DO NOT DEVALUE THE BIRR: Ignore the World Bank By Tecola W Hagos

July 28th, 2014 Print Print Email Email

The recent poisoned advice from the World Bank to devalue the Birr by another 10% is a sure process of killing the Ethiopian economy for good. What they are attempting is to get at China through such pariah-nibbling at small economies around the world where China has gained well-earned influence and often mutually beneficial partnerships with numerous developing countries.

“Lars Moller, the bank’s chief economist in Ethiopia, told reporters today in the capital, Addis Ababa,” about the 10% devaluation so reported William Davison in his short article “World Bank Urges Ethiopia to Devalue Birr to Boost Exports,” Bloomberg, Jul 22, 2014.

The first and subsequent devaluations that were also instigated by the World Bank/IMF forcing the then new Ethiopian leaders of the new EPRDF Government as a condition for badly needed loans did not benefit Ethiopia at all. It degraded the labor value of every commodity Ethiopia was exporting. There was no dramatic increase in volume of exports due to the devaluation. The increase was due to other economic factors having to do with market demands not devaluation. It is absolutely stupid to think of devaluation in order to boost the volume of export.

In this regard, in an extensive and highly illuminating article, the well-received economist Prof Seid Hassan enlightened us on the subject of devaluation, four years ago, in 2010. [Must Read.]
“The devaluation of the birr is likely to aggravate inflation and it could spark a snowball effect of higher inflation as it can build into a cascade of expectations for further devaluation by private citizens. When devaluation is done overnight in secretive and surprising manner as is done to the birr, the action has the potential to irritate the business sector and speculators. As a result, the devaluation measure could be self-defeating and self-fulfilling. Moreover, for those who control the commanding heights of the Ethiopian economy and the party-controlled conglomerates and their ‘owners’, the action will tempt them to convert their assets into dollars/pounds/euros and expatriate their assets before their values are eroded… There is also a possibility for potential and future birr holders to shun the currency since holding the birr will be very expensive to them.” Seid Hassan, Zenawi and the devaluation of the birr: A layman’s guide, Pampazuka News, Issue 498, 09-30-2010.

I hope you will understand the nature of my emotive statements herein, for my views are decidedly that of a layman. In fact, the Ethiopian Government should lodge stern warning and serious complaint against the individuals in the World Bank who came up with such destructive schema. This is not something that can be hidden from public scrutiny and challenge. We have read the devastation caused by devaluation in a number of South American countries. They have struggled out of that debacle by adopting the very opposite of what the World Bank is suggesting now for Ethiopia to adopt—by reevaluating their currency in reducing inflationary economy.

I believe that the Ethiopian Birr is severely undervalued. As a net importer country, it is in our best interest to increase the value of the Birr and not devalue it. I understand the argument that it will encourage export and discourage imports thereby expanding the domestic economy. I am not convinced that such domestic economic boom is possible, from having studied what followed devaluation in a number of countries in Africa and South America. What we must seek to evaluate is the labor cost of our unit production. It is not the general population’s economic condition that ought to determine the value of the Birr. The lower labor cost of production certainly overcompensates for the inefficiency rooted in less technologically advanced economies. I believe the starting point of our currency is first and foremost our medium of exchange in our domestic economic life. I would advocate that we should move back to the gold-standard system of valuing currency and reevaluate our Birr against the Dollar. If we had maintained a gold-bullion reserve rather than giving up our gold for mere 2-3% royalty to some mercenary exploitative Foreigner, the value of our Birr would have been right now at least on par with that of the oil based economies of the Middle East.

Devaluation is a fictional man’s system of creating virtual efficiency, a delusion of doing something, while doing nothing worth anything. The economy problems of Ethiopia can not be solved by manipulating indices such as the currency. What we need to focus our energy and talent is in creating and maintaining a political system that has core democratic values, the rule of law, and that encourages and rewards individual industry and creativity. There are also specific policies on the Ethiopian economy, the Ethiopian Government has to undertake. Foremost, the issue of land ownership must be resolved; monopolistic control of service and manufacturing industries must be dismantled; banking must be revolutionized to allow credit/debt based economy; serious effort must be carried out on educating qualified citizens to undertake the many tasks in an industrialized community. The problem essentially can be solved by such structural adjustments and democratic policy implementations rather than fiddling with the currency. Once again I quote Seid Hassan for his poignant remarks identifying what truly should be our concern in regard to the economy of Ethiopia, for his words are prophetic and valid to this day.

“If the birr collapses, therefore, it will not be due to those unscrupulous speculators, but due to structural problems and bad policies and their implementation by the government in power. But again, given what took place in Zimbabwe, a combination of existing shortages and the expectation of further devaluation could lead to the collapse of the birr… Speaking about the IMF, it is quite puzzling that the IMF would suggest a devaluation of the birr on such a massive scale, particularly for a currency that has not faced a currency collapse. Devaluation of this magnitude is generally necessitated by a currency collapse, which is not the case with the birr. One may also argue that this relatively massive devaluation may indicate the government’s willingness to forgo the necessary structural adjustment measures, using the massive devaluation as the only measure to ameliorate the problem.” Seid Hassan, “Zenawi and the devaluation of the birr: A layman’s guide,” Pampazuka News, Issue 498, 09-30-2010.

I will conclude my concern with another outstanding economist, Mustafa Acar: “ these findings imply that policy makers in developing countries should be cautious when taking a decision on devaluing the currency or using the policy instruments under their control in such a way as to create real depreciation. More particularly, it is not advisable to call for devaluation if the major concern is increasing output in the short run. Along the same lines, we can say that it is not recommended for the LDC [Less Developed Countries] governments implementing a flexible exchange rate system to allow for a major depreciation, since it may hurt economic growth.” Mustafa Acar, “Devaluation in Developing Countries: Expansionary or Contractionary?” Journal of Economic and Social Research 2 (1) 2000, 59-83, 79-80. Devaluation has far extensive and deeper effect on the economic life of a country that devalues its currency. It sets bad precedent and a polarized solution to a problem lodged elsewhere in the government of a country. The fact is that devaluation eats at our savings and vaporize already completed transactions whose economic value was determined at then existing market system. Devaluation brings into the system one of the most unacceptable degree of inequity, unfairness, and corrosive of social values. It creates unusually high level of uncertainty and a form of economic Tsunami that would rock every corner of the Ethiopian society. It is problematic to no end. Do not devalue the Birr, but make structural political and economic reforms.

Tecola W Hagos
July 25, 2014
Washington DC

  1. Ittu Aba Farda
    | #1

    This an excellent article.

    I am from the school of thoughts that agrees with the advice of the World Bank. If that country has to be transformed by industry playing the leading role, export of finished and semi-finished goods should be available in the world market at competitive prices. I assume that transportation costs can be very high due to the inefficient infrastructure and cumbersome bureaucracy. It is a global market in the internet world. Look how we shop these days. These days I go to malls to do my window shopping and in the meantime for daily brisk walks. We can easily see the days of brick and mortars are numbered. So are the days of ‘Made In China’ gold rush. They are not competitive anymore. The problem with the infrastructure back home can not and will not be solved in a year or two. It is going to take years and decades to solve. One should not forget the topography of that country. If I am sourcing a commodity, say a pair of pliers, and I found same item in the Philippines, Vietnam, South Africa, China and Chile, the first thing I am going to look at or grab my attention is the price. Then I look at lead time, quality and how long the supplier has been doing business globally in general and in USA in particular. Ethiopia is not known to be a player as a source of manufactured goods in the global market. Such lack of notoriety can only be tackled by being very aggressive in the two categories – price and quality. If I find the same pair of pliers with lowest prices and sought quality from China and Ethiopia for US $1.00 and $0.80 each respectively, I may still be reluctant to buy from an Ethiopian source(Don’t even think about citing nationalism on me here) because of the reasons I mentioned above. But I get an offer from an Ethiopian manufacturer with $0.50/each, then you have grabbed my attention and very serious interest. I will be willing to invest my time and expertise to work with you in the coming days and months until you get my entire requirements. This how China took over Hong Kong and Taiwan. Capable experts in the trade commissions play an important role in selling the capabilities of the country. That is where the exchange rates play a deciding role. As USA buyer, the only price I accept is 50 cents each in US Dollars. I don’t see any break until the Birr is devalued to between 28-33 Birrs to one US dollar. Period.

  2. Abe
    | #2

    Prof Tecola is absolutely right. Devaluation works only when we have too much production, be it agricultural or manufacturing. Short of this, devaluation is suicide. We do not even have enough production to eat. We are basically importers. We do not have export based economy.

  3. yy
    | #3

    moral economics ? at work ?

  4. ahmed
    | #4

    Iam just wandering whom are we going to believe,the self made economist prof Tecula or the world bank economist. Remember, many of us used to believe the macro economic statistics given by the bank on Ethiopia’s economic growth and development.How did it happen now that we are arguing to reject the bank’s devaluation proposal? We need a quantitative economic analysis to see the pro and cons of devaluation.I expect this to come from renewed and seasoned economists and not from historians or lawyers.

  5. Abegaz
    | #5

    We know the world bank’s role. They want to buy Ethiopian good cheap. They have no other mission. The other theory they put is only quoting part of the theory. It does not work in the Ethiopian case because we produce small. We do not have excess production to export that attracts foreign purchasers to order more. Whether you devalue the birr or not the amount of coffee we produce for export is nearly the same. We do not have coffee siting idle because the price is high. Plus our production costs are so low because of cheap labor and that by itself make Ethiopian prices of good extremely cheap for external buyers. There is no need to make them further cheap by devaluing the birr.

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