The history of emerging market currencies and exchange rate systems can most usefully be divided into four main periods — 1973–1981, 1982–1990, 1991–1994 and 1995–2001.
1973–1981 For the most part, this period saw relative exchange rate stability, not least because most emerg- ing market currencies were not freely convertible either on the current or capital accounts. There was a steady if modest capital outflow from the industrial countries to the emerging markets, which were mostly at that time dependent on commodities rather than the manufacturing bases they would become.
1982–1990
If the previous period was characterized by stability, that of 1982–1990 was one of anarchy followed by a gradual attempt at restructuring. Massive tightening of monetary policy in the US and a consequent dramatic rise in the US dollar, plunging commodity prices and a reversal in capital flows out of the emerging markets combined to trigger first emerging market currency devaluations and then defaults, most notably in Mexico and also elsewhere in Latin America. Given ensuing capital flight, many emerging market countries sought to impose capital controls, driving interest rates artificially low in response. The gradual debt restructuring process during 1985–1990 helped restore some stability to emerging markets, helped in part by lower interest rates in the US and a sharp fall in the value of the US dollar. The currency devaluations and then low nominal interest rates — and negative real rates — as capital controls were imposed, resulting in very poor returns for passive currency investors.
1991–1994
This was the heyday for the emerging markets. As the Berlin Wall was torn down, so the East was opened up to investment. Latin America had a slightly better time of it as economies gradually recovered in the wake of the Brady bond restructuring programme. Capital controls were lifted, largely as demanded by the IMF, and domestic interest rates, which had been kept artificially low, were set free to the whim of market forces. “Privatization” of state assets was greatly accelerated, supporting budget balances and helping to attract capital inflows. Rising interest and exchange rates greatly boosted total returns for currency investors during this period. In light of this, the Mexican peso devaluation of December 1994 came as rather a rude awakening.