A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Erhardt, Barbara Article — Digitized Version Floating exchange rates and their problems for the developing countries Intereconomics Suggested Citation: Erhardt, Barbara (1977) : Floating exchange rates and their problems for the developing countries, Intereconomics, ISSN 0020-5346, Verlag Weltarchiv, Hamburg, Vol. 12, Iss. 1/2, pp. 29-34, http://dx.doi.org/10.1007/BF02929168 This Version is available at: http://hdl.handle.net/10419/139444 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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What particular ed in Kingston in early 1976 has set the seal on problems ensue from flexible rates for this group what had been common practice: it laid down of countries? How can the difficulties be counter- that IMF members may choose their own ex- ed? Could the problems be solved by a general change-rate system. Floating exchange rates are return to fixed rates of exchange? thus no longer contrary to the IMF statutes 1 For purposes of analysis a distinction should be As a matter of fact nearly 60 p.c. of the world made between two cases - floating of the trade is transacted by countries which let their developing countries' own currencies and floating currencies float, either by themselves or in a block by the industrialized countries. The latter prob- with others (cf. Table). A close look shows how- ably presents the developing countries at present ever that almost all of them are industrialized with a bigger problem, for they have to face It but countries. Among the developing countries there have no direct influence on it while they can take are only four which engage in floating: most of decisions, within given parameters, about the the others have linked their currencies in some possible flexibility of their own currencies. way or other to other currencies. Own Floating No Alternative So it is quite obvious that developing countries take a different attitude to floating exchange rates The most important argument against the intro- than do industrialized states. In their catalogue duction of flexible exchange rates in developing of demands for a New International Economic countries probably rests on the prospective Order they advocate stable rates of exchange not repercussions on their foreign trade. The export only for their own currencies but especially for trade of the developing countries is characterized the currencies of the industrialized countries 2. by predominance of primary products: most devel- The group of 24 3 objected to general legalization oping countries derive the bulk of their export of floating 4. earnings from one or a few raw materials, and the prices of these are as a rule expressed In Why is it that an exchange-rate regime clearly in foreign currencies and determined outside their favour with the industrialized countries at the borders s. Their market power is low so that al- * HWWA-Institut fSr Wlrtschaftsforschung-Hamburg. most all their imports and exports are invoiced In 1 Cf. Report by the Executive Directors to the Board of Gover- one of the key currencies. nors, International Monetary Fund, Washington, D.C., 1976, Part IV, p. 6. As a result of these particular conditions the 2 Cf. Mantle Declaration end Programme of Action, published in: developing countries, unlike the industrialized United Nations Conference on Trade and Development, TD/195, Febr. 12, 1978, p. 22. states, have little flexibility in their response to 3 The Group of 24 was appointed by the Group of 77 in 1972 so data changes which are brought about by floating. as to ensure consideration for the interests of the developing One has to distinguish here between the repercus- countries in the reform of the International monetary system. Cf. (no author) Fund and World Bank Prepare for Meetings in sions of exchange-rate fluctuations and those Manila, in: IMF Survey, Vol. 5 (1976), No. 17, p. 259. 4 Cf. Intergovernmental Group of 24 on International Monetary s Cf. Carlos Federlco Dlaz-AleJandro, Less developed Affairs, Communlqu6, Tenth Meeting of Ministers, June 9, 1975, countries and the post-1971 International financial system, printed In: IMF Survey, Vol. 4 (1975), No. 12, p. 180. Princeton 1975, p. 2. INTERECONOMICS, No. 1/2, 1977 MONETARY POLICY stemming from changes in exchange-rate trends. theless provide carry-over facilities for foreign The uncertainties ensuing from exchange-rate currencies at a low rate, they stand to lose if their fluctuations for the foreign trade can easily lead currency is in fact devalued. In a few countries, to a contraction of the trade of the developing such as India, the public authorities do however countries. The exporters and importers run all the provide forward trading facilities for foreign cur- greater risks because the developing countries rencies. have no functioning forward exchange markets. They are without the technical and personal pre- This is no doubt better than utter insecurity but requisites for setting up forward markets whereas foreign exchange guarantees Involve costs which in the industrialized countries the profit motive may militate against foreign trade. It may make would bring such markets into being if they were things easier for private interests if there are fixed needed 6. Moreover, the developing countries find forward rates at odds with the market but they the inconvertibility of their own currencies a amount to a redistribution at the expense of the hindrance when they want to carry out necessary state which the latter cannot sustain for ever. compensation transactions in the international One general economic consequence of exchange- financial markets. rate fluctuations is increased uncertainty about the Attempts by public authorities in the developing level of imports which the developing country Is countries to create the requisite facilities also able to finance with the foreign currency proceeds have their problems: difficulties arise when the from its exports, for - other things being equal - monetary authorities fix both spot and forward the import potential depends upon the rate of ex- rates 7. In certain circumstances they may incur change between exporting and importing country. considerable losses: if for instance they expect This is a factor which can have repercussions on their own currency to go down in value but never- development planning. Short-term fluctuations apart, floating exchange Table rates in developing countries must be expected Exchange-rate PracUces of IMF Members = to have a detrimental effect on the exchange-rate June 30, 1975) trend. In a system of fixed exchange rates, it is Percentage true, these states will also face the necessity of Number of p.c. share of trade periodical exchange-rate adjustments. But they currencies of all IMF members b will be able to bring their influence to bear on the rate of devaluation so as to keep the price rise Currencies floating independently 11 9 48.4 for foreign goods in their local market within of which: bounds, for the higher cost of imports, especially Developing countries 4 3 1.2 food imports, which are essential to the develop- Currencies floating together 7 6 23,2 ing countries may have grave consequences for Currencies linked their population. Moreover, the elasticities per- to one other currency c 81 66 14.4 of whlch: taining to developing countries are such that to the US dollar 54 44 12.4 devaluation will as a rule neither help to expand French franc 13 11 0.4 exports nor reduce imports; hence the balance Pound sterling 10 8 1.8 Spanish peseta 1 1 - of payments will not improve as desired. It follows South AfriCan rand 3 2 - that in most developing countries exchange-rate Currencies linked to a group modulations are not a suitable means of bringing of other currencies, of which : about adjustments. SDR 5 4 5.0 other currencies 14 11 7.4 It is for these reasons that most developing coun- Currencies linked to other tries consider floating an unacceptable device for currencies at rates which are altered frequently their own currencies. Instead, they have linked according to a specified their currencies to one other currency or else formula 4 3 2.0 to a ,currency basket": the link is In principle 122 106 98.4 rigid although exchange-rate alterations at cer- a The figures and percentage rates In this table must be regard- tain intervals are not ruled out.