The less developed countries and stable exchange rates

Abstract

It is now the conventional wisdom that the currencies of the developed countries should float, but the currencies of the less developed countries (LDCs) should not; that is to say that each LDC should choose a more developed country (MDC) as a partner, or the Special Drawing Rights (SDR), and tie itself in a fixed relationship. It is quite an advance in our thinking to recognise that in the international monetary sphere the LDCs may require different treatment from the MDCs. Members of the Group of Ten used to assume, rather in the spirit of General Motors, that whatever solution was best for them would also be best for all, and were surprised when the LDCs insisted on having the wider Group of Twenty. The purpose of this paper is to explore aspects of the special problems of LDCs. One has to begin by confirming the General Motors proposition, up to a point. LDCs require two things of MDC currencies, and neither of these is a fixity in relationship to the other. The first requirement is that they be freely convertible into each other, so that what LDCs earn in one market they can spend in another. The second requirement is a regime within which MDCs feel comfortable, in the sense that they have no urge to restrict their imports from the rest of the world. In this limited sense, any regime that is good for the MDCs is also good for the LDCs. Any individual LDC that wishes can tie itself to the SDR and can hold its reserves in an appropriate basket of currencies. It will suffer inconveniences from other countries' fluctuations, but these are a minor nuisance compared with a possible breakdown of world trade occasioned by MDC currencies operating within an inappropriate regime. However, my main concern is with what LDCs should do, and not with what MDCs should do. It is quite clear why the experts advise the LDCs that they should be stable even though the others float. Note four powerful reasons. In the first place there are forward markets for MDC currencies but not for LDC currencies. This is a particular nuisance for LDCs trading with each other