THE IMF SUPPLY‐SIDE APPROACH TO DEVALUATION: A RESPONSE
| Published date | 01 February 1986 |
| Date | 01 February 1986 |
| DOI | http://doi.org/10.1111/j.1468-0084.1986.mp48001005.x |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 48, 1 (1986)
0305-9049 $3.00
THE ¡MF SUPPLY-SIDE APPROACH TO
DEVALUATION: A RESPONSE
Karim Nashashibi and Patrick Clawson
Hussain and Thiriwall (1984) set out to use the Nashashibi (1980) esti-
mates of production costs for major export crops in Sudan to evaluate
the effect of a devaluation on the profitability of these crops. They
conclude, 'Owing to the inflationary repercussions of devaluation and
the low export supply elasticity . .. devaluation was at best neutral in
its effect on profitability.' In this note, it is shown that the Hussain and
Thiriwall conclusion rests upon the application of a model of a pure
market economy to Sudan which, like many less developed countries,
has an economic structure that differs significantly from that assumed
by the classical theory of a pure market economy. Furthermore, Hussain
and Thirlwall are shown to overlook the effect of policies that a govern-
ment adopts in conjunction with devaluation, which, it is argued, can
significantly enhance or erode the impact of the devaluation. Indeed
their article starkly illustrates the pitfalls of model building for develop-
ing countries without due allowance for the structural and institutional
characteristics of the country concerned. It is also suggested that
Hussain and Thirlwall failed to consider the encouragement given by
the devaluation to non-traditional agricultural exports.
The analytical framework attempts to evaluate the effect of devalua-
tion upon the competitiveness of export crops, where competitiveness
is determined by: C(PxXPmT)rIPaD (1)
and where the elasticity of competitiveness with respect to devaluation
is given by:
= (w2epm) + (w21'/i -]i/) + (ePd) + (w1k(1 + er)) (2)
where C = coefficient of competitiveness, or the ratio of international
value added to domestic input cost; D = quantity of domestic inputs;
e, ePd, epm and e = elasticities of competitiveness, domestic prices,
import prices and export supply, respectively, with respect of devalua-
tion; k = P/í, or the degree of pass-through from exchange rate
changes to export prices in domestic currency; d, m and P,, = domestic,
import and export prices, respectively, all in domestic currency; r = ex-
change rate (foreign price of domestic currency); T = quantity of
imported inputs; w1 and w2 ratio of export value and imported input
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