Global Economics Essay Example | Topics and Well Written Essays - 750 words

Global Economics - Essay ExampleThe recent fascination appears to have been inspired by their success in dealing with hyperinflation in several countries such as Argentina and Bulgaria. Argentina did in fact abandon its up-to-dateness board sometimes back in 2002 after it experienced one of its worst recession. Lithuania and Estonia also turned to currency boards to obtain credibility for their newly established countries. The renewed appetite for persistent exchange rate governance justifies a closer look at ideal conditions for their establishment, with particular interest to the Argentinas experience.A currency board combines three aspects one, the exchange rate is fixed to an ground currency. Secondly, in that respect must be automatic convertibility- it should be always possible to exchange local currency at the fixed rate and thirdly, there should be a long term dedication to this system. The fixed exchange regime that that currency board imports is usually appropriate fo r small economies with fragile central banks. The fixed exchange rate regime will only be effective if there are sufficient foreign exchange reserves to cover the local current issued.A fixed exchange rate system will be of no use if a country is unable to maintain a sustainable exchange rate to the anchor currency. This might cause serious balance of payment problems if the local currency is overvalued. Argentina paid scant rate for these economic principles that precipitated its financial crisis of 2002. The peso was locked at one US dollar since 1991, when then the currency board was established. Because of this overvaluation, Argentina exported in addition little and imported too much. The manufactured balance of payment problems rendered it difficult for the country to earn the foreign exchange it needed to repay its foreign debts.Usually, currency boards have the capacity to initiate confidence in the public and financial markets because of the certainty of payment adjustme nt mechanism. However, experiences with Argentina and Hong Kong shows that currency board are not immune to speculative tendencies bring on by fear of devaluation. Devaluation did actually take place in Argentina in 2002. Though this was meant to help resolve the countries balance of payment problems, it rendered many business community who had borrowed in foreign currency bankrupt. It is also essential for the fiscal policy of a country to be disciplined by the establishment of a currency board and this requires political will from the establishment. At least initially, Argentina bureaucrats played by the rules of the game. But they were perhaps emboldened and the discipline was lost in the recent 90s when Argentina picked where it had left from and proceeded to ruin its economy by running persistent deficits. Argentina Convertibility Plan Mission Impossible.The convertibility plan got its name from the currency board system of rules that was at the centre of economic program i n Argentina. At first, it experienced a measure of success and was credited with the growth and stability experienced there in the first half on the 1990s. The initial success, which saw the growth rates going up to 9 percent in 1994, momentarily make Carlos Menem, the then President, and Domingo Cavallo, the then minister of finance heroes in Argentina. The latter years were far from rosy. Its hard to put a finger at what really went haywire and some things even surprised seasoned economists, like the fact that