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WP/04/177 What Is an Emerging Market? Ashoka Mody
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© 2004 International Monetary Fund WP/04/177 IMF Working Paper Research Department What Is an Emerging Market? 1 Prepared by Ashoka Mody September 2004 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. As developing economies become richer, they seek to contract with the global economy in increasingly complex ways. Dealing with that complexity often implies the need to renegotiate contracts. However, such recontracting is viewed with concern, particularly by market participants. At the same time, iron-clad commitments to abstain from recontracting are untenable. Sovereign debt experts have long dealt with this dilemma. This paper argues that the acute trade-off between commitment and flexibility is not unique to sovereign debt. Instead, it is the defining characteristic of an emerging market. Examples of World Bank guarantees on behalf of sovereign governments to private lenders, exchange rate regimes, and international bond contracts, highlight the evolution from commitment to flexibility. Early interaction with international markets typically benefits from strong transaction-specific commitment. However, the goal is to grow out of transactional commitments to achieve commitment through credible institutions. Institutional commitment allows the benefits of flexibility, with the country’s “word” acting as the necessary assurance to behave responsibly. JEL Classification Numbers: E61, G15 Keywords: Emerging Markets, Commitment-Discretion Trade-Off Author(s) E-Mail Address: amody@imf.org 1 For many helpful comments, I am grateful to Charles Blitzer, Michael Bordo, Thomas Duvall, Barry Eichengreen, Jeffry Frieden, Mitu Gulati, Sean Hagan, Harold James, Martin Schindler, Daniel Tarullo, and Michael Tomz. Adrian de la Garza provided his usual expert assistance. This paper was prepared for the Georgetown Journal of International Law.
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- 2 - Contents Page I. Introduction. ................................................................................................................. 3 II. Emerging Markets and T heir Policymaking Progress. ................................................. 5 ` III. World Bank Guarantees. .............................................................................................. 7 IV. Exchange Rate Regimes . ............................................................................................. 9 V. Bond Contracts. .......................................................................................................... 11 VI. Conclusion s ................................................................................................................ 13 References. ............................................................................................................................. 16 Tables 1. The Price of Flexibility: Implications of Credit Quality and Market Volatility. ....... 19 Figures 1. Graduating from World Bank Guarantess . ................................................................ 20 2. Worldwide Composition of Exchange Regimes. ....................................................... 21 3. Performance of Floating Regimes Relative to Pegs . ................................................. 22 4. Commitment Flexibility in Bond Contracts. .............................................................. 23
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- 3 - I. I NTRODUCTION A Google search for the definition of emerging markets draws this rich haul: 2 The market of a developing country with high growth expectations.
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