The Economist's evidence on devaluations


Sunday, February 28, 2015 5.37pm / By Dr. Temitope Oshikoya**

While the debate on devaluation has been ongoing in Nigeria, and some writers like to cite The Economist of London to justify their arguments about the efficacy of devaluation, they need to cast their net wide when reading about this subject matter in The Economist.

We do not want to add too much of our own prose to the empirical and analytical evidence on devaluations which the authoritative Economist has provided in spite of its writing on Nigeria.

On January 9th 2016, the Economist published an article on "After the dips: Big Currency Depreciation is not boosting exports as much as they used to.”

According to the Economist, “Large currency depreciations can hurt, by raising the price of imports and spurring inflation. Pricier imports should encourage consumers to switch towards domestic products and stimulate local production. A cheaper currency should also boost growth by spurring exports… Between 1980 and 2014, according to an analysis of 60 economies by the IMF, a 10% depreciation relative to the currencies of trading partners boosted net exports by 1.5% of GDP over the long term, on average…“

The Economist continues But devaluations do not seem to have provided quite the same boost recently….Russia is a good example...the Russian rouble is one of the cheapest currencies around, 69% undervalued against the dollar…”Yet,” non-energy exporters appear to be struggling despite the ruble’s plunge. Over the 1st half of 2015, as the volume of energy exports surged, non-energy exports fell, according to Brigit Hansl of the World Bank. She points out that it is not enough to have a price change: First, you have to produce something that someone wants to buy.” The rouble’s weakness is an opportunity for industries that already exports such as chemicals and fertilizers. But boosting other exports requires investment in new production, which takes time…. Devaluations in other countries including South Africa and Turkey, have also disappointed”

On Feb 22nd 2016, The Economist, ina recent article,Don’t Cheer devaluation, writes as follows: “Devaluation is a cut in a nation’s standard of living. It costs more to buy other people’s goods. And there may be no gain to exporters as we recently reported recent devaluers have seen little benefit.”

The Economist further notes that “The IMF and the World Bank have highlighted another possible explanation for the weak performance of exports in countries with falling currencies: the prevalence of global supply chains. Globalization has turned lots of countries into way-stations in the manufacturing of individual products. Components are imported, augmented, and re-exported. This means much of what a country gains through devaluation in terms of competitiveness of its exports it loses through pricier imports. …The World Bank argues that it explains about 40% of the diminished impact of devaluations globally…”

On September 30, 2015, The Economist in “Devaluations didn’t work”writes that Stephen King, the senior economic adviser at HSBC, notes that currently “attempts by individual central banks to boost growth and inflation via currency depreciation have been collectively self-defeating…Rather than pursue devaluation, Mr. King argues that countries should try to improve their productivity records, which have been poor. But that implies pushing through the kind of economic reforms that special interests (and many voters) dislike. Devaluation is the more tempting, and easier, option.”

We hope this message is not lost in the devaluation debate in Nigeria, whichfor the most part appears to be long on polemics and rhetoric, but short on logic and empirical and analytical evidence.

**Dr. TemitopeOshikoya, an economist and a chartered banker, is CEO of Nextnomics Advisory 

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