The International Monetary System:

Looking for Future Directions

23 April 2010 | Note


Stiglitz commission’s proposal for a transition to a global reserve currency vitally important. SDR could be the bridge.

Expectations on SDRs: liquidity; Counter-cyclical role and Developmental role; Financing of global public goods – opened up proposals for SDRs to go into a general pool rather than be held based on IMF quota share.

Countries reluctant to come to the Fund – Greece latest example – problems of governance, decision making and conditionalities

Fund is supposed to be a cooperative institution, not a shareholder-owned one.

Fund was supposed to balance the interests of creditors and borrowers – European over-representation is a legacy of an early commitment to ensure borrowers (as Europeans were at the time) had a strong voting share – but now lenders are massively over-represented.

If the Fund could play a credible and equitable role as lender of last resort, there would be reduced need for countries to build up reserves, and also reduce incentives for export-led economies to undervalue currency.

Fund has continued to push for capital account liberalisation right up to the crisis. This is part of the problem. Last few months there has been some opening up, but there has also been backtracking.

Aldo Caliari, Center of Concern

Monetary system needs to be fairer, sustainable, pro-development. Needs to eliminate or reduce volatility of currencies – this should be the overarching goal.

Original Bretton Woods agreement put currency stability at heart of IMF mandate. This was why the trade system could concentrate of tariff reductions etc – assumed that there were few problems with exchange rates. But exchange rate problems have returned, yet the WTO assumptions have not changed.

There are limits to what developing countries can do on their own to manage exchange rates on their own.

Exchange rate instability hurts small and medium enterprises far more than multinationals. McKinsey study showed that exchange rate stability had a major impact on multinational investment.

Costs to US of holding world’s reserve currency has been growing – around 1% of GDP

SDRs and regional reserve currencies. Don’t believe SDR reform is as long term as people say Why not issue more?

Current problem is that you have to exchange SDRs for dollars – e.g. for imports. Hence demand for dollar is not reduced – could be increased. Idea that countries on which is SDR based can exchange SDRs for currency on a voluntary system will not allow it to cope during crisis. Therefore need SDRs to be used directly. Basket of currencies on which SDR is based should be expanded. Regional reserve currency units also valuable.

Questions/ comments

Dollar is a ‘reserve currency curse’ for US. Likely this will only change when a crisis arrives. Smooth transitions rarely occur. Therefore how much can we prepare for this moment?

Need to be clear on which problems we are trying to solve. Free market system is based on taking risks – don’t want to stop this.

Possibility of international central bank – this will create a global risk – what happens if the institution fails?

Should reserve currency be left as a sovereign choice?

Rishi Goyal, IMF (missed his initial presentation)

One possibility is a mutual agreement on what different players would do in the event of a crisis of confidence in the dollar. They would have to be confident that others would change their policies.

Or substitution account – China etc put dollars into an account to back up the SDRs. This was proposed in the 1980s, but no one could agree on who would share the cost and at that time there was no expectation that the dollar was in trouble.

Agree that finance can be an important handmaiden of growth but a cruel master. Need to get a much better understanding of how financial linkages take place, and need for a safety net.

Jomo KS

Capital account liberalisation Fund research shows that capital has flown ‘uphill’ , real investments have gone down and growth has been badly affected. No evidence that capital inflows have helped in any way and has exacerbated volatility. Arguments in favour of capital account liberalisation are weak.

Low income countries have not suffered because of capital controls during current crisis – they suffered from trade impacts.

Businesses are risk-takers, but there are different kinds of risk and some are unfathomable, particularly those related to finance.

Need to resubordinate finance to the real economy.