Wednesday, May 30, 2007

Strong Armenian currency.

It's been a few years since the Armenian currency, dram, started appreciating against other currencies. In 2003, when I was in Armenia and came face to face with the weak purchasing power of my money when converted to drams, I was a little bit pissed off. Since the college days I had had a strong conviction that the Central Bank should try to maintain a stable exchange rate - buy or sell foreign currencies as needed in order to avoid wide fluctuations. The free market approach by the Armenian Central Bank annoyed me; they isolated themselves from the market and let everybody else determine the value of the dram.

Now I am starting to change my opinion about the CB attitude. While my dollars are worth much less than in 2003, I think that CB staying out of the foreign exchange markets has actually been a good thing. Evidence shows that state agents almost always screw up when they mess with the economy, and then often painful reforms are needed to undo the damage caused by such interference.

Coincidentally, the IMF is praising the CB approach in an RFE/RL article. I don't know what to think; the IMF attributes the strong economic growth to the CB non-action which although I agree, I am pessimistic enough to take the words of the IMF at face value. The IMF can be quite hazardous for the health of a third world country's economy. Remember Argentina?

2 comments:

Haik said...

Free Market doesnt work if there is no social justice. It is proved that there are always people who would speculate. Social justice can be established only when the society is directly envolved in decision making and deciding its faith and wellfare.
In Armenia prices or currency exchange rates dont flactuate becuase "the invisible hand" is in charge but because some people speculate and manipulate. The finance ministry and legilative bodies work for few individuals instead of working for people. It has nothing to do with people - the problem is the system. Armenia is not a big country and is not rich in natural resources that it can work in the American or anglo- saxon model. The best suitable model is the Swiss model and I believe a similar variation will fit pretty well in Armenia, i.e. direct democracy, developed technological and commerical industries, tourism (this one with some reservation).

nazarian said...

How would direct democracy prevent speculation in the currency market? People speculate in order to gain through arbitrage. As long as the government does not mess around with the free markets, direct or indirect democracy doesn't matter.