–53.


Israel had a system of export premiums until February 1962. One appraisal of this system concludes that, even though deliberate attempts were made to avoid misallocation of resources, multiple rates did not do so; see David Pines, Direct Export Premiums in Israel, 1952–1958 (Falk Project for Economic Research in Israel, Research Paper 16, July 1963).


W. John R. Woodley, “Exchange Measures in Venezuela,” staff papers, Vol. XI (1964), pp. 347–50.


A discussion of the extent of unification of multiple rates in Latin American countries and of the techniques used is to be found in F. d'A. Collings, “Recent Progress in Latin America Toward Eliminating Exchange Restrictions,” Staff Papers, Vol. VIII (1960–61), pp. 274–86.

IMF Staff papers: Volume 12 No. 2
Author: International Monetary Fund. Research Dept.