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Friday, December 17, 2010

You have to solve the question - “Describe briefly the exchange rate arrangements of developing and transition countries.” The assignment question is a sequel of International Business Management SMU MBA MB0037. There are already some solved assignments of MB0037 like - “current issues in globalization” and “bill of lading”.

There is considerable diversity in the exchange rate regimes of developing and transition countries, from very hard currency pegs to relatively free floats and with many variations in between. This is not surprising in view of the wide differences among these countries in economic and financial circumstances. However, as these countries have adapted to expanding opportunities arising from deeper involvement in an increasingly integrated global economy and to changes in their own economic situations, there has been a shift toward greater flexibility, for the following reasons:

Gross capital flows to developing countries have risen considerably since the early 1980s, increasing the potential for large and sudden reversals in net flows that would make pegged rates more difficult to maintain;

Consistent with the trend toward globalization, many developing economies now trade with a wider range of partner countries. Countries with single-currency pegs are exposed to the wide fluctuations among major currencies.

Recent crises involving emerging market economies – from the “tequila crisis” of 1994-1995 that originated in Mexico through the Asian/Russian/Brazilian crises of 1997-99 – have led some observers to conclude that pegged exchange rate regimes are inherently crisis-prone, and that emerging market countries should be encouraged, in the interests of themselves and the international community, to adopt floating rate regimes.

In considering this conclusion, it is important to stress a critical caveat: while recent crises have directly and adversely affected many emerging market economies linked to global financial markets, they have only indirectly affected the majority of developing and transition countries. And factors other than the relative fixity of their exchange rate regimes were, of course, at the root of the problems of the most affected countries.


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