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Author(s): MOORE , WINSTON; BECKLES, JAMILA; WORRELL, DELISLE;
Exchange rate devaluations have been used by economies around the world in an attempt to enhance their external price competitiveness. This paper evaluates the efficacy of this strategy in small-island developing states. We classify countries around the world into two broad categories, large or small according to population, land area and economic size, proxied by GDP. We compare large countries with small countries according to the following dimensions: the country’s share of world export markets, the diversity of exports of goods and services, the elasticity of import demand for consumer and producer goods, and the sensitivity of prices and wages to exchange rate changes. Using these results, we assess the efficacy of devaluation as a competitive strategy in small states as well as in larger countries. For small open economies, our findings are that exchange rate devaluations, at best, result in a redistribution of income within the country or, at worst, result in a deterioration in external competitiveness, the balance of payments, and economic contraction.
Key Terms: Keywords; Economic size; Concentration; Exports; Devaluation