1995– This last period has been characterized above all by volatility, on the one hand by huge capital inflows and on the other hand by frequent currency devaluations. One by one, peggedexchange rate regimes tried to defend themselves, tried to delay the inevitable. However, capital mobility, coupled with pegged exchange rate regimes and in some cases a degree of monetary independence were a poor policy mix, forgetting the principles of Mundell–Fleming, and one by one they were forced off their pegs, to “float” (devalue) their currencies. Among those emerging market currencies forced to devalue during this time were:
1994/95 — Mexico
1996 — Czech Republic
1997/98 — Asian region (Thailand, Indonesia, Korea, Philippines)
1998 — Russia
1999 — Brazil
1999 — Ecuador
2000 — Colombia
2001 — Turkey
The year 2002 has brought with it so far the devaluation of the Argentine peso, the first “currency board” in history to be defeated, and also that of the Venezuelan bolivar. There have also been cases where emerging market countries have either had some success in fighting back or alternatively have de-pegged voluntarily during periods of exchange rate stability, rightly anticipating that a freely-floating exchange rate would provide a far more effective buffer for the economy during subsequent periods of market turbulence than the alternative, which would require defending an overvalued exchange rate. In the first camp, we have had countries such as Malaysia and also Hong Kong, which have tried various strategies to fight the market. Malaysia, for its part, in September 1998 banned offshore trading of the Malaysian ringgit and pegged it to the US dollar at 3.8 — where it has stayed ever since. Hong Kong, long the self-proclaimed bastion of the free market, intervened in the stock market, ostensibly to rid it of “manipulative, speculative elements”. In the second camp, countries like Chile, Poland and Hungary have de-pegged their exchange rates voluntarily, under calm and stable market conditions. As a result, when market conditions became more volatile, the freely floating exchange rate was able to buffer or insulate the real economy from damaging imbalances or instability.
As the emerging markets became integrated into the global economy and particularly within the global financial system rather than just commercial trade, so the pressure became irresistible for them to move from a fixed or pegged exchange rate system to more flexible exchange rate arrangements, such as the free float — the reed that bends in the wind, rather than the pane of glass that shatters. Two major trends in terms of the liberalization of capital markets have played a major part in the development and history of exchange rate systems within the emerging markets — the rise of capital flows and the opening of the emerging markets to international trade.