Both China and the UN Commission on Reforms of the International Monetary and Financial System have called for a new global reserve system. That issue should be at the top of the agenda when the IMF’s International Monetary and Financial Committee next meets.
The essential idea is quite simple: In the long run, an international monetary system cannot be built on a national currency — a point made half a century ago by the Belgian-American economist Robert Triffin. Recognition of this fundamental problem was the reason why the IMF’s Special Drawing Rights (SDRs) were created in the 1960s.
The US dollar standard with which the world has lived since the early 1970s has three fundamental flaws. First, as with all systems that preceded it, it puts the burden of adjustment on deficit countries, not on surplus countries. The main exception is the US, which, thanks to its reserve currency status, has so far been able to finance its deficit by issuing dollar liabilities that are held by the rest of the world.
Second, the system is unstable because it makes the major reserve currency’s value dependent on US macroeconomic policy and the vagaries of the US balance of payments and associated domestic deficits. Since the abandonment of gold-dollar parity in 1971, the world has experienced increasingly intense cycles in the value of the dollar and the US current account. The dollar has lost what any reserve asset should have: a stable value. The governor of China’s central bank recently emphasized this basic point.
Third, the current system is inequitable because it forces a transfer of resources from developing countries to the industrial nations that provide reserve currencies. This transfer has dramatically increased over the past two decades. Developing countries’ main defense against world financial instability has been to accumulate international reserves.
At the end of 2007, developing countries, excluding China, held reserves equivalent to 20.6 percent of their GDP, compared with just 3.7 percent in 1990. This generated a huge asymmetry in the world economy, as industrial countries, excluding Japan, hold only 2.6 percent of GDP in reserves. One basic reason is that the only “collective insurance” available is limited and highly conditional IMF lending.
It must be emphasized that a system based on competing reserve currencies would not solve the instability and inequities of the current system, In fact, it would add another one: The instability of the exchange rates among major reserve currencies. This problem is already present in the current system.
The deficiencies of current arrangements are why the world monetary system should be based on a truly global reserve currency: a fiduciary currency backed by the world’s central banks. This is what was hoped for when SDRs were created in the 1960s and this process must be completed by transforming the SDRs into such a global currency.
A major advantage of an SDR-based system is that it would provide a mechanism for the IMF to provide finance with its own resources in an agile way during crises, thus operating in the same way as central banks have been doing on a massive scale in recent months. It would also be a much better mechanism with which to finance the IMF during crises than the credit lines to the IMF from a few countries (“arrangements to borrow”) that the G20 is again advocating, as it is truly multilateral financing that does not depend on any individual country.
For such a program to work, it is essential that developing countries recognize that IMF financing is good “collective insurance” so that their demand for foreign-exchange reserves would decline. This means that the IMF would have to lend rapidly during balance-of-payments crises and do so without the overburdening conditionality of the past, particularly when crises stem from rapid reversal of capital flows or a sharp deterioration in terms of trade.
The IMF took steps in this direction last month, particularly by creating the Flexible Credit Line for crisis-prevention purposes, as well as expanding other credit lines and overhauling conditionality. The major problem with the new credit line is that it runs the risk of unduly dividing developing countries into two categories, with significant additional risks for the latter.
A better alternative would be to go back to John Maynard Keynes’ proposal of an overdraft facility for all member countries, with countries that continue to use it eventually having to apply to a formal lending program. The overdraft facility could again be financed with counter-cyclical issues of SDRs.
The reform should also allow for a mechanism for countries to exchange their current dollar (and euro, yen and pound) assets for SDRs, thus avoiding the disruptions that could be generated by the transition to the new system. As Fred Bergsten has reminded us, the mechanism is already available in the form of the “substitution account” that was negotiated in the IMF in 1980.
It is time to broaden the agenda of global financial reform, which so far has focused on an essential but still limited set of issues, particularly financial regulation. Reform of the global reserve system must be part of that broader agenda.
Jose Antonio Ocampo, a former Colombian minister of finance, is a member of the UN Commission of Experts on Reforms of the International Monetary and Financial System.
COPYRIGHT: PROJECT SYNDICATE
The EU’s biggest banks have spent years quietly creating a new way to pay that could finally allow customers to ditch their Visa Inc and Mastercard Inc cards — the latest sign that the region is looking to dislodge two of the most valuable financial firms on the planet. Wero, as the project is known, is now rolling out across much of western Europe. Backed by 16 major banks and payment processors including BNP Paribas SA, Deutsche Bank AG and Worldline SA, the platform would eventually allow a German customer to instantly settle up with, say, a hotel in France
On August 6, Ukraine crossed its northeastern border and invaded the Russian region of Kursk. After spending more than two years seeking to oust Russian forces from its own territory, Kiev turned the tables on Moscow. Vladimir Putin seemed thrown off guard. In a televised meeting about the incursion, Putin came across as patently not in control of events. The reasons for the Ukrainian offensive remain unclear. It could be an attempt to wear away at the morale of both Russia’s military and its populace, and to boost morale in Ukraine; to undermine popular and elite confidence in Putin’s rule; to
A traffic accident in Taichung — a city bus on Sept. 22 hit two Tunghai University students on a pedestrian crossing, killing one and injuring the other — has once again brought up the issue of Taiwan being a “living hell for pedestrians” and large vehicle safety to public attention. A deadly traffic accident in Taichung on Dec. 27, 2022, when a city bus hit a foreign national, his Taiwanese wife and their one-year-old son in a stroller on a pedestrian crossing, killing the wife and son, had shocked the public, leading to discussions and traffic law amendments. However, just after the
The international community was shocked when Israel was accused of launching an attack on Lebanon by rigging pagers to explode. Most media reports in Taiwan focused on whether the pagers were produced locally, arousing public concern. However, Taiwanese should also look at the matter from a security and national defense perspective. Lebanon has eschewed technology, partly because of concerns that countries would penetrate its telecommunications networks to steal confidential information or launch cyberattacks. It has largely abandoned smartphones and modern telecommunications systems, replacing them with older and relatively basic communications equipment. However, the incident shows that using older technology alone cannot