Exchange Depreciation in Developing Countries (2024)

Measuring the magnitudes

The percentage changes in the exchange rates of 109 countries from the end of 1948 to the end of 1967 are summarized in Table 1. The 109 countries—the total members of the International Monetary Fund on December 31, 1967, plus Cuba and Switzerland—are divided into 21 more developed and 88 less developed countries.⁴ As a starting date, the end of 1948 has been preferred to an earlier postwar date (that is, the end of 1945 or 1946 when the Fund set initial parities for its original members) because the exchange rates of several countries were more settled by that year (or by early 1949) than they were immediately after World War II. Moreover, data for 1948 are readily available.⁵

Because the results depend on the particular exchange rates used, and because in some instances (as for countries with multiple exchange rates) a choice of rates existed, an endeavor has been made to select, for these calculations, exchange rates that were currently used for most transactions. This choice of rates is especially important in the calculations of purchasing power parity rates in Section II. Of course, the starting-period exchange rate, which becomes a base by which subsequent price rises are multiplied, determines the purchasing power parity rate. Similarly, the end-period exchange rate selected may also alter considerably the ratio obtained between actual and calculated rates. Wherever more than one rate prevailed in the base year, bias has been in favor of selecting the more depreciated of the rates. This was a deliberate effort to avoid choosing base rates that obviously exaggerated the extent of depreciation.

For most countries par values, or at least fixed official rates, could be used for both initial and end years. In Tables 1 and 2, for 93 out of 109 countries, par values or official rates were used; in Tables 3–6 par values or official rates were used for only 41 out of 65 countries. For other countries, a free market rate or one of their multiple rates has been used for at least one year or another, and in some instances midpoints among multiple rates were used. Table 7, in the Appendix, specifies the particular rates used for each country.

Exchange rate changes have been measured relative to gold, that is, with the initial period as the base, the percentage has been calculated of the change in the exchange rate expressed in terms of grams of fine gold per local currency unit. This is the customary Fund way of measuring exchange rate changes: it produces the familiar results, for example, of devaluations in the pound sterling of 30.5 per cent in September 1949 and of 14.7 per cent in November 1967. Measured in this way, 100 per cent is the maximum that a currency can depreciate. Inasmuch as the gold content of the U.S. dollar has remained unchanged, measurements with respect to gold are, of course, identical with measurements relative to the U.S. dollar.

How much devaluation?

In Table 1 the countries covered, divided into two groups—more developed and less developed countries—are distributed over five categories according to the degree of their exchange depreciation from the end of 1948 to the end of 1967.

It may be noted that even among the more developed countries as many as 7 out of 21 have depreciated their currencies by more than 40 per cent. But well over half of the less developed countries—some 55 in all—have depreciated by more than 40 per cent. One of the more developed countries (namely, Iceland) depreciated by more than 75 per cent, but some 22 less developed countries were also in this category, including Argentina, Brazil, Chile, Ghana, Israel, Korea, Spain, Uruguay, and Yugoslavia.

The difference in degree of depreciation between more and less developed countries is also revealed by the median depreciation of these two groupings and by arithmetic means. The median for the more developed countries in Categories A through E is 30.5 per cent, while that for the less developed countries in Categories F through J is 52.1 per cent. Arithmetic means, both unweighted and weighted by the country’s shares in the aggregate exports (1966) of the 109 countries, are given in Table 2 for five regional groups of less developed countries, compared with the more developed countries as one group.

As would be expected, since the countries which have the largest shares in total exports have devalued the least, the over-all weighted mean for all countries (22.8 per cent) is much below the unweighted mean (47.8 per cent). Moreover, even among the less developed countries, most of the weighted means are lower than the unweighted ones (for Africa, Asia, and the Middle East), again revealing the greater devaluations of the smaller trading countries. Indeed, this inverse relation between the size of a country’s shares in world export markets and the extent of its exchange depreciation may well reflect deliberate export-oriented policies, against policies emphasizing development of the domestic economy, by the smaller trading countries with smaller internal markets. In Latin America, this inverse relation between trading size and magnitudes of depreciation did not hold: to the contrary, several large trading countries, such as Argentina, Brazil, and Chile, have depreciated their currencies by the largest magnitudes.

Nature of calculations

Because of the wide differences among countries in their rates of internal inflation, and, in particular, because the majority of less developed countries have had a great deal more inflation than the more developed countries, it is not sufficient merely to compare the size of the external depreciation of various currencies. One should rather compare external with internal depreciation, or depreciation in real terms, for various countries. Accordingly, calculations are given in Tables 3–6 for 65 countries, comparing their actual exchange rates at the end of December 1967 with two purchasing power parity rates— one based on 1948 and one based on 1955.⁶

It must be emphasized again, however, that such ratios do not imply any causal relations between domestic prices and exchange rates. Adjustments of exchange rates are due to several factors in addition to, and apart from, movements in domestic prices. This is, in effect, another way of stressing that purchasing power parity rates are not tantamount to equilibrium rates. Equilibrium exchange rates are a function not only of changes in the over-all level of domestic prices but also of changes in relative prices, in productivity, and in the structure of output and of exports and imports, and of variations in capital flows. In fact, even the nature of the policies pursued—including not only trade and tariff policies but also domestic monetary, fiscal, and employment policies—are now recognized as having crucial bearing on the determination of what constitutes an equilibrium exchange rate.

Another reason why purchasing power parity rates cannot be considered guides to overvaluation or undervaluation of any currency at the end of 1967 is that neither of the base years used here can be regarded as an initial equilibrium. Since this is especially true of 1948, chosen to provide an assessment for the total postwar period, an additional set of calculations has been made based on 1955, selected as the first year after the abnormalities of the Korean boom and its immediate aftermath. Since the initial periods are not ones of equilibrium, comparisons are, in effect, made only of changes over time in relative prices and exchange rates.⁷

The statistical vicissitudes that beset purchasing power parity calculations must also be given explicit recognition. There is, of course, the problem as to the best indicators of general price movements. Although cost of living indices, such as are used here, are probably the most common, they are subject to several weaknesses that have often been spelled out.⁸ The difficulties of using a uniform price index are compounded in intercountry comparisons: The composition of cost of living indices, and even the extent to which they reflect freely determined prices, varies greatly among countries. Even more, cost of living indices are often little guide to developments in prices for exportable goods and for domestically produced import-competing goods, which are, after all, the most significant ones for exchange rates.

In the purchasing power parity calculations that follow, changes in a country’s cost of living index have been taken relative to that of the United States. Considering the United States to be a bench mark for such comparison is, admittedly, not equally relevant for all countries, but the United States is a commonly used frame of reference. Moreover, in Tables 3–6 the countries are grouped according to their degree of price rise, and the United States, according to the data used here, was among those with the least rise in postwar consumer prices. Hence, it is not an unsuitable point of reference for measuring the relative price advances of other countries.

Letting P_a0 represent the cost of living index for each country in the base period, P_a1 the index at the end of July 1967, and P_b0 and P_b1 the corresponding indices in the United States, $\frac{\frac{P_{a_1}}{P_{a_0}}}{\frac{P_{b_1}}{P_{b_0}}}$ was calculated as the relative price rise for each of 65 countries.⁹ Each country’s exchange rate (expressed in local currency units per U.S. dollar or the equivalent in gold) for the base period was then multiplied by the relative price ratio to obtain the purchasing power parity rate at the end of 1967. The ratio between the calculated rate and the actual exchange rate $\left(\frac{\text{purchasing power parity rate}}{\text{actual rate}}\times 100\right)$ at the end of December 1967 was then determined for each country. A resulting final ratio of 100 represents the equivalence of the external depreciation of a country’s currency with its internal depreciation, relative to that of the U.S. dollar; ratios below 100 reflect external depreciation in excess of internal depreciation—that is, depreciation in real terms.

Empirical findings—base 1948

The 64 countries (the United States has been excluded) have been grouped in two different ways, and arithmetic averages for each group have been obtained to show the ratios between their purchasing power parity rates and their actual exchange rates. Table 3 represents the average when the countries are grouped into more developed and less developed, and the latter divided into regions, and Table 4 presents the averages when the countries are grouped by the degree of inflation that they have experienced since 1948.

It is evident that the less developed countries in all regions (although not all of them individually) had considerably greater exchange depreciation in real terms than the more developed countries. This was especially true for the less developed countries in the Middle East, in Asia, in Europe, and in Africa. Even in Latin America, where the rate of internal inflation has been higher than in other less developed countries, it was also true, although not to such a marked extent.

When countries are grouped according to the degree of their internal inflation since 1948, it is still apparent that the less developed countries have experienced greater external than internal depreciation. Moreover, those with the greatest inflation have also had the largest depreciation in real terms. In contrast, depreciation in the more developed countries has kept pace roughly with their degree of relative inflation, compared with that in the United States.

Table 4 presents ratios similar to those in Table 3 for six country groupings, based on the rate of their inflation. Again, the price rise in the United States was used as a reference point—the level of consumer prices in the United States in July 1967 being 1.4 times the level in 1948. Countries that experienced less price rise than that of the United States are referred to as those with “little inflation.” Countries with about the same degree of price rise as the United States—that is, where prices in mid-1967 were from 1.4 to 2.0 times the level in 1948—are labeled those with “moderate inflation.” “Relatively strong inflation” refers to those countries where price levels rose from 2 to 3 times from 1948 to 1957, and “chronic inflation” to those where consumer price levels went up more than 3 times.

Thus, among the less developed countries even those with relatively strong inflation and chronic inflation had ratios of 78.6 and 73.3, respectively, compared with ratios of 93.1 and 100.0 for more developed countries. This represents substantial depreciation by the less developed countries in real terms and relative to that of the more developed countries.¹⁰

Empirical Findings—base 1955

Similar results, although somewhat less marked, were also obtained from calculations on a 1955 base, and are presented in Tables 5 and 6.

Although the relatively greater real depreciation of the less developed countries was not so large from 1955 to 1967 as from 1948 to 1967, it was nonetheless still evident. Moreover, for Latin America and the less developed countries with chronic inflation it was even larger in the more recent period.

This is all the more noteworthy because among the countries in the last two categories in Table 6 several had rates of inflation that were greater in 1955-67 than in the early postwar period: Argentina, Brazil, Chile, Colombia, Ghana, India, Spain, and Uruguay; their exchange depreciation, as a group but not for each country, was greater than their inflation.

Interpretations of findings

The findings observed here must be considered provisional rather than definitive. Additional calculations would be required before conclusions could be firmed. Limitations on cost of living indices reveal the need for testing alternative price series. Adapting the years selected as bases to different countries, or country groupings, would also remove the difficulties of using a uniform base year for all countries.¹¹ Most importantly, careful reconciliation is required between the results obtained here and the oft-cited, and probably statistically verifiable, thesis that prolonged inflation produces overvaluation of existing exchange rates. The two theses that inflation produces overvaluation and that less developed countries have, over the long run, depreciated their exchange rates in excess of their rates of internal inflation need not be diametrically opposed. Reconciliation would require experimentation with shorter time intervals and tracing through the interrelated dynamics of price movements and exchange rate changes for a wide sample of the less developed countries.¹²

There are several explanations for the findings of this study. First, the less developed countries have, to a greater extent than the more developed countries, used exchange rate adjustments as a policy tool. The more developed countries have tended to rely heavily on monetary and fiscal policies, and on other domestic measures; while these non-exchange policies may not have slowed down over-all price advances (according to the statistics presented here), the balance of payments may have been affected.

Second, demand for the exports of the more developed countries has, on the whole, been subject to much more rapid growth than that for the exports of the less developed countries. Productivity advances in the more developed countries could often run ahead of their exchange rates, preventing damage to their export positions. Because of productivity advances in export production, prices of export goods in the more developed countries may well have gone down despite advances in the cost of living index. This has probably occurred much less frequently in the less developed countries.

Third, the mechanism by which exchange rates have been adjusted also seems to have been a factor in the extent of total depreciation. Countries that have used multiple or fluctuating rates—mainly the less developed countries—have depreciated their currencies much more in relation to their general domestic prices than have countries with fixed exchange rates. As countries have eliminated multiple exchange rates, their currencies have usually been depreciated down to the prevailing free market rate; the free market rate, at least at the time of depreciation, has usually been below that indicated by general prices. A phenomenon of more rapid depreciation than price increase under regimes of fluctuating rates has also been noted elsewhere.¹³ And it has also been suggested by some that inflation itself, because of its price-distorting effects, may induce a degree of exchange depreciation in excess of the rise in domestic prices.¹⁴

It is also possible, of course, that the exchange rates of the less developed countries in 1948 may have been more out of line with prices in the rest of the world than were the exchange rates of the more developed countries. It is difficult to judge this possibility, but it is discounted by the fact that similar results, although to a lesser extent, are also obtained for the shorter and more recent period, 1955–67.

Whatever the explanation, the statistics given above seem sufficient to suggest that important alterations have occurred in the postwar structure of international exchange rates: a substantial realignment of the exchange rates of the less developed countries in general vis-à-vis the more developed countries has taken place. This restructuring of the relative rates between the less developed and the more developed countries has occurred despite the fact that at least some of the more developed countries have undergone impressive depreciation of their own exchange rates, and despite the fact that many of the less developed countries have had considerably greater inflation than the more developed countries.

The foregoing findings are also useful for interpreting the results of other studies. A study by the Economic Commission for Latin America, for example, has also obtained purchasing power parity rates for several Latin-American currencies that were, in 1960 and 1962, less depreciated than prevailing exchange rates;¹⁵ similar results were obtained earlier for Asia and Africa.¹⁶ For the reasons noted above, it cannot, however, be concluded from such purchasing power parity rates that actual exchange rates are, therefore, undervalued. More exploration of the causes of the relations observed between the magnitudes of depreciation and the degrees of price rise—especially for the less developed countries with chronic inflation—is required.¹⁷

The findings obtained by the author also suggest that complications in the results relating the export performances of the less developed countries to developments in their price levels and/or to their exchange rate policies should be anticipated. Quantitative studies of the responsiveness of exports to relative prices, for example, may well tend considerably to understate the influence on exports of prices.¹⁸

Résumé

Les divergences d’opinion qui se sont fait jour depuis quelques années au sujet de la politique des taux de change ont eu tendance à donner l’impression que les fluctuations des changes ont été assez limitées depuis la fin de la Seconde Guerre mondiale. En outre, bien que de nombreux pays moins développés aient pu déprécier leurs taux de change dans de très fortes proportions, il est généralement admis que ces dépréciations n’ont pas été suffisantes pour compenser les augmentations considérables des prix internes qui ont accompagné leur inflation relativement plus prononcée.

Le présent article présente, pour une large gamme de pays, des statistiques qui infirment ces suppositions. Bien que quelques-uns des pays moins développés aient eu tendance à s’aligner sur les principales monnaies — le dollar E.U., la livre sterling et le franc français — la plupart d’entre eux ont déprecié leurs monnaies indépendamment et dans de plus fortes proportions que les pays plus développés. De plus, ce qui est encore plus significatif, les taux de change des pays moins développés — considéres dans leur ensemble et selon divers groupements — se sont déprecies, au cours de longues périodes, dans de plus fortes proportions que leurs prix internes n’ont augmenté. On voit ainsi que ce phénomène — dépréciation externe plus prononcée que la depreciation interne — constaté de temps à autre pour certains pays, ne se limite pas à des exemples isolés, mais qu’il est plutôt plus généralement répandu parmi de nombreux pays moins développés. Au surplus, cette dépréciation a entrainé un réalignement des taux de change des pays moins développés par rapport à ceux des pays plus développés.

Resumen

Los debates de los últimos años con respecto a la política cambiaria han tendido a dar la impresión de que, desde el final de la Segunda Guerra Mundial, apenas ha habido modificaciones cambiarías. También se suele dar por sentado que, aunque muchos de los países menos desarrollados hayan efectuado extensas depreciaciones de sus tipos de cambio, la medida de las depreciaciones ha sido muy inferior a las alzas substanciales de precios internos que han acompañado a su relativamente más elevada inflación.

En este artículo se presentan, para una amplia gama de países, las estadísticas que controvierten esas suposiciones. Aunque varios de los países menos desarrollados han tendido a seguir a las principales monedas—el dólar de los EE.UU., la libra esterlina, y el franco francés—la mayoría de ellos han depreciado sus monedas independientemente y en mayor cuantía que los países más desarrollados. Y lo que es aún más significativo, los tipos de cambio de los países menos desarrollados, tomados en conjunto y en diversos grupos, se han depreciado a largo plazo en medida mayor que las subidas de sus precios internos. Así es que el fenómeno de una mayor depreciación externa que interna, que se ha venido notando de cuando en cuando en países determinados, no parece haberse confinado a ejemplos aislados sino que tiene mayor preponderancia entre muchos de los países menos desarrollados. Más aún, esa depreciación ha implicado una reordenación de los tipos de cambio de los países menos desarrollados, en relación con los de los países más desarrollados.

In statistical matter (except in the resumes and resúmenes) throughout this issue,

Dots (…) indicate that data are not available;

A dash (—) indicates that the figure is zero or less than half the final digit shown, or that the item does not exist;

A single dot (.) indicates decimals;

A comma (,) separates thousands and millions;

“Billion” means a thousand million;

A short dash (-) is used between years or months (e.g., 1955–58 or January-October) to indicate a total of the years or months inclusive of the beginning and ending years or months;

A stroke (/) is used between years (e.g., 1962/63) to indicate a fiscal year or a crop year;

Components of tables may not add to totals shown because of rounding.

*

Mrs. de Vries, Consultant to the Fund, was formerly Chief of the Far Eastern Division of the Fund and Lecturer in Economics at the George Washington University. She is a graduate of the University of Michigan and of the Massachusetts Institute of Technology and author of various articles in professional journals.

1

Margaret G. de Vries, “Multiple Exchange Rates: Expectations and Experiences,” Staff Papers, Vol. XII (1965), pp. 282–313, and “Fund Members’ Adherence to the Par Value Regime: Empirical Evidence,” Staff Papers, Vol. XIII (1966), pp. 504–32.

2

The resurgence of interest in purchasing power parity relationships of recent years is, indeed, noteworthy. The Federal Republic of Germany’s Statistisches Bundesamt, in its Statistisches Jahrbuch für die Bundesrepublik Deutschland, regularly publishes, for example, estimates of purchasing power parities for about 15 countries. See also Milton Gilbert and Irving B. Kravis, An International Comparison of National Products and the Purchasing Power of Currencies (Organization for European Economic Cooperation, Paris, 1954); Milton Gilbert and Associates, Comparative National Products and Price Levels (Organization for European Economic Cooperation, Paris, 1958); and Economic Commission for Latin America (ECLA), “A Measurement of Price Levels and the Purchasing Power of Currencies in Latin America, 1960–62,” Economic Bulletin for Latin America, Vol. VIII (1963), pp. 195–236. On the theoretical side, there have been Leland B. Yeager, “A Rehabilitation of Purchasing-Power Parity,” The Journal of Political Economy, Vol. LXVI (1958), pp. 516–30; Bela Balassa, “The Purchasing-Power Parity Doctrine: A Reappraisal,” The Journal of Political Economy, Vol. LXXII (1964), pp. 584–96; and James M. Holmes, “The Purchasing-Power-Parity Theory: In Defense of Gustav Cassel as a Modern Theorist,” The Journal of Political Economy, Vol. LXXV (1967), pp. 686–95.

3

For example, this depreciation in real terms has been noted most recently for the Brazilian cruzeiro. (See Nathaniel H. Leff, “Import Constraints and Development: Causes of the Recent Decline of Brazilian Economic Growth,” The Review of Economics and Statistics, Vol. XLLX, 1967, pp. 494ȓ501.)

4

This division is approximately the same as that in the International Monetary Fund’s Annual Report, 1967, pages 55 and 101. The term “more developed countries,” as used here, includes 15 industrial countries (Austria, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Luxembourg, Netherlands, Norway, Sweden, Switzerland, United Kingdom, and United States) and 6 of the primary producing countries considered as more developed in the Annual Report (Australia, Finland, Iceland, Ireland, New Zealand, and South Africa). Five countries (Greece, Portugal, Spain, Turkey, and Yugoslavia) that were treated in the Annual Report as more developed primary producers for some purposes and as less developed for other purposes, are here grouped with the latter.

5

The annual supplement to the International Monetary Fund’s International Financial Statistics regularly presents series beginning with 1948.

6

Those 65 countries have been selected for which price data are available from 1948. Of the 44 countries included in Tables 1 and 2 but not covered by Tables 3–6, 30 are African countries, for which early data are especially scarce.

7

In other words, the relative, rather than the absolute, version of the purchasing power parity doctrine is used. The difficulties of finding a so-called equilibrium year as a base, as well as other problems, have brought the absolute version of the purchasing power parity doctrine under attack more often than the relative version. See, for example, Bela Balassa, op cit., pp. 584–86.

8

Attempts to overcome some of the weighting and related problems have been discussed by R. C. Geary, “A Note on the Comparison of Exchange Rates and Purchasing Power Between Countries,” Journal of the Royal Statistical Society, Series A (General), Part 1 (1958), pp. 97–99, and J. van Yzeren, “Three Methods of Comparing the Purchasing Power of Currencies,” Statistical Studies (Netherlands Central Bureau of Statistics, No. 7, December 1956).

9

The denominator $\frac{P_{b_1}}{P_{b_0}}$ (the U.S. price rise), constant for all countries, was 1.40 from 1948 to July 1967, and 1.25 for 1955 to July 1967.

10

This cannot, however, necessarily be construed as a deterioration in the terms of trade for the less developed countries.

11

It is unlikely that an alternative uniform base year would yield vastly different results. The author was first led to these investigations by similar results obtained for the period 1950–66. The longer period 1948–67 used above, however, provides a stricter test because it incorporates the 1949 and 1967 series of devaluations.

12

See, for example, the study of Argentina by Carlos F. Diaz Alejandro, Exchange-Rate Devaluation in a Semi-Industrialized Country: The Experience of Argentina 1955–1961 (Cambridge, Massachusetts), 1965.

13

International Monetary Fund, Annual Report, 1962, p. 66.

14

See Graeme S. Dorrance, “The Effect of Inflation on Economic Development,” Staff Papers, Vol. X (1963), pp. 1–47.

15

ECLA, op. cit.

16

Max F. Millikan cited very low ratios in 1950 between purchasing power parity rates and actual exchange rates for Southeast Asia (0.29) and Africa (0.27) in comparison with the U.S. dollar. Statement by Dr. Millikan in Hearings Before the Subcommittee on Foreign Economic Policy of the Joint Committee on the Economic Report, Congress of the United States (84th Congress, 1st Session, November 9–17, 1955), pp. 23–29.

17

Bela Balassa, op. cit., has obtained a statistically significant correlation between purchasing power parity rates and the level of per capita income for 11 industrial countries. In order to rule out this explanation for the results obtained above, the author has undertaken a similar regression analysis for the much wider range of countries included here. The results obtained were not statistically significant. With per capita income from UN data for 1958 as the independent variable and the ratio between purchasing power parity rates and actual rates, calculated for the period from 1955 to mid-1966, as the dependent variable, a linear regression was fitted for 62 country observations. The regression coefficient was only 0.047 with a t value of 1.716 and a Durbin-Watson statistic of 1.553.

18

Relatively low correlations and even reverse signs have, for example, been obtained for some of these relations. See, for example, Gertrud Lovasy, “Inflation and Exports in Primary Producing Countries,” Staff Papers, Vol. IX (1962), pp. 37–69, and Barend A. de Vries, Export Experiences of Developing Countries (World Bank Staff Occasional Papers Number Three, Baltimore, Maryland, 1967). The World Bank study, recognizing the possibility of such results, also determined that, for nearly half of the countries examined, exchange rate devaluations between 1950–53 and 1960–63 were in excess of, or nearly equivalent to, the increases in their domestic price levels.