A more market-based exchange-rate “makes Russia simply more competitive,” Dmitri Fedotkin, an economist at VTB Capital, said yesterday by phone from Moscow. “For the last few months, Russian producers were competitive on the global market. After this devaluation Kazakhstan has matched them.”
The multiple fallacies in this belief include:
1. Competitiveness is based on price alone: Yes, a currency devaluation means that all of a sudden, the relative price of a currency is cheaper than it was, meaning goods that are denominated in that currency are suddenly cheaper. Holding everything else constant, a change in prices should shift the demand curve and increase the demand of good X from country Y. However, in the real world, you can't always hold everything else constant. In particular, countries that produce goods at the margin can't realistically expect to see a huge jump in exports simply because their good X is cheaper; what if Russia's cars are still more expensive than China's? What if Kazakh clothing is still perceived as being of lower-quality than Vietnamese? In this case, monetary price has changed, but actual price (i.e. all of the other considerations that go into what we think of as "price," including time, availability of substitutes, reputation, willingness to pay, etc.) may still be holding firm.
Moreover, this belief totally betrays a lack of understanding of "price," which is not uncommon in relation to policymakers. A market-determined price for something that is low means there is less willingness to pay, or demand is lower. A price that is managed downward does not necessarily mean that there is a shift in demand, but merely a change in the monetary price - much like a minimum wage or price support, the shift of a currency's management (really, a soft price floor) can temporarily disrupt equilibrium until the market clears again - if it's allowed to clear. But market clearance in the currency realm is difficult, because of government management and central bank intervention. So you end up taking a distortion (an already-managed price that markets have settled on as second-best) and add two more on top (sudden change in price, imposed disequilibrium). Keynesians are way off the mark on most things, but in currency markets you might actually see "sticky" prices... because governments apply the tar to make them stick.
2. Competitiveness at the country level is just about temporary relative price changes: Believing that this temporary price change can somehow set a country on the path to righteousness not only ignores all of the other factors that actually go into actual competitiveness, it conflates the two. A country may be able to produce cars cheaper because of worker productivity, not because of cheaper labor. But calling competitiveness as an outcome of cheapening prices, you miss all of the infrastructure, institutions, education, and capital that went into that productivity. You focus on the outcome (relative cheapness!) as opposed to the inputs.
3. Devaluations can happen in a vacuum. Now, there is no sane politician that argues that their move towards devaluation won't have an effect on other countries... in fact, the whole idea of a competitive devaluation is to get in first before the other guy does. However, a key fact in the modern global economy is that no nation, not even North Korea, is autarkic - no one makes everything at home with no interaction with the outside world. In fact, intermediate goods are hugely important, as even a country that makes cars needs the steel (or carbon-fiber or aluminum) from somewhere. And with a currency devaluation, those inputs are now relatively more expensive. So you might not even get the evanescent boost you want, simply because it costs more to buy the steel to make your cars.
So there you have it - devaluation is really not the panacea for all that ills. It's not even good medicine, as it can be an exchange rate-managed way to increase inflation. And what do you get for it? Currency wars and a week of a growth boost. Seems not worth it to me.