What is An Emerging Market?
IMF Working Papers, September 1, 2004
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- What is An Emerging Market?
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Bibliographic details
- Authors: Ashoka Mody
- Published: September 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451858907.001
Core argument and findings
- Developing economies, as they become richer, seek to contract with the global economy in increasingly complex ways.
- Dealing with that complexity often implies the need to renegotiate contracts; such recontracting is viewed with concern by market participants.
- Iron-clad commitments to abstain from recontracting are untenable.
- The acute trade-off between commitment and flexibility is not unique to sovereign debt; it is the defining characteristic of an emerging market.
- Early interaction with international markets typically benefits from strong transaction-specific commitment.
- The policy 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.
Examples and evidence cited
- World Bank guarantees on behalf of sovereign governments to private lenders illustrate evolution from commitment to flexibility.
- Exchange rate regimes exemplify the commitment-flexibility trade-off.
- International bond contracts (including considerations such as Collective action clauses and bond contracts) demonstrate the same dynamics.
- Sovereign debt practices and the experiences of bond issuers, credit ratings, and EMBI volatility are discussed as part of the transactional versus institutional commitment transition.
Policy implications and recommendations
- Recognize the inherent Commitment-Discretion Trade-Off (commitment-flexibility framework) as central to policy formulation for emerging markets.
- Use strong transaction-specific commitments initially to gain access to international markets and reduce perceived risk.
- Invest in building credible institutions to substitute for transaction-level guarantees, enabling responsible use of flexibility.
- Leverage institutional commitment so that the country's "word" provides assurance, reducing the need for rigid contractual constraints.
Subject areas and keywords (as provided)
- Subjects: 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
Content in this bundle
- What is an Emerging Market? by Ashoka Mody