#OpenEconomy #2 - Devaluation cuts salaries 

In 1990 one USD was LKR 40. This rate has nearly trebled to 115
by 2010. Do we see a related growth either in exports or balance
of payments during this period? There can be multiple
explanations why previous LKR devaluations didn’t work ...
The devaluation of LKR naturally increases the cost of living. Any
devaluation is associated with an immediate rise in imported
food, fuel and other input prices. As we know by experience this
puts immediate pressures not only on households but even local
industries. It eventually forces the government, goods and
services producers for both local and export markets to increase
wages of labour, offsetting the gains.
The last one can mean far reaching negative impact. The
inflation that will certainly follow the devaluation will lead to
the increase of prices, wages and inflation. This is what the
economists call a ‘devaluation/inflation spiral’. This ‘wages
chase prices and prices chase wages’ situation will have the
opposite impact on the industry to the intended.
Going back to the previous example, we hope exporters and neo
classical economists come out of the mentality of dry zone
peasants who expect the government to subsidize their fertilizer.
The exports are important, no doubt, in the economic growth of a
country but we reach nowhere by perennially waiting for a
weaker LKR.
A more rational approach is to increase productivity and product
quality. Unless we improve product quality and introduce product
diversification devaluation will not help exporters in the long run.
It might perhaps help the opposition in the next elections,
though.
(Mr Siriwardena, holds an MA in Economics from Vanderbilt
University and Mr Wattegama an MBA from the University of
Colombo. They are independent policy researchers and can be
contacted at lankaecon@gmail.com).
www.sundaytimes.lk/110417/BusinessTimes/bt09.html