Flawed exchange rate attitudes

Brian FrancisIt has been argued time and time in the economics literature that the exchange rate is one of the most critical prices in international trade. That is so because the exchange rate determines the extent of international competitiveness of a country’s exports of goods and services. To put it simply, the lower the exchange rate the higher the value of a country’s currency and hence the less attractive its goods and services would be to the rest of the world. The reverse scenario also holds true.

If we accept that argument, then, it is not too difficult to understand and appreciate why China and Japan would have for many decades maintained pretty high exchange rates with the United States dollar. In short, what both of these countries have been doing is subsidising their exports to make them more affordable and attractive to the rest of the world, particularly the United States, thereby easily expanding their levels of exports of goods and services.

The United States in response has been calling without much success for an appreciation of those two currencies so that the current imbalances that exist in the trade sector can begin to move in its favour.

Since higher exchange rates are associated with cheaper exports, and the growth in a country’s exports is supposed to provide stimulus to economic activity, why, then, do some countries settle for low exchange rates? Further, when economic conditions begin to deteriorate as a result of changing dynamics on the global front, why are some countries so resistant to increasing their exchange rates to put them in a relatively stronger position to boost their quantities of exports of goods and services? The answer to those questions is quite straightforward: flawed exchange rate attitudes!

You see, take for example, the case of Caribbean countries. How will the citizens of the OECS respond if the Eastern Caribbean Currency was to be devalued? How many Barbadians would be prepared to accept a devaluation of the Barbadian dollar? I am of the opinion that only a minority of persons will ever accept any explanation from our respective governments that seek to justify a devaluation of our most cherished, existing exchange rates! Why?

Devaluation, which simply represents an increase in the exchange rate of a country’s currency under a fixed exchange rate regime, has clearly become a rather contentious word in our parts of the world; justified in some instances, ridiculous in other cases.

Why should that situation exist when in fact a devaluation makes a country’s currency less valuable and hence its exports more appealing to the rest of the world? Shouldn’t every country in the region be excited about the prospects of increasing its exports, especially in an international environment that has become rather hostile in recent times? I would certainly think so!

As ailing economies, going forward, we have to begin to look seriously at all available economic management strategies and options available to us in response to the continued turmoil in the global economy. We cannot continue to rely solely or heavily on sentimental values to take us to the glory land. If, for example, there are net positive benefits to be derived from devaluation, our leaders should not hesitate to implement such a policy. For that to happen, though, we have to eradicate our present flawed exchange rate attitudes! Can we?


Dr. Brian Francis, the former Permanent Secretary in the local Ministry of Finance, is a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Bridgetown, Barbados of the University of the West Indies)

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