Jorge Braga de Macedo, Barry Eichengreen and Jaime Reis
One of the most pronounced international economic trends of the late twentieth century is the adoption of convertible currencies. For many years after World War II, countries maintained restrictions on the freedom of residents to convert domestic currency into foreign exchange, Until the end of the 1950s the industrial economies, aside from the United States and Canada, controlled purchases and sales of foreign currency for purposes related to current account transactions (that is, purchases and sales of goods and services abroad). Developing countries were slower still to restore convertibility on current account. The centrally planned economies, for whom restrictions on convertibility were a corollary of their strategy of suppressing the market economy, never began the process.
In recent years this situation has been transformed. Current account convertibility is now an economic fact of life throughout the industrial world. An increasing number of developing countries have relaxed exchange restrictions. Many of the previously-planned economies of Central and Eastern Europe, including several of the successor states of the former Soviet Union, have opted for convertibility after debating its merits relative to those of a payments union. The spread of convertibility reflects the desire of national policy-makers to integrate their economies into the global trading system. It is driven by the effort to attract financial capital and direct investment from abroad. It signals that governments have made significant progress in implementing a stable and sustainable macroeconomic strategy.
Many countries have followed the establishment of current account convertibility by relaxing restrictions on international capital flows (by establishing convertibility on capital account, in other words). While the removal of controls on capital account transactions has been selective, in significant parts of the world-Western Europe for example-controls have all but disappeared. Members of the European Union participating in the Exchange Rate Mechanism of the European Monetary System peg their currencies to