What is An Emerging Market?

September 1, 2004

Preview Citation

Format: Chicago

Ashoka Mody. What is An Emerging Market?, (USA: International Monetary Fund, 2004) accessed November 12, 2024

Disclaimer: 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

Summary

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.

Subject: Banking, Bonds, Collective action clauses, Emerging and frontier financial markets, Exchange rate arrangements, Financial institutions, Financial markets, Foreign exchange, International capital markets

Keywords: Bond contract, Bond issuer, Bonds, Collective action clauses, Commitment-Discretion Trade-Off, Commitment-flexibility framework, Credit rating of the bond issuer, EMBI volatility, Emerging and frontier financial markets, Emerging market bond, Emerging Markets, Exchange rate arrangements, Exchange rate regime, Global, International capital markets, Law bond, Monetary policy, Policy debate, Policy dilemma, Transactional commitment, World Bank guarantee, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/177
Stock No:

WPIEA1772004
ISBN:

9781451858907
ISSN:

1018-5941

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