DEVALUATION AND ADJUSTMENT IN DEVELOPING COUNTRIES*
Since the early 1970s, acute external payments difficulties have become widespread among developing countries, necessitating borrowing from both official and unofficial sources. In large part, these deficits were the counterpart of the large balance of payments surpluses of some of the oil producing countries, amounting to over US$100 billion in 1980. The rise in oil prices that generated these surpluses might have been expected to affect various countries according to their share of world oil imports. In fact, however, the current account of some of the less developed countries deteriorated to a disproportionate degree, owing to measures adopted by developed countries to protect their own balances of payments; the fact that the non-oil producing developing-countries (unlike the industrial countries) were not able to supply many exports to the oil exporters; and, among other reasons, because of the inadequacies of their own domestic policies. The most common causes of the latter difficulty--at least in the view of some authorities--were excessive pressure of demand, often resulting from overspending by governments financed by budgetary deficits, and increases in money wages even in the absence of a state of excess demand. These demand and cost pressures led to inflationary increases in prices as well as to external imbalances.
The prescription, generally recommended by the Fund, to improve the current account in such cases is a program of phased financial retrenchment, the liberalisation of foreign trade, and, to make all this possible, substantial devaluation. The latter is recommended not only, or even mainly, to improve a country's trade competitiveness--for the foreign balance may be insensitive, at least in the short run, to changes in the exchange rate--but to supplement budgetary measures to reduce domestic demand and consumption.____________________