IFI governance


Held in reserve: can a new approach to monetary policy transform the global economic outlook?

12 October 2010 | Minutes

Speakers: Isabelle Mateos y Lago (IMF), José Antonio Ocampo (IPD), Yilmaz Akyüz (South Centre), Stephany Griffith-Jones (IPD)
Chair: Soren Ambrose (ActionAid)
7 October 2010

The background paper (written by Ariane Ortiz) prepared for this meetnig is also available: Accumulation of Foreign Exchange Reserves & The Reform of the International Monetary System


José Antonio Ocampo

  • Why the current international monetary system is flawed:
    • Deflationary bias risk
    • Triffin Dilemma
    • World is hostage to US monetary policy, volatile US exchange rate; Only time we’ve really had a global currency that is not essentially stable in value
    • Developing countries accumulate international reserves, which is individually rational, but contributes to the global imbalance. In his words: “the Central Banks of developing countries act as intermediaries between US securities and private capital flows, which is ridiculous”. Accelerated accumulation actually began before East Asian crisis, but that event was where the corner was turned
  • Two families of solutions
    1. Reform the current system – Deter reserve accumulation, a mechanism to stabilize exchange rate (Williamson has long suggested a target zone for currencies, similar to UNCTAD’s CRER proposal)
    2. Possibilities for a new IMS system – SDR based system to develop the SDR as envisioned. Could be used more actively for lending purposes. Could free IMF from having to finance its credit lines, a ridiculous problem for such an institution, which ends up hostage to a few rich countries. Or multicurrency system; or regional agreements
  • Demand for reserves needs to linked to SDRs, need an international tax linked to aid; but you can distruibute SDRs predominantly to developing countries, but still along IMF quota lines
  • There is a need to combine the SDR account and the GRA at the IMF – the IMF should lend in SDRs

Isabel Mateos y Lagos

  • First it is worth mentioning the merits of the current system:
  • Allows policy autonomy for developing countries
  • Resilient to economic crisis
  • Problems of current system:
    • Global imbalance build-up and no mechanism for adjustment
    • Increasing exchange rate volatility
    • Increasing reserves accumulation
    • Probably going to get worse; emerging markets do not have the financial system to absorb the capital flows, so the demand for reserves will only increase. Our projections show demand reaching 800% of US GDP, which is absurd. The ultimate question is: what is the source of new reserves to meet demand?
  • IMF proposals:
    • Meetings with Finance Ministers/staffs at annual/semi-annual meetings to educate them
    • Try to encourage dialog between those causing imbalances and those most affected.
    • The creation of  global safety nets (Global Stabilization Mechanism – GSM), revamped lending instruments (Precautionary Credit Line, etc.) with few conditions
    • Encouraging diversification of reserve currencies
    • Encourage these reforms through a multilateral framework
    • Deal with capital flows (penalties or taxes to curb capital flows); ongoing discussion if the policies should be implemented only by the capital receiving countries and/or also by the countries that export capital flows.
    • A new SDR based international monetary system is envisioned by the IMF. She mentioned that it could be a medium term solution before the yuan is ready to be a reserve currency, hinting that a multicurrency reserve system should (or would) be the long-term system.
    • Enhance synergies between IMF lending and regional arrangements
    • The immediate task is to improve the data gaps and try to increase collaboration among countries.
  • Reserve adequacy for developing countries: old benchmarks don’t work. We don’t know what the right level is – more is better, but beyond a certain threshold it doesn’t make much difference. Trying to figure out where that line is.
  • Good thing is that the atmosphere on these questions remains fundamentally different than pre-crisis. But US is very skeptical about proposals for big changes. But in some ways the real problems are a few European governments

Yilmaz Akyüz

  • Developing countries should limit short-term, liquid capital flows from foreigners. Very concerned that we always bear in mind the distinction between earned and borrowed reserves.
  • Why is China putting its money into US treasuries rather than FDI in Asia? Estimates that developing countries lose $130b annually through holding reserves in low-return vehicles.
  • IMF seems to see the situation as a way to expand its lending rather than involving the private sector. It needs to do more to distinguish between liquidity and solvency problems.
  • In theory, agree with IMF’s outlined proposals but stresses that the IMF needs first to undergo an important internal institutional reform before it is trusted with the task of fixing the system
  • He said that to force the US to adjust (reduce Current Account deficit and fiscal deficit), there is a need for reserve currency competition
  • Using SDRs to address reserves problem a good idea – use the existing system rather than try to invent something new.  Could bring some discipline to US but not sure it would solve stability problem. But it could solve the problem of the high cost of holding reserves.
  • How to promote use of SDRs? Regular allocations, linked to world trade and income. But don’t use existing quota system to determine allocations.
  • Need a way to spread the risk of destabilisation from the imbalances between US and China – a reformed monetary system could do this
  • While against linking aid to SDRs, printnig money (meaning SDR issuance) would be a good for linking to climate finance
  • Details of reserve currency problem are not on the G20 agenda, and they won’t get attention until there is a deeper crisis

Stephany Griffith-Jones

  • Broader points important to remember: unresolved issue of financial sector regulation; macro responses in the developed world are pushing deflation
  • A lot of work is left to do to improve developing countries trust in the IMF and its facilities; LIC facilities haven’t been improved mouch; only with trust will desire for iron-clad self-insurance reduce; The Fund needs to be willing to lenf more, with less conditionality and more quickly
  • Reasons for accumulation of reserves are varied: current account surplus vs capital account surpluses, temporary surpluses versus structural surpluses, etc
  • Tackling short-term capital flows with capital account management would help: short-term flows don’t do any good; because of ths ize of flows we need noly management but source country regulation on flows
  • The politics of reserve reform necessitates a grand bargain – an SDR-system and appreciation of the Chinese yuan (along with reblanced Chinese demand) can come together


Isabelle response to the others:

  • These topics are on the French G20/G8 presidency agenda – there is a window of opportunity
  • On China – must remember it is a big country with varied interest groups internally, so this complicates policy change
  • The IMF is working on new facilities to regain trust of developing countries
  • The SDR might be more useful as a store of value rather than as a tool for exchange-rate stability

Questions were taken on: piecemeal/evolution reform versus a complete overhaul; what it will take to get an overhaul on the agenda, SDRs for climate finance, burden sharing for global public goods, and more detail on the political landcscape

JAO: European economic troubles are the only reason we have some desire for reform; but the EU is deeply divided on the direction reform should take

Yilmaz: we will need a serious crisis before we get real reform; SDRs could be usefully used to finance the interest cost on climate finance loans

SGJ: We could use international taxation to finance a subsidy element for SDRs; real erform would be ni the interest of the US, we need to go further to calculate the benefits for the US of refornm, ie increased compeattiveness, more jobs, etc; on IMF facilities the emerging markets are keen to not have to go back to the IMF board for money – they want automatic disbursements to speed the process

Isabelle – SDRs are already benig used for LICs, witness UK and French moved to loan their SDRs back to the IMF; Asians are asking for the IMF to do more to serve their interests so there is some hope; markets are really the drivers of the system so SDRs need to be useful to markets (either exposure to IMF as a pseudo-sovereign credit risk or exposure to unavailable RMB through its inclusion in the SDR); the natural evolution of the system will be towards a multi-currency but recognise this may increase instability – maybe once we have a volatile multi-currency system countries will see the attractiveness of an SDR-based system; don’t expect too much from the French presidency in the next year, they are managing expectations