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Title:Currency devaluation in developing countries: some lessons for Nigeria from recent experience
Author:Ukpolo, V.
Periodical:The Nigerian Journal of Economic and Social Studies
Geographic term:Nigeria
terms of trade
Abstract:This paper examines whether combining devaluation policy with trade liberalization would be effective in improving the balance of payments situation of a developing country with an enormous trade imbalance. The analysis is illustrated with case studies of the implementation of devaluation policies in Mexico and Nigeria. First, the author evaluates the impact of devaluation on an economy using the 'elasticity approach'. Using a theoretical model for a developing country the author shows that, where the balance of trade is in equilibrium initially, devaluation is bound to be successful in increasing net foreign exchange earnings as long as the sum of the price elasticities of import demand and export supply exceed one. Devaluation can expand exports without reducing the foreign price and/or reduce imports at a fixed foreign price, with an overall effect of a positive net trade balance. An examination of the case of Nigeria shows that, with the depreciation of the naira in 1985, Nigerian exports could not be enhanced due to the lack of short run responsiveness to any increase in foreign demand for exports. Furthermore, there was a lack of short-term responsiveness to import-substitute production. The author concludes that devaluation would ordinarily lead to a rise in domestic currency prices of foreign commodities, which could result in stagflation. In his policy recommendation, he stresses the importance of policies aimed at diversifying a country's economic base in the long run. Bibliogr.