From the Editor’s Keyboard

Devaluation & the Indoctrinated Mind - Africa’s Curse

13 August 2006 at 01:43 | 320 views

The following article, first published in 2001, is, according to the author, a continuing effort to inform S/Leoneans about the way forward for our country, by highlighting the predictable mistakes against which a succession of SL governments was warned, in vain, and which have predictably, and needlessly, brought our once proud nation to its knees.

By Mohamed A. Jalloh, Guest Writer

The wholesale historical adoption by African leaders of the policy of devaluation, at the behest of the IMF, is arguably the most conclusive evidence of the mind-boggling failure of African leaders to disabuse themselves of the fallacy that any and all foreign ideas are inherently superior to homegrown African ideas.

In order to see this, one need only consider the history of IMF-sponsored devaluation in Africa; specifically, how devaluation works and why it could never work in the typical African economy:

The policy of devaluation is designed to correct a negative trade imbalance, i.e., trade deficit (imports exceed exports) between the devaluing country and other countries with which it trades. In theory, devaluation does this by manipulating the exchange rates between the devaluing country’s currency and those of its trading partners.

Through a mere announcement, the devaluing country changes its currency’s exchange rate by deliberating making it cheaper than before. Thereby, the devaluing country hopes to entice foreigners to buy more of its suddenly less expensive exports and thus reduce or eliminate its trade deficit with those countries.

This result, obviously, assumes that the other countries do not retaliate by announcing an offsetting devaluation of their own currencies. However, that is not the only assumption necessary for devaluation to work successfully.

A critical prerequisite for a successful devaluation policy is the presence of market-driven prices for goods and services traded among countries.

In order to see this, consider what would happen if, after Country A devalues its currency by 10%, thereby making its goods cheaper to buyers in Country B, the latter’s government immediately announces a 10% increase in custom duties on all goods imported from Country A?

The result: a stalemate, viz. The devaluation would fail to make Country A’s exports cheaper to Country B’s residents because Country A’s 10% devaluation has been effectively checkmated by Country B’s exactly offsetting tariff increase on imports from Country A!

Still, even where there is no interference with market forces, and no intervention by governments in the form of a retaliatory devaluation, the success of the policy of devaluation is not assured unless and until two other critical elements are in place, viz.

The desire and ability of the non-devaluing countries to buy the now cheaper goods and services of the devaluing country (what economists call "demand"), and the ability of the devaluing country to produce the goods and services demanded ("supply").

Tragically, for all African countries in the past thirty years, not a single one of the above prerequisites for a successful policy of devaluation was in place when they succumbed to IMF dictates that they devalue their currencies.

Predictably, each and every one of those IMF prescr1ptions woefully failed, with resulting searing hardships inflicted on the hapless African masses and crushing mountains of foreign debt shackled to African economies, thereby guaranteeing their collective current demise.

Photo: Mohamed Jalloh.