Vietnamese Dong Devaluation: Securing the Future with a Weaker Currency?

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Case Details:

Case Code : ECON032
Case Length : 15 Pages
Period : 2010
Pub. Date : 2011
Teaching Note : Available
Organization : -
Industry : -
Countries : Vietnam

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

Currency Devaluations: Historical Evidences

“Countries devalue their currencies only when they have no other way to correct past economic mistakes – whether their own or mistakes committed by their predecessors.” ¹

- Shmuel (Sam) Vaknin, Columnist, analyst, and government advisor, Macedonia

“Devaluation is a dangerous and destructive game. Though favored by the IMF, and other ivory tower economists divorced from economic reality, devaluation harms economies.”⁹

- Andrew West, Economics Editor. Capitalism Magazine, in 2001.

Under a fixed exchange rate system¹⁰, devaluation connotes an official downward adjustment of a domestic currency relative to the price movement of gold or other major global currencies, especially the US Dollar. Under a floating exchange rate regime¹¹, a government (more often with the consent of the respective central bank) reduces its currency’s value due to a variety of reasons. Sometimes, devaluation is forced on a country by international institutions, as happened in India in 1966 (Refer to Exhibit II for India’s currency devaluation)...

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Dong Devaluation: A Solution to Vietnam's Macroeconomic Problems? >>

8] Sam Vaknin, “How do Countries Devalue their Currencies?” http://samvak.tripod.com/nm025.html
9] Andrew West, “Devaluation is Not the Answer,” www.capmag.com, April 11, 2001
10] Under the fixed exchange rate regime, the exchange rate is fixed and the value of the domestic currency is tied to a major global currency (mostly the US Dollar) or gold, and the value of the domestic currency moves in tandem with the changes in the value of the currency to which it is tied. For instance, if currency X is tied to the US$ at 10:1, any change in the value of the US$ will affect the value of X to the same extent.
11] Under the floating exchange rate regime, the value of a currency is left to market forces in global forex markets, i.e, demand and supply of a particular currency in the global market will determine the exchange rate of the currency.

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