Payments adjustment with fixed exchange rates

For much of the post-war era, the world has operated with fixed exchange rates, and even today many developing countries still maintain fixed parities. It therefore seems useful to discuss possible routes to balance-of-payments adjustment with a fixed parity before going on to devaluations and then to floating exchange rates. As will be seen, payments adjustment without use of the exchange rate is frequently painful and/or unsuccessful. This situation may explain why devaluations are so common in the developing world and why many of the industrialized countries have flexible exchange rates.