Much heat has been generated on the the subject of the best foreign exchange rate regime for developing countries. I do not intend to add to it. I, however, do intend to draw attention to the major question of this paper: Is exchange rate regime the most important thing to focus on in developing countries Furthermore, is there really any exchange rate regime that is fail-proof Is there any that enjoys the unanimous support of the leading economists If there is, are there not sufficient illustrations of countries who failed using a regime others succeeded in If such cases do abound, are there not factors that made an otherwise workable regime unworkable in their situation We shall look at the factors we think might affect any exchange rate regime adversely. And it is our intention that these suggestions will trigger off further study on the subject matter and uncover several other factors. This is to say that the factors discussed here are not exhaustive. There is room for further exploration of the subject and, indeed, that is the intent of this paper. We intend to stimulate interest that will fuel extensive research.
We shall begin with those factors we believe have militated and still do militate against the successful implementation of exchange rate policies in developing countries. ...
quality of governance in developing countries focusing specifically on political stability, the often defective and totally dissatisfactory electoral process, quality of opposition and separation of powers among other things. Finally, we shall look at the effects of social instability, lack of quality infrastructure, the absence of independence of controlling institutions and the stability and strength of the banking sector.
Thereafter, we shall look at what we consider a better process. It will be wise to state here that the process does not refer to any exchange rate regime. It refers to what we consider to be a better approach to the issue of foreign exchange rate regimes. We believe that the process does not start with the implementation of any exchange rate policy, but the creation of an enabling environment and establishment of relevant institutions. The establishment of these relevant institutions does not refer to just setting up structures but truly entrenching these structures and their deserved independence in the consciousness of the population.
The effect of the quality of the country's Polity
The polity of any nation plays a major role in the policy thrust of the government. The level of accountability demanded by them and their level of involvement through their representatives go a long way in affecting the policies of that nation. The level of illiteracy in developing countries is certainly not as high as that of developed nations. In fact, there is a high level of illiteracy in the lower developing countries. Furthermore, even for those who are considered educated, the level of background knowledge necessary for proper evealuation of economic policies is very low or totally inexistent.
Now, how does this affect the country's foreign exchange