Tag Archives: currency devaluation

Currency Devaluation and Development

Venezuela's currency, the bolivar.

Venezuela’s currency, the bolivar.

The government of Venezuela last week cut the value of its currency, the bolivar, by 32 percent against the U.S. dollar. The move, intended to boost the economy’s sluggish performance, was the fifth devaluation by Hugo Chavez’s government since 2003.

Governments usually devalue their currency in an effort to address balance of trade disparities. Because most commodities (including Venezuela’s primary export, oil) are priced in U.S. dollars, devaluing the local currency boosts exports and cuts imports. A country that exports more and imports less will experience an improvement in their balance of trade and a reduction of their trade deficit.

But will it work? Devaluation generally works best when the country is exporting commodities for which there is steady demand and importing luxury goods. Countries which depend heavily on imports for basic commodities like food or gasoline will often not benefit from devaluation, because in the relative increase in the cost of imports offsets any increase in exports. This was the case, for example, when Rwanda devaluated the Rwandan franc in 1993. Because Rwanda exported primarily coffee (for which there was already excessive supply) and imported foodstuffs, devaluation of the Rwandan franc failed to result in any real improvement in the economic situation in the country. Venezuela, on the other hand, exports primarily oil and imports primarily machinery and construction materials, suggesting devaluation may have a positive effect.

But Venezuela also faces some real challenges. The Venezuelan bolivar was already trading at four times the official exchange rate on the parallel market, suggesting that even with the recent devaluation it remains overvalued. And price controls have left many basic consumer commodities in short supply. Still, Venezuela is in far better straits than Zimbabwe, which last week reported that the country had just $217 (yes, that’s $217.00, not $217 million, or even $217 billion) in its coffers.

What do you think? Will Venezuela’s devaluation of the bolivar help turn the country around? Or is it too little, too late? Take the poll or leave a comment below and let us know what you think.

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The Declining Dollar and the Rise of American Jobs

Blogging over at The Daily Beast, Simon Johnson offers an interesting take on the recent but steady decline in the value of the U.S. dollar. Gold prices reached record levels yesterday, as the U.S. dollar continued its six month decline against most major international currencies. The dollar is currently trading at near-record lows against the euro and the yen. And according to a story by Robert Fisk in Tuesday’s Independent,

Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

This comes on the heels of discussions within the Chinese government to diversify its currency reserves, potentially replacing the dollar as the global reserve currency with a basket of currencies.

If true, such moves could have dramatic implications for the U.S. economy. The dollar has been the de facto reserve currency for the world since the end of World War II. And oil is the most widely traded commodity in the world, and the global oil trade provides a significant level of demand for U.S. dollars.

Most economists suggest that a shift will occur, but that it will be a gradual change rather than a sudden shift. Indeed, as former U.S. Trade Representative and current President of the World Bank, Robert Zoellick conceded ahead of World Bank meetings in Istanbul last week, “One of the legacies of this crisis may be a recognition of changed economic power relations.”

Still, Simon Johnson suggests that the current decline in the value of the dollar may not be anything to worry about. Indeed, he suggests that it may be part of a deliberate strategy by the Obama administration to improve the economic outlook in the United States ahead of 2010 Congressional elections. A weak dollar has historically been viewed as good for manufacturing but bad for the financial sector. Given that inflation is a major concern currently, the reason for a strong dollar appear less compelling. Johnson writes,

think what a weaker dollar does for the industrial heartland, where so many congressional seats will be in play and where today it’s easier to export or compete against imports because the same dollar costs convert into fewer euros, yen, or renminbi (this is what a “weaker” dollar means—foreigners can more easily afford our goods and their stuff is more expensive to us). If the dollar stays weak or declines further, our car companies, machinery makers, and turbine blade manufacturers will soon be rehiring and we’ll finally get some job growth as part of our sputtering economic recovery.

Certainly a new spin on an old debate.