| || || Prakash, Kushneel Avneet|
| || || Devaluation and its impact on trade performances in Fiji : a sectoral and bilateral level analysis|
Author:Prakash, Kushneel Avneet
Institution: University of the South Pacific.
Subject: Devaluation of currency -- Fiji, Fiji -- Economic conditions -- 20th century, Fiji -- Economic policy
Call No.: Pac HG 3998 .5 .P73 2015
Copyright:Under 10% of this thesis may be copied without the authors written permission
Abstract: Over centuries, international trade has allowed countries to expand their product markets and to derive welfare gains; it also exposes them to shocks in the global economy. Small island developing economies, particularly in the Pacific region in order to deal with external shocks find that many a times fiscal policies are quite exhaustive due to high debt and monetary policies have been used restrictively after the global financial crisis, resort to maintaining the exchange rate system fixed with the major trading partners to use it as a shock absorber. The strategy of devaluation has often been employed in an effort to withstand declining trade performance and foreign reserves in the country. The effect of devaluation could be unfavourable immediately in the short-run but seem to be beneficial in the medium-run and demonstrated as the J-curve phenomenon in the traditional literature. In order to understand the resultant impact of devaluation on trade performance many scholars have very often attempted to validate the J-curve phenomenon. Therefore, this thesis uses Fiji as a case study to explore the effectiveness of devaluation on the improvement of trade balance not only at aggregate level but also at sectoral and bilateral level in the short– and in the long–run along. The J-curve phenomenon is also examined in response to devaluation at aggregate, sectoral and bilateral level. This thesis uses vector error correction methodology (VECM) to carry out empirical analysis using annual data over the 1975–2012 periods. Using the widely applied reduced form of the trade balance model of Rose and Yellen (1989), the study models trade balance, categorised by goods and services sectors, bilateral trade relationship with its ten trade partners along with trade relationships at sectoral level. The results on the aggregate goods trade balance suggest that currency devaluation in Fiji significantly improves trade balance in the goods sector but the services sector is adversely affected. However, the combined goods and services trade balance is significantly and positively affected in the long–run. The results also indicate that domestic income has an adverse impact while foreign income positively influences trade balance in Fiji. The J-curve vi phenomenon as such is valid only for the goods sector and the combined goods and services sector trade. The services sector, on the other hand, exhibits inverse J-curve phenomenon implying that improvements in service trade balance are more pronounced in the short–run only. By further disaggregating the data at sectoral level, evidence suggests that the trade balance for food, travel and transportation sectors are adversely affected by devaluation in the long–run. The additional three export sectors and another ten import sectors being modeled show mixed responses. The tests on the J-curve phenomenon appears to be valid only for the travel sector using the impulse response analysis. Advancing the analysis further, the results show significant improvements in the bilateral goods trade balance of Fiji only with New Zealand and the USA in the long–run. On the other hand, it has adverse impact on the bilateral trade performance with Australia, China, Hong Kong, India, Malaysia, Singapore and the UK. Additionally, evidence of the J-curve phenomenon is obtained in four out of the ten trading partners which includes Japan, New Zealand, the UK and the USA. Hence, from a policy perspective, the comprehensive analysis carried out at the aggregate, sectoral and bilateral levels of trade performance in response to devaluation to the policy makers that devaluation has worked moderately for Fiji to boost overall trade performance in the country. It is also important to highlight that results have been more pronounced for the goods sector rather than the services sector. Even maintaining international competitiveness of the domestic sectors, improving productivity and diversification of exports is of paramount importance to ensure sustained benefits from price adjustments due to deliberate exchange rate reductions. With the center of global trade slowly shifting to Asian countries, Fiji is well situated to benefit from increased goods trade and particularly by tapping into the Asian tourist market.