The developing and transition countries whose
exchange arrangements are the subject of this
section cover a very broad range of economic devel-
opment—from the very poorest to the newly indus-
trialized economies with per capita incomes at levels
that categorize them, along with industrial countries,
as “advanced economies.” Correlated with the level
of economic development, but not perfectly so, are
both the degree of domestic financial sophistication
and the extent of involvement with the global eco-
nomic system, especially modern, global financial
markets. The 30 or so countries that are most ad-
vanced in this last regard are commonly referred to
as the “emerging markets.”
In view of the wide economic and financial diver-
sity among developing and transition countries, it is
neither surprising nor untoward that there is consid-
erable diversity in their exchange rate regimes—
from very hard one-currency pegs to free floats and
many variations in between.18 Correspondingly, the
purpose of this section is not to search for the one,
ideal exchange rate regime that would fit all devel-
oping and transition countries. Rather, the aim is
twofold: to elucidate the relationship between the
circumstances of a country and the exchange regime
that is most likely to suit its economic interests; and
to discuss the factors required to make a chosen ex-
change rate regime function reasonably well in the
circumstances of a particular country.
One characteristic shared by essentially all devel-
oping and transition countries and relevant for their
exchange arrangements is that they must do the vast
bulk of their international commerce and finance in
terms of the monies of major industrial countries
rather than in terms of their domestic monies. Thus,
developing and transition countries with substantial
involvement in international trade and finance have
a deep interest in how the global economic and fi-
nancial system operates. In particular, in deciding on
their exchange arrangements, these countries must
take as given the