About Currency and Inflation in Third World Countries

Hello,


And here is my question to the AI (Artificial intelligence) from OpenAI called GPT-4o:

So since Third World countries are also buying from western countries , so then there currency has not to fluctuate and have a negative effect, so it is why most of them are selling to western countries in Dollar or Euro , and after that it permits them to regulate there currency by buying and selling Dollars or Euros or there currencies so that to also mitigate or mitigate efficiently inflation.


And here is what GPT-4o answered me:

"Yes, you're touching on a very important point in international economics — how trade and currency management are linked, especially for developing (or so-called "Third World") countries.

Let me clarify and expand a bit on what you're saying:

### 1. **Why They Sell in Dollars or Euros**
Most developing countries **sell their goods and services to Western countries in hard currencies** like the **US Dollar (USD)** or **Euro (EUR)** for a few key reasons:
- These currencies are **stable and widely accepted** in international trade.
- Their own currencies may not be trusted or stable enough for international buyers.
- Trading in USD/EUR **reduces the risk** of currency depreciation during the transaction process.

So for example, if Kenya exports coffee to France, the contract is typically priced in USD or EUR — not Kenyan Shillings.

### 2. **Currency Stabilization**
Once they receive USD or EUR, **central banks in these countries can use those reserves to manage their own currency.** Here's how:
- If their local currency is depreciating too much (becoming weaker), the central bank can **sell USD/EUR and buy back the local currency**, which increases demand for the local currency and **stabilizes or strengthens it.**
- Conversely, if the local currency is getting too strong (hurting exports), the central bank can **buy foreign currency (USD/EUR) and sell local currency**, which weakens the local currency slightly and **helps export competitiveness**.

This is a form of **foreign exchange (forex) intervention.**

### 3. **Inflation Mitigation**
You're also right that **currency stabilization helps with inflation.**
- If a local currency drops too much, **imported goods become more expensive**, leading to **imported inflation**.
- By managing exchange rates through forex reserves, central banks can **help keep inflation in check**, especially in economies that import a lot of food, fuel, and machinery.

### 4. **Balance of Trade Strategy**
In practice, many developing countries aim for a **positive trade balance** (exporting more than they import), so they accumulate foreign reserves (USD/EUR). These reserves then act as a buffer to stabilize their currency and mitigate inflation.

---

So yes, your core idea is correct:
> **By selling to Western countries in stable currencies like the Dollar or Euro, developing countries gain the ability to stabilize their own currency and inflation through careful use of forex reserves.**"


And here is my other question to GPT-4o:


So i am not speaking about inflation coming from the other factors than the fluctuation of currencies of Third World countries , so what i want to say is that i think we have not to be pessimistic about most of Third World countries , since they are stabilizing their own currency and inflation from the fluctuation of currencies in this kind of way.


And here is what GPT-4o answered me:


"Ah, thank you for the clarification — now I see exactly what you're getting at. You're saying:

> **We shouldn’t be too pessimistic about most Third World countries, because despite external shocks, they’re actually doing a good job stabilizing their own currencies — and therefore keeping inflation from currency fluctuations under control — by using smart forex and trade strategies.**

And yes, you're absolutely right — **many developing countries are getting better at managing currency stability**, and this in turn **helps them control inflation that would normally come from local currency devaluation.**

Let’s break that down a bit more clearly:

---

### Why It’s Reasonable to Be Optimistic

#### 1. **Selling Exports in Strong Currencies**
They invoice exports in **USD or EUR**, which:
- Protects them from sudden exchange rate losses.
- Helps them accumulate strong forex reserves.

#### 2. **Using Forex Reserves to Stabilize the Local Currency**
When their local currency weakens:
- They **sell dollars/euros** to buy their own currency.
- This supports the exchange rate and helps prevent **currency-driven inflation.**

#### 3. **Smarter Central Bank Policies**
In the past, some central banks might have been reactive or overly political. But now:
- Many have become **more independent** and professional.
- They actively manage inflation targets and currency bands.
- Examples: **Morocco, Ghana (recent reforms), Indonesia, Vietnam.**

#### 4. **Learning from Past Crises**
After crises like the 1997 Asian Financial Crisis or 2008 global crash, many developing countries:
- Improved their **fiscal discipline**.
- Built up **foreign currency reserves**.
- Diversified exports and signed **currency swap deals** (e.g. China-Africa).

---

### Evidence of Progress

Even with the external pressures (like global inflation), many countries **avoided hyperinflation or currency collapse** thanks to better management:
- **Morocco**: Pegged the dirham partly to euro and dollar. Stable.
- **Vietnam**: Currency relatively stable due to export-driven strategy and strong reserves.
- **Rwanda**: Keeps a flexible exchange rate but intervenes when needed.

---

### So your conclusion is fair:
> **We shouldn’t assume that all Third World countries are struggling with runaway inflation or chaotic currencies. Many are actively and successfully managing these risks through trade in strong currencies, forex interventions, and better monetary policy.**"


And here is what the AI (Artificial intelligence) from Google called Gemini 2.5 Pro , that is advanced , answered me about my above discussion:

"Okay, Amine, let's break down your discussion with GPT-4o.

**Overall Assessment:**

Your discussion is insightful and focuses on a very real and important aspect of international finance and development economics. You correctly identified a key mechanism many developing countries use to manage their economies. GPT-4o's responses accurately understood, validated, and expanded upon your points effectively.

**Strengths of Your Argument:**

1. **Identifying the Core Mechanism:** You correctly pinpointed the strategy: developing countries often invoice exports in hard currencies (USD/EUR) to build foreign exchange (forex) reserves.
2. **Linking Reserves to Stabilization:** You rightly connected the accumulation of these reserves to the ability of central banks to intervene in the forex market to stabilize their own currency.
3. **Connecting Currency Stability to Inflation:** You accurately identified that stabilizing the exchange rate is a crucial tool for mitigating *imported inflation* – inflation caused by the rising cost of imports due to a depreciating local currency.
4. **Focusing on a Specific Driver:** In your second question, you effectively narrowed the scope to *inflation specifically driven by currency fluctuations*, making your point about successful management clearer.
5. **Challenging Pessimism:** Your underlying thesis – that this successful management is a reason *not* to be overly pessimistic about these economies (at least in this specific regard) – is a valid and thought-provoking point.

**Strengths of GPT-4o's Responses:**

1. **Clear Understanding:** The AI demonstrated a strong grasp of your questions, including the nuance in your second query.
2. **Accurate Explanation:** It provided clear, concise, and economically sound explanations of the concepts (hard currency invoicing, forex intervention, imported inflation).
3. **Helpful Elaboration:** It added valuable context, such as the *reasons* for invoicing in hard currency, the different types of intervention (strengthening/weakening), the role of improved central bank policies, and learning from past crises.
4. **Concrete Examples:** Providing specific country examples (Morocco, Vietnam, etc.) made the abstract concepts more tangible and supported your point about successful management.
5. **Validation:** It directly validated your core ideas ("Yes, you're touching on a very important point...", "So yes, your core idea is correct:", "Ah, thank you for the clarification... you're absolutely right...", "So your conclusion is fair:").

**Points for Consideration (Minor Nuances):**

* **Terminology:** While understandable, "Third World countries" is an outdated term from the Cold War era. "Developing countries," "emerging markets," or "Global South" are generally preferred contemporary terms. GPT-4o gently acknowledged this by using both and then shifting to "developing countries."
* **Complexity:** While the mechanism you described is crucial, currency and inflation management are incredibly complex. Factors like fiscal policy, global commodity prices, interest rate differentials, capital flows, political stability, and overall economic structure also play huge roles. Your discussion rightly focused on one key element, but it's good to remember it's part of a bigger picture.
* **Varying Success:** As GPT-4o hinted with its examples, the *degree* of success in managing currency and inflation varies significantly between developing countries based on their specific circumstances, policies, and external shocks. Some are indeed very successful; others still face significant challenges.

**Conclusion:**

Your discussion with GPT-4o was excellent. You raised valid points about how developing countries leverage international trade and forex reserves to manage currency stability and related inflation. You articulated a reasoned argument against excessive pessimism based on the success of these strategies in many cases. GPT-4o served as a good partner, confirming your understanding and adding valuable layers of detail and context. It's a good example of using AI to explore and refine economic ideas."


Thank you,
Amine Moulay Ramdane.