Since 2008, Sterling has devalued by 20% but there has been no discernible impact on the trade deficit as policy makers have hoped (and as we have consistently predicted). According to policy makers, what does devaluation mean to the British Economy. Here is a quote from the Prime Minister.
“What it [devaluation] does mean is that we shall now be able to sell more goods abroad on a competitive basis. This is a tremendous opportunity for all our exporters and for many who have not yet started to sell their goods overseas. But it will also mean the goods we buy from abroad will be dearer and so for many of these goods, it will be cheaper to buy British. Because one of the great problems we in Britain have had over the past [five or six years] has been the great increase year by year in imports of goods manufactured abroad.
Saving imports, and still more the export drive, will mean that industrial production will go up. Many industries and firms which are now working below capacity, will have a chance to get into full production. This means more work, more jobs in the development areas, because we intend to be ruthless in diverting new enterprise to those areas.
Is this the "march of the makers" speech from Chancellor Osborne? If the quote sounds familiar, it should do. But it would be even more familiar if prefaced by the words, “from now on the Pound abroad is worth less but it does not mean the Pound in your pocket, or in your purse or in your bank has been devalued.”
The quote is from Prime Minister Harold Wilson in 1967 speaking of the 14% devaluation of the currency, “creating a great opportunity for exporters and manufacturers and salesmen, what a great opportunity for them”.
So what really happened? In 1967, the pound was devalued by 14% but in the following year, the cost of imports went up by 12.5% and the price index of exports increased by 8%. The following year 1969, export prices rose slightly ahead of imports but by the third year any price gain had been eroded. Import costs and export costs had both risen by 20% compared to 1967. In volume terms by 1970 import and export volumes had risen by 28% compared to 1966. (Source Pink Book ONS).
There had been no relative gains to prices or to volumes relative to imports. Devaluation did little or nothing to solve the problems of the British Economy in 1931, 1945, 1967 and 1992. It has done little and will do little to solve the problems of the British Economy from 2008 to 2011.
“The pound in your pocket” is being devalued by higher inflation especially on dollar denominated prices paid for food, energy and commodity imports from abroad. The devaluation will not lead to a rebalancing of the economy.
A rise in interest rates would increase the value of the pound abroad and the pound in your pocket as the inflation effect of international commodity price rises is moderated. Devaluation isn’t working, it never did.
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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University
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