Over time, an economy may experience changes in imports and exports, and this can lead to a balance of payments disequilibrium (deficit or surplus). Under a floating regime, the deficits and surpluses will lead to adjustments in the exchange rate, which alter relative import and export prices in the future. Therefore, imports and exports can readjust to move the balance of payments back towards a desirable equilibrium. Exogenous shocks, like the financial crisis of 2008-09, can occur from time to time and floating exchange rates can help the readjustment process.
“The [Eurasian Economic Union] EAEU partners also devalued their currencies. The Russian rouble depreciated by almost two times, the Belarusian [rouble] by 56 percent, the Armenian dram by 17 percent. Thus, the majority of countries, including those in the European Union, countries exporting raw materials as well as trade partners of Kazakhstan devalued their currencies,” said President Nursultan Nazarbayev at ameeting with Kazakhstan’s major exporters and representatives of the National Chamber of Entrepreneurs (NCE) Atameken and business circles of the country on Aug. 20.
Since June 2014, currencies in Russia, Colombia, Brazil, Turkey, Mexico and Chile depreciated by 20-50 percent against the U.S. dollar, in Malaysia and Indonesia the exchange rates have reached the lowest level since the Asian financial crisis of 1997-1998. Also in August, China allowed the yuan to weaken against the dollar by 4.5 percent, which triggered a new wave of adjustments in exchange rates in developing countries.
However, a recent World Bank study of 46 developed and developing countries showed that in 2004-2012 the effectiveness of currency devaluation to stimulate exports was twice lower than in 1996-2003, though it still brings some benefit. Thus, the country is now in a more difficult position to increase exports due to the devaluation of currency. “The general conclusion is that exports are much more dependent on external demand than on exchange rates,” says David Labin, Citi’s chief economist for emerging markets.
Moreover, what kind of measures could be taken by the countries-members of the World Trade Organisation if the import price of the product under a floating regime is much lower than the price of the local product?
For instance, the United States is a major supplier of meat in Kazakhstan traditionally. Last year, 119,400 tonnes of meat was delivered, the lion’s share of which were chicken leg quarters, totaling $104.1 million.
According to a general director of the management company for the poultry industry Shanyrak, Maxim Bozhko, it is impossible to compete on the price index with American-made chicken legs. He provides an example of the imported price of one kilogramme of a chicken leg quarter, which is $1; however, the cost of production of one kilogramme of meat in Kazakhstan is about $2-$3.
There is no doubt that the quality of the local products is much higher than some imported goods. Therefore, one of the solutions is to explain to customers that they are paying for quality.
In order to inform potential consumers, marketing strategies could be used. However, to protect clients from simple advertisements, the companies should prove the quality of goods.
In order to do so, the government should control the process of producing and verifying the quality of the final product.
No recent financial crises have canceled the protection of public health, which should play a pivotal role in agendas of all countries.
