Problem

Devaluation of money

Other Names:
Currency devaluation
Depreciation of currency
Nature:
The lowering of a currency's value in relation to the currencies of other countries, especially the strong currencies such as the USA dollar, the Japanese yen and the German mark. Currency devaluation's primary effects are to raise import prices in terms of domestic currency, thus causing a reduction in the demand for imports, and to reduce export prices in terms of foreign currency, thus causing an increase in external demand for exports.
Incidence:
For countries with a large trade sector and substantial industrial capacity it is easier to generate a given rise in export earnings relative to domestic production by real currency depreciation and ensure an effect on a large proportion of the output. It therefore needs a smaller real devaluation to generate a given swing in the trade balance than for an economy with a small trade sector. For these reasons, and because it does not entail a substantial decline in real wages, devaluation can provide a growth stimulus without setting off an inflationary spiral. However, where the trade sector is small, the depreciation needed to generate the same amount of net foreign exchange revenues is much sharper and is associated with large changes in income distribution, with disruptive effects on out put and price instability. The major exporters of manufactures in Latin America have corresponded more to the latter type and those of East Asia to the former. In a number of countries where the external debt of private firms was large, devaluations have substantially weakened the financial position of firms.

Although sometimes the result of events in the international currency market, devaluations of third word currencies are more often intentionally implemented as part of IMF austerity programmes. In many African countries, devaluations of local currency are a frequent event. However in 1994 the French government unilaterally devalued the African franc, based on the French franc, by 50%. This resulted in a wave of price increases, labour disputes and violence in the 14 countries using it. Governments imposed wage freezes and layoffs, with unions riposting with wildcat strikes. France was encouraged to undertake the devaluation by international institutions and Western countries who objected to the subsidies of from US$2 to 3 billion per year effectively made to its foreign colonies.

Problem Type:
E: Emanations of other problems
Date of last update
01.01.2000 – 00:00 CET