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  1. Current events in Iraq reveal the government is preparing to privatize in an effort to liberalize the market or best put institute a market economy. Why would Iraq decide such drastic change to its centrally managed economy? One short answer is that its budget deficit revealed economic fragility. Iraq finds itself in a precarious situation since its macroeconomic stability, as recently revealed, is tied to factors outside of its own control. A critical factor of oil price volatility, and the affect it has on developing oil producing economies pegged to the dollar, is known as terms-of-trade shock. (Nikola Spatafora and Andrew Warner completed an interesting research paper addressing this specific issue - read more). In a Sebastian Edwards article "Flexible exchange rates as shock absorbers", he states: We find evidence suggesting that terms of trade shocks get amplified in countries that have more rigid exchange rate regimes. We also find evidence of an asymmetric response to terms of trade shocks: the output response is larger for negative than for positive shocks. Finally, we find evidence supporting the view that, after controlling for other factors, countries with more flexible exchange rate regimes grow faster than countries with fixed exchange rates. Supporters of flexibility, on the other hand, have argued that under floating exchange rates the economy has a greater ability to adjust to external shocks. According to this view, which goes back at least to Meade (1951), countries with a flexible exchange rate system will be able to buffer real shocks stemming from abroad. This, in turn, will allow countries with floating rates to avoid costly and protracted adjustment processes. continued research reveals that Edwards is not alone in his findings concerning the dangers of rigid exchange rates for market based economies. Jbili of the IMF's Finance & Development Magazine wrote an article entitled "Should MENA Countries Float or Peg?" examining 6 MENA countries and their exchange regime. I note some of the identical remarks..... The prevailing view now is that increasing flexibility in exchange rate management would help countries deal with external shocks, reduce the risk of banking crises, and contribute to financial stability. There are, of course, dissenters who argue in favor of intermediate regimes, stressing the difficulty developing countries have in meeting the preconditions for a successful float and the negative impact of excessive exchange rate volatility on investment and growth. The above country-by-country analysis indicates that exchange rate regimes in the six countries had varying degrees of success. Exchange regimes in Jordan, Morocco, and Tunisia have not recently come under pressure, because real shocks were relatively manageable and macroeconomic policies were generally consistent with the choice of exchange rate regime. In contrast, the recurrent pressures in the foreign exchange markets of Egypt and Lebanon demonstrate that vulnerability to real exogenous shocks, volatile capital inflows (Egypt), and large structural fiscal deficits financed by heavy domestic and foreign borrowing (Lebanon) are incompatible with a pegged exchange rate. Popular opinion through much research shows that it is quite favorable for developing countries to free themselves from a fixed peg toward a more flexible exchange rate regime in order to protect their economies from terms of trade shock. A great example of this is Egypt by 1986 where the country began to experience serious macroeconomic imbalances and a dramatic fall in growth characterized by budget deficits of 17% of GDP. Egypt launched its Economic Reform Program to address dire economic conditions which really took off by 2003 for further liberalization of the economy. In 2003, the government began floating the rate of exchange of the Egyption pound, releasing it from its peg to the dollar (read more). Although Egypt continues to struggle with its economy for numerous reasons, it stands to reason that Iraq would be in a much better place should it head in the same direction. There are preconditions to a successful release from the peg and toward a flexible exchange regime. The country must establish a sound market economy, political energy must be aligned with it, a sound financial sector must be established, and capital markets should be in operation. Everything we see Iraq doing tells us the country's intent is to float the dinar. Government controlled economics with rigid exchange regimes can be the death of a country whose economy is subject to highly violatile exogenous terms of trade shock. It's tie to the dollar can create years of deficits. Iraq must take control of its economic future. It must liberalize its economy, harmonize its political landscape and float its currency. all of this is my 2c on the matter through my own research. take it for no more than that. be blessed my friends
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