THE IMF SUPPLY‐SIDE APPROACH TO DEVALUATION: A REPLY
| Author | M. Nureldin Hussain,A. P. Thirlwall |
| Published date | 01 February 1986 |
| Date | 01 February 1986 |
| DOI | http://doi.org/10.1111/j.1468-0084.1986.mp48001006.x |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 48, 1(1986)
0305-9049 $3.00
THE IMF SUPPLY-SIDE APPROACH TO
DEVALUATION: A REPLY
M. Nureldin Hussain and A. P. Thirlwall
We welcome Nashashibi and Clawson's reply to our paper on the IMF
supply side approach to devaluation originally expounded by Nashashibi
(1980) with reference to the Sudan. lt helps to clarify the issues in-
volved, and we are pleased that they find our elasticity framework
useful for the empirical analysis of whether or not devaluation ulti-
mately improves 'competitiveness' and the profitability of exporting.
They make three basic points. First, that our various elasticity estimates
of domestic inflation, supply response and 'pass-through' with respect
to devaluation are suspect because we assume an inappropriate model
of a classical pure market economy. Secondly, that we ignore the struc-
tural and institutional characteristics of the country and the actions
that governments take which may enhance or erode the impact of
devaluation. Thirdly, that we fail to consider the encouragement of
non-traditional agricultural exports.
On the first point, we are very puzzled by their constant reference to
the fact that we assume that the Sudan approximates to a classical pure
market economy. Nothing could be further from our minds or the
truth. Indeed, we concluded at the end of the paper by placing Sudan
in the 'rigid country' category of Branson's (1983) taxonomic classifica-
tion of trade structures in which the country produces agriculture-based
raw materials with low supply elasticities and with less than infinite
demand elasticities, and where there are sticky real wages. There may
be a semantic problem here, but our conception of a pure market
economy is one in which prices are set by the free forces of supply and
demand with no institutional rigidities; where there is a high degree of
factor mobility; high elasticities of substitution; high elasticities of
supply and demand, and very little, if any, real wage resistance in
conditions of surplus labour. In general, it is precisely because we
estimate supply and demand elasticities to be lower than might be
expected in a pure market economy, and because there is a high wage
response to devaluation, that we reach the conclusion that devaluation
in the Sudan has been largely neutral on the profitability of exporting.
Devaluation has done very little to alter the structure of the tradeable
goods sector of the economy, which is what is urgently required, and
has simply contributed to a much higher domestic price level with all
the social unrest and political upheaval that this has entailed in the past
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