Chapter 9: International Economics: Basic Theory and Core Institutions


Your staff sends a memo to the President detailing your decision, highlighting your desire to take advantage of the world economy to help Abkhazia develop. It outlines the importance of using Abkhazia's strengths to ground the economy, and rely on imports, initially, for needed goods. Tourism will inject the domestic economy with money, and agricultural (and some other) exports can be used to bring in manufactured goods and other necessities. The President understands your thinking, and agrees that open trade will help develop the economy while maintain or build positive relations with Russia, Georgia, and other neighbors. The President now asks you to outline a few points on how to pursue your plan, one element at a time.

What do you do now?

Establish a fixed exchange rateThis will help curb inflationary expectations and ensure some measure of stability in Abkhazia's fragile economy for the time being.
Establish a flexible exchange rateThis will avoid the risks associated with a fixed exchange rate, namely accentuating domestic inflation risks and creating vulnerability to foreign financial issues and retaliatory measures. A flexible exchange rate will make Abkhazia a more favorable trade partner.
Retain the Russian rubleIt has worked well so far, and with Russia as your primary trading partner, it makes sense to keep it. Additionally, it may provide some measure of security against the volatility of a new currency, especially since Abkhazia cannot print rubles in the face of economic pressure.
Convert to the US dollarMany countries have done this for some of the same reasons discussed. The dollar is a relatively stable currency. Using the US dollar will provide security and stability during early economic challenges.