Hote: ECONOMLC GROWTH CHUTER YALE UALVERSITY Box 1987, Yale Station New Haven, Connecticut SATER DISCUSSION PAPER NO, 72 CURRENCY DEVALUATION TH DEVELOPING COUNTRIES: Richard Wl. Cooper July, 1969 Center Discussion Papers are preliminary materials circulated to stimulate discugsion and critical comment, References in publications to Discussion Papers should be cleared with the author to protect the tentative character of these papers.Table of Contents I. Nominal vs. Effective Devaluation IT, Devaluation and the Balance of Payments III, Devaluation and the Terms of Trade IV. Devaluation and Aggregate Demand V. Devaluation and the Wage-Price Spiral VI. Political Effects of Devaluation VII. Conclusions and Recommendations Appendices A. Calculations of Effective Devaluation B, Devaluation and Aggregate Demand C, Wage-Price Spiraling Bibliography Tables Nominal and Effective Currency Devaluation Balance of Payments Changes in Volume of Merchandise Trade Four Quarters Before and After Devaluation 4, Actual and Computed Merchandise Trade 5. Instances of Import Liberalization 6. Changes in Foreign Trade Prices and Terms of Trade Increases in Economic Aggregates from Year Before Devaluation 8. Price and Wage Increases in the 12 Months Following Devaluation B1, Range of Import Demand Elasticity for which Successful Devaluation will be Deflationary Footnotes 44 a7 53 36 1a 15 18 22 31 49 59Introduction By wide agreement, many less developed countries have “over-value: currencies. Yet most countries are reluctant to devalue their currencies even when the signs of over-valuation are unmistakable. A variety of objections are raised to devaluation, but most of them reduce to three basic one: 1) devaluation will not in fact improve the devaluing country's payments position; 2) devaluation might work if given a chance, but it will unleash forces in the economy that will eventually undercut its benefits and those of other economic policies; and 3) even if devaluation works it will be politically disastrous to those officials who are responsible for undertaking it. Despite these sources of resistance, currency devaluation has frequently taken place under the pressure of circumstances. These devaluations provide an opportunity to evaluate, at least crudely, the consequences of devaluation and to assess the extent to which the foregoing fears are justified. This study generalizes from the experience of 24 devaluations, involving 19 different countries, It includes most of the currency devaluations during the period 1959-1966, ‘Those devaluations during this period that are ex- cluded involve countries in unusual circumstances, such as Laos and Vietnam, Venezuela was also excluded because it is a country with a large trade surplus, and therefore untypical of less developed countries. Canada, on the other hand, was included in the study because of its large trade deficit and regular importation of capital, making it similar in that respect to many less de~ veloped countries. Iceland and Spain, like many less developed countries, both had multiple currency practices. A few cases of devaluation in the mid~ fieeles were also included, to enlarge the semple, Availability of data also influenced the selection,