Export-Import Responses to Devaluation: Experience of the Nonindustrial Countries in the 1960s (La raction des exportations et des importations

la dvaluation: l'exprience des pays non industrialiss durant les annes 1960) (Reacciones de la exportacin y la importacin a la devaluacin: experiencia de los pases no industriales en el decenio de 1960) Author(s): Avinash Bhagwat and Yusuke Onitsuka Source: Staff Papers - International Monetary Fund, Vol. 21, No. 2 (Jul., 1974), pp. 414-462 Published by: Palgrave Macmillan Journals on behalf of the International Monetary Fund Stable URL: http://www.jstor.org/stable/3866471 . Accessed: 27/10/2011 04:32
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Palgrave Macmillan Journals and International Monetary Fund are collaborating with JSTOR to digitize, preserve and extend access to Staff Papers - International Monetary Fund.

http://www.jstor.org

Export-Import Responses to Devaluation: Experienceof the NonindustrialCountriesin the 1960s

AVINASH BHAGWAT

and YUSUKE

ONITSUKA*

A NUMBER OF NONINDUSTRIAL countries experiencedbalanceof payments difficultiesin the 1960s, resulting from overvalued currencies. To cope with these difficulties, they devalued their currencies and adopted policies to support the exchange rate changes by, inter alia, restraining demand so as to facilitate the transfer of resources to the external sector. Also other nonindustrial countries devalued their currencies following the devaluations of the United Kingdom in 1967 and France in 1969, mainly to avoid an appreciation of their currencies against their major trade partner's currency. Many of these countries had historical, economic, and financial ties with the United Kingdom and France. This paper limits its scope to the responses of exports and imports of goods to devaluations in nonindustrial countries during the 1960s. It attempts to assess these responses with the help of selected quantitative indicators which are designed to be applicable to a broad and varied
* Mr. Bhagwat is Assistant to the Director of the Asian Department. At the time this paper was prepared, he was Assistant Chief, Stabilization Policies Division, Exchange and Trade Relations Department. Mr. Bhagwat is a graduate of the University of Bombay, India, and Yale University. Mr. Onitsuka, an economist in the Stabilization Policies Division, Exchange and Trade Relations Department, when this paper was prepared,is now Associate Professor at Osaka University, Japan. He holds degrees from the University of Tokyo, as well as a doctorate in economics from the University of Chicago, and has contributednumerous articles to economic journals. The authors wish to acknowledge the contribution of Miss Christine Sutton, a research assistant in the Stabilization Policies Division in the summer of 1973, to the quantitativeanalysis.

414

EXPORT-IMPORT RESPONSES TO DEVALUATION

415

cross section of countries.' In all, the experienceof 46 countries (50 devaluations)is examined.SectionsI and II discussbrieflythe analytical and framework,the methodologyof measurement, the diversityof ecoin nomic circumstances the countriesstudied.SectionIII coversdiscrete and independentdevaluationsin 19 countries;Section IV covers 14 countriesthat devaluedin 1967 followingthe devaluation the pound of and Section V covers 14 countriesthat followed the French sterling; franc devaluationin 1969. Section VI summarizesthe trade impact of devaluationsin nonindustrial countries and attemptssome general conclusions.

I. Analytical Framework and Methodology of Measurement

The primaryeffect of currencydevaluationis to increase the price in domesticcurrencyof exportsand imports,althoughthese prices may remain unchanged in terms of foreign currencies. Higher domestic prices enable exportersto offer higherprices to producersand encourage importersto shift to domesticgoods. Thus, these price changes are expected to shift the internal terms of trade in favor of currently tradedgoods (exports and importsubstitutes)and to redirectresources from other sectors to the tradedgoods sectors.Facilitatedby stabilization policies in supportof the devaluation,this resourcereallocationis expectedto have a favorableeffect on the supplyof exportsand import as substitutes well as on outputin general.2
EXPORTS

The short-runeffect of devaluationon exports is particularly large if there is unutilizedcapacity in that sector. Also, the easier it is to shift resourcesinto the export sector, the greaterwould be the initial effects of devaluation.However, to sustain the export expansion,the relative price of exports has to be maintainedat a higher level than before the devaluation, so that resources and products continue to move into the export sector. The domesticrate of inflation,particularly the domesticprice of home goods, has to be restrained.
1 See R. N. Cooper, "CurrencyDevaluation in Developing Countries,"in Gustav Ranis, editor, Government and Economic Development (Yale University Press, 1971), pp. 472-513, for an assessment of 24 devaluations in 19 developing countries during the period 1959-66. 2 If the immediate response of output to devaluation is small, then the main short-runeffect may be to redistributeincomes.

416

INTERNATIONAL MONETARY FUND STAFF PAPERS

The supplyresponseof exportsto the changein their domesticprice resulting from a devaluationis significantlydifferentfrom the price in stimulusof normalfluctuations externalprices. Under normalcondiexternal prices may fluctuate every year, so that an expected tions, increasein export prices may be substantially discountedby producers in view of the possible fall in prices in the near future. Devaluation, however, gives certainty to the direction of change, and this change is usually significant.This implies that an increase in the domestic price of exports as the result of devaluationcan be expectedto have a greatereffect on productionthan the same price increaseundernormal price fluctuations.In other words, the absolute and relative domestic price of exports, relevantfor supply response,is an "expected"price which takes into accountthe possibilityof fluctuations, devaluation and is likely to affect this expected price. If, in addition, government takes supportingmeasures for export expansion, these reinforce the favorable expectations and producers are even more convinced that expansionof outputwill be profitable. The measurementof the effects of devaluationon exports can in theory be approachedby estimatingthe price elasticity of the supply curve. However,the commonmethodof estimating supplyelasticity the of exports by using data of the predevaluationperiod may not be data accuratefor the reasonsmentionedabove. Scarcityof appropriate makes the task additionallydifficult.For these reasons, three types of analyses have been combined in this paper to measure the effect of on devaluation exports.
Comparison of average growth rates of exports

The first step in the analysis is to compare the growth of exports 3 before and after the devaluationby estimating the ten-year trend growth rate of exports and comparingit with the three-yearaverage annualgrowthrate after the devaluation. Since such a comparison may underestimate effects of devaluationon exportsif their growthrate the starteddecliningprior to devaluation,especiallyon accountof currency overvaluation,the three-yearaverage annual growth rate before the devaluationis also compared with the three-year average after the devaluation. Also, the comparisonof growth rates of exports (value) may not be an accurateindicator,since exportreceiptsof the devaluingcountry can be influencednot only by supply factors but also by such factors
3

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

EXPORT-IMPORT RESPONSES TO DEVALUATION

417

as world demandfor the major exports of the devaluingcountry.For example, if world demand for exports had increased,export receipts of the devaluingcountrycould have increasedeven withoutthe devaluation. Likewise, if world demand for exports had decreased, export receipts could decline in spite of the devaluation,althoughthe fall in exportreceiptscould have been greaterwithoutthe devaluation.
Import demand analysis

To take into account the effect of world demandon export receipts of the devaluingcountry,the importdemandfunctionswere estimated before for 14 industrial countrieson the basis of ten yearlyobservations in export devaluation.For each industrialtrading partner, the gain earnings after devaluation was measured as the difference between actual export earningsfor the three-yearperiod after the devaluation and the estimatedvalue of exports based on these import equations. This approachrecognizedthe possibleeffectsof changesin the level of economic activity of the importing countries on the exports of the devaluingcountry. Because no appropriateimport price index was available for the industrialcountries,an assumptionwas made that the ratio of prices of their importedgoods to the gross nationalproduct (GNP) deflator remains constant. When this assumptiondoes not hold, the import demand analysis will not give the expectedresults. In such cases, two typesof marketshareanalyseswereused.
Market share analysis

For a ten-year and a five-year period before the devaluation,the share of the devaluingcountry'sexportsin the importmarketin each industrialcountry was analyzed to determinewhether the exporting country experiencedan increasingor decreasingtrend for its exports. When the trend values were statistically significant,the theoretical values of marketsharesfor the three-yearperiod after the devaluation were estimatedby extrapolationand used to estimate the theoretical values for exports, which were then comparedwith the actual values the duringthe same period.When a trendcould not be identified, threemarket share before devaluationwas used to projectthe year average theoretical values for exports after devaluation. The advantage of market share analysis is that it takes into account the effects of both prices and income changesin the importingcountries.Its shortcoming is that the market shares need not remain constant when the level of

418

INTERNATIONAL MONETARY FUND STAFF PAPERS

countrieschangesfrom year to year. economicactivityof the importing The underlyingassumptionfor the market share analysis is that the various impacts from the sides of demand and supply that cannot be measureddirectly would have continuedto affect the marketshare in the absence of devaluationin the same way as they did during the predevaluation period.
IMPORTS

Imports of the devaluing country are affected by devaluationin severalways.Higherdomesticpricesof importsaffectdemandadversely and encourage substitutionof domestic for imported goods, both in productionand consumption.On the other hand, the higher income from the expansionof export and importsubstituting industriesstimulates the growthof imports.A thirdaspectclosely relatedto the second (and often important for developing countries) is the increase in importsof capital goods. An upsurgein investmentactivitybecause of in higher profitability externalsectors after devaluationwould lead to an upsurgein importsof capital goods. While the price effect tends to reduce imports, the other two effects tend to increase them; the net effect depends on their relative magnitudes.However, in most of the developingcountriesthe price elasticityof the demandfor importsmay be small, and import substitutionmay be limited in the short run; therefore,devaluationmay lead to an increasein importsratherthan to a decrease. The behavior of imports after the devaluation also and depends on the monetary-fiscal wage policies in that period. Another relevantfactor is that a significantportion of importsmay be subject to restrictions.The changesin prices and incomes may not have the expected effects upon imports,if devaluationis accompanied of by an exchangeand tradereforminvolvingrelaxation existingrestrictions. For all these reasons no attempt was made to estimate the predevaluation importfunctionand to measurethe effectof devaluation on imports.Instead, a comparisonis made of the averagegrowthrates of importsbefore and after devaluation.The trend of importsover the ten-yearperiod before devaluationis estimated,and the movementin importsafter devaluationis analyzed,by studyingdeviationsfrom this trend. Also, imports might have started to increase at a lower rate than the ten-year annual averagerate a few years before devaluation due to declining or slowly growing foreign exchange receipts from measuresto reducebalanceof paymentsdeficits. exportsand restrictive Therefore,the three-yearaveragegrowth rates of importsin the pre-

EXPORT-IMPORT RESPONSESTO DEVALUATION

419

devaluationperiod are also comparedwith the predevaluation ten-year average and the three-yearaverageof the postdevaluation period.

II. The Diversity of Experience

In selecting devaluationsfor analysis, the goal was to include the countries as possible during the experienceof as many nonindustrial 1960s.4 The degree of economic developmentthereforevaries all the way from the developed nonindustrialcountries (such as Finland, New Zealand,and Spain) throughdevelopingcountrieswith a significant industrialbase (such as India, Peru, and Tunisia) to the leastdevelopedcountriesin early stages of development(such as Afghanistan and Burundi). Accordingly, the commodity structure of trade, counparticularly exports, shows great variation.The more-developed tries export a greaterproportionand range of manufactures, which for world demand is growingrapidly,prices and productcompetitionare good, and production can be quickly expanded, particularlywhen financialpolicies assist in transferof resourcesto the externalsector. On the other hand, small countries relying primarilyon exports of commoditieshave no influenceon the world marketprice agricultural and cannot escape the instabilityin their export earningscaused by price fluctuations and by variations in domestic output caused by weatherconditions. Moreover, the possibility of increasing the supply of agricultural commodities is often limited in the short run, except when large stocks exist. Thus in the case of tree crops such as coffee, cocoa, and tea, it takes a few years between planting and increasedproduction. Even when the gestation period is shorter (for example, cereals and fibers), additional output through substitutionof acreage for some other product is often limited, especially in the short run. It is true that supply may be expanded by increasing productivity through improved techniques,but to realize this potential, market incentives need to be supportedby development policies to facilitatethe adoption by farmers of more efficienttechniques.And, even then, the supply response is likely to be realized over the medium-termrather than soon after the devaluation.Consequently,in the short term, changing weatherconditionsand fluctuationsin world marketprices tend to be
4 Actually 1960-70 inclusive. Situations where several devaluations occurred at short intervals and where countries followed a flexible exchange rate policy involving frequent devaluations are generally omitted.

420

MONETARYFUND STAFF PAPERS INTERNATIONAL

more identifiableinfluenceson export earningsfrom primaryagricultural commodities.For minerals, the demand in importingcountries of tends to be the importantdeterminant export volume in the shorter since supply is elastic up to a certainpoint. Moreover,the price term, elasticityof demandalso varies considerablyamong the primarycommodities, thus influencingthe degree of price fluctuation.Finally, the of primaryproductsin total exportsvarieswidely proportion traditional among the countriesstudied-in over two thirdsit exceeded one half, and in a few it was over 80 per cent. Thus, one would anticipate considerablevariationamong countriesin the degree and speed of the responseof exportreceiptsto exchangerate adjustments. surroundThere is also a great deal of diversityin the circumstances the devaluation.The cases dealt with in this paper are dividedinto ing three groups: (A) independent and discrete devaluations,covering 19 countriesand 22 devaluations;(B) 14 countriesthat devaluedwith and the United Kingdomin 1967 and by the same proportion;5 (C) 14 countriesthat devaluedwith France in 1969 and by the same proportion. Group A countriesdevalued to correct an existing fundamental whereasmany countriesin GroupsB and C devaluedto disequilibrium, of forestall an unwantedappreciation their currency.Moreover,within A there is great variationin (1) the causes of the fundamental Group and disequilibrium its durationbefore devaluation,and (2) adaptations in the exchange and trade system accompanyingthe devaluation,as well as the supportingfinancialpolicies after devaluation.Finally, the impact of a devaluationon trade flows of the devaluing country is also governedby the size of the devaluation by exogenousdevelopand ments in the rest of the world-for example,level of economicactivity in importingcountries,exchangeand trade policies of competitorsand customers,and so on. In nearly all Group A countries,devaluationwas accompaniedby reform and simplification the exchange and trade system, including of in measuresto liberalizeimports.Severaldevaluations the early 1960s, of especially those connected with establishment an initial par value, were concerned as much with rationalizingthe exchange and trade system to improve resource allocation and economic growth in the the of longer term, as with raisingimmediately prices and profitability exportablesand import substitutesin order to strengthenthe balance of paymentsin the shorter term-for example, Costa Rica, Ecuador (1961), Iceland (1961), and Israel (1962). In other cases, in the
5 New Zealand is included in Group B, although its devaluation was somewhat larger.

EXPORT-IMPORT RESPONSES TO DEVALUATION

421

late 1960s, devaluationwas precededby a prolongedperiod when the was and had currency overvalued balanceof payments problems required, in the absence of exchange rate adjustment,intensification import of restrictionsand special supportsfor exports (for example, India, Sri Lanka, and Turkey). Here, too, devaluationwas accompaniedby a majorreformof the exchangeand trade system.In severalother cases, devaluation was preceded by two or three years of large fiscal imbalancesleadingto monetaryexpansion,price increases,and balance of paymentsdifficulties-for example,Burundi,Ecuador (1970), Peru, and Rwanda; therefore, success of the devaluationcould be assured only by correctingthe underlyingfiscal and financialcauses through an effective stabilizationprogram.Finally, in a few cases, all among the nonindustrial was uncomdevelopedcountries,devaluation relatively plicated-for example, Finland and Iceland (1968). After some years of excessive wage-priceincreaseshad weakenedthe international comhad petitivenessof the economy, a fundamentaldisequilibrium clearly emergedand the currencywas devaluedto correctit. In most of the Group A countriesthe predevaluation exchangeand trade system included such features as explicit dual or multiple exchangerates for a limited range of transactions, exchangepremiums and taxes, variousad hoc specialcredit and fiscal incentivesto exports, temporaryimport levies such as a stamp tax or an across-the-board tariff surcharge,and administrative restrictionof imports.Such measures have the same economic effect as a partial devaluationof the currency, since they result in higher domestic currency prices for of exportedand importedcommodities.Thus realignment the domestic prices of tradables(that is, exports, exportables,imports, and import was already set into motion before the substitutes) and nontradables formal devaluation itself;6 moreover, devaluation was often accompanied by measuresto spread over time its impact on prices, such as either temporarysubsidizationof essential imported goods to avoid hardshipto consumersor temporarytaxation of traditionalexports to absorbpart of the incremental profits (as in Finland and India). Such transitionalmeasuresspread the domesticcurrencyprice effect of the devaluation into the period following the devaluation.Furthermore, when export earningsare primarilyfrom one or two agricultural commodities, the producerprice is frequentlyset by the authoritieseither
6 For example, the "true" depreciation of the Icelandic krona from 1959 to 1962 was probably about 30 per cent, when one considers earlier extensive de facto devaluations through export subsidies and import taxes, in contrast to the nominal devaluation of 164 per cent shown in Table 1.

422

INTERNATIONAL MONETARY FUND STAFF PAPERS

through market interventionor through direct monopoly of procurement for exportation (for example, coffee in Burundi and Rwanda, cotton in Egypt, and cocoa in Ghana). This producerprice did not to of necessarilychangein proportion the devaluation the currencyand often changed at other times, both before and after devaluation.Thus, for all these reasons, the timing and the size of the price effect on exportscould be differentfrom the timing and the size of the devaluation; and consequently,the impact on exports and importswould also be spread over time both before and after the devaluation.However, much of the relativeprice alignmentdoes take place aroundthe time of formal devaluation,and this is why the quantitativeanalysisbelow of trade flows, centered on the devaluationyear, can be expected to in of indicatethe generaleffectiveness the price mechanism influencing exportsand imports. Another influence on price effects that may cause the "effective" devaluation to differ from "nominal"devaluation is exchange rate action by tradingpartnersand competitors.If importanttradingpartners and competitorsalso devalue at about the same time,7the impact on the domestic currencyprices of tradablesis diluted and the impact on exports and importsis also less. Moreover,after the devaluation,if domestic costs and prices are permittedto rise faster than those of trading partnersand competitors,the price effects of the devaluation are eroded-the potentialcompetitiveedge in export marketsand the price incentivefor reallocationof resourcesfrom home goods toward tradablegoods are reduced. Hence, maintenanceof price stability in support of a devaluation is important in determiningits effective impact; in the cases examined, there was varying success from such supportingpolicies. Even when the devaluationdoes bring about the anticipatedchange in relative prices of traded and home goods, the market incentivesmay not result in a major reallocationof resources unless they are supported by development policy-including, for instance,an investmentstrategywith emphasison expansionof exports. Other institutionalconstraintscan substantially neutralizeor reduce the expected impact of an exchange rate change on relativeprices of traded and home goods before it reachesthose economicunits whose behavior it is intended to influence;and even after having reached them, the effect on trade flows may be small. When both volume of trade and prices are governedby international commodityagreements
7 This was particularly true in the case of Groups B and C countries and of some Group A countries (for example, Finland and Sri Lanka).

EXPORT-IMPORT RESPONSES TO DEVALUATION

423

(for example, coffee and tin, until recently), an exportingcountry is not free to expand its share of the marketthroughprice competition. Devaluationcould lead to an increasein exportvolume and value over what it would have been only if the countrywould otherwisehave been unable to fulfillits full exportquota underthe international agreement. Petroleumis a somewhatsimilarexampleof this, since the marketshare of each producingcountryand the export price have been, as recently, countrieson the one hand negotiatedcollectivelybetweenthe producing and international petroleumcompanieson the other, or prior to that, between individualcountriesand one or more international petroleum of companies.A similarsituationis miningby subsidiaries large, multinational corporations,where the ore or semiprocessedproduct (such as bauxiteor aluminum)is sold at a "transfer between price"negotiated the companies and the governments.Also, expansion of exports of certain commoditiesmay be adverselyaffectedby import restraintsof one sort or another, including internationalagreements,"voluntary" limitations by exporting countries, and import quotas. Important instances of this are the international governingtrade in arrangement cotton textiles and importrestrictions agricultural on productsin many countries. In assessingthe quantitative evidencepresentedbelow, it is important to bear in mind this great diversityof circumstancessurrounding the individual devaluations.Such a broad survey of a cross section of devaluationsgives a general view of how exports and imports have of faredin the aftermath devaluations amiddiversesettingsof economic structures,policies, and exogenous developments, and it leaves an overall impressionof the effectivenessof exchange rate policy in the tradeflows of nonindustrial countries. past in influencing

III.

Group A Countries: Independent and Discrete Devaluations

This section deals with 22 devaluationsin 19 countries (Table 1), rangingin nominaldevaluationfrom 15.3 per cent 8 for Costa Rica to 67 per cent for Zaire. These were all "independent" devaluationsin the sense that they were not implemented responseto exchangerate in action by an importanttradingpartneror competitor.They were also
8 Percentage reduction in external value of currency. However, the reciprocal (percentage increase in rate of devalued currency per U. S. dollar or SDR, as shown in Table 1) is appropriate as an indicator of the potential percentage increase in the domestic currencyprices of tradablegoods.

424

MONETARYFUND STAFF PAPERS INTERNATIONAL

TABLE 1. GROUP A: SELECTEDDISCRETE DEVALUATIONSIN THE NONINDUSTRIAL COUNTRIES, 1960-70

Country and Devaluation Afghanistan 2 Burundi 2 Costa Rica2 Ecuador (1961) Ecuador (1970) Egypt Finland Ghana Iceland (1961) 3 Iceland (1968) 4 India Israel (1962) Korea 5 Mali Peru 6 Philippines (1962) Philippines (1970) Rwanda 2 Sri Lanka Tunisia2 Turkey Zaire 7

Nominal Devaluation 1 Date of Devaluation March 22, 1963 January 26, 1965 September 3, 1961 July 14, 1961 August 17, 1970 May 7, 1962 October 12, 1967 July 8, 1967 August 4, 1961 November 12, 1968 June 6, 1966 February 9, 1962 February 2, 1961 May 5, 1967 October 5, 1967 January 22, 1962 February 21, 1970 April 7, 1966 November 21, 1967 September 28, 1964 August 9, 1970 June 23, 1967 55.6 42.9 15.3 16.7 28.0 19.3 23.8 30.0 62.1 51.1 36.5 40.0 61.5 50.0 30.7 48.5 38.7 50.0 20.0 19.2 40.0 67.0

Change in Domestic Currency per Dollar

(per cent) 125.0 75.0 18.0 20.0 38.9 23.9 31.3 42.9 164.0 104.7 57.5 66.7 160.0 100.0 44.3 94.1 63.2 100.0 25.0 23.8 66.7 203.0

Sources: InternationalMonetary Fund, International FinancialStatistics and InternationalFinancialStatistics AnnualSupplements; and data provided by the national
authorities. 1 Changes in par value, except as otherwise stated. It should be noted that in many instances the "effective" devaluation in the economic sense was substantially less than the nominal devaluation shown here.
2

3 Combined effect of 1960 and 1961 devaluations. 4 Combined effect of 1967 and 1968 devaluations. 5Change in the official rate from February 23, 1960 to February 2, 1961. 6 Change in the principal rate. Compared with the average of predevaluation buying and selling rates.

Establishment initial par value. of

"discrete" devaluations in the sense that they were neither immediately preceded nor followed by another exchange rate change; 9 and even with the smallest devaluation the potential increase in the domestic currency prices of traded goods would be no less than 18 per cent. The comparative analysis of trade flows before and after devaluation deals with exports and imports but gives more attention to exports,
each pair is treated as a single devaluation.

9 In Iceland, where the devaluations came in two pairs (1960-61 and 1967-68),

EXPORT-IMPORT RESPONSES TO DEVALUATION

425

partly because in many nonindustrialcountries, merchandiseexport of earningsare a major determinant imports (since the liberalitywith which the importregimeis administered the authorities governed is by by their foreign exchange availabilities). In the rest of this section, first some quantitative indicatorsof the comparativebehaviorof trade flows before and after devaluationare presentedand discussed.This is followed by a brief discussionof the experiencein a few individual cases of devaluation.
QUANTITATIVE EVIDENCE

Exports

Three major quantitative indicators of export performance by devaluingcountriesare discussed: (1) the averageannualgrowthrate of exports during three postdevaluation years,10comparedwith their growth rate during the three precedingyears and also with the predevaluation medium-term trendgrowthrate (Table 2); (2) the average annual growthrate duringthree years before and after devaluationof the export volume of major export commoditiesin various countries (Table 3); and (3) adjustmentof the postdevaluation exports to 14 industrialcountriesfor the growthrate of the importmarketsin those is of countries (Table 4). The examination importperformance limited to a comparison growthratesbeforeand afterdevaluation(Table 5). of The diversityof economicconditionsand the weak data base dictated can the choice of quantitative indicators.A simpleframework rationalThe ize the comparisonof ratesof growthbefore and afterdevaluation. observedtrendgrowthrate of, say, exportsin the predevaluation period can be regardedas the final outcomeof a varietyof factorsinfluencing the demand for and supply of exports. If all these factors, with the exception of currency devaluation and the associated policies, were simplisticallyassumed to continue to operate unchangedin the postdevaluationperiod, then the differencebetween the actual growthrate of exports in the postdevaluation trend period and the predevaluation growth rate could be attributedto the devaluation and associated policies. The assumptionis, of course, a heroic one and renders any conclusions highly tentative; the main difficultyis that in practically each devaluationa numberof special factors are in operation11before
10 Since trade flows immediately before and after devaluation are frequently affected by their anticipation and occurrence, the quantitative indicators are based on a three-year experience. Export and import data are in U.S. dollars. 11As illustrated by the discussion below of individual country cases.

426

INTERNATIONAL MONETARY FUND STAFF PAPERS

or afterthe devaluation tend to influenceexportbehavior.However, and it is hoped that since a large numberof cases are being examined,these special factors would tend to cancel each other, and so the general shouldbe of interest. conclusionfrom the comparison one obvious specialfactor can be expected to be present However, on a systematic basis. Especially in large, discrete exchange rate changes,the currencyis apt to have been overvaluedin the immediate predevaluation period,with some impacton exportsand imports.Since the implicationis that, in the absence of devaluation,exports would medium-term have grownat a rate lower than the predevaluation trend, the predevaluation three-yearaveragegrowthrate was also calculated. To test this, the medium-term trend growth rate was comparedwith the growth rate during the three predevaluation years; in about two thirds of the cases, exports had slowed down to a below-trendrate of growth before devaluation (Table 2). This reflected in a large measure the emergingovervaluationof the currencyand its adverse effects on export performance, in some cases it was compounded but by an adverse, exogenous, and reversibledevelopment-such as, for example, a poor crop of the main export commodityor a decline in its world marketprice. Not infrequentlya fundamental disequilibrium is identified,and devaluationof the currency when a turn precipitated, on of events adverse to the balance of paymentsis superimposed a balance of payments position. For instance, export weakening basic earnings of Costa Rica and Ecuador were adversely affected during 1958-61 by a decline in the prices of bananasand coffee; Egypt's exports fell by nearly 30 per cent from 1960 to 1962, because of smaller cotton crops and a fall in world marketprices; and the years immediatelypreceding Iceland's 1967-68 devaluationsand Ghana's devaluationwere periods of sharply decliningexport prices for fish 12 and cocoa, respectively. Turning to export performancein the postdevaluationperiod, in almost all cases export earnings grew at higher rates than before. Thus, of the 20 instances in which it was possible to estimate a medium-termtrend, exports grew at a rate faster than the trend in 17 cases and the postdevalaution growth rate of exports was approximately equal to the trend rate in the 3 others (Israel, Peru, and Sri Lanka).13 Moreover,in Peru and Sri Lanka, export performance
12 A severe decline in the stock and hence the catch of herring furthel exacerbatedIceland's problem. 13 Let gi and g2 be the predevaluationand postdevaluation growth rates. Then the rule of thumb used here is that, if gi (0.8) < g2 < gi (1.2), gi and g2 are not significantlyapart.

RESPONSESTO DEVALUATION EXPORT-IMPORT

427

TABLE GROUP A: COMPARATIVE 2. GROWTHRATE OF EXPORTS AND AFTER BEFORE

DEVALUATION

(Inper centper year) Before Devaluation Country Afghanistan

Burundi

After Devaluation Second year 2.4

1.6

Ten-year Three-year Three-year First year trend1 average2 average 6.1 5.9 16.9 5.2 6.1 2.3 7.8 6.5 4.8 3.3 16.7 11.4 4.3 6.0
.. ... ... 7.7 ...

Third year -1.0

13.3

Costa Rica Ecuador(1961) Ecuador(1970) Egypt Finland Ghana Iceland (1962) Iceland (1968) India Israel (1962) Korea Mali Peru Philippines(1962) Philippines(1970)
Rwanda

-2.3 -1.3 5.7 -2.5 6.4 0.1 4.4 -12.6 -0.9 20.0 20.1 -13.6 5.4 0.8 1.1
..

10.9 7.6 19.1 14.6 14.3 16.8 15.8 23.2 5.2 15.2 39.0 37.4 10.7 14.7 9.5
6.8

10.5 12.5 4.6 28.1 5.3 8.4 18.0 31.1 2.3 13.8 24.4 -11.3 11.7 11.3 24.2
19.6

2.2 0.5 33.7 3.3 21.4 -1.7 11.4 36.2 9.1 25.9 34.3 99.5 -0.2 30.8 6.2
5.9

19.9 9.8 12.4 16.1 43.6 18.1 2.4 4.2 5.9 58.4 24.0 20.7 2.0 -2.0
-5.2

Sri Lanka Tunisia Turkey Zaire

5.7 -

-5.1 5.6 4.2 8.4

-0.5 5.3 22.7 19.5

-1.9 -7.6 15.0 20.6

-5.9 17.1 30.3 25.7

6.2 6.3 12.1

Sources: InternationalMonetary Fund, International FinancialStatistics and International FinancialStatistics AnnualSupplements; and data provided by the national authorities. 1Compoundgrowthratecomputedby regressing time; data for yearsbefore 1953 on not used. 2 Arithmeticmean of annualpercentagechanges. 3 Two-yearaverage.

immediatelybefore the devalution was significantlyworse than the trend and so in comparison, reversion to trend signified improved
performance. In Israel, the slower postdevaluation growth rate is a

reflectionof the fact that afterrapid growthin the 1950s from a small base, Israel's exports, though continuingto grow rapidly, decelerated somewhatin the 1960s. If postdevaluation is export performance comparedwith that in the immediate three predevaluationyears, the above overall impression from comparisonwith predevaluation trend growth rate is reinforced. In 19 out of 21 cases, there was significantimprovement; Tunisia in the the performancewas approximately same, and only in Israel, as discussed above, was it worse. However, although this result agrees

428

MONETARYFUND STAFF PAPERS INTERNATIONAL

to with a prioriexpectation,it would not be appropriate attributeall of the improvementto the exchange rate change. For, as mentioned above, part of the improvementwould in some cases be simply a recovery,which would in any case have occurred,from the predevaluation troughin exportearnings. The growth rates of the export volume of selected primarycommodity exports during three-yearpredevaluationand postdevaluation in periodsare presented Table 3. In each case, the commodityselected accountedfor at least about 15 per cent of total exportsof the country and abouthalf of the commodities accountedfor more than 50 per cent of the country'stotal exports.The evidence of supply responseis less unequivocalhere but still fairly persuasive.Of the 24 selected comTABLE 3. GROUP A: COMPARATIVE GROWTH OF EXPORT VOLUME FOR SELECTED COMMODITIES BEFORE AND AFTER DEVALUATION

(In per cent per year)

Before After Devaluation Devaluation Country Burundi Costa Rica Ecuador(1961) Ecuador(1970) Egypt Ghana Iceland(1962) Iceland (1968) India India Israel Peru Peru Philippines(1962) Philippines(1970) Philippines(1970)
Rwanda

Commodity Coffee Coffee Bananas Bananas Cotton Cocoa Exports Exports Jute fabrics Black tea Citrusfruits Copper Fishmeal Coconut products Coconut products Wood
Coffee

Percentage Three-year Three-year Share1 average average 82.8 -6.52 16.8 53.2 4.1 -0.4 63.0 7.3 10.1 51.5 5.5 2.7 61.6 -6.2 10.5 65.5 -2.6 3.3 100.0 9.4 5.8 100.0 -6.8 7.3 19.5 -6.1 -4.9 13.9 -6.9 -1.3 22.8 3.0 16.7 23.5 3.4 3.0 22.8 4.2 7.9 30.4 -5.6 19.2 24.2 -17.4 23.9 25.7 0.4 -3.4
53.2 .. 2.3

Sri Lanka SriLanka Tunisia Tunisia Turkey Turkey Zaire

Tea 65.5 2.1 -1.3 Rubber 17.3 4.9 7.1 20.2 6.3 14.0 Phosphates Olive oil 21.8 5.5 -22.5 Cotton 26.3 14.9 11.6 Tobacco 15.7 -4.1 5.9 66.7 0.9 7.7 Copper Source: International Financial Statistics. MonetaryFund, International 1Proportionof earningsfrom the commodityto total exportearningsof the country; in most cases, averagefor the three predevaluation years. J Comparisonof the 1962-64 averagewith 1961.

EXPORT-IMPORT RESPONSES TO DEVALUATION

429

modities, 13 showed a faster rate of growth after devaluationbut 7 experienceda slowdown,caused in many instancesby specialfactors.'4 The volume of India's two main primary commodity exports (jute slower fabricsand black tea) continuedto declinebut at a significantly the and rate. In considering relationship betweendevaluation the supply of primarycommoditiesfor export,it is necessaryto note that in many cases the domestic currencyprices received by producersdid not increase immediatelyby as much as the percentageof the devaluation because export taxes were imposed-for example, Burundi,Ecuador (1961), India, the Philippines(1970), and Sri Lanka.But, after allowing for this and for annual fluctuationsin productioncaused by the weather and other factors, the evidence from this broad cross section of suggeststhe prevalence supplyresponse.The responseis strengthened if better price incentivesare supportedby extension and development policies, but this aspectcannotbe adequately capturedfrom the experience of three years summarized the quantitative in indicatorspresented here. The next step of the analysiswas to identifythe role of demandfrom importingcountriesin influencingthe postdevaluation export performance, since the actual growth in realized export earningswould be a combinationof supply response to devaluationand to the growth of demand in the importingcountries.Hence, the postdevaluation export performancewas adjusted for the growth of import demand in 14 industrialcountries,15 which accountfor a large proportionof the total exports of most of the countriesexamined.Projectedpostdevaluation countrieswere soughtto be estimated exports16 to each of 14 industrial by three alternativemethods: (1) by estimatinga linear propensityto the importby regressing industrial country'simportsfrom the devaluing countryon the industrial country'sGNP and then extrapolating; by (2) a linear trend to the ratio of importsfrom the devaluingcountry fitting to the total imports of the industrialcountry (trend in marketshare) and then extrapolating;(3) by calculatingthe average share of the importsfrom the devaluingcountryin the total importsof the industrial
14 For example, Costa Rican coffee production was affected by the eruption of the Irazu Volcano. Wood exports from the Philippines decreased as a result of a policy of conserving forestry resources and promoting exports of plywood. The decrease in Sri Lanka's tea production was due partly to adverse weather conditions and partly to a policy of reducing output and improving quality by finer plucking of leaves. A severe drought in 1966 sharply curtailed olive production in Tunisia. 15Austria, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Luxembourg, Netherlands, Norway, Sweden, the United Kingdom, and the United States. 16 Actually, import data of the industrialcountries were used.

430

INTERNATIONAL MONETARY FUND STAFF PAPERS

country during the three predevaluation years (predevaluation average market share) and applying this to the postdevaluation period. Method (3) was used only if (1) and (2) did not yield a good fit; if both (1) and (2) were statistically significant, the method that made greater a priori economic sense was selected. In practice, in many cases, though with important exceptions, approach (3), that is, simple extrapolation of predevaluation market share, had to be used. Some countries were excluded for lack of usable data. The results of this adjustment for the growth of import demand (Table 4) show the difference between actual exports of each devaluing country in the three postdevaluation years to the group of 14 industrial countries and its projected exports, expressed as a percentage of projected exports. Thus, a positive difference shows that export performance improved after devaluation even when adjustment is made for the growth of demand in the industrial countries; and a negative difference implies that, when the growth of import demand is taken into account,
TABLE4. GROUPA: POSTDEVALUATION EXPORTS INDUSTRIAL TO COUNTRIES,
CONTRASTINGACTUAL AND PROJECTEDVALUES

Country 1 Afghanistan Costa Rica Ecuador (1961) Egypt Finland Ghana Iceland (1962) Iceland (1968) India Israel (1962) Korea Peru Philippines (1962) Philippines (1970) SriLanka Tunisia Turkey Zaire

Exports to Industrial Countries as Percentage of Total Exports 2 50.1 92.4 89.7 28.3 67.9 73.6 59.6 68.4 55.8 71.6 89.3 81.2 93.7 88.2 48.6 76.1 68.7 96.4

Difference as Percentage of Projected Value of Exports First year 10.2 -6.4 -3.4 -9.8 1.3 21.9 13.3 -19.6 -6.4 0.2 15.0 -7.9 -8.0 -6.5 -8.1 -39.7 1.0 5.2 Second year -28.2 -10.7 11.0 -14.1 10.0 33.6 30.2 12.5 -9.4 16.2 40.2 -16.8 0.7 -5.8 -17.0 -37.2 12.6 9.6 Three-year average Third (million year (per cent) U.S. dollars) -29.6 -2.7 15.4 -23.6 11.3 28.5 35.2 6.3 -13.4 5.7 64.2 -20.5 -0.5 -10.2 -13.8 -42.9 ... 5.5 -17.3 (-18.4) -6.5 (-6.3) 8.2 (13.3) -16.2 (-36.6) 8.0 (152.7) 28.1 (75.3) 26.9 (15.1) 0.7 (0.8) -9.9 (-131.6) 7.6 (17.3) 41.6 (13.6) -15.6 (-167.4) -4.1 (-31.2) -10.2 (-143.5) -13.0 (-27.9) -40.0 (-84.5) 7.13 (39.6) 6.8 (47.1)

Source: International Monetary Fund, Direction of Trade. 1 Burundi, Ecuador (1970), Rwanda, and Mali are not included for lack of adequate data. 2 Exports to industrial countries expressed as percentage of total exports of the country concerned; average for the three predevaluation years in most cases. 3 Two-year average.

EXPORT-IMPORT RESPONSES TO DEVALUATION

431

exports failed to keep pace with it even though they might have done better in relationto the predevaluation period.The last two columnsin Table 4 show that in 9 out of 18 cases there was an improvement by this criterionand that in the other 9, there was a worsening.However, an importantqualificationneeds to be borne in mind in interpreting countries these results.Generallyspeaking,the exportsof nonindustrial as a group grew at a slower rate in the 1960s than the importsof the industrialcountries as a group and, as a consequence,the share of nonindustrialcountries in world trade declined. The major reason is that trade in primarycommoditieshas been growing at a slower rate than trade in industrial products, the discrepancybeing even more pronouncedif petroleumexports are excluded. It would thereforebe "normal"for a typical nonindustrial countryto experiencesome loss of marketshare in the importmarketin industrialcountries.However, since in many cases in Table 4 "projected" exports are estimatedby the market share, such a loss of extrapolating averagepredevaluation market share can show up as a negative differenceeven though the of export performance the devaluingcountryhas improvedin relation to its own past experience.Thus, when an allowanceis made for this element of bias in the import demand adjustment, the evidence becomes more favorableto the existenceof positive responseof export earningsto devaluation. Some of the seeminglylarge discrepancies betweenthe averagepostdevaluationgrowth rate of exports in Table 2 and the average deviations betweenprojectedand actual exportsin Table 4 arise eitherfrom or of special circumstances from a changein the proportion the devaluing country'sexports going to the industrialcountries.Thus, Table 4 shows a large decline (a negativedifference)for some countries-such as Afghanistan,Egypt, and Tunisia-and a large increase for some other countries-such as Ghana and Iceland (1962)-because these countries'exportsto the industrial countriesperformed somewhatworse or better, respectively,in comparisonwith their global exports, after the devaluation.Sometimesthere were special reasons. Iceland's successful performance(1962) was based on a rapid expansion of the exports of the fishing industry after the devaluation and a sharp increasein the share of herringin the fishingcatch; in fact about half the adjustedexport gains were in the U.K. market alone from higher herringmeal exports. The exceptionallylarge decline in Tunisia (-40 per cent) was due mainly to the expirationin September1964 of a trade agreementwith France grantingpreferentialentry to Tunisian wines. Tunisianwine exportsto France,which had exports,particularly

432

INTERNATIONAL MONETARY FUND STAFF PAPERS

increasedrapidly until then, suffereda sharp decline thereafter.This was furthercompoundedby a droughtthat affectedthe olive crop and olive oil exportsin 1967.
Imports

Turningto the responseof imports,about half the cases had about the same growthrate of importsin the three-yearperiodbefore devaluation as the predevaluationmedium-termtrend growth rate; the other cases are divided about evenly between increasesand decreases countriesdevalua(Table 5). This suggeststhat (1) in nonindustrial tions are not usually broughtabout by large increasesin imports,and of (2) in the face of sluggishness exportearningsdue to the overvaluation of currencyor other reasons,the import"norm" tends to be maintained either throughreliance on externalcreditsor by runningdown reserves,or both. Moreover,excess demandfor importscreatedby the of growingovervaluation the currencyis held in check throughintensification of import restrictionsor through a slower rate of economic growth. In the postdevaluation period, in more than half the cases (12 out of 20) the growthrate of importsactuallyexceededthe predevaluation growth rate because of an interactionof several influences. Higher export earningsand larger capital inflows from abroad due to greater confidence in the currency at its more realistic exchange rate raise foreign exchange availabilityand permit a larger volume of imports. At the same time, import liberalizationmeasures associated with devaluation,the higher rate of real economicgrowthmade possible by the betterallocationof resources,and the growthof exportsand import substitutescombine to produce a higher demand for imports. These influencestend to outweigh the restrainingeffect on imports of their higherdomesticcurrency prices.
COUNTRY EXPERIENCE

If the devaluationsare arrangedaccordingto the average growth rate of exportsin the three-yearpostdevaluation period (see Table 2),
in 4 cases it exceeds 20 per cent, in 5 cases it is 15-20 per cent, in

another5 cases it is 10-15 per cent, in 7 cases it is 5-10 per cent, and in 1 case it is negative.A brief surveyis made here of the experience of a few of the cross sectionof countriesexamined.This drawsattention, inter alia, to the particular that exogenousdevelopments playeda role in severalinstances.

EXPORT-IMPORT RESPONSES TO DEVALUATION

433

RATESOF IMPORTS GROWTH AND AFTER TABLE5. GROUPA: COMPARATIVE BEFORE DEVALUATION

(Inper cent a year)

Before Devaluation Country Afghanistan Burundi Costa Rica Ecuador (1961) Ecuador (1970) Egypt Finland Ghana Iceland (1961) Iceland (1968) India Israel (1962) Korea Mali Peru Philippines (1962) Philippines (1970) Rwanda Sri Lanka Tunisia Turkey Zaire Ten-year Three-year Three-year trend average2 average 7.0 ... 4.7 11.1 5.1 9.5 3.5 6.9 5.7 8.8 10.8 3.0 8.6 ... 3.7 5.3 ... 12.8 4.1 0.9 9.9 5.9 4.5 0.3 1.6 1.0 6.0 12.1 -6.1 14.2 12.4 3.0 9.9 -1.1 5.6 11.3 -0.6 4.5 0.3 9.0 13.6 22.73 7.6 16.6 9.2 20.4 16.8 -8.8 12.6 19.4 12.1 -8.9 9.3 3.0 11.8 -2.2 1.8 28.3 4 31.0 After Devaluation First year 8.6 36.7 5.8 -9.1 22.7 21.0 -6.9 -3.5 18.7 -10.7 -5.3 7.2 -8.0 27.2 -25.0 -3.4 -3.5 17.3 -14.5 -0.7 23.5 25.2 Second year 11.9 -24.1 9.3 32.4 4.0 26.7 12.9 23.1 27.5 -7.3 5.9 33.4 -20.9 -1.6 4.9 9.6 16.6 17.0 1.7 33.1 41.0 Third year -7.1 -11.6 11.9 17.6 -2.1 30.1 18.2 19.4 33.7 -13.8 24.6 32.8 29.9 -0.1 26.4 3.0 1.4 -9.1 4.5 26.9

Sources: InternationalMonetary Fund, International FinancialStatistics and International FinancialStatistics AnnualSupplements; and data provided by the national
authorities. ' Compound growth rate computed by regressing on time; data for years before 1953 not used. 2 Arithmetic mean of annual percentage changes. One-year data. 4 Two-year average.

Countrieswith the highestpostdevaluation growthrate (over 20 per

cent) are Iceland (1968), Korea, Mali, and Turkey. In Korea the

major reform of the exchange system early in 1961 marked the

beginning of a period during which exports grew from $41 million in

1961 to $1,676 millionby 1972. Duringthis decade,therewas another of large devaluationin 1964 and subsequentdepreciation the currency in smaller steps.17 The export performance was made possible through an export-centereddevelopment strategy, which provided the main guidelinefor economic policies. Of great importancealso was a large
17However, the quantitative indicators in this paper refer only to the 1961 devaluation.

434

INTERNATIONAL MONETARY FUND STAFF PAPERS

and increasinginflow of capital from abroad, supplementing domestic resourcesand facilitatingimplementation the developmentprogram. of Iceland'svery high export growthrate after the 1968 devaluationwas largely attributableto the sharp decline of exports in the preceding two years. This decline was a consequenceof a temporary in the fall world market price for fish, which made up about 90 per cent of Iceland'sexports, and a severe drop in Iceland'sfish catch, caused by unpredictablevariations in the natural cycle of the stock and by exceptionallyharsh weather in 1967. A recoverywas to be expected in any case. After 1968, with the faster than expectedrecoveryin the fish catch (facilitatedby the switchfrom herringto whitefish) and also in fish export prices, Iceland's export earnings grew rapidly and in 1971 rose 7 per cent above their previouspeak in 1966. In Table 4, Iceland's actual postdevaluationexports are only marginallygreater than projectedexports,but this does not indicate a poor postdevaluation performance,because projected exports are derived from past trends which, besides being based on the unfavorableyears 1967-68, also reflect the extremelyfavorableyears of the herringboom ending in 1966. The 1967 and 1968 devaluations Icelandwere a necessary in condition for the recovery,since rising costs had impairedthe profitability of the fishing industry so that in 1968 it had to be given subsidiesamountingto over 11 per cent of total governmentrevenue in that year. The devaluations,by restoring profitabilityto export industries,permittedthe eliminationof this strain on the budget and createdincentivesto bringabout new investmentand needed structural changesin the export sector. The increasedincome helped to stimulate import demand.The substantial importdecline in 1969 (see Table 5) was largely due to the effect of the 1967-68 devaluationson reai, personal,disposableincome. Turkey's excellent postdevaluationexport performancewas influenced by favorablefactors, such as vigorousimportdemandin industrial countriesin 1971-72 and higher prices for cotton. Nevertheless, the devaluation encouraged increased supply of the main primary export commodities(cotton, tobacco, and hazelnuts) and made possible the acceleratedgrowth of manufactured exports by raising their The greatestimpactof the devaluationwas on remittances profitability. from Turkish workers in Western Europe, which rose sharply to a high level. The resulting increase in foreign exchange availability, of togetherwith the liberalization the import system after the devaluation, facilitatedthe sharp growth of importsrequiredby the acceleration of domestic economic activity.In Mali's case, inadequaciesin the

EXPORT-IMPORT RESPONSES TO DEVALUATION

435

data indicate caution in interpretation. Part of the increase seems to be due to the incidence of unreportedexports in the predevaluation period, which tended to go throughofficialchannelsafter the devaluation, and the increasesin producer prices. Countriesin the 15-20 per cent range are Ghana,Ecuador (1970), Iceland (1962), Israel (1962), and Zaire. In Ghana a major factor contributingto higher export earningswas a 68 per cent increase in export unit value from 1967 to 1970; the volume of cocoa exportsin 1970 was only slightlygreaterthan in 1963. There was also a significant increase,comparedwith the predevaluation years, in export earnnontraditional ings from noncocoa exports, particularly products, and the more realistic exchange rate contributedto this. Importsdeclined sharplyfrom the peak in 1965, because of intensifiedrestrictions,to reach a low level in 1967; they declined further in 1968 despite liberalization measures, as investment expenditures were reduced (imports of consumer and intermediategoods increased). But from 1969, imports began to rise in response to greater foreign exchange measures. availability,acceleratedeconomic activity, and liberalization There were two factors in Ecuador'sgood export performanceafter 1970: (1) growth of nontraditionalexports, particularlyseafood products,which were encouragedby the more realisticexchangerate, and (2) the beginningof petroleumproductionin 1972 and a rapid increase in export earnings from this source. As regardsthe export volumeof traditional exportcommodities(bananas,coffee, and cocoa), the most important (bananas) showed only a small increase, while coffee and cocoa fluctuationswere mainly due to weatherconditions, The devaluationin Zaire (1967) was precededby financialimbalance and large price increases,compounded uncertainties by disrupand by tion of transportfacilities and trade services.This situationhad led to a considerable loss of export earningsfrom agricultural goods, because of both supply problemsand smuggling.The devaluation June 1967 in was accompaniedby a reformof the exchangesystem and a comprehensive stabilizationprogramdesignedto restore conditionsnecessary for the recovery of production, investment, and exports. The postdevaluationyears were markedby a steady increase in the volume of both mining and agriculturalexports. In addition to these favorable domestic developments, export earnings rose even more, due to a 48 per cent increase in the price of the principal export product (copper), from 1967 to 1970. In Costa Rica, Egypt, Finland, Peru, and the Philippines (1962), the postdevaluation growth rate of exports was in the 10-15 per cent

436

INTERNATIONAL MONETARY FUND STAFF PAPERS

case of a range. Finland'sdevaluationin 1967 was an uncomplicated successful exchange rate action. It was precipitatedby substantial currentaccount deficits,leading to loss of reserves,and was preceded by a profitsqueezein the exportsector.Exportsrespondedquicklyand were aided by an accelerationin economic activity in the industrial countries and in their imports. The postdevaluation stabilization policies kept domesticprice increaseswithinbounds and facilitatedthe transferof resourcesto the external sector, ensuringsuccess for the devaluation.In the Philippines(1962), the devaluationwas preceded by a periodof low export earningsaccompanied reformand simpliby fication of the exchange system and followed by rapid growth of exports.Traditionalexports (lumber and coconut products) responded well to the exchangerate change, but minor and nontraditional products also receivedan export impetus.Costa Rica's export performance improved after the devaluation,facilitated by special developments unrelated to the devaluation-the introduction of a new diseaseresistant variety of bananas, higher coffee export quotas under the InternationalCoffee Agreement, higher sugar export quotas to the United States, and entry into the CentralAmericanCommonMarket. In Peru, large budget deficits for two years and resultingfinancial difficultiesled to capital flight, a loss of confidencein the currency, and devaluationin 1967. It was followed in March 1968 by prohibition of the importationof many articles and in June 1968 by the impositionof a 15 per cent import surcharge.In the postdevaluation period, export earnings,which had begun to slow down, recoveredand reverted to the medium-termtrend annual growth rate of around 11 per cent. Consequentlythe trade balance made a quick and large recovery,though confidencereturnedonly after an effective stabilization programwith strong fiscal measureswas adopted in mid-1968. In Egypt, the devaluationhad a limited impact on the domestic currency prices of the main export products because of countervailing changes in export premiumsand little change in the minimumprices paid to the producersof the major export (cotton). The large postdevaluationincrease in export earningswas due largely to a recovery in both cotton production and world market cotton prices from low abnormally levels, supplemented the buoyancyof other exports, by such as rice. Finally, in Afghanistan, Burundi, Ecuador (1960), India, the Philippines(1970), Rwanda, and Tunisia, the growthrate of exports after devaluationwas in the 5-10 per cent range, and in Sri Lanka it was negative.Sri Lanka had balance of paymentsdifficulties nearly for

EXPORT-IMPORT RESPONSES TO DEVALUATION

437

ten years before the devaluationin 1967, arisingfrom lack of growth in export earnings and increased imports due to continuous budget deficits.The export volume of tea, the main export product,increased throughonly slowly,while its worldmarketprice declinedcontinuously out the 1960s; meanwhile,Sri Lanka's share of the world tea market was also slipping.The 20 per cent devaluationdid not lead to significant increasesin the domesticpricesof the main exports,partlybecause of the impositionof export taxes but also because the currencyof the price setting country (the United Kingdom) for tea had been devalued by 14.3 per cent at about the same time; hence, the effectivedevaluation was rathersmall. And immediatelyafter 1967, weatherconditions affectedproductionadversely,causing export volume to decreasemarginally. Since the world market price continuedto move downwards, foreign exchangereceiptsfrom tea decreased.The exchangereformof 1968 providedsome incentivesfor nontraditional exports,althoughthe profitabilityof exports was affected by the increase in wages. There was some increase in earningsfrom minor exports and from rubber, but not enoughto offset the decreasein tea receipts.Since the external resource constraintcontinued in effect after the devaluation,imports were governedby foreign exchange availabilityand did not increase. The devaluation of the Indian rupee also came after persistent balance of payments difficultiesand was accompaniedby a major simplificationof the exchange system. The export stagnationin the predevaluationperiod was due not only to the overvaluationof the rupee but also to the drought. Since the devaluationoccurredwhen the supply of resourceswas strainedby poor harvestsand this in turn caused a slowdown in overall economic activity, the export response to the devaluation even in the nonagricultural sector was delayed. The volume of traditionalexports (jute fabrics and tea) had been declining in the medium term before devaluation because domestic consumptionwas outpacing growth in output. The shift in relative prices after the devaluation was not sufficient (partly because of export taxes) to reverse this trend, although it was slowed down. Nontraditionalexports, particularlyengineeringgoods, iron ore, and chemicals,receiveda substantial impetusfrom the devaluationand the cash subsidies,and grew quite rapidlyafter the economyhad staged a recovery from the agriculturalreverses. In fact, the postdevaluation growth in India's export earnings was primarilyattributableto the manufactured items, indicatingsome diverbuoyancyof nontraditional sificationof exports.Importsof food, which had increasedsignificantly during the predevaluation droughtperiod, declined in the three post-

438

INTERNATIONAL MONETARY FUND STAFF PAPERS

devaluationyears. Other imports showed an increase while the economy was gettingout of the recession. After their independencein 1962, Burundiand Rwandaformed an economic union, which was ruptured in 1964, and this situation resulted in economic policy problems in both countries. The weak fiscal systems led to large financial imbalances, inflation, decline in the reportedexports, and balance of paymentsdifficulties, latter being the curtailmentof foreign assistance.In Burundi,the compoundedby of exchangereformin 1965 involvedthe unification a complexmultiple rate structure.The net domestic currency proceeds received by the producersof the two principalexports (coffee and cotton), were not increased substantiallyafter the devaluation,since most of the additional income from coffee was channeledto the budget and there were countervailingreductionsin subsidiesfor cotton. However, the minimum price paid to coffee producershad already been increased in 1964. The large increase in the volume of coffee exports was due partly to successfulfinancialefforts and a restorationof confidencein the currency but partly also to favorable weather conditions. In the Rwandathe financialstabilization programaccompanying devaluation was designedto strengthen budgetary the position,and export and import duties were increased.The producerprice of coffee (the principal export commodity), which had been raised by 40 per cent in 1964, was furtherincreasedby 35 per cent at the time of the devaluation in 1966; beginningin 1967, a policy of maintainingstable and remunerative producerprices for coffee was put into effect. In the postdevaluation Fund was effectivelyutilized period,the CoffeeStabilization to absorbfluctuations world marketpricesand to improvemarketing, in and transportation, other facilities so as to foster steady and long-term growthin coffee production.This policy provedsuccessful,althoughits results are only partly reflected in the three-year postdevaluation period.

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

This group consists of 14 countrieswhich devaluedtheir currencies followingthe U.K. devaluationof November18, 1967, mainlyto avoid unfavorableeffectson their externaltrade and other financialrelations with the United Kingdom.With the exception of Spain, all countries

EXPORT-IMPORT RESPONSES TO DEVALUATION

439

are members of the sterling area; they maintain close commercial and financial ties and there are almost no trade barriers or exchange restrictions within the area. The trade and financial relations with countries outside the sterling area are subject to controls similar to those of the United Kingdom. In some cases (Cyprus and Guyana), some degree of export control is applied to countries outside the area. Imports from countries outside the area are subject to some quantitative restrictions or tariffs, and payments for invisibles and capital transfers are subject to exchange controls if made to countries outside the area. The group covers a wide range of countries in terms of economic development and structure of trade. Ireland, Israel, Malta, New Zealand, and Spain are relatively advanced in economic development, exporting industrial as well as agricultural products. Ireland mainly exports cattle, meat, and dairy products, but also has industrial products such as textiles and machinery. Spain exports a wide range of manufactured goods, including machinery and processed agricultural products. The main exports of New Zealand are wool, meat, and dairy products. Israel mainly exports processed diamonds, textiles, and citrus fruits. Malta's main exports are also semimanufactured and finished manufactured goods, as well as agricultural products. The rest are primary-producing countries: Cyprus (cereals, citrus fruits, and potatoes), The Gambia (groundnuts and groundnut products), Guyana (sugar, rice, aluminum, and bauxite), Jamaica (sugar, bananas, bauxite, and aluminum), Malawi (tea and tobacco), Mauritius (sugar), Sierra Leone (diamonds, coffee, cocoa, and palm kernels); Trinidad and Tobago (fuel and lubricants, chemicals, and sugar), and the People's Democratic Republic of Yemen (fuel and lubricants).
EXPORTS

Nominal and adjusted rates of devaluation The nominal rates of devaluation, defined as changes in par value, were 14.3 per cent, which was the same as the United Kingdom's rate (Table 6). The only exception was New Zealand, which already had balance of payments difficulties before the U. K. devaluation and decided to devalue by 19.5 per cent. The nominal rates of devaluation in terms of changes in units of local currency per foreign currency were 16.7 per cent for other countries and 24.1 per cent for New Zealand. Of particular importance for the internal effects of devaluation, especially on the internal terms of trade, is the fact that a substantial

440

INTERNATIONAL MONETARY FUND STAFF PAPERS

TABLE 6. GROUP B: NOMINAL AND ADJUSTED RATES OF DEVALUATION FOR EXPORTS

(In per cent)

Country Cyprus The Gambia Guyana Ireland Israel Jamaica Malawi Malta Mauritius New Zealand SierraLeone Spain Trinidadand Tobago Yemen, People's Democratic Republicof3 Unweightedgroup average

Nominal Rate of Devaluation 14.3 14.3 14.3 14.3 14.3 14.3 14.3 14.3 14.4 19.5 14.3 14.3 14.3 14.3 14.7

MarketShareof Area Outside AdjustedRate of Devaluation2 Group B x 54.3 39.5 68.2 28.7 83.2 72.1 47.4 62.1 21.7 57.8 37.1 88.0 84.9 75.5 58.6 7.8 5.6 9.8 4.1 11.9 10.3 6.8 8.9 3.1 11.3 5.3 12.6 12.1 10.8 8.6

Sources:International MonetaryFund, Directionof Trade;and data providedby the national authorities. 1 Marketsharein 1966 of area outsideGroup B in exportsof the countrieslisted. 2 Nominal rate of devaluationtimes marketshare of area outside Group B. 3 Quantitative analysisfor the People'sDemocraticRepublicof Yemenis not possible becauseof lack of data priorto 1966.

portionof exportsby each of the countrieswent to the UnitedKingdom and other countries in the group and they were not directly affected initially by the devaluation.The nominal rates of devaluationwere thereforeadjustedfor the share of other countriesin the group in the exportmarketof the particular country(Table 6). These adjustedrates attemptto determinethe effect of devaluationon the domestic economy.18After this adjustment,the average rate of devaluationfor the groupis reducedfrom 14.7 to 8.6 per cent. For example,The Gambia, Ireland, and Mauritiushad such strong economic ties with the United Kingdomand with the group as a whole that the devaluationaffected a limited portion of their exports. On the other hand, a much greater portion of exports of Israel, Jamaica, New Zealand, Trinidad and Tobago, and the People's DemocraticRepublic of Yemen were influenced by the devaluation.On average, the market share of exports
18 This is of course an imperfect measure of the devaluation effect; for example, weighting by exports to countries outside the area is inappropriate if the export price in, say, dollars is uniform in all markets, nor does it capture the increased competitiveness in countries within the area for those products for which competitors are from outside the area.

EXPORT-IMPORT RESPONSESTO DEVALUATION

441

was about59 per cent, and the adjusted directlyaffectedby devaluation ratesof devaluation from 3.1 to 12.6 per cent. ranged
The effects of devaluation on exports Comparison of growth rates of exports. A comparison of the

growth rates of exportsbefore and after devaluation(Table 7) shows that, with the exceptionof Ireland,the countrieswith very low adjusted rates of devaluation (The Gambia, Malawi, and Mauritius) did not show an increase after devaluation.In 6 out of 13 countries( Cyprus, Ireland,Malta, New Zealand,SierraLeone, and Spain) the three-year averagegrowth rates of exports after devaluationwere higherthan the eight-yearaveragebefore devaluation.If, however,these are compared with the predevaluation three-yearaveragegrowthrates of exports,the the numberof countrieswithfavorablechanges picturechangesslightly; after devaluation increases to 8 (excluding Cyprus and including Guyana, Mauritius, and Trinidad and Tobago). The main factors which accountedfor these changes in the growth rates of exports are discussedin the next section. Eight countriesexperienceda decline in the growth rate of exports during the predevaluationperiod in the
TABLE 7. GROUP B: COMPARATIVEGROWTH RATES OF EXPORTS BEFORE AND AFTER

DEVALUATION

(In per cent)

Before Devaluation After Devaluation Annual rate of growth 1968 7.9 -27.0 -8.2 10.6 15.3 -8.3 -2.1 43.0 15.4 3.5 57.9 14.8 7.2 1969 10.7 27.9 14.4 11.2 14.1 15.8 9.8 12.8 3.2 17.5 10.8 19.6 0.5 1970 10.5 2.2 11.7 15.5 6.8 17.0 13.0 0.7 5.3 1.0 -3.2 25.6 1.3

Country Cyprus The Gambia Guyana Ireland Israel Jamaica Malawi Malta Mauritius New Zealand Sierra Leone Spain Trinidad and Tobago

Eight-year Three-year Three-year average average average (1959-67)1 (1965-67)2 (1968-70)2 5.8 8.5 7.4 8.3 14.5 9.3 13.7 3 8.5 4.6 -10.2 3 10.43 6.8 13.0 25.2 5.4 8.5 14.3 9.1 12.3 9.4 -9.5 -2.3 -13.4 13.8 2.6 9.7 1.0 6.0 12.4 12.1 8.2 6.9 18.8 8.0 7.3 21.8 20.0 3.0

Source: International Monetary Fund, International Financial Statistics. 1 Annual compound rate of growth estimated by regression analysis, unless otherwise indicated.
2

Arithmeticaverageof annual rates of growth.

Seven-year arithmetic average.

442

INTERNATIONAL MONETARY FUND STAFF PAPERS

sense that the predevaluation three-year average was lower than the eight-year average (Guyana, Israel, Jamaica, Malta, Mauritius, New Zealand, Sierra Leone, and Trinidad and Tobago). Israel, Malta, and Spain maintained very high rates of growth of exports; the growth rate of Israel showed a tendency to decline over time, while the rates of Malta and Spain increased over time.
IMPORT DEMAND-MARKET SHARE ANALYSIS

In the preceding section it was shown that 8 out of 13 countries experienced an increase in the growth rate of exports after devaluation, but this increase cannot be immediately attributed to the devaluation. The level of economic activity in most of the industrial countries declined in 1967, causing exports of developing countries to slacken or fall. In 1968, on the other hand, economic activity recovered strongly, so that the demand for exports of developing countries increased. This tended to raise the average growth rates of exports in the postdevaluation period, thus overstating the effects of devaluation. To separate the effects of changes in the level of economic activities in the industrial countries, import demand-market share analyses were carried out (Table 8). The effect of devaluation on exports is defined as the difference between actual exports and theoretical values estimated from the import demand-market share analyses. If the effect is significantly large (greater than 8 per cent of actual exports of the predevaluation period), the effects are called "strongly expansionary." If they are less than 8 per cent, but greater than zero, they are called "expansionary." Zero is included in the expansionary effect because exports could have declined in the absence of devaluation, since their currency would have appreciated against their important trade partners (the United Kingdom and the countries that followed the devaluation of the pound sterling). In this sense, even small negative numbers could be included in the expansionary effect, if there is strong evidence that exports would have declined further in the absence of devaluation. Table 8 shows that 5 out of 13 countries had a "strongly expansionary" effect and 8 out of 13 countries had "strongly expansionary" or "expansionary" effects. However, the three-year cumulative effects tend to underestimate the effects of devaluation, since a negative number for an individual year does not mean that devaluation caused exports to fall; exports fell for other reasons. Six countries experienced a strongly expansionary effect of at least one year, and 5 of these experienced strongly expansionary effects for more than one year. If this expansionary effect is included, the number increases to 10. However, the expan-

TABLE

8.

GROUP

B:

EFFECT OF DEVALUATION

ON EXPORTS 1

First Year (million U.S. dollars) 10.0 -2.5 -7.4 80.4 57.9 -69.9 5.0 3.0 -7.5 -64.3 12.3 111.1 1.6

Second Year (million U.S. dollars) 4.2 1.0 -5.7 118.4 36.6 -76.1 -3.0 6.5 -16.7 69.2 9.4 128.6 -47.8

Third Year (million U.S. dollars) -2.8 -1.8 -9.5 168.9 24.9 -66.0 -6.2 6.0 -24.9 22.6 -2.7 263.0 -88.1

Country Cyprus The Gambia Guyana Ireland Israel Jamaica Malawi Malta Mauritius New Zealand Sierra Leone Spain Trinidad and Tobago

(per cent)2 (13.9) (-16.9) (-8.4) (10.1) (14.6) (-22.0) (13.3) (17.6) (-10.3) (-6.4) (10.0) (9.0) (0.4)

(per cent)2 (5.1) (6.1) (-5.9) (13.6) (8.0) (-22.2) (-7.3) (34.6) (-21.6) (6.8) (7.0) (9.2) (-11.7)

(per ce

(-3.0 (-9.5 (-8.8 (17 (5 (-17.3 (-13.5 (28 (-29.5 (2 (-1.5 (16 (-19.5

Sources: International Monetary Fund, International Financial Statistics and Direction of Trade. 1 Difference between actual exports and theoretical values estimated from predevaluation behavior. 2 Effect of devaluation as percentage of theoretical value of exports. 3 Effect of devaluation as percentage of actual exports.

444

INTERNATIONAL MONETARY FUND STAFF PAPERS

sionary effects on an annual basis must be discounted,because they could be due to statistical errorsif only one yearshowedthe positivesign. Even in cases of stronglyexpansionary effects, an export expansion could be due to factors other than devaluation.The import demandmarketshare analysisis based on the assumption that afterthe devaluation there were no drasticchangesin the supplyand demandconditions other than devaluationand changesin the level of economic activities in the industrialcountries.If this assumptiondoes not hold, the above effects would give overestimations underestimations the effect of or of For this reason,other quantitative qualitative devaluation. and information was utilized to qualify the quantitative results.The circumstances of "strongly expansionary," "expansionary,"and "contractionary" effects are discussedbelow, and the distribution the three types of of in effects is summarized Table 9.
Cases of "strongly expansionary" effects

Table 9 shows "strongly in effectsof devaluation 5 out expansionary" of 13 countries(Ireland, Israel, Malta, SierraLeone, Spain). As noted earlier, these are countrieswhich had high adjustedrates of devaluation. The five countries can be further divided into two subgroups: were the majorfactor (1) Israel, Malta, and Spain,where devaluations for expansion,and (2) Ireland and SierraLeone, where other factors appearto have been equal to or more importantthan devaluationsin bringingabout significant export expansion. In Israel, a combination circumstances of favoredexports.Therewas unutilized capacity prior to devaluation,due to minor recessions in 1965 and 1966. In 1967, the economy responded quickly to the devaluationand the Government's expansionary policy withoutcausing seriousinflationary pressure.Also, the Government's wage freezeduring 1967-68 and tariff reductions contributedto price stability. Labor unions cooperatedwith the Government abstainingfrom claims for by higherwages after the expirationof the freeze. The overall high-saving propensityseems to have contributedto the increased availabilityof for resources exportsafterdevaluation. In Spain, the devaluationtook place when the economywas suffering from inflationarypressure;it was followed by austeritymeasures, also carried includinga freeze on wages and salaries.The Government out disinflationary with price stabilizamonetary-fiscal policies, together tion policies. Partly because of a reduction in import duties and increasedimport subsidies,price stabilitywas maintainedin 1968 and 1969. In 1969 the Government initiallyfollowed a permissive monetary

TABLE9. GROUP B: SUMMARY QUANTITATIVE OF INDICATO Exports

Country Cyprus The Gambia Guyana Ireland Israel Jamaica Malawi Malta Mauritius New Zealand Sierra Leone Spain Trinidad and Tobago Number of countries with positive signs

Adjusted rates of devaluation 1 (I) (II) (+) (+ ) (+) + + (+) (+) + (+) + + 5 (-) (+) + (+) (+) + (+) + + 5

Comparison of Import demand market share analy growth rates2 (Three(Eight(Eightyear year year average) average) average) (Annu + (+) (+) (+) + + + + + + (+ ) + + + + 6 + + + + + + 8 + (+ ) + + 4(8) 4 (+) + (+ + + (+)

6(10)

Sources: Tables 6, 7, 8, 10, and 11. 1 The plus sign indicates an adjusted rate greater than 10 per cent, and the plus sign in parentheses in greater than 5 per cent. 2 The plus sign indicates that the three-year average growth rate in the postdevaluation period is g eight-year average growth rates in the predevaluation period. 3 The plus sign indicates "strongly expansionary" effects, and the plus sign in parentheses indicates 4 The numbers in parentheses indicate the number of countries with either "strongly expansionary"

446

INTERNATIONAL MONETARY FUND STAFF PAPERS

policy, with resultant inflationary pressures, but then reverted to restrictive monetary policy and introduced a stabilization policy toward the end of the year. In Malta, monetary-fiscal restraints were not followed in the postdevaluation period. Control measures on import prices were introduced after the devaluation, and there was an increase in wages. Significantly positive effects of devaluation were felt in spite of the temporary setback caused by the closure of the Suez Canal. In Sierra Leone a remarkable expansion in exports was brought about by a number of factors, including devaluation. Following the financial deterioration caused by ambitious development efforts, in 1966 the Government introduced stabilization policies, which mainly involved fiscal restraints and a rationalization of the tax system. Export performance was aided by the price increase of the principal export product (diamonds) in pounds sterling by the full extent of the devaluation. Also of importance to exports were the elimination of the increased diamond export taxes and the financial rehabilitation of the Sierra Leone Produce Marketing Board, which purchases agricultural products for export. The policies during this period restored confidence and helped to eliminate the drastic reduction of exports caused by increased smuggling and low output. Devaluation was one of the policy instruments that enabled the Government to increase the purchase prices of diamonds and agricultural exports and to reduce the financial difficulties of the Produce Marketing Board. Ireland is an example of a country where exports grew at significantly higher rates after devaluation, largely because of increased exports to the United Kingdom. Its adjusted rate of devaluation was only 4.1 percent, due to the strong economic ties with the United Kingdom, indicating that devaluation would have a limited impact on the Irish economy. However, the advanced stage of economic development, aided by the successive relaxations of trade barriers under the 1965 Anglo-Irish Free Trade Area Agreement, enabled Ireland to exploit the increase in its relative competitive position in the U.K. market. Cases of "expansionary" effects The countries with "expansionary" effects are Cyprus and New Zealand. Their production for exports suffered from bad weather and adverse price movements in the world markets after devaluation. However, devaluation appears to have more than offset these adverse effects, with the result that their exports showed moderate gains. In Cyprus, agricultural production declined as a result of bad weather conditions,

EXPORT-IMPORT RESPONSES TO DEVALUATION

447

and the world price of its major exports also declined in 1968. In 1969, agriculturalproductionrecovered, allowing exports to recover and expand, although monetary-fiscal policies were expansionaryand increased. In New Zealand, its major export (wool) suffered wages from unfavorableworld demand, mainly owing to competitionwith synthetics. Drought also cut down the productionof dairy products. On the other hand, exports of meat, forestry products, and manufactured goods grew at a high rate, indicating a positive effect of devaluation. Cases of "contractionary" effects When devaluationdid not fully offset other adverse factors which effects resulted. This caused the export shortfalls, "contractionary" group can be divided into two subgroups.The first consists of The Gambiaand Mauritius,which had strongeconomicties with the United Kingdomand where the adjustedrate of devaluationwas too small for a significantpositive effect on exports (Tables 6 and 9). The Gambia depended for its exports upon a single crop (groundnuts), which sufferedfrom bad weather conditionsas well as unfavorablechanges in export prices. Mauritiusalso dependedheavily upon sugar exports, Sugar mostly going to the United Kingdomunder the Commonwealth Agreement, which denominatedthe sugar price in pounds sterling. the Because of this marketingarrangement, producerprice in domestic on average,much less than the rate of devaluation. currencychanged, Export earningsmeasuredin U.S. dollars declined. The second subgroupconsists of countrieswhich had relativelyhigh adjustedrates of devaluationbut whose exports declined, owing to a special marketing arrangement,bad weather conditions, unfavorable world demandconditions,and other specialfactors.These are Guyana, Jamaica, Malawi, Trinidadand Tobago, and the People's Democratic Republic of Yemen. Guyana, Jamaica, and Trinidadand Tobago are sugar exporters and were adversely affected by the Commonwealth Sugar Agreement and the low world demand for sugar. Also, bad weatherconditionsadverselyaffectedthe exportsof Guyana,Jamaica, Malawi, and the People's DemocraticRepublicof Yemen. In Guyana, heavy rain in 1968 caused damageto rice crops and bauxiteore mines, while Jamaicasufferedfrom severe droughtwhich reducedagricultural production. Malawi's main exports (tobacco, tea, and groundnuts), the suffereda major setback from bad weather.A disease aggravated situationfor groundnutproductionin Malawi. The export shortfallsof Trinidadand Tobagowere mainlycausedby a declinein exportsof fuel

448

INTERNATIONAL MONETARY FUND STAFF PAPERS

and lubricants. A part of these are imported and exported under processing agreements, and changes in that portion would not have been influenced by the devaluation. The second important export (sugar) was also adversely affected by the Commonwealth Sugar Agreement, and total exports declined in spite of the growth of exports to the neighboring countries following the formation of the Caribbean Free Trade Area in 1968. Exports and re-exports of the People's Democratic Republic of Yemen in 1968 were 33 per cent below the 1966 level, mainly because of the sharp decline in the number of ships bunkering in the port of Aden after the closure of the Suez Canal in mid-1967.
IMPORTS

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

TABLE10. GROUPB: ADJUSTED RATESOF DEVALUATION IMPORTS FOR (In per cent) Market Share of Area Outside Adjusted Rate of Devaluation 2 Group B1 60.8 61.4 66.9 43.7 79.2 74.3 68.7 57.2 73.9 62.3 66.1 88.2 79.7 86.6 69.2 8.7 8.8 9.6 6.3 11.3 10.6 9.8 8.2 10.6 12.1 9.5 12.6 11.4 12.4 10.2

Country Cyprus The Gambia Guyana Ireland Israel Jamaica Malawi Malta Mauritius New Zealand Sierra Leone Spain Trinidad and Tobago Yemen, People's Democratic Republic of Unweighted group average

Sources: International Monetary Fund, International Financial Statistics and Direction of Trade; and Table 6. 1 Market share in 1966 of area outside Group B in imports of the countries listed. 2 Nominal rate of devaluation times market share of area outside Group B.

EXPORT-IMPORT RESPONSES TO DEVALUATION

449

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

TABLE1. GROUPB: COMPARATIVE GROWTH RATESOF IMPORTS BEFORE AND AFTER DEVALUATION (In per cent) Before Devaluation After Devaluation Annual rate of growth 1968 2.3 8.9 -16.2 14.1 44.1 10.6 14.4 26.9 13.5 -9.3 0.3 1.3 2.4 1969 21.9 -7.4 7.5 18.9 18.7 15.1 5.7 19.7 -10.7 11.6 23.3 20.1 13.1 1970 13.4 -7.9 13.8 10.1 9.1 18.1 19.0 9.1 11.7 23.8 4.2 12.3 12.3

Country Cyprus The Gambia Guyana Ireland Israel Jamaica Malawi Malta Mauritius New Zealand Sierra Leone Spain Trinidad and Tobago

Eight-year Three-year Three-year average average average (1959-67)1 (1965-67)2 (1968-70)2 4.1 9.2 6.2 8.8 9.9 7.3 2.62 -0.3 2 6.6 6.1
26.32

8.3

16.4 17.4 14.2 3.5 -2.4 6.4 23.1 0.5 -6.5 0.9 -2.8 16.5 -0.3

12.5 -2.1 1.7 14.4 24.0 14.6 13.0 18.6 4.8 8.7 9.3 11.2 9.3

Source: International Monetary Fund, International Financial Statistics. 1 Annual compound rate of growth estimated by regression analysis unless indicated otherwise. 2 Arithmetic average of the annual rates of growth.

450

INTERNATIONAL MONETARY FUND STAFF PAPERS

and Trinidad and Tobago had quantitativerestrictions.New Zealand also tightened import restrictionsin 1967 for balance of payments reasons.

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

This group consists of 14 countriesin the French franc area 19that maintain strong commercialand monetaryrelations with France and among themselves. They devalued by the same proportion as the French franc to avoid adverseeffects of the 1969 French devaluation. Five out of the 14 countrieshave a monetaryand customsunion within the area; they have only one central bank (Banque des Etats de l'Afrique Centrale) and trade is free from controls and tariffs the the (Cameroon, CentralAfricanRepublic,Chad,2? People'sRepublic of the Congo, and Gabon). Seven other countriesalso had a common centralbank (Banque Centraledes Etats de l'Afriquede l'Ouest) and a customs union (Dahomey, Ivory Coast, Mauritania, Niger, Senegal, Togo, and Upper Volta). There are no controls over trade and capital movementswithin the Frenchfranc area. Trade and capitaltransactions with countriesoutside the French franc area were traditionallysubjectto varyingdegreesof control and restrictions.In 1969, however, the French franc area countries abolished the prevailing exchange controls, following the action by France.21 Also, the Frenchfranc area countriesextendedthe trade arrangements, preferential formerlyextendedonly to France, to member countriesof the EuropeanEconomic Community(EEC) on the basis of reciprocityprovidedfor in the agreementof association. the dismantled Under this arrangement, Frenchfranc area progressively the restrictions importsfrom the EEC and severalother countries.22 on Direct investmentsboth inward from and outward to the countries

19 France and its overseas departments and territories (except the French territories of the Afars and Issas) and Monaco, and all other countries whose bank of issue is linked with the French Treasury by an operations account. 20 Chad is no longer a member of the customs union. 21 Ivory Coast had already done this in 1967. 22 In particular, the People's Republic of the Congo reduced considerably the restriction on current transactions, including elimination of the 10 per cent surcharge on imports and the advance deposit scheme. Also, Chad, the Malagasy Republic, and Mauritania reduced their quantitative restrictions in 1968.

EXPORT-IMPORT RESPONSES TO DEVALUATION

451

outside the area and the EEC were subjectto control. A large part of importsfrom countriesoutsidethe area still remainedsubjectto quantiand tative restriction licensing. The countries in this group were primaryproducingcountries at a relatively early stage of economic development.Their main exports were agricultural mineralproducts:Cameroon(coffee, cocoa, and and aluminum), the Central African Republic (diamonds, cotton, and coffee), Chad (cotton, livestock, and meat), the People's Republic of the Congo (forestry productsand petroleum), Dahomey (palm kernel products), Gabon (petroleum,manganese,wood, and wood products), IvoryCoast (coffee, cocoa, and timber), the MalagasyRepublic(coffee, sugar, rice, and vanilla), Mauritania (iron ore), Mali (groundnuts, cotton products, and livestock), Niger (groundnutsand livestock), Senegal (groundnuts and groundnut products), Togo (phosphates, coffee, and cocoa), and Upper Volta (livestock). Five countries (the Central African Republic, Chad, Mali, Niger, and Upper Volta) are landlockedcountries,where lack of transportation facilities is a major barrier to trade and development.Also, a significantportion of the total trade of all of the above countrieswas unrecorded.
EXPORTS

Nominal and adjusted rate of devaluation

The nominalrate of devaluationwas 11.1 per cent, and it was 12.5 per cent in terms of local currencyper U.S. dollar. The marketshare of the area outside the group was 52 per cent, on average, ranging from 21 per cent for Niger to 87 per cent for the People's Republic of the Congo. Table 12 gives the nominal rates of devaluationfor exports.There is no countrywhose adjustedrate exceeded 10 per cent. Nine of the 14 countrieshad adjustedrates greaterthan 5 per cent, and only three of these countrieshad rates greaterthan 7 per cent.
Effect of devaluation: qualitative and quantitative evidence

To isolate the effect of devaluationsfor the French franc group is were small. Secondly, very difficult.First of all, the rates of devaluation factorsother than price incentivesplayeda dominantrole. Among these were governmentdevelopmentefforts supportedby foreign economic and technical assistance, world demand, and weather conditions. In some cases, the economic and technicalassistanceprovidedby France

452

INTERNATIONAL MONETARY FUND STAFF PAPERS RATESOF DEVALUATION TABLE12. GROUPC: NOMINAL AND ADJUSTED
FOR EXPORTS

(In per cent)

Nominal Rate of
Country Devaluation

MarketShareof Area Outside

Group Cl

of Devaluation

AdjustedRate 6.5 7.3 4.0

9.7

Cameroon CentralAfricanRepublic Chad Congo, People's

Republic of the

11.1 11.1 11.1

11.1

58.3 65.6 36.0

87.4

Dahomey Gabon Ivory Coast MalagasyRepublic Mauritania Mali Niger Senegal Togo Upper Volta
Unweighted group average

11.1 11.1 11.1 11.1 11.1 11.1 11.1 11.1 11.1 11.1
11.1

42.0 61.3 60.9 60.6 79.8 49.6 20.7 23.1 58.9 28.7
52.4

4.7 6.8 6.8 6.7 8.9 5.5 2.3 2.6 6.5 3.2
5.8

Source:International Financial Statistics. MonetaryFund, International 1 Market share in 1968 of area outside Group C in export market of the countries listed.
2

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

and the EEC, which was important during the 1960s, was curtailed in the early 1970s. The association of the French franc group with EEC countries, which began in the early 1960s and increased in subsequent years, is also a factor, because the French franc group received preferential treatment from the EEC in exchange for similar treatment of the EEC's exports. This arrangement affected the direction of trade of the French franc group; exports could have expanded more than in the past, even in the absence of devaluation. Thirdly, a significant portion of their trade is not recorded. These factors reduced the reliability of the quantitative analysis, especially the import-demand analysis, which could not produce statistically significant results. Table 13 compares the growth rates of exports before and after devaluation; 8 out of 14 countries increased their growth rate of exports after devaluation. However, this change may have been largely due to factors other than devaluation, since 3 out of the 8 countries had an adjusted rate of devaluation less than 5 per cent. The market share analysis (Table 14) also reveals a similar picture; 7 out of 14 countries improved their exports after adjustmentfor the import demands

EXPORT-IMPORT RESPONSES TO DEVALUATION

453

TABLE 13. GROUP C: COMPARATIVE GROWTH RATES OF EXPORTS BEFORE AND AFTER DEVALUATION

(In per cent)

Before Devaluation

After Devaluation

Country Cameroon CentralAfricanRepublic

Chad

Seven-year Three-yearTwo-year Annual rate of growth average average average 1971 (1962-69)1 (1967-69)2 (1970-71)2 1970 8.2 2.5 14.0 8.4 -3.4 12.1 6.0 -1.2 -14.7 12.3
9.42

7.4

2.7

2.2

3.1

Congo, People's Republicof the Dahomey Gabon

Ivory Coast

2.92 14.3 2

3.2
33.2

11.8
12.72

13.1
11.9

17.7 37.5 19.2

7.8

15.7 35.4 -15.8

10.1

19.6 39.6 54.1

5.5

MalagasyRepublic Mauritania
Mali

4.1 4.7
14.02

5.3 3.3
0.5

14.5 11.1
50.0

27.4 16.5
92.4

1.5 5.7
7.6

Niger Senegal Togo Upper Volta

12.2 -0.7 13.3 19.3

-11.0 -7.4 8.6 9.2

25.6 10.8 6.0 -12.6

29.9 32.2 22.1 -12.4

21.3 -10.7 -10.2 -12.8

Financial Source: International Statistics. MonetaryFund, International I Annual compound rate of growthestimatedby the regressionanalysis. 2 Arithmetic averageof annual rates of growth.

of the industrial countries. In the 5 countries with both relatively high adjusted rates and favorable changes in exports, factors other than devaluation may have played a dominant role. Therefore, the evidence for expansionary effects of devaluations in Group C was very limited and scattered. Cases of export expansion Countries where some quantitative evidence of an expansionary effect of devaluation was found were the Central African Republic, Gabon, the Malagasy Republic, Togo, and Mali. In the Central African Republic, the major export product (diamonds) declined, due to the low producer price offered to diggers. The producer price of cotton, another important export, was raised by 7 per cent after devaluation, and subsidization, necessary in. the past, soon became unnecessary, partly due to the devaluation and partly due to the improved world price. During 1970-71 cotton production declined because of bad weather, departure of foreign agricultural advisors, and reorganization of the agricultural sector. However, without devaluation and higher

454

INTERNATIONAL MONETARY FUND STAFF PAPERS

TABLE GROUP GAINS EXPORTS INDUSTRIAL 14. C: COUNTRIES TO IN DURING PERIOD POSTDEVALUATION 1 Gains as Percentage of ProjectedValues of Exports Two-yearaverage First year -17.6 7.7 -9.2 -20.8 35.4 -2.7 -8.0 10.5 -12.7 34.0 -29.0 22.2 -3.4 38.0 Second (million year (per cent) U.S. dollars) -26.7 -34.5 -156.1 -2.3 -23.5 -24.1 49.0 23.9 -22.3 25.5 -12.0 47.4 -28.8 39.5 -25.5 -3.8 2.5 -16.7 -22.5 44.7 10.3 -15.6 18.2 -12.3 41.2 -28.6 29.7 -15.2 15.8 1.8 -10.0 -35.5 21.8 27.8 -185.9 36.7 27.7 8.7 -27.2 53.6 -22.1 3.1

Country Cameroon CentralAfrican Republic Chad Congo, People's Republicof the Dahomey Gabon Ivory Coast MalagasyRepublic Mauritania Mali Niger Senegal Togo Upper Volta

Exportsto Industrial Countriesas Percentageof Total Exports 88.5 81.0 83.0 77.2 90.8 72.3 83.0 69.6 95.7 34.7 83.9 82.9 93.1 27.2

Financial Statisticsand Direction Sources:International MonetaryFund, International of Trade. 1 Differencebetweenactualexportsand theoreticalvaluesestimatedfrompredevaluation behavior.

external prices, the decline could have been greater. Togo's cocoa exports declined during 1970-71 as a result of adverse world demand conditions. However, the producer price was raised by 10 per cent during 1969-70 and by 6 per cent during 1970-71, significantly cushioning the impact of a fall in the world price on production. This can be in part attributed to the devaluation. Price supports for other exports before 1969 resulted in deficits for the government-sponsored purchasing agents in view of the adverse world price movement. However, the deficit disappeared after the devaluation; the price support policy would have been difficult to maintain in the absence of devaluation. After devaluation, the Malagasy Republic increased the producer price for coffee and cloves, contributing to the recovery of production after violent cyclones in 1969; however, the recovery was also due to favorable weather and an exceptionally good crop in 1970. Although these increases in producer prices were largely due to the improved world market conditions, they were also due to the devaluation; the degree of the price increase to the producers would have been smaller in the absence of devaluation.

EXPORT-IMPORT RESPONSES TO DEVALUATION

455

Mali is an exception in the sense that it had devaluedits currency two years earlier (May 1967) by 50 per cent, and the second devaluation in 1969 cannot be analyzedwithout taking into account the first devaluation.The adjustedrate of devaluationindicatesthat the second devaluationhad a very limited impact on Mali's economy. However, toward the end of 1968, the Governmentcarried out a number of measuresdesignedto promotethe productionof exports.Among these were selective increasesin producerprices and new investmentincentives. The effect was to raise the relativeprice of exports.While exports expanded substantially,there was a reduction in the productionof food crops, and this resultedin a substantial home goods, particularly increasein foodstuffimports.
Cases of export contraction

Four out of 9 countries which had adjusted rates of devaluation greater than 5 per cent did not experience an expansionaryeffect of devaluationon exports: Cameroon,the People's Republic of the Congo, Ivory Coast, and Mauritania. Cameroon suffered from drought in the north and heavy rain in the south, causing severe damage to agriculturalproduction. The People's Republic of the Congo had a decline in export volume of forestry products, partly owing to near depletion of certain species in concession areas and infrastructure. Also, partly owing to a lack of adequatetransportation an export tax was imposed in 1971 on exports of logs in order to industry. Ivory Coast's two encourage the domestic wood-processing and timber) fell substantiallybecause of low major exports (cocoa externaldemand.The increasedreceiptsfrom exportsof coffee, another majorexportof the Ivory Coast, could not fully offset the setbackfrom the cocoa and timberexports because of the quota imposedunder the coffee agreement. were The remaining5 countrieswhose adjustedrates of devaluations too small to expect an expansionaryeffect on exports were Chad, Dahomey, Niger, Senegal, and Upper Volta. Of these, 3 countries improved their export performance due to improvementin world demand (Dahomey), the recovery from bad weather conditions (Niger), and successfuldevelopmentefforts (Dahomey, Senegal). The remainingtwo countries(Chad and Upper Volta) sufferedfrom export shortfalls,mainly on account of bad weather conditions (Chad) and animaldiseases (Upper Volta). A summary of export performancesbefore and after devaluation appearsin Table 15.

OF INDICATO TABLE15. GROUP C: SUMMARY QUANTITATIVE Exports Adjusted rate of devaluation l (II) (I) Country Cameroon Central African Republic Chad Congo, People's Republic of the Dahomey Gabon Ivory Coast Malagasy Republic Mauritania Mali Niger Senegal Togo Upper Volta Number of countries with positive signs (+ ) + + (+) ( +) (+ ) + ( +) (+) 3 (+ ) (+) (+) (+) (+ ) (+) (+ ) (+) (+) 0 7 7 + 7 + + + + + + + + + + + + + + + + + + Comparison of growth rates 2 Seven-year average Three-year average Market share analysis 3 +

Sources: Tables 12, 13, and 14. 1 The plus sign indicates an adjusted rate greater than 7 per cent. The plus sign in parentheses indic 2 The plus sign indicates that the three-year average growth rate in the postdevaluation period exc year average growth rates in the predevaluation period. 3 The plus sign indicates that the difference between the acutal and theoretical value is positive.

EXPORT-IMPORT RESPONSESTO DEVALUATION

IMPORTS

457

Adjusted and nominal rate of devaluation While the nominal rate of devaluation was the same for exports and imports, adjusted rates of devaluation for imports were less than those of exports, because of stronger dependence on imports from the French franc area (Table 16). The market share of the area outside the French franc area was on average 43 per cent before the devaluation, so that the adjusted average rate of devaluation was only 4.8 per cent. Comparison of the growth rates of imports The effect of devaluations on imports is also difficult to isolate. In particular, a significant portion of total imports was unrecorded; also, imports were made for re-export to neighboring countries. The fact that government development efforts and aid-financed imports played an important role in determining the pattern of imports in the 1960s indicates that import performances were significantly influenced by factors other than price and income during the postdevaluation period. Another difficulty is that at the time of devaluation there were changes in the import regimes, reflecting association with the EEC. In examinFOR RATESOF DEVALUATION IMPORTS TABLE16. GROUPC: ADJUSTED (In per cent) Market Share of Area Outside Adjusted Rate of Devaluation 2 Group C1 41.0 44.2 56.1 36.4 43.1 42.8 45.6 33.8 41.6 48.6 28.1 45.9 64.9 30.3 43.0 4.6 4.9 6.2 4.0 4.8 4.8 5.1 3.8 4.6 5.4 3.1 5.1 7.2 3.4 4.8

Country Cameroon Central African Republic Chad Congo, People's Republic of the Dahomey Gabon Ivory Coast Malagasy Republic Mauritania Mali Niger Senegal Togo Upper Volta Unweighted group average

Sources: International Monetary Fund, International Financial Statistics and Direction of Trade. 1 Market share in 1968 of area outside Group C in import market of the countries listed.
2

Nominal rates of devaluationtimes marketshare of area outside Group C.

458

INTERNATIONAL MONETARY FUND STAFF PAPERS

ing the growth rates of imports presented in Table 17, all these difficulties need to be kept in mind. Of the 5 countries which had some Central African positive effects of devaluation on exports-the Republic, Dahomey, Gabon, the Malagasy Republic, and Mali-only Gabon and Mali experienced an increase in the growth rate of imports after devaluation. It has to be noted, however, that imports measured in U.S. dollars would have declined without any real change in the volume of imports from the French franc area due to the devaluation of the French franc. If an adjustment is made for this decline in imports arising from the accounting unit problem, then the Malagasy Republic also experienced an increase in imports and Dahomey's growth rate of imports did not change after devaluation. These performances of imports before and after devaluation are summarized in Table 17.

TABLE17. GROUPC: COMPARATIVE RATESOF IMPORTS GROWTH BEFORE AND AFTER DEVALUATION (In per cent) Before Devaluation After Devaluation

Country Cameroon Central African Republic Chad Congo, People's Republic of the Dahomey Gabon Ivory Coast Malagasy Republic Mauritania Mali Niger Senegal Togo Upper Volta

Seven-year Three-year Two-year Annual rate of growth average average average 1971 1970 (1963-69)1 (1967-69)2 (1970-71)2 7.7 9.2
9.02

10.0 4.1 16.8 -0.9 19.3 6.4 6.9 9.2 25.8 -8.1 3.5 7.2 6.8 10.6

15.5 -3.8 16.2

...

26.9 -10.3 23.9 -23.7 15.4 1.8 24.8 -7.4 30.6 20.6 19.1 -1.9 13.6 -7.0

4.1 2.7 8.5 20.0 20.6 11.6 25.2 12.8 16.1 -7.6 13.1 8.5 8.4

0.9 2

9.4 8.0
11.12

4.7
8.82

3.62 10.1 1.6 9.5 5.8 2

17.7 11.2 18.2 8.9 21.7 18.4 5.8 5.6 11.1 0.7

Source: International Monetary Fund, International Financial Statistics. 1 Annual compound rate of growth estimated by the regression analysis. 2 Arithmetic average of annual rates of growth.

VI. Conclusions
The discussion above is limited to the export-import response in a cross section of nonindustrial countries that devalued their currencies during

EXPORT-IMPORT RESPONSES TO DEVALUATION

459

the 1960s. The devaluationscan be divided into two main groups: and and discretedevaluations, (1) GroupA, consistingof independent of two subgroups countrieswhich devaluedin the wake of devalua(2) tions of the pound sterlingin 1967 (GroupB) and the French franc in in 1969 (GroupC). As a rule, the devaluations GroupA were substantially largerin magnitudeand in severalcases occurredafter a prolonged period of balance of paymentsdifficulties,when the currencybecame increasingly overvalued. Meanwhile, the weak external payments position necessitatedresort to various types of restrictionson imports of and ad hoc supportsto maintainthe competitiveness exports. The devaluationwas usually the occasion to simplify and rationalizethe exchange and trade system. In contrast, most of the devaluationsin GroupsB and C becamenecessarybecauseof the close commercialand financial relations of these countries with the United Kingdom and France. They occurrednot so much to correctan existingfundamental disequilibrium as to avoid unfavorable repercussions on external commercial and financial relationships.Accordingly, there are some differencesin the trade response to devaluationamong the two main of in groups of countries,particularly the responsiveness exports. The main conclusionsare summarized below, but they can only be regarded as tentative,both because of the weak data base and because this is in only a synopticview of the experienceof devaluations nonindustrial countries. group of (1) In many cases, particularlyin the "independent" devaluations,the "effective"devaluation in terms of the impact on domestic currencyprices of traded goods was substantiallyless than devaluation.This is in contrastto the the magnitudeof the "nominal" theoretical experienceof industrialcountriesas well as to the simplified analysisof exchangerate policy. The divergencebetween effectiveand of nominalrates occurredbecauseformaldevaluation the currencywas ad hoc measures to encourage exports and generally preceded by restrainimports.Since devaluationwas usually accompanied either by outrighteliminationor by reductionin these ad hoc measures,the net increase in the domestic currency prices received by producers of exportables and paid by the end-users of imports was substantially smallerthan the nominaldevaluationof the currency. (2) The "effective" devaluation was smaller than the nominal devaluationin the countriesof GroupsB and C because there was a

460

INTERNATIONAL MONETARY FUND STAFF PAPERS

simultaneousand equivalent devaluationby their importanttrading partners.The potential impact on domestic currencyprices of traded goods, particularlyimports, would thereforebe dampened,since the exchange rates connecting the devaluing currencieswith each other wouldremainunchanged. numberof countriesin GroupA, exportgrowth (3) In a substantial had slowed down in the immediatepredevaluation period because the overvaluationof the currencywas not adequatelyoffset by increasing ad hoc export supports. Another reason for the slowdown was that devaluationwas often precipitatedby an adverse developmentin the period, such as a poor crop of the export commodity predevaluation on or a decline in the world market price superimposed an already weakbalanceof payments position. was signi(4) In almost all cases in Group A, export performance three-yearperiod, comparedwith ficantlybetter in the postdevaluation both the predevaluation medium-term trend and the three-yearperiod devaluation.A major element in the postdevaluation export preceding performancewas the effectivenessof the supportingfinancialpolicies in controllingdomesticdemandand of the accompanying development policies in transferringresources to the export sector. These were particularlyimportant for the growth of nontraditionalexports, an important element in the export performance of many countries. factor in some cases was that since the Anotherimportantcontributory such devaluationwas precipitated a reversibleadversedevelopment, by of exports, a part of the as poor crops or a fall in international prices was a naturalincreasefrom the predevaluation improvedperformance performance postdevaluation trough.This generalimpressionregarding when an adjustment made for the growth was of exportswas confirmed countries. of demandfor importsin industrial (5) The evidencewas somewhatmore equivocalwith respectto the supply response as measuredby the growthrate in the export volume of the majorprimarycommodities.This may be partly due to the fact that in many instances the domestic currency price received by producersof major primaryproductexports is set by the government and was often not changed by the same proportionas the exchange rate or was changed over time by small amounts. Also, the supply responseof certainprimarycommoditiesmay involve time lags.

EXPORT-IMPORT RESPONSES TO DEVALUATION

461

(6) There was no tendency for imports to either accelerate or decelerate immediately prior to the devaluation, in contrast to the observable deceleration in exports. Thus, in the face of slower growth in export earnings, imports were maintained by running down reserves and relying on external borrowing. The overvaluation of the currency did not result in acceleration of imports, because of cost restrictions and administrative restrictions. (7) In most cases, imports continued to grow after devaluation and, in a majority of cases, the growth rate exceeded the predevaluation growth rate. Thus, the increase in demand for imports stemming from the export-led higher level of domestic economic activity and from import liberalization measures was stronger than the price effect of devaluation in the opposite direction. Furthermore, the greater foreign exchange availability from higher exports and from easier access to foreign capital made it possible to translate the increase in demand into actual imports. (8) In the group of countries that followed the 1967 devaluation of the pound sterling, nearly half experienced a significant expansionary effect of devaluation on exports. These were the countries that experienced a high "effective" rate of devaluation because their trade with other devaluing countries was relatively small. Also, these countries were relatively more advanced, and the supply of exportables was more responsive to price changes. Finally, their supporting policies were more effective and contributed to the better export performances. Approximately half of this group of countries did not experience a significant expansionary effect of devaluation on exports. The reasons were that the effective rate of devaluation was in fact small, producer prices were not increased, and in certain cases, unfavorable exogenous factors such as adverse weather conditions affected the supply of exports or there was a decline in the world market price for export products. Imports grew at a higher rate after devaluation than before in the case of Group B countries where devaluation had a positive effect on exports, indicating that the expansionary income effect was stronger than the contractionary price effect of imports. (9) In the group of countries that followed the 1967 devaluation of the French franc, only five experienced some expansionary effects of devaluation on exports because of the low effective rates of devaluation and dominance of factors other than price incentives in the external

462

INTERNATIONAL MONETARY FUND STAFF PAPERS

trade. The effective rates of devaluation were low due to the low nominal rates of devaluation and the group's strong commercial ties with France. Also these countries were at an early stage of economic development, and exports of primary products were affected by weather conditions and world demand. In this group, imports also had a tendency to increase after devaluation in countries which had positive effects on exports. The same tendency was also observed in countries whose exports grew at a higher rate, largely because of factors other than devaluation.