Article

Will Contemporaneous Devaluations Hurt Exports from Sub-Saharan Africa?

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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During the past decade, critics of the IMF-and World Bank-supported adjustment programs in Africa have argued that the frequent recommendation for currency devaluations is likely to prove counterproductive. According to these critics, any gains in competitiveness for individual countries would be offset by a fall in the terms of trade resulting from devaluations and increases in export volume from other countries exporting the same products. The net result would be no gain—and perhaps even a decline—in total export earnings for the countries that devalue. Given that African countries are principally exporters of primary commodities, there is concern that the devaluations undertaken by these countries will lead to a cumulative negative impact on their export prices and economic welfare.

The true picture is somewhat different and, given the diverse nature of individual economies, much less clear than the view held by the critics. Devaluations by countries that export mainly primary commodities can lower the earnings from each unit of commodity exported by increasing the world volume of exports of the commodity. Indeed, these declines in per unit earnings may be large enough to offset the effects of higher export volumes, thereby lowering overall export earnings. The possibility of this, however, depends on whether the increases in export volumes in the devaluing countries significantly affect the world supply of these commodities. If world demand for most primary commodities is sufficiently insensitive to price changes, even a moderate increase in the world supply could lower prices sufficiently to cause export revenues of the producing countries to fall. For this to happen, however, the devaluing countries must be responsible for a major share of total world supply of commodities they export, and these commodities must account for a large share of these countries’ total exports. Thus, the two key parameters for judging the effect of contemporaneous devaluations by Sub-Saharan African countries are (1) the combined share of these countries’ exports of major primary commodities in world supply, and (2) the share of these commodities in the devaluing countries’ total exports. Also important are the nature of world demand for the relevant commodities and the impact of devaluation on domestic prices and production. These factors, however, are not crucial to our analysis.

Recent devaluations

Before examining the effect of devaluation on exports in Sub-Saharan Africa, it is important to acknowledge that many of these countries have undertaken currency devaluations during the past decade. As shown in Table 1, in terms of bilateral (US dollar) exchange rates, 11 or more countries in Sub-Saharan Africa experienced devaluations of 10 percent or more each year from 1981 through 1989. Moreover, in terms of nominal effective exchange rates, ten Sub-Saharan African countries experienced devaluations of 10 percent or more each year from 1984 through 1989. Many of these adjustments were taken in the context of IMF-and Bank-supported adjustment programs and reflected deliberate policy actions to lower the level of the underlying real exchange rate, which determines the international competitiveness and profitability to producers of a country’s exports. At the same time, however, there is little evidence that these depreciations were made as competitive responses to earlier devaluations by other African countries. Rather, most of the depreciations were taken to offset the overvalued exchange rates that had resulted from declines in the international terms of trade faced by most African countries, and, in many cases, from high inflation rates attributable to domestic economic policies. In some cases, currencies were also devalued to alter the domestic terms of trade between export producers and others in the economy, in particular, to increase the profitability of exports and to allow higher real producer prices for farmers supplying export crops to agricultural marketing agencies.

Table 1Sub-Saharan Africa: numbers of countries with depreciations of 10 percent or more, 1981-89
198119821983198419851906190719881989
Bilateral rate vis-â-vis
US dollar1171515202011151622
Nominal effective
exchange rate337101018161111
Of which:
Real effective
exchange rate1235410835
Source: IMF Internationa! Financial Statistics; and IMF, Information Notice System.

Exchange rates measured in units of national currency per US dollar Excludes countries with fixed parities to the French franc.

Source: IMF Internationa! Financial Statistics; and IMF, Information Notice System.

Exchange rates measured in units of national currency per US dollar Excludes countries with fixed parities to the French franc.

Effects on export earnings

Data on primary commodity exports by country of origin indicate that only for very few commodities do Sub-Saharan African countries account for a major share of total world exports. In recent years, Sub-Saharan African countries accounted for 50 percent or more of world exports only in the case of two commodities—cocoa beans and palm kernels (see Table 2). For most other exports, Sub-Saharan Africa accounted for less than 25 percent of total world exports, and the region’s share of total exports for virtually all non-mineral commodities has fallen significantly since 1980.

Table 2Sub-Saharan Africa: export values and share of world exports for selected agricultural commodities, 1980 and 1977(In millions of US dollars)
19801987
ProductExport valuePercent of world exportsExport valuePercent of world exports
Cocoa beans1.796.463.41,783.859.7
Palm kernels38.070.911,384.3
Sisal61.346.814.733.3
Coffee2.794.422,41,929.518.8
Groundnut oil89.023.967.233.9
Tea281.614.0301.414.0
Cotton747.29,5680.410.2
Tobacco339.08.9498.612.6
Groundnuts69.113.134.56.0
Source: United Nations Conlcrence an Trade and Development Commodity ‘yearbook. 1987. 1989
Source: United Nations Conlcrence an Trade and Development Commodity ‘yearbook. 1987. 1989

A recent study (see source to Table 3) published by the International Food Policy Research Institute (IFPRI) provides a guide to the likely effects of simultaneous devaluations by Sub-Saharan African countries. The analytical model used in the IFPRI study incorporates values for the relevant shares of producing and consuming countries in world commodity markets and estimates of the responsiveness of price to demand and supply for imports and exports of primary commodities by countries in Sub-Saharan Africa, as well as other regions. The study presents the results of simulations that gauge the combined effects of a 5 percent policy-induced increase in the supply of each of the six primary commodities that comprise the major exports of Sub-Saharan African countries. We, in turn, have applied the results of this exercise to the corresponding case of contemporaneous devaluations of real exchange rates by Sub-Saharan African countries that would increase the profitability and, therefore, the supply of their traditional exports.

Table 3Sub-Saharan Africa: estimated efects of a five percent increase it the supply of selected agriculatul commodities1(In pecrent)
CocoaCotfeeTeaCottonSugarGroundnuts
Short run2
Change in production2.84.04.54.84.84.4
Change in exports3.05.16.110.855.134.6
Change in world
market price-5.6-2.5-1.1-0.4-0.5-1.6
Marginal revenues as a
percent of world price-86.751.081.996.399.195.4
Long run3
Change in production2.54.34.64.94.94.0
Change in exports2.95.56.39.556.333.4
Change in world
market price-2.5-1.4-0.7-0.2-0.25-1.0
Marginal revenues as a
percent of world price13.874.588.997.999.697.0
Source: “External Demand Constraints for Agricultural Exports: An Impediment to Structural Adjustment Policies in Sub-Saharan African Countries?” by Koester, Harlwig Schaefer, and Alberlo Valdes, Food Policy 14, August 1989

Estimates are based on simulations of a simple model of production, consumption, and world trade of primary commodities in which each Sub-Saharan African country is assumed to shift outward, through policy actions or other autonomous means, the supply schedule of each commodity by 5 percent. The reported changes in production are equilibrium values that reflect decreases in world prices following the initial increases in supply. For the Sub-Saharan African countries, price elasticities of export supply are assumed equal to about 1, except for sugar (elasticity of about 3) and groundnuts (elasticity of about 6). For other countries in the aggregate, price elasticities of import demand are assumed to range from about 0.5 for cocoa and coffee to values much higher than unity for groundnuts and cotton.

Assumes no production response by non-African exporting countries.

After production decreases in non-African exporting countries.

Source: “External Demand Constraints for Agricultural Exports: An Impediment to Structural Adjustment Policies in Sub-Saharan African Countries?” by Koester, Harlwig Schaefer, and Alberlo Valdes, Food Policy 14, August 1989

Estimates are based on simulations of a simple model of production, consumption, and world trade of primary commodities in which each Sub-Saharan African country is assumed to shift outward, through policy actions or other autonomous means, the supply schedule of each commodity by 5 percent. The reported changes in production are equilibrium values that reflect decreases in world prices following the initial increases in supply. For the Sub-Saharan African countries, price elasticities of export supply are assumed equal to about 1, except for sugar (elasticity of about 3) and groundnuts (elasticity of about 6). For other countries in the aggregate, price elasticities of import demand are assumed to range from about 0.5 for cocoa and coffee to values much higher than unity for groundnuts and cotton.

Assumes no production response by non-African exporting countries.

After production decreases in non-African exporting countries.

Table 3 summarizes the results of the simulations. As indicated, marginal revenues from the collective increases in output and exports following devaluation decline only for cocoa, and then only in the short run. In the long run, even this negative effect tends to disappear, as other producing countries reduce the volume of their exports of cocoa in response to lower world prices. For coffee, where Sub-Saharan African producers accounted for less than 20 percent of world supply by 1987, the decline in world prices was estimated to offset, in the short run, only about half, and in the long run only 25 percent, of the gain in export earnings induced by the supply response of African export producers. For cotton, sugar, and groundnuts (i.e., peanuts), the initial gains in export earnings were estimated to be offset by less than 5 percent in the short run and 2 percent in the long run. Overall, therefore, these simulations suggest that contemporaneous devaluations have raised total export earnings from individual crops in Sub-Saharan Africa.

The positive impact of contemporaneous devaluations on export earnings is strengthened if, as has typically happened in IMF-and World Bank-supported adjustment programs, the devaluations took place in concert with economic reforms aimed at eliminating distortions that reduce economic efficiency. In particular, if these reforms generated efficiency gains sufficient to offset the effects of a decline in world prices, the effective prices paid to producers could still increase and net export earnings from cocoa could rise. At the same time, because other commodities represent a significant percentage of total export earnings, even in the region’s two leading cocoa producers, Ghana and the Cote d’lvoire, net receipts from other commodities would increase. Thus, there is a high probability that contemporaneous devaluations by Sub-Saharan African countries would yield a net gain in export earnings even in these two countries.

Finally, it is important to recognize the potential benefits of devaluations for non-traditional exports, such as high-value horticultural products and light manufactures, for which many African countries may have an underlying comparative advantage.

Allowing exchange rates to adjust to more realistic levels could lead to significant increases in the production and export of such items. This is particularly true if these adjustments occur in the context of adjustment programs that are designed to rectify shortcomings in the infrastructure of Sub-Saharan Africa, such as poor communications networks, outmoded investment codes, and weak regulatory and institutional arrangements.

Indeed, the greatest effects from adjusting exchange rates may come from providing incentives to produce items not yet grown or manufactured to any significant extent in Sub-Saharan Africa. In this regard, the experience of Mauritius may be instructive. During the 1970s, Mauritius implemented an ambitious adjustment program of exchange rate adjustments and widespread reforms of its domestic tax system, investment code, and exchange and payments system, which featured the establishment of an export processing zone (special enclaves outside a nation’s normal customs barriers) within which exporters could profitably undertake a variety of manufacturing activities. In recent years, the output of firms in Mauritius’ export processing zone has displaced sugar as the country’s leading export. Although factors unique to Mauritius, such as the country’s highly literate population, may have contributed to this outcome, other countries in Sub-Saharan Africa could also benefit from undertaking similar reforms, including currency depreciations aimed at increasing the competitiveness of their economies.

… simulations suggest that contemporaneous devaluations have raised total export earnings from individual crops in Sub-Saharan Africa.

Conclusion

Although it is conceivable that under certain conditions contemporaneous devaluations could generate a sufficient deterioration in the terms of trade to reduce total export earnings, such conditions in practice have not occurred in Sub-Saharan African countries. Although these countries are primarily exporters of primary commodities, their shares in world exports of these commodities are generally low. Thus, even simultaneous devaluations by a number of African countries are unlikely to reduce world commodity prices sufficiently to reduce their total export earnings. The one possible exception is the case of cocoa producers, which could face a temporary decline in export earnings in the short run. Even for these countries, however, there are additional factors—such as the significant share of export earnings from other commodities for which the market share of countries in Sub-Saharan Africa is lower, and the possibility of export contraction by non-African producers over time—which would raise total export earnings over the longer run. There is also a strong possibility that devaluations, as part of comprehensive structural adjustment programs aimed at promoting efficiency and fostering productive investment, could lead to significantly higher volumes of nontraditional exports, as well as greater production of traditional exports. Therefore, in practice, contemporaneous devaluations by a number of countries in Sub-Saharan Africa can be expected to be advantageous both for individual countries and for the group as a whole.

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