EMERGING MARKETS AND CURRENCY DEVALUATION

Economies worldwide have been struggling to recover after the 2008 financial crisis, with many still dealing with repercussions over six years later. Emerging markets have been hit especially hard, and are now resorting to rash economic maneuvers to maintain the minimal gains they have made over the past year. Several countries, including India, Turkey, Russia, Vietnam, and South Africa, have been resisting a decline in exports by artificially deflating their currency. Currency devaluation is when a country enacts “a deliberate downward adjustment to the value of a country’s currency, relative to another currency,” which in this case is the US dollar or euro (Investopedia). Unlike currency depreciation, devaluation is a monetary policy tool used by countries with a fixed exchange rate to combat trade imbalances and difference in imports and exports. Monetary policy is enacted by central banks to control the money supply and set policy affecting imports and exports. When an individual country devalues its currency, that country’s exports become cheaper while imports become more expensive; this has the effect of boosting the local economy by promoting consumption of domestic goods. However, there are several drawbacks to devaluation, which include the risk of declining foreign investments, rising inflation, and disabling the import of necessary commodities.
Foreign investors look for currency appreciation in emerging markets; however, with wide spread currency devaluation, capital will be allocated less efficiently. Also, with the cost of imports rising, domestic markets will become less efficient due to a decrease in competition. Higher import costs will also create problems for countries that are not self-sufficient and rely upon imports of necessary commodities such as fuel and food.
With rapidly increasing prices, the central banks will have to subsidize imports in order to get necessary supplies to citizens, but some governments only have the funds to carry this out for a few months before they either have to change policy or the World Bank will have to step in. The lower cost of exports also has its price since an increase in demand for domestic goods will lead to inflation currently shown by Vietnam, which is experiencing a 1-month high for inflation.
While this strategy might work temporarily for one country, this simultaneous devaluation will ultimately fail to have a lasting impact. As more and more countries devalue their currencies, more goods are exported at lower costs, which increases global competition. After a while all of the participating countries are back where they started after losing the competitive edge gained by devaluation. This is a classic game theory conundrum: it is in each country’s best interest to devalue their currency, since they will enjoy temporary gains and will miss out if they don’t. But eventually, the benefits will cease. The strategy will ultimately lead to a state where the countries will suffer from inflation, inability to import necessary goods, and decrease foreign long-term investment.