Testing the Marshall-Lerner-Robinson Condition in Ghana prior to 1983: Was a devaluation of the cedi justified in improving the trade balance?

The aim of this paper is to empirically predict the quantitative impact of a devaluation of the Ghanaian Cedi on the trade account for 1960 to 1983. The imperfect substitutes model is employed to test the Marshall-Lerner-Robinson condition. In doing so, conclusions are drawn about the World Bank's implementation of loan conditionalities requiring a devaluation in order to address the trade deficit. Similarities between the economic structure of Ghana and other less developed countries allow for an extension of this study to other countries considering depreciation policies. The effect of a currency devaluation on the cocoa industry is also discussed. OLS and panel regressions conclude that the Marshall-Lerner-Robinson condition does not hold, implying a devaluation would lead to worsening the trade account. The Prais-Winsten procedure is applied to address potential autocorrelation. This result is supported by the trade account data in the decade following this devaluation. These results are in agreeance with relative literature suggesting that an economy with high import dependency will not see an appreciative trade balance following a currency devaluation. It also supports the theory that a concentration of exports in a few primary commodities will see low export price elasticities. However, the extent of the trade deficit's consistent widening may be exaggerated by the consecutive currency devaluations that followed.