Exchange rate policy and price level changes: Casualty tests for Turkey in the post‐liberalisation period

The purpose of the present study is to examine the relationship between exchange rate changes and price level changes in Turkey during the 1980s using some modified Granger causality tests. During this period, Turkish exchange rate policy was characterised by considerable flexibility, in contrast to the long‐standing policy of fixing the exchange rate until a foreign exchange crisis necessitated devaluation. The weight of the evidence presented suggests that Granger causality runs from price level changes to exchange rate changes but that there is not feedback causality from exchange rate changes to price level changes. This conclusion is not altered by the inclusion of a money supply variable. Thus, for Turkey, exchange rate adjustment does not seem to have created a vicious cycle of currency depreciation leading to inflation as is often feared. Whether this result will hold for other developing countries which adopt flexible exchange rate regimes will require further testing.     

Output effects of devaluation: Evidence from Asia

We study the effect of devaluation on output in six developing countries of Asia. In an empirical model that includes monetary, fiscal, and external variables, we examine the impact of devaluation as the effect of real exchange depreciation and alternatively as the effect of nominal devaluation and changes in the foreign‐to‐domestic price ratio. We find that with few exceptions a devaluation fails to make any effect on output over any length of time — short run, intermediate run or long run. Whatever effect on output we are able to uncover comes from the relative price level (the ratio of foreign to domestic prices) but not from nominal devaluation.     

Aggregate consumption,interest rates and inflation in LDCS: An error correction model

This article explores the relationship between the real interest rate and the consumption‐saving decisions in LDCs following the Error Correction Methodology. The model also includes an income term, the inflation rate and a term for inflation uncertainty. The main conclusion drawn from this exercise is that, for low‐inflation countries there is a positive and stronger interest rate effect on saving while this effect is less clear (and not significant) for most high‐inflation countries. Also, the results show that for at least half of the countries in the sample, an EC model with a unit elasticity restriction seems to be an adequate representation of the data.     

European Media Coverage of Argentina’s Debt Default and Recovery: distorting the lessons for Europe

In 2001 Argentina defaulted on its debts and then devalued its currency by abandoning the peso–dollar peg. The economy rebounded and has grown relatively strongly since then. This paper uses a critical political economy approach to first show that the Argentinian strategy finds support in the literature examining the effects of sovereign debt default, currency devaluation and fiscal consolidation on economic growth. Argentina is thus relevant to Europe’s ongoing crisis. The article then investigates European media coverage of the Argentinian experience through an examination of major newspapers’ stories between 2008 and 2013. It argues that the media have distorted the lessons of the Argentinian recovery by focusing on the negative consequences of default rather than its benefits; by emphasising the role of rising commodity export prices over domestic policy decisions in stimulating the economy; by opposing some aspects of government intervention in the economy even if the latter played a beneficial role; and by exaggerating the negative consequences of inflation. This distorted coverage is explained through reference to the media’s ideological role in the implementation of austerity policies in Europe.     

Inflation and the savings ratio across countries

Using cross section data, the paper develops and tests the hypothesis that the savings ratio is positively related to the rate of domestic inflation as long as inflation is mild, but negatively related if inflation is excessive. ‘Optimum’ rates for inflation can be derived, but the point estimates in many samples are not significantly different from zero. The model developed tries to capture any distorting effect that foreign capital inflows may have on the inflation‐saving relation, and also tries to distinguish the inflation hypothesis from other traditional hypotheses such as the life‐cycle hypothesis and the Keynesian ‘absolute’ income hypothesis.     

The inflationary impact of repetitive devaluation

It is suggested that in countries which have sustained a significant inflationary condition and, as a consequence, have frequently changed their foreign‐exchange rate, price expectations may be developed on the basis of these changes. In order to examine this hypothesis a macroeconomic model is built and econometric tests are undertaken using quarterly data for Brazil, Chile, and Uruguay. The author warns that since repetitive devaluation‐type policies can fuel price expectations, they may only lead to increased domestic inflationary pressures, balance of trade deficits, and further rounds of devaluation.     

Book reviews

The article attempts to model structural adjustment patterns in a single, middle‐income oil exporter, Mexico. It explores the economy‐wide costs, in terms of economic growth, income inequality and poverty, of Mexico's economic stabilisation policies of the 1980s. On the basis of counterf actual simulation, it also explores the likely impacts of alternative adjustment strategies. This analysis utilises a modified Social Accounting Matrix (SAM) approach designed to overcome one of the major shortcomings of the conventional SAM: the assumption of unitary expenditure elasticities in household accounts. The base model is calibrated to track the overall and sectoral growth performance of the Mexican economy from 1980 to 1986 and becomes the foundation upon which our policy experiments are built. The article is part of an on‐going study of economy‐wide impacts of alternative structural adjustment policies in Mexico [Adelman and Taylor, 1990], and proceeds as follows: the SAM framework and estimated SAM are described in parts I and II; part III presents the base SAM model solution for 1980 to 1986; part IV presents the results of the policy experiments; and the conclusions are summarised in part V.     

Interpreting Polak: Monetary analysis in ‘dependent’ economies

The Polak model is ordinarily considered to be a quantity theory view of the world, in which the level of income is determined by changes in the stock of money. This interpretation is not warranted by close examination of the model, which can equally well be interpreted as a purely Keynesian framework for income determination, modified to reflect the particular characteristics of an open, developing economy. And because of these modifications, the Polak model leads to policy conclusions quite distinct from either of the standard macro theories.     

Analysing inflation in developing countries: An econometric study with application to Kenya

This article demonstrates an approach to modelling the inflation rate in developing countries through the use of the annualised monthly inflation rate in an attempt to distinguish between once‐and‐for‐all increases in the price level and a generally rising price level. Our empirical results show that this approach is useful in allowing both monetary and institutional variables to play a role in determining the inflation rate. In addition, we estimate the inflation rate for different income groups and show the changing determinants of the inflation rate across these groups.     

The exchange rate and the balance of trade: The Turkish experience

In this article, we examine the responsiveness of Turkey's trade balance to devaluation accompanied by trade liberalisation. Our results show that the trade balance was responsive to changes in the exchange rate that were brought about by the economic reforms introduced in the 1980s, suggesting that exchange rate policy was able to create and maintain a satisfactory balance of trade position in the 1980s and early 1990s.     

The dual and the exchange‐constrained economy

Nelson's model of the exchange‐constrained economy is compared with Eckaus's model of the dual economy. The purpose of this comparison is to illustrate the similarity of the models in explaining unemployment of one factor as the result of the composition of demand and the scarcity of a second factor. Both authors agree to this point. However, Nelson emphasises that unemployment arises from price rigidity while Eckaus maintains that technological limits of substitution are also important. Policy implications differ depending on whether Nelson's or Eckaus's assumptions are accepted. Currie has suggested that the redistribution of income may reduce unemployment in both circumstances.     

Autonomy in nicaragua

Since the 1979 Revolution, Nicaragua's Sandinista government has been engaged in the reconstruction of political and administrative institutions throughout the country. Problems of administrative development have been especially acute along the Atlantic Coast, which has not only been geographically separate from the Pacific Coast, but ethnically and culturally distinct as well. U.S. intervention into the region since 1981 has intensified Sandinista efforts to accommodate indigenous demands for autonomy. The result has been the establishment of limited self-government involving a regional coordinator and council structure. Although many problems remain unresolved, the Nicaraguan experience offers a novel approach to a number of the policy and administrative issues involving indigenous minority populations within modern nation-states.     

Terms of trade and class conflict in a computable general equilibrium model for Mexico

A computable general equilibrium model for Mexico is constructed in which class conflict over the distribution of the surplus is the principal determinant of the terms of trade. The model consists of seven social classes and eight productive sectors. Classes are distinguished as ‘fundamental’ or ‘subsumed’ according to whether their incomes are primarily determined by conscious class struggle or by the resulting system of relative prices. Flexible prices are assumed to clear markets for which non‐produced means of production, such as agricultural land, limit supply while output in the remaining sectors is determined by the level of effective demand. For the latter sectors, two theories of price formation are compared and are seen to differ radically in their implicit conception of the nature of class conflict. A ‘Keynes‐Kalecki’ closure is considered in which prices are determined by a fixed mark‐up on costs. This enables capitalists to protect themselves from incursions on the rate of profit due to labour militancy or state‐imposed terms‐of‐trade policy designed to favour peasants andlor the agrarian bourgeoisie. A second, ‘Marx‐Sraffian’ price closure constrains the economy to a wage‐profit‐terms‐of‐trade surface; where the economy conjuncturally resides on this surface depends upon the level of effective demand, wages and terms‐of‐trade policy. Various policy scenarios are investigated under both closures.     

The Welfare Effects of Balance of Payments Reform: A Micro-Macro Simulation of the Cost of Rent-Seeking

This article proposes a methodology for analysing the effect of balance of payments liberalisation on measures of poverty and distribution and applies it to the case of Jamaica in the 1990s. The methodology consists of a macro-micro simulation in which a CGE model provides labour market outcomes, which in turn are used to manipulate the sectoral allocation of employment to generate the income distribution consistent with the new labour market outcome. In the application to Jamaica, we find that the reallocation of resources away from rent-seeking activities in the presence of exchange controls is significant and has large macroeconomic effects. Opening up of the current account has little effect on poverty, but liberalisation of the capital account reduces poverty, especially amongst the very poor. Neither policy change taken separately, nor the combination of the two, has more than a negligible effect on the distribution of income.     

Globalisation and Unequalisation: What Can Be Learned from Value Chain Analysis?

Although many have gained from the process of globalisation, there remains a stubbornly large number of people living in absolute poverty and a rise in inequality within and between countries. The issue is thus not whether to participate in the global economy but how to do so in a manner which provides for sustainable and equitable income growth. This study shows how value chain analysis can be used to chart the growing disjuncture between global economic activity and global income distribution and to provide causal explanations for this outcome. In so doing, value chain analysis provides valuable insights into policy formulation and implementation.     

Exchange rates in nineteenth‐century Brazil: An econometric model

This paper develops a model for the exchange rate in Brazil during the second half of the nineteenth century. The exchange rate discussion has a bearing in the sources of industrialization in Brazil. Two explanations stem from a primary export base. Whereas the ‘adverse shock argument’ links industrialization to unfavorable conditions in the external sector and exchange devaluations, the alternative approach views industrialization from the standpoint of the growth of income brought by the rise in exports. Those mechanisms are discussed. Also considered are the effects of monetary policy and the behavior of wages. The evidence shows that purchasing power parity is not enough to explain the exchange rate behavior, which clearly responded to coffee export revenues.     

Redistribution,consumer demand and employment in Kenyan furniture‐making

Earlier macro‐level studies of the secondary employment and income effects of an income redistribution ignored a key element in the income distribution‐technology‐employment hypothesis. No account was taken of the diversity of factor proportions within each industry, which is reflected in the size distribution of firms. This case study has been addressed at the level of a particular product group. From an expenditure survey the poor of Kenya are revealed to buy furniture predominantly from the smaller, more labour‐intensive firms in the industry. Consequently, a policy of income redistribution through growth will further the expansion of employment and earnings opportunities in the low income sector of the industry.     

Private foreign asset accumulation,not just capital flight: Evidence from the Philippines

External debt problems have been accompanied in many developing countries with large private capital outflows. The latter phenomenon is usually identified in the literature as ‘capital flight’. This article argues that private foreign asset accumulation is a more appropriate term and compares a great variety of definitions and measurement methods and applies these to Philippine data for 1971–88. Outcomes show striking differences in assessment of the magnitude of the phenomenon. In the preferred definition of this study applied to the Philippines, unrecorded workers remittances from abroad, a factor omitted in other studies, represent a major source of foreign exchange earnings which indirectly support private foreign asset accumulation. Other definitions appear to severely underestimate private capital outflows. Econometric evidence on the causes of private foreign asset acquisition shows a strong sensitivity to the applied definition. Regression analysis for six alternative definitions shows that the expected real exchange rate depreciation and the real foreign‐domestic interest rate differential are ‐ in line with portfolio theory ‐ important determinants in the case of nearly all alternative measures, except for those that attempt to define a narrow ‘capital flight’ concept. Other determinants found significant are the availability of external finance and the previous year stock of private foreign assets. Debt‐fuelled private capital outflows are associated with the political economy of public external borrowing and the segmented nature of the foreign exchange market in the Philippines. Stock‐adjustment behaviour in the acquisition of private foreign assets in turn is interpreted as being a result of a simultaneous decision‐making process determining consumption demand and portfolio choice of high‐income Philippine households to satisfy demands related to their international lifestyles. These results have important welfare implications and policy consequences.     

Distributional effects of dollarisation: the Latin American case

Over the past two years Ecuador, El Salvador and Guatemala have adopted the US dollar as a legal currency in their countries. Several other Latin American countries, including Argentina, are currently discussing dollarisation. In this policy paper we look at the existing evidence for answers to two basic questions. First, under what general circumstances might dollarisation make sense? Second, are there clearly differentiated winners and losers from dollarisation and, if so, can we identify them, so that policy can take these political economy factors into consideration? Our review of the evidence demonstrates that there are consistent patterns of distributional effects, both positive and negative, from the choice of exchange rate regime. These effects are presently not considered in exchange rate policy decision making, but should be. While the effects are not as pronounced as those from major trade liberalisation agreements, they are significant. Ways to cushion the effects of exchange rate regime choice should be considered in the future by policy makers. Moreover, we find that dollarisation is embedded in the politics of the region. Dollarisation is often sold as a substitute for the deeper institutional reforms needed to improve economic performance and distribution in Latin America.     

A note on modelling labour migration in LDCs

Taking the family as the rural‐to‐urban migration decision‐making unit, will the ‘expected‐income migration model’ accurately predict the level of migration? Consideration of two variables ‐ desire for leisure, and a version to risk ‐ serves to show that the expected‐income model yields a systematic downward bias in the predicted level of rural‐to‐urban migration. Likely policy implications emanating from the incorporation of these variables in the migration decision are indicated.