A Minister of Finance is morally right to lie about a future devaluation and a woman has the right to lie about their age. This is common sense.
Rumours about a devaluation of the Macedonian dinar against major currencies were in the air in recent weeks. However, no government official had to be. The market simply could not believe it. The unofficial exchange rate stayed put at 27 MKD to the Deutschmark even though the devaluation took place.
This is strange. Rumors of devaluation are usually reflected in the exchange street. The MKD has held its ground against other currencies over the past three years. A devaluation seemed a reasonable proposition - or was it?
Why do governments devalue?
They do so primarily to improve the trade balance. A devaluation means that the local currency is needed to purchase imports and exporters get more local currency when they convert export earnings (the foreign currency they earn from their exports). In other words: imports become more expensive - and exporters earn more money. This is supposed to discourage imports - and to encourage exports and, in turn, reduce the trade deficit.
At least, this is the old, conventional thinking. A devaluation is supposed to improve the competitiveness of exporters in foreign markets. You can even afford to cut prices in its export markets and to fund this reduction of the perks they get from the devaluation. In professional jargon we say that a devaluation "improves the terms of trade."
But before examining the question of whether this is true in the case of Macedonia - let's consider a numerical example.
Suppose we have a national economy with the types of products:
Imported, exported, locally produced substitutes for imports, domestic consumption of exportable products. In an economy in equilibrium all four will be the same price, say at 2700 dinars (= 100 DEM) each.
When the rate is 27 MKD / DM, the total consumption of these products will be influenced by price. On the contrary, considerations of quality, availability, customer service, market positioning, status symbols and so on will influence the consumption decision.
But all this will change when the exchange rate is 31 MKD / DM following a devaluation.
The imported product is now sold locally in 3100. The importer will pay more MKD to get the same amount of DM you have to pay the foreign manufacturer of the products being imported.
The imported products exporter now seek the same amount of foreign exchange earnings. However, when converted to MKD - you will receive 400 MKD more than before the devaluation. You could use this money to increase their profits - or to reduce the price of your product in foreign markets and sell more (which will also increase your profits).
The Locally Produced Import substitution will benefit: yet will be priced at 2700 - while the competition (imports) will have to raise the price of 3100 to break even!
Local consumption of products that can, in principle, be exported - will go down. The exporter will prefer to export and get more MKD for their foreign exchange earnings.
These are the subtle mechanisms by which exports rise and fall in imports after devaluation.
In Macedonia, the situation is less clear. There is a large component of imported raw materials in industrial products exported. The price of this component will increase. The price of capital goods (machinery, technology, intellectual property, software), will also increase and make it harder for local companies to invest in your future. However, it is safe to say that the overall effect of the depreciation favors exporters and exports and reduce imports marginally.
Unfortunately, most of the imports are indispensable at any price (inelastic demand curve): raw materials, capital goods, credits, even cars. People buy cars not only to lead - but also to preserve the value of their money. Cars in Macedonia are a commodity and a store of value and features that are difficult to replace.
But this is an idealized country which really exists anywhere. In reality, devaluation tends to increase inflation (= the general price level) and therefore have an adverse macroeconomic effect. Six mechanisms of operation immediately after a devaluation:
The price of imported goods increases.
The price of goods and services denominated in foreign currency rises. An example: prices of apartments and residential and commercial rentals is fixed in DEM. These price increases (in terms of MKD) by the percentage of devaluation - immediately! The same goes for consumer goods, big (cars) and small (electronics).
Exporters get more MKD for their exchange rate (and this has an inflationary effect).
People can make money saved in foreign currency - and get more MKD for it. A devaluation is a prize awarded to speculators and market operators BLACK.
Therefore, the cost of living. People put pressure on employees to increase their wages. Unfortunately, there is still no example in history in which governments and employers did successfully defend against such pressures. In general, assign, in whole or in part.
Some countries tried to contain pressures as wages and wage inflation of propulsion is the result of wage increases. The government, trade unions and employee representatives of employers' associations - to sign "covenants economic or packages."
The government promises not to increase tariffs for public services, the employer agrees not to lay off people are going to reduce wages and trade unions of employees agree not to demand wage increases and not strike.
Such economic pacts have been very successful in stabilizing inflation in many countries, from Israel to Argentina.
However, some of the devaluation inevitably seeps into wages. The government can effectively control only to employees who are their direct employees. You can not dictate to the private sector.
Inflation gradually erodes the competitive advantage it gives to exporters by the devaluation which preceded it. So that devaluations have a tendency to create a chain reaction of cancer: the devaluation-inflation followed by devaluation and yet by more inflation.
Without doubt, the worst effect of devaluation is psychological.
Macedonia has succeeded where many other countries, no: it created an environment of macroeconomic stability. The fact is that the spread between official rates and unofficial, was very small (about 3.5%). This was a sign of confidence in macroeconomic management. This devaluation of the effects of drugs: it could be stimulating for the economic body in the short term - but could be detrimental to him in the long term.
These risks are worth under two conditions:
That devaluation is part of a comprehensive economic program to stimulate the economy and especially the export sector.
That devaluation is part of a long-term macro-monetary plan with clear objectives, openly stated, goals. In other words: government and the Central Bank should have designed a multi-year plan, stating clearly their inflation targets and how much it will devalue the currency (MKD) above the inflation target. This is far preferable to the "shock therapy": keeping the secret of devaluation until the last minute and then declare that during the night, taking everyone by surprise. The instinctive reaction is: "If the government announces its intentions in advance - people and speculators rush to take advantage of these plans, for example, they will buy currency and put pressure on the government to devalue by squandering its reserves Currency.. "
If so, why did not happen in Israel, Argentina, Chile and dozens of other countries? In all these countries, the government announced inflation and devaluation targets well in advance. Surprisingly, it had the following effects:
The business sector was able to plan its operations years in advance, the price of their products properly, to protect themselves by buying hedging contracts. Suddenly, the business environment became safe and predictable. This had a favorable micro-economic force.
The currency stabilized and displayed qualities normally associated with "hard currency". For example, the New Israeli Shekel, which no one wanted to play and immediately became U.S. dollars (To protect the value) - became a national hit. (!) Appreciated 50% against the dollar, people sold their dollars and bought Shekels - and all this with an inflation rate of 18% per year! It became a truly convertible currency - because people could predict its value over time.
The consistency, endurance and resistance of governments in implementing its macro-economoic agendas - made people regain their confidence. Citizens began to believe their governments again. Open government, transparency of operations and the fact that he kept his word - meant a lot in restoring the right relationship, trusting that should prevail between subjects and their administration.
Taken rigorous measures to prevent the metamorphosis of the devaluation on inflation. Standard measures include freezing all wages, a reduction of budget deficit, even temporary import protective barriers to protect local industries and reduce inflationary pressures.
Of course, the Macedonian government and Central Bank are not fully autonomous in setting economic priorities and decide what action to take and to what extent. They have to be aligned with the "advice" (not to say dictates or conditions) given by the likes of the IMF. If they do, the IMF and World Bank Macedonia reduce the bloodlines of international credits. The situation is sometimes very close to coercion.
However, Macedonia could use successful examples in other countries to defend their position. They could have done this devaluation a turning point for the economy. Could have reached a national consensus to work towards a better economic future within a national "Economic Agenda." There is still time to do so. A devaluation should be an essential part of any economic program. However, it could be the cornerstone of an export driven, employment oriented, economy stimulating building.
Rumours about a devaluation of the Macedonian dinar against major currencies were in the air in recent weeks. However, no government official had to be. The market simply could not believe it. The unofficial exchange rate stayed put at 27 MKD to the Deutschmark even though the devaluation took place.
This is strange. Rumors of devaluation are usually reflected in the exchange street. The MKD has held its ground against other currencies over the past three years. A devaluation seemed a reasonable proposition - or was it?
Why do governments devalue?
They do so primarily to improve the trade balance. A devaluation means that the local currency is needed to purchase imports and exporters get more local currency when they convert export earnings (the foreign currency they earn from their exports). In other words: imports become more expensive - and exporters earn more money. This is supposed to discourage imports - and to encourage exports and, in turn, reduce the trade deficit.
At least, this is the old, conventional thinking. A devaluation is supposed to improve the competitiveness of exporters in foreign markets. You can even afford to cut prices in its export markets and to fund this reduction of the perks they get from the devaluation. In professional jargon we say that a devaluation "improves the terms of trade."
But before examining the question of whether this is true in the case of Macedonia - let's consider a numerical example.
Suppose we have a national economy with the types of products:
Imported, exported, locally produced substitutes for imports, domestic consumption of exportable products. In an economy in equilibrium all four will be the same price, say at 2700 dinars (= 100 DEM) each.
When the rate is 27 MKD / DM, the total consumption of these products will be influenced by price. On the contrary, considerations of quality, availability, customer service, market positioning, status symbols and so on will influence the consumption decision.
But all this will change when the exchange rate is 31 MKD / DM following a devaluation.
The imported product is now sold locally in 3100. The importer will pay more MKD to get the same amount of DM you have to pay the foreign manufacturer of the products being imported.
The imported products exporter now seek the same amount of foreign exchange earnings. However, when converted to MKD - you will receive 400 MKD more than before the devaluation. You could use this money to increase their profits - or to reduce the price of your product in foreign markets and sell more (which will also increase your profits).
The Locally Produced Import substitution will benefit: yet will be priced at 2700 - while the competition (imports) will have to raise the price of 3100 to break even!
Local consumption of products that can, in principle, be exported - will go down. The exporter will prefer to export and get more MKD for their foreign exchange earnings.
These are the subtle mechanisms by which exports rise and fall in imports after devaluation.
In Macedonia, the situation is less clear. There is a large component of imported raw materials in industrial products exported. The price of this component will increase. The price of capital goods (machinery, technology, intellectual property, software), will also increase and make it harder for local companies to invest in your future. However, it is safe to say that the overall effect of the depreciation favors exporters and exports and reduce imports marginally.
Unfortunately, most of the imports are indispensable at any price (inelastic demand curve): raw materials, capital goods, credits, even cars. People buy cars not only to lead - but also to preserve the value of their money. Cars in Macedonia are a commodity and a store of value and features that are difficult to replace.
But this is an idealized country which really exists anywhere. In reality, devaluation tends to increase inflation (= the general price level) and therefore have an adverse macroeconomic effect. Six mechanisms of operation immediately after a devaluation:
The price of imported goods increases.
The price of goods and services denominated in foreign currency rises. An example: prices of apartments and residential and commercial rentals is fixed in DEM. These price increases (in terms of MKD) by the percentage of devaluation - immediately! The same goes for consumer goods, big (cars) and small (electronics).
Exporters get more MKD for their exchange rate (and this has an inflationary effect).
People can make money saved in foreign currency - and get more MKD for it. A devaluation is a prize awarded to speculators and market operators BLACK.
Therefore, the cost of living. People put pressure on employees to increase their wages. Unfortunately, there is still no example in history in which governments and employers did successfully defend against such pressures. In general, assign, in whole or in part.
Some countries tried to contain pressures as wages and wage inflation of propulsion is the result of wage increases. The government, trade unions and employee representatives of employers' associations - to sign "covenants economic or packages."
The government promises not to increase tariffs for public services, the employer agrees not to lay off people are going to reduce wages and trade unions of employees agree not to demand wage increases and not strike.
Such economic pacts have been very successful in stabilizing inflation in many countries, from Israel to Argentina.
However, some of the devaluation inevitably seeps into wages. The government can effectively control only to employees who are their direct employees. You can not dictate to the private sector.
Inflation gradually erodes the competitive advantage it gives to exporters by the devaluation which preceded it. So that devaluations have a tendency to create a chain reaction of cancer: the devaluation-inflation followed by devaluation and yet by more inflation.
Without doubt, the worst effect of devaluation is psychological.
Macedonia has succeeded where many other countries, no: it created an environment of macroeconomic stability. The fact is that the spread between official rates and unofficial, was very small (about 3.5%). This was a sign of confidence in macroeconomic management. This devaluation of the effects of drugs: it could be stimulating for the economic body in the short term - but could be detrimental to him in the long term.
These risks are worth under two conditions:
That devaluation is part of a comprehensive economic program to stimulate the economy and especially the export sector.
That devaluation is part of a long-term macro-monetary plan with clear objectives, openly stated, goals. In other words: government and the Central Bank should have designed a multi-year plan, stating clearly their inflation targets and how much it will devalue the currency (MKD) above the inflation target. This is far preferable to the "shock therapy": keeping the secret of devaluation until the last minute and then declare that during the night, taking everyone by surprise. The instinctive reaction is: "If the government announces its intentions in advance - people and speculators rush to take advantage of these plans, for example, they will buy currency and put pressure on the government to devalue by squandering its reserves Currency.. "
If so, why did not happen in Israel, Argentina, Chile and dozens of other countries? In all these countries, the government announced inflation and devaluation targets well in advance. Surprisingly, it had the following effects:
The business sector was able to plan its operations years in advance, the price of their products properly, to protect themselves by buying hedging contracts. Suddenly, the business environment became safe and predictable. This had a favorable micro-economic force.
The currency stabilized and displayed qualities normally associated with "hard currency". For example, the New Israeli Shekel, which no one wanted to play and immediately became U.S. dollars (To protect the value) - became a national hit. (!) Appreciated 50% against the dollar, people sold their dollars and bought Shekels - and all this with an inflation rate of 18% per year! It became a truly convertible currency - because people could predict its value over time.
The consistency, endurance and resistance of governments in implementing its macro-economoic agendas - made people regain their confidence. Citizens began to believe their governments again. Open government, transparency of operations and the fact that he kept his word - meant a lot in restoring the right relationship, trusting that should prevail between subjects and their administration.
Taken rigorous measures to prevent the metamorphosis of the devaluation on inflation. Standard measures include freezing all wages, a reduction of budget deficit, even temporary import protective barriers to protect local industries and reduce inflationary pressures.
Of course, the Macedonian government and Central Bank are not fully autonomous in setting economic priorities and decide what action to take and to what extent. They have to be aligned with the "advice" (not to say dictates or conditions) given by the likes of the IMF. If they do, the IMF and World Bank Macedonia reduce the bloodlines of international credits. The situation is sometimes very close to coercion.
However, Macedonia could use successful examples in other countries to defend their position. They could have done this devaluation a turning point for the economy. Could have reached a national consensus to work towards a better economic future within a national "Economic Agenda." There is still time to do so. A devaluation should be an essential part of any economic program. However, it could be the cornerstone of an export driven, employment oriented, economy stimulating building.
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