Direct reasons of Russia's 1998 economic crisis
One of the direct reasons of Russia's 1998 economic crisis was the Russian government's failure to address fiscal imbalances. The structural issues were the indirect but more basic culprits. The government had a poor tax framework that did not produce enough money to meet its fiscal responsibilities (Moffett et al 246). More specifically, inadequate economic reforms left the economy, much of which was run on the barter system, that hid inefficiencies as well as value-depleting economic activity, making maintaining fiscal balances even more difficult (Moffett et al 246). The lessons learned from this crisis include the need to encourage the new investment, both the domestic and foreign to substitute the worn-out and outdated capital assets since the crisis undermined the confidence of investors, setting back prospects of growth of economy. After occurrence of this crisis Primakov formulate an anti-crisis plan to stabilize the economy in October the same year. Some of the things included in that plan were subsidies for production of medicine, food, and other products that were seen fundamental to the Russian population. The government strictly controlled the natural monopoly activities. Restructuring of the banking industry as well as tax system and reducing the wage-bill were some of the others measures government took to solve this economic crisis (Moffett et al 247).
Part Two
The relatively small countries should adapt flexible exchange rates because they are vulnerable to face several challenges than are the developed countries. These challenges may change over time necessitating adoption of new exchange rate policy depending on changing circumstances. The advantages of currency controls include reduced exchange rate volatility, prevention of dollarization, and they are fundamental in a fixed exchange-rate system. On the other hand, the disadvantages of this system include it a system that is very hard to enforce and does not favor the domestic investors and companies.
This post has only concentrated on one aspect of economy and that is foreign investment. Developing countries will have several financial issues emerging everyday which would be addressed much better using the flexible exchange rate policy because they are open to partner with different countries who they think present better opportunity for the growth of their economy.
Works Cited
Moffett, Michael H., Arthur I. Stonehill, and David K. Eiteman. Fundamentals of multinational finance. Pearson, 2017.
