For the evaluation of the devaluation

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					            For the evaluation of the devaluation
                                By Candlestickcourse.blogspot.com


The Minister of Finance is morally right to lie about the 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 just does not think so. The
unofficial exchange rate stayed put at 27 dinars for the Deutschmark Although devaluation occurs.

This is strange. Rumors of devaluation are usually a reflection of the street rate. The MKD has
held its ground against other currencies over the past three years. A devaluation seemed a
reasonable proposition - or not?

Why do governments devalue?

They do so primarily to improve the situation of trafficking. A devaluation means that more local
currency needed to purchase imports and exporters get more local currency when they convert
export earnings (which are currency for their exports). In other words: imports become more
expensive - and exporters earn more money. This should discourage imports - and to encourage
exports and, in turn, reduce the trade deficit.

At least, this is the old, conventional thinking. A devaluation should improve the competitiveness
of their 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
the devaluation "improves the terms of trade."

But before examining whether this is true in the case of Macedonia - let's consider a numerical
example.

Suppose we have a national economy with the type of products:

Import, Export, import substitution of local production, local consumption of exportable products.
In an economy in equilibrium all four will be the same price, say at 2700 dinars (DM = 100) each.

When the rate is 27 MKD / DM, the total consumption of these products will be influenced by
price. Instead, considerations of quality, availability, customer service, market positioning, status
symbols and so on, affect the consumption decision.

But all this will change when the exchange rate is 31 MKD / DM devaluation Mon

The imported product is now sold locally in the 3100th Importers have to pay more MKD to get
the same number of marks to be paid by the foreign manufacturer of the products being imported.

The products exported by the exporter will now get the same amount of foreign currency earnings.
However, when converted to MKD - you will receive 400 MKD more than before the devaluation.
You can use this money to increase their profits - or cut the price of your product in foreign
markets and sell more (which will also increase your profits).

Substitutes for imports will benefit local production, which will remain a cost of 2700 - and
competition (imports) would increase the price of 3100 to break even!
Local consumption of products that can, in principle, be exported - will go down. The exporter will
have to export and get more MKD for their foreign exchange earnings.

These are the subtle mechanisms by which exports rise and imports fall to the devaluation.

In Macedonia, the situation is less clear. There is a large component of imported raw materials in
exports of industrial products. The cost of this component will increase. The cost of capital
(machines, technology, intellectual property, software) will also increase and become more
difficult for local companies to invest in your future. However, it is safe to say that the total effect
of the devaluation will benefit exporters and exports and reduce imports marginally.

Unfortunately, most of the imports are indispensable at any price (inelastic demand curve): raw
materials, capital goods, loans, and even cars. People buy cars not only to drive - 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 a negative macroeconomic effect.
Six mechanisms operate immediately after the devaluation:

   * The price of imported goods increases.
   * The price of goods and services denominated in foreign currencies increases. An example:
prices of apartments and residential and commercial properties, fixed in DEM. These prices are
increasing (in terms of MKD) by the percentage of devaluation - immediately! The same goes for
consumer goods, big (cars) and small (electronics).
   * Exporting more MKD for foreign currency (and this has an inflationary effect).
   * People can turn the money saved in foreign currency - and get more MKD for it. Devaluation
is an award given to speculators and black market operators.
   * Therefore, the cost of living. People put pressure on employees to increase their wages.
Unfortunately, there is no example in history in which governments and employers did
successfully defend against such pressures. Usually they give up all or part.

Some countries have tried to contain such wage pressures and wage inflation has led to a result
of increased wages.

The unions of government employees and union representatives of employers - the sign of
"economic arrangements or the packages."

Government pledges not to increase tariffs for public services, employers agree to fire people or
not to cut salaries of employees and unions do not agree to the demand for wage increases, not
to strike.

These contracts are economically very successful in stabilizing inflation in many countries, from
Israel to Argentina.

However, some of the devaluation inevitably seeps into wages. Government to control effectively
only employees in direct employment. You can not dictate to the private sector.

   * Inflation gradually erodes the competitive advantage granted to exporters in the previous
devaluation. So that devaluations tend to create a chain reaction of cancer: the devaluation-
inflation followed by devaluation and inflation.

Probably the worst effect of devaluation is psychological violence.

Macedonia succeeded in many other countries that do not: it created an environment of
macroeconomic stability. The fact is that the spread between the official and unofficial exchange
was very low (3.5%). This is a sign of confidence in macroeconomic management. This
devaluation of the effects of the drug may be stimulating economic body in the short term - but
may be detrimental in the long run.

These risks are worth under two conditions:

   * That the devaluation is part of a comprehensive economic program to stimulate the economy
and especially the export sector.
   * This is part of the devaluation of long-term macro-monetary plan with clear objectives, public
statements, goals. In other words, the government and the Central Bank must be a multi-year
plan, stating clearly their inflation objectives and how it will devalue the currency (MKD) and
inflation above the target. This is much better "shock therapy": keeping the secret of devaluation
until the last moment and then declared in the night, when 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 its currency in squandering reserves .. "

If so, why does 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, this was the result:

   * The business sector was able to plan its operations years in advance, to price their products
properly, to protect itself by buying financial hedge contracts. Suddenly, the business
environment became safe and predictable. This was very beneficial micro-economic force.
   * The currency stabilized and displayed qualities normally associated with "hard currency". For
example, the new Israeli shekel, which nobody wanted to play and was converted into U.S.
dollars (To protect the value) - became a national hit. Appreciated 50% against the dollar, people
sold their dollars and bought Shekels (!) - All with inflation at 18% per year! He became truly
convertible currency - because people can predict their value over time.
   * The consistency, strength and durability of governments in implementing its macro-
economoic agendas - people did back their trust. Citizens began to believe their governments
again. Open government, transparency of operations and the fact that he kept his word - meant a
lot in exchange for the right relationship, trusting that should prevail between subjects and their
administration.

Taken rigorous measures to prevent the metamorphosis of the devaluation on inflation. Typical
measures include freezing all wages, reduce the 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 deciding 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 case. You
could do this devaluation a turning point for the economy. It could reach a national consensus to
work for a better economic future within a national "economic agenda." It's not too late to do yet.
A devaluation should be an essential part of any economic program. However, it could be a
cornerstone in the export driven, employment oriented, economy stimulating construction.

				
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