Currency Convertibility in Transforming Economies: Was It a Mistake?

Date Published:

Abstract:

A rapid move to currency convertibility by the transforming countries of eastern Europe does not seem to have hurt those countries that undertook it compared to those that moved more gradually. Indeed, on balance they seem to have performed better. Yet the evidence is not conclusive, and the number of observations too few to make strong conclusions, after allowance is made for other differentiating features among countries.

Western European countries almost surely could have moved to currency convertibility more rapidly than they did in the 1950s, especially if arrangements had been made for partial funding of the sterling balances held by Commonwealth countries, but the intellectual climate and political consensus were not present for making the move.

The experience of the eastern European countries in the early 1990s, although admittedly embedded in special circumstances, at least raises strong doubts about the justification for preserving exchange controls in many developing countries. A much heavier burden of proof should be levied on those countries by the international community and in particular by the International Monetary Fund, whose Articles of Agreement call for convertibility as a basic condition for membership.

Notes:

Working Paper 96–05, Weatherhead Center for International Affairs, Harvard University, December 1996.