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8. Infrastructure Weakness. Infrastructure weakness was one of the causes of the emerging market crisis in Thailand in 1997. Define infrastructure weakness and explain how it could affect a country’s exchange rate. Infrastructure weakness refers to situations where public services (roads, railroads, electric power, impartial judicial system, minimum corruption by politicians, adequate police and fire services, reasonable health care systems, etc.) are dysfunctional. Lack of quality services increases the difficulty and risk of operating a business in that country, which in turn means domestic investment funds will tend to escape from the country and foreign investment funds will not enter. The flight of domestic currencies and the lack of foreign demand for the domestic currency force the exchange rate down (floating regime) or force the government to devalue (fixed exchange rate regime). 9.
Infrastructure Strength. Explain why infrastructure strengths have helped to offset the large BOP deficits on current accounts in the United States. The strength of the U.S.-infrastructure encourages foreign capital to invest in the safety of the United States. Foreign investors like the U.S. legal system, protection of intellectual property rights, freedom from ethnic strife, and other aspects of the U.S. infrastructure conducive to business development.
10. Speculation. The emerging market crises of 1997–2002 were worsened because of rampant speculation. Do speculators cause such a crisis or do they simply respond to market signals of weakness? How can a government manage foreign exchange speculation?