Currency Devaluation: Impacts on Human Growth

Currency

Taking a year off to travel has become an extremely common phenomenon among recent graduates. Popular destinations for these young travellers include countries like Thailand, Vietnam and Laos – in which one Canadian dollar can conveniently buy a meal at an all-you-can-eat buffet or a round of beers for new friends made back at the hostel. According to status updates posted on Facebook by backpackers journeying through Laos, just a few more dollars is all it takes to rent a beach house or embark on a three day-long boat tour. In fact, more and more of these young travelers seem to be visiting Laos – and rejoicing at the low costs of food, lodging and activities there. However, low exchange rates typically signal major economic weakness and put local economies – and citizens – at great financial risk.

Governments often devalue their currencies amid persistent shortfalls in revenue and high levels of national debt. As the debt to GDP ratio increases, a nation’s central bank will be unable to fund both the currency reserve and the government’s budget deficit. These dire financial circumstances often leave governments with little choice but to devalue their currencies – which, from an economic perspective, has both advantages and disadvantages.

One advantage to having a weaker currency is that it almost always boosts the competitiveness of the local labour force in international markets. This in turn creates a boom in demand for a nation’s exports, which cranks up growth at the domestic level. However, since devaluation is rarely neat or controlled, the risks tend to outweigh the benefits. A weaker currency pushes up import prices, which leads to disaster if a society depends on imported essential goods like food, water and shelter (as was the case in Zimbabwe when its currency was devalued by nearly 95% in the late 2000s). Aside from creating an inflationary downward spiral, devaluation usually leads to an international loss of confidence in the country or its government.

As backpackers take to their social media accounts to tell friends and family back home just how cheap everything is, Laos is on the brink of an economic crisis. Recently, the country was ordered by the IMF to tighten its macroeconomic policies amid accelerating national debt. Inflation in Laos is soaring as a result of rising food costs and increasing credit growth, which is partly driven by public spending. This growing fiscal deficit has raised serious concerns among IMF representatives regarding the unsustainable nature of the Laotian banking system.

While travellers may find it virtuous to visit lesser-travelled corners of the world like Laos, it is important to do so consciously. Rejoicing in low exchange rates signals certain insensitivity to global economic inequality. While many economists focus on the bigger-picture repercussions of currency devaluation, it is undeniable that weaker currencies have direct impacts on citizens. Celebrating the low costs of consumable goods while on vacation demonstrates disregard for the economic hardship imposed by weakened currencies on citizens.

About Rebecca McFadgen

Rebecca McFadgen is a recent Political Science MA graduate from Dalhousie University in Halifax, Nova Scotia. During her studies, Rebecca developed a keen interest in Aboriginal rights, environmental issues and maritime security. Rebecca's Master's thesis examines the impacts of the Canadian federal and provincial governments' duty to consult on the empowerment of First Nations communities in sustainable resource development decisions. She also holds a BA with Honours in French and Political Science from Dalhousie and completed her undergraduate thesis in French on the unique political situation of Saint-Pierre-et-Miquelon.