Perverse effects of currency devaluation in the Asian currency crisis

Abstract

In the Asian currency crisis last year, the IMF imposed its standard austerity program on Thailand, Indonesia and South Korea - devaluation of currencies accompanied by high interest rates and taxes. The program, that has had disastrous effects on the three countries, is widely blamed for the global financial contagion which has since spread to Russian and Latin America. This paper demonstrates the perverse effects of a devaluation on a small and open economy, such as S Korea, which relies heavily upon imported factors of production. Devaluation will raise the domestic price of these imported factors, inducing sellers' inflation and reducing production. This will increase unemployment, accelerate overall inflation, and ultimately, leave the current account in deficit.