By Mulubrhan Dagnew
Tigrai Onlne - September 4, 2014
Almost none of IMF benefactors of past, present and probably future express satisfaction! majority express negative impact of devaluation! Why?
In search for answers, I was searching and reading scholarly articles regarding the devaluation, IMF and World Bank. I have read case studies after case studies, listened to audio clips about the issue. I could not find any single paper or experience that endorses IMF claim, except IMF case studies that approves its own works. Why should then Ethiopia accept IMF advises? No devaluation at least for now.
For countries like Ethiopia which is at the juncture of building its infrastructure where most of development attributes are imported, neither theory nor global practice will guarantee us positive results from devaluation.
The world monetary institutions theoretical claim for export benefit from devaluation of the national currency, an improved foreign trade balance will only result a short positive effects. This conclusion is reached not from skewed and narrowed interest but is learnt from various case studies and experiences of many nations that has failed to boost their economic performance by devaluation that has followed IMF loans and advises, case in point it includes most of developing countries in Asia, Africa and Eastern Europe.
Many economists agree that the economic mathematical calculation that endorses devaluation to boost export is one sided assumption, they do not see how import expenditure will play out, it usually become expensive, i.e. you are going to whole lots of your resources to import and satisfy your needs, and above all most of Ethiopia’s imports are none-replaceable at least in short term.
When you perform devaluation, export promoters will be liquidated by hiking import costs, simple example to take is the ongoing renaissance dam, if devaluation is done lets say today, all the inputs needed to build the dam that are imported will be increasing, that means construction cost of the dam is going to show a variation of building cost which is, it is going to be expensive, and at the completion of the dam the profit margin which is expected to be capitalized by exporting power is going to be compromised. If used domestically, it is still going to affect production of any exportable and domestically consumed products and services. This case can also be analyzed using other scenarios and for emerging countries like Ethiopia the merits that can be obtained from deviation will end up being consumed by hiking import expenses. If also import expenses are higher, companies have to reduce their expenses or they have to sell higher prices and they will also stop hiring and will reduce their work force in order to maintain their profits.
The other serious problem is also that exporting is usually controlled by the demanding consumer and it is a slow process, while import is fast process because it is your need, therefore if your needs are import dependent there is no way to curb them or stop them, the first thing Ethiopia should do is therefore that to work intensively on strategic sectors that satisfy domestic need, i.e. develop methods that reduce imports and that is not possible in short period of time.
It is not only practically impossible but also theoretically flawed, if you really scrutinize the facts deeply in each and every bit of the economic factors that have significance in Ethiopian case; they do not support the merits of devaluation. There is no single country from the developing world that has passed through similar path that endorses the IMF advice, the only nations that will endorse the IMF stand are the developed, and these countries are not borrower but inherently are decision makers and lenders.
It is no brainer therefore to easily conclude that from both theoretical and practical points of view devaluation is not going to benefit economies like Ethiopia, it will simply put us in a chain cycle of problems.
The Economic theory of devaluation can positively impacts exports only the major economies and the powerful that is strong with meager resources. Export in these countries is affected due to their strong currencies while importing counties own weak currencies. Devaluation won’t affect these countries economy because in many terms they are self-sufficient. They are also not that much prone for price shocks caused by devaluation, they can easily endure it through their exported good and technologies.
Literatures in Economics also have a parameter called import-export price elasticity, even-though I do not have an exact calculated figure that show Ethiopia’s import-export elasticity, I do not think we have higher or better import-export elasticity. If the price elasticity is lower, devaluation does not simply work, it automatically fails.
What matters now is what Ethiopia can do to balance its balance sheet of import-export, as many scholars agree; it is only by adding value on its products and improving competitiveness on quality. Bulk export due to devaluation is not going to curb or improve the situation of a country which is currently at cross road of accomplishing major infrastructure works by accomplishing its transformation plans. We have to also define the main economic drivers in Ethiopia and analyze the impact of devaluation on those main economic drivers.
Though they call him, Utopian dreamer, crazy and communist, the famous thinker, futurist, social engineer, environmental advocate, sustainability and mechanical engineer Jacque Fresco have said it all “ Money based economy is a false economy” , money based economy creates corruption, environmental destruction, unrest, political maneuvering and it is not sustainable.
It might not be realized now and people of the world have a long way to go but at least what he envisioned and what he has said seem true.
Finally, I want to take this opportunity to ask the audience: what solutions do you have?