Non-convertibility of currencies
Name(s):
Lack of reliable currency convertibility
Nature
The non-convertibility of the currency of a country or a group of countries (such as the Eastern bloc) and the absence of a realistic parity for the currency may make trading conditions very artificial and aggravate disparities with other economic systems.
Incidence
For a long time, trade with the collectivist economies was done almost entirely within a system of clearing agreements. Trade had to be exactly balanced and tended to be aligned on the exports level of the economically weaker partner, so that triangular trade was made impossible. Most industrial countries trade today on the basis of a convertible currency, but clearing is still the rule in the case of developing countries. These countries can use the money received for their exports only for purchases from the bilateral partner; this obligation often restricts the choice of purchases and distorts sales prices. In the 1990s there is no reliable or predictable currency convertibility in Eastern Europe and the former USSR, and therefore there is no sensible opportunity for investment and trade with other industrialized countries.
Claim
The key to the economic difficulties of many developing and former socialist countries lies in the terrible instability of their currencies and the great difficulty in converting them to other currencies. Without stable currencies in Eastern Europe the policy of privatization is bound to fail.
Broader
Aggravates
Strategy(ies)
Type
(F) Fuzzy exceptional problems